After a bull run of 10 years of growth, airlines and lessors have grown more and more profitable, fuelled by a wall of investor liquidity that has been attracted to the yield and stable assets of the aviation industry in an ultra-low interest rate environment. After an elongated upward cycle, there is general agreement that the airline industry has peaked and a slow correction/moderation is underway.
Macroeconomic headwinds are continuing to build, creating challenges for weaker airlines to maintain growth and profitability. There is greater potential for more extreme volatility. Further bankruptcies and consolidation in the airline market is expected, while M&A activity is predicted to increase among leasing companies. The industry fundamentals remain strong, however. People keep travelling. Passenger demand remains in growth territory creating continued opportunities for the market actors. The trick for airlines and for leasing companies is to manage capacity and retain enough flexibility to manoeuvre through choppier conditions.
Rather than spur much hand-wringing, the turn in the cycle may be cautiously welcomed by financially strong market players because a downturn tends to eliminate competition and present valuable opportunities for growth.
Legacy airlines that have used the boom times to shore up balance sheets and beef up cash reserves can capitalise on the coming opportunities as they seek to expand into routes freed-up by weaker competitors reducing networks and capacity, or exiting the market altogether.
Financially strong lessors will also seek to capitalise on a tougher operating environment in the hope that it will present opportunities for high value acquisitions as weaker less experienced lessors struggle.
A turn in the market may also finally grant banks the ability to push up margins and tighten terms in time for when regulatory changes begin to transform lending strategies.
The headwinds over the next 12-24 months are expected to shake up the aviation industry environment. Experience will be liquid gold. For some, these headwinds will prove a tailwind to further growth.