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Regional Outlook

Regional Outlook

All industry leaders surveyed were asked to rate their optimism levels for certain regional areas of the world. Aircraft leasing is a truly global industry, with most firms placing equipment with airlines located around the world albeit at different scales.


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Joe O'Mara

Head of Aviation Finance & Leasing

KPMG in Ireland


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While lessors tend to be concerned more with weak airlines rather than regions in general, they all have very strong opinions about the stresses showing in particular countries.

For airlines, levels of optimism are very much influenced by their home base and network reach as well as expansion prospects.

The largest aviation banks also operate globally – a prerequisite for this industry but they too are watching for signs of stress in particular countries as they evaluate new deals and seek to minimise geographical exposures by diversifying their portfolios.


Aircraft lessors are united in their continued focus on expanding business into China, where the growth of passenger traffic is most pronounced. There are pockets of stress in the country, however, which tend to be isolated rather than a broader regional issue.

China is undergoing a period of economic tightening, which is dampening economic growth, but this is largely viewed as a positive development for the industry because growth brings its own risks. “The very strong economic growth in China may be a trigger for more bubbles particularly in the shadow banking system and may lead to more risk down the line,” says David Power.

Lessors in general are bullish on Asia, with many of the larger firms having significantly expanded their exposure to the region. ALC for example has about 43-44% of its entire fleet in Asia, with half of that placed into China, which Plueger sees continuing for the foreseeable future.

Airlines’ optimism in China is very much dependent on their location and business model, but on a macro-level, they are also very optimistic about the country. China continues to be an important market for us,” says Gerry Laderman, senior vice president of finance & procurement at United Continental Holdings. “There has been a lot of added capacity on the trans-Pacific routes over the last few years but that is beginning to level off, which should allow the market to absorb this capacity better.”

Long-term growth

One airline finance manager bemoaned the bureaucracy in China for impeding expansion for some airlines and referred to “speed bumps” such as the dampening economy, but despite this, the long-term growth is clear.

China is Ethiopian Airlines’ largest market, according to Tewolde GebreMariam, group CEO of the African carrier. “We fly to five gateways in China – Beijing, Shanghai, Guangzhou, Chengdu, and Hong Kong, and we are also currently evaluating Shenzhen,” he says. “We are putting so much capacity in China [because] we believe that it is still a growth market. Chinese investment into Africa is massive. China is now in almost every African country investing in infrastructure development, commodities, especially in natural resources, driving up exports and imports generating significant passenger and cargo traffic between Africa and China.”

Financiers too are bullish on China, praising the efficient infrastructure that has been constructed in recent years and the positive support from the government. “We are very pleased and pleasantly surprised by the steps the Chinese government is taking in furthering aviation,” says Thomas Hollahan, global head of aviation at Citi. “This is one area where Trump and Xi Jinping are happy to engage.”


India is poised to become the third-largest civil aviation market by 2020 and the largest by 2030. The Indian Government has developed an aggressive plan to promote the sector, which includes the Civil Aviation Policy introduced in 2016 that reflects an intent for the country to migrate to a more liberal administrative and regulatory regime for the aviation sector.

Importantly, the policy relaxes rules for airlines to fly overseas – the 5:20 rule – that previously only allowed domestic carriers to operate international routes after having a fleet of 20 aircraft for overseas flights and operating as a business for five years. The new rule allows all airlines to fly internationally irrespective of years in operation, subject only to the airline deploying (the higher of) 20 aircraft or 20% of its entire seat capacity on domestic operations. Also in 2016, Indian courts recognised the Cape Town Convention and the new Insolvency and Bankruptcy Code was passed, which makes it easier to recover debts and wind up failing companies.

“India is on the cusp of large international growth,” says Robert Martin. “Air India’s international dominance will change when a number of the newer airlines hit the 5:20 roll limit in 2018 and some stronger carriers move into international operations. That’s the big opportunity.”

These latest developments have lifted optimism levels dramatically, with all sectors referring to opportunities in India. The one shadow threatening to curtail this growth is poor infrastructure and high taxes.

Rest of Asia

Generally, optimism levels are high for the vast region but there are pockets of volatility that are creating some wariness among lessors. Airlines, however, view South East Asia particularly as the “growth engine of the world”, along with China. Indonesia, Malaysia and the Philippines are high growth areas in terms of passenger numbers and GDP growth, which is encouraging for airlines, but lessors are closely watching areas of stress.

“Yield compression in Asia is still very strong which leads to concerns over airline profitability,” says Sibylle Paehler. “It’s not so visible now because aircraft financing has become very, very inexpensive but the cost side needs to be monitored to see how each airline is coping.”

The strength of the dollar has caused some issues in developing countries in 2017, which has cooled of late and airlines have been aided by the stable and low oil price. Countries such as Australia, Korea, Southeast Asia, Malaysia, Indonesia and Japan remain in recovery mode with improving economies, which is contributing to the general levels of optimism in the region.

South Asia

One airline head of treasury in South East Asia commented that the airline is being “actively positioned for large increases in Chinese and (later) Indian routes, firstly by charter operations then converting to scheduled,” which it intends to achieve by increasing utilisation (and overnight flights) rather than fleet numbers.

Shamini Law, chief executive officer and principal shareholder of flyGlobal Charter, a Malaysia-based international ACMI/wet lease operator, believes there are good opportunities in parts of South Asia. “Some countries have private sector opportunities that outsiders cannot see or cannot access, or they’re very cautious of the political problems they may encounter. Yet they still have compelling business models, fast-growing populations, business growth opportunities, an aircraft shortage, and lack the right expertise to set up an aircraft operator,” she says.

From a financing perspective, as a US-dollar denominated business, the US capital markets dominate but there has been a significant uptick in the amount of Asian investors pouring into aviation transactions in the US and in Asia, both on the debt and the equity side. “Institutional investors in Asia, depending on the region, have started investing,” says Vinodh Srinivasan, managing director, co-head structured credit group, Mizuho Securities USA. “There’s more work that needs to be done to cultivate that further.”

Europe & Russia

Europe is a mature aviation market, which is considered to be in the early stages of a wave of consolidation that is expected to continue for the near term. Many industry observers saw the recent airline insolvencies as a healthy development: “The problems experienced by some European airlines is a healthy development because it sorts the wheat from the chaff, which is a sign of the recovery and the strength of the European market,” says SMBC Aviation’s Barrett.

The uncertain impact of Brexit, the continuing sovereign debt issues in Greece and Italy as well as the high-profile airline bankruptcies in 2017 have dented confidence in the region at the macro level. However, the economies in Europe are performing much better than expected and despite some airline-specific operational issues – Ryanair’s pilot issues for example – passenger demand is strong and growing, with record high load factors.

“European carriers are booming,” says Barrington. “My own airline, Finnair, is having an incredible year. We have had to revise our profit forecast upwards three times this year. This success is mainly due to Asian traffic coming into Europe through Helsinki.”

Seeking to capitalise on the boom, Ethiopian is opening up new destinations in Europe – Oslo in April 2017, and it has also launched routes to Geneva and Istanbul. “Europe is also our growth market,” says GebreMariam. “Not as fast growth as Asia but, as a matured market, we see the growth trend continuing.”

There are signs that the Russian market is coming back, according to SMBC Aviation Capital’s Barrett. “Russia had a tough couple of years, but we have some really strong customers there like Aeroflot, S7 and Ural, which have overcome a challenging period in this market.”

North America

The mature North American market continues to impress observers. The airlines are managing capacity well and despite occasional fare wars, profitability levels continue to rise. United’s Laderman indicates that there has been some pricing pressure from new European low-cost carriers entering the North American market recently. It will be interesting to see if that continues to bite.

For lessors, the US is a stable market and flat in terms of growth since the major carriers tend to own their fleets. As a result, the North American fleet also tends to be older than European fleets, for example, which provides a natural need for replacement aircraft. US carriers have tremendous access to the debt and equity capital markets, with the EETC market being regularly tapped by the big four carriers to efficiently fund aircraft deliveries.

The changes to the US tax regime has generally been greeted favourably by airlines. There is, however, a lot of complexity in the changes that is still being worked through. The airlines should also benefit if tax reform drives economic growth as US industry traffic typically grows at twice GDP.

South America

Confidence in South America is mixed but there is tremendous optimism that the problems are being solved gradually. Confidence in the Brazilian market is particularly strong.

“Airlines in Brazil and Argentina have experienced an awful lot of distress over the last few years,” says Accipiter’s Sheridan. “The Brazilian airlines have taken drastic actions over the last two years and seem to be coming out of that.

We saw some good news from GOL with their refinancing efforts recently which is a very positive step. Argentina is starting to come out of its shell a bit more, while the low-cost carriers across the region are opening up.”

ALC’s Plueger is equally as bullish about the region as traffic numbers continue to escalate. He too sees the emergence of new entrants – specifically flybondi in Argentina –- as a positive development for the region as a whole.

Although South America presents a high growth prospect, respondents warn that it will not be a smooth ride.

Middle East

Although it has long been characterised for its booming business as a major aviation hub, airlines in the Middle East have begun to show signs of stress, which is impacting confidence levels. Some observes shake this off as “noise” or a blip but others are more concerned that this marks the beginning of a significant change in the status quo. Airline consolidation in the region is being hotly debated right now.

Emirates is already moving closer to Flydubai but there continues to be those who believe a link-up between Emirates and Etihad makes economic sense, especially since the latter is feeling the pressure from some ill-advised equity investments – namely Alitalia. Qatar is experiencing political pressures at the moment, which is impacting the airline although, as a oneworld alliance member, it continues to expand equity investments into foreign airline groups, namely IAG and Cathay Pacific, as well as an aborted attempt to purchase shares in American Airlines.

These issues are not impacting asset values, although according to Ruth Kelly, some lessors are concerned about the saturation of the widebody market in the region. This is expected to lead to further deferrals of widebody orders from some or all of the major three Middle Eastern carriers.


Africa is still regarded as a volatile region with only a handful of solid airlines, but there is optimism that the market will improve and develop, albeit at a continuing slow pace.

flyGlobal’s Law believes that the region is still the next big area of opportunity: “For pioneering airline operators we would also include Iran, Iraq, and Pakistan. But Africa is where the future lies, if you are looking for an interesting, long-term growth story.”

African airlines face many challenges: a lack of attention and vision from government, higher oil prices due to taxation and the high cost of transport which also impacts fares, and a lack of continental aviation policy coordination like a single market.

“Many African governments wrongly believe that aviation is transportation for the rich,” says GebreMariam. “But the reality is very different. Africa is such a vast land mass how else are Africans expected to travel from one country to the other? The reality is that aviation is an essential public service but it is still not seen that way, which means infrastructure has not developed up to international standard simply because it is at the bottom of the priority list. The lack of liberalization compounds the problems. African countries are not working together to open up their air spaces to African carriers but paradoxically African countries are opening their air spaces more to non-African airlines.”

“We’re really missing out on Africa,” agrees Mark Lapidus, CEO of Amedeo. “It would be amazing if African countries found a way of not being nationalistic about it and let travel prosper.”

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