How exactly have market values in aviation been affected since Covid-19? George Dimitroff, Ascend by Cirium’s Head of Valuations, discusses the impact of Covid-19 on current aircraft market values and aircraft lease rates – and Cirium’s agile approach to tracking and providing the most dynamic data and expert insights for aviation investors during this global pandemic.
- What impact do you think Covid-19 will have on supply and demand?
The Covid-19 crisis has created an unprecedented disruption in global and regional aviation demand. Following the long expansion cycle which began in 2010 and finally ended in 2019 – with global passenger traffic being around 90% greater than in 2009 – IATA is now predicting that traffic will decline by some 38% this year. The recovery scenario for 2021 and beyond remains highly uncertain. This significant demand reduction is expected to have a fundamental impact on aircraft demand. In previous downturns, such an impact resulted in reductions in lease rates and values, which we calibrate primarily against market transactions observed, but also by monitoring other key supply-demand metrics.
- Do you believe that lease rates and Current Market Values will be lower than after 9/11 or 08 market crash?
Following both the shock events of 9/11 in 2001 and Lehman Brothers in 2008, these reductions occurred incrementally in several steps over an 18-24-month period, as declines in both trading volume and pricing naturally followed declines in traffic and then aircraft demand, before they were eventually reflected in Current Market Values and Lease Rates. This is why you should not expect us to slash values by an extreme amount overnight to reflect a scenario that could in fact take until late 2021 or 2022 to fully reveal itself; and with an ultimate magnitude that, frankly, nobody can accurately predict today.
- In this unusual time how are you planning your upcoming quarterly value review boards?
We’re committed to thoroughly monitoring the market to reflect movements in value as quickly and nimbly as possible. As such, our Current Market Values and Lease Rates Values Review Board is now held weekly due to the rapidly evolving nature of the market and the number of types requiring review.
- How are you delivering this data?
We’ve just issued the first of a series of special edition newsletters related to the Covid-19 crisis that will be published in quick succession, as and when we make important value changes. We aim to publish news of the value changes as quickly as possible and would rather issue several small releases than wait for one big update. We’re also including engines in the newsletter as some engine and aircraft value changes are interlinked. Comments on engine value changes are also covered in this – and future – editions.
In addition, I’m hosting a key webinar – The Impact of Coronavirus on the Aviation Market – with Rob Morris, Global Head of Consultancy, on 22 April, during which we’ll be specifically presenting data designed for aviation investors. Register here
The team will cover how this downturn in demand could affect the aviation finance and leasing market and the impact on aviation asset values today, plus a longer-term view on potential market changes.
- Have you adapted your approach to measuring Base Values?
We’ve been asked numerous times whether we’ll be making any impairments to our Base Values as a result of the Covid-19 crisis, and the broad answer is no, not purely because of the crisis. Even if this crisis puts a two to three-year dent on passenger demand and traffic growth, it’s still a short-term blip relative to the 20+ year nature of Base Value projections. Therefore, we do not believe in making impairments to a long-term outlook in reaction to near term events.
What we can say, however, is that we’ll continue to review and revise Base Values annually, in the mid-year, and there may be impairments to specific aircraft types due to factors that already existed prior to Covid-19. Some of the popular twin-aisle aircraft types are more susceptible to such structural corrections, especially when they were underperforming our Base Value expectations even in the strong market conditions of 2015-2019.
- Can you provide examples of some of these specific aircraft types that were struggling prior to and as a result of Covid-19?
Yes, one of the most relevant aircraft types to highlight in the Twin-aisles sector, A330-200 Market Lease Rates decreased by 6-25% with the mid-life vintages taking the biggest hit. The type was already struggling prior to Covid-19 as both storage rates and availability had been increasing. In Q1 2020, we observed some transactions that all pointed to shrinking demand for the type. Lease Rates now range between $180,000/month for the oldest vintages and $565,000/month for a new, 2020-build aircraft. We did not have reason to move Market Values yet, but we are watching them closely as we expect there to be an impact, particularly on mid-life and younger vintages in the coming weeks.
And aircraft types impacted since the pandemic include Boeing 737-800 – it’s Market Values fell by 5-11%. Although there were many data points collected at the beginning of the first quarter which validated the strength of the market, we started to observe weakness in March as a number of deals fell apart, demand from the Part-Out market fell and passenger aircraft started to be parked (even if temporarily). With lower Part-Out values, inevitably Market Values for older vintages saw the greatest reductions (but it was these same vintages that saw the greatest increases in value throughout the course of 2019). Market Lease Rates fell by 2-3% in a slight downward correction supported by at least 10 transactions. The evidence shows that the type has been surprisingly resilient right up to the end of March, although the global restrictions on movement of people due to Covid-19 is likely to put further pressure on lease rates in the weeks and months to come, which is why we continue to monitor them closely.
- What transactional data will you use to determine any changes in aircraft values and lease rates?
We’re actively reaching out to aircraft owners and traders for transactions and their associated price data points, as well as to better gauge trading conditions – and this is precisely what makes us able to track and report latest changes as they happen.
We’ll also be considering other non-transactional data, including (but not limited to) used aircraft availability (stored/available fleet), premature lease returns, airline failures, demand for each type from airlines looking to grow their fleets (if any), return to service of the 737 Max, any production cuts at OEMs, and any other issues which may affect supply. With these factors, we will be able to quickly apply any required adjustments to Current Market Values and Lease Rates through our Values Review Board process.
- What advice would you give to an investor in aviation today?
The pandemic is still very young, and its constant evolution makes it very difficult for anyone to make any medium- or long-term plans. Only once the pandemic is brought under control, will airlines understand the new demand environment. When more clarity emerges, the real demand for aircraft will once more become evident and the long-term impact on Values and Lease Rates can be thoughtfully and properly analyzed. This doesn’t stop us from reporting the near and medium-term changes to Current Market Values and Lease Rates. However, those we are reporting now are likely just the beginning of a series of reductions.
Register now and secure your place for The Impact of Coronavirus on the Aviation Market webinar for aviation investors on Wednesday April 22.