We are delighted to present you with our Aviation Industry Leaders Report 2020: Steering the Supercycle. The report captures the views of over 40 industry leaders across the leasing, airline and banking markets and includes the views of the rating agencies and analysts covering the sector.
With oil prices relatively stable and the low interest rate environment continuing, the aviation industry continues to enjoy a record period of profitability. 2019 represented the tenth consecutive year of global airline profitability ($25.9bn) and it was the fifth highest on record. In a sector where business cycles typically last eight or nine years from peak to peak, we are in uncharted territory. Passenger traffic continues to grow (4.2% RPK growth in 2019) and IATA expects this supercycle to continue into 2020 for a record eleventh year.
However, all is not rosy in the garden. While the headline figures for 2019 are positive, they represent a decline from 2018 where profits stood at $27.3bn and RPK growth was 7.4%. We have also seen a spike in airline bankruptcies during the year. The consensus of the industry leaders interviewed for this report is that the cycle has peaked, and a slow downturn has commenced. Our report last year focused on significant headwinds such as the volatile geopolitical environment, slowing economies, rising interest rates, a strong US dollar, increasing production rates and capacity constraints. Aside from interest rates (which ultimately fell during 2019), these concerns have either remained or, in the context of the global trade war, exacerbated.
Significant new challenges have also arisen, the most pressing of which is the grounding of the Boeing 737 MAX. At the time of issuing this report, Boeing has suspended production of the aircraft and there remains no clear line of sight as to when it will return to service. The situation is unprecedented. Over 80 airlines have taken delivery of 385 MAX aircraft which are not currently in use and there are in the region of another 400 aircraft currently held in storage by Boeing. This issue is significantly distorting the market, both for airlines and lessors, and it has the potential to cause even further disruption in 2020.
An area that was not of particular focus in last year’s report was climate change. There has been a dramatic shift over the last 12 months, with the climate change agenda now having an ever-increasing impact on the aviation sector. ‘Flight shame’, the imposition of environmental related taxes and the increased Environment, Social and Governance (ESG) focus of investors are real concerns for the industry. Improvements are being made through new aircraft technology efficiencies and significant investment is being made into alternative fuel sources. However, most participants agree that the sector as a whole (OEMs, airlines and lessors) needs to better promote these technical innovations, as well as highlighting the social benefits that air travel brings. This is an area we will no doubt revisit in next year’s report and beyond.
In the context of aviation finance, while the above headwinds are concerning, the overall outlook remains broadly positive. In a world where air travel is expected to grow, where significant capital is needed to fund aircraft deliveries, and where the percentage of leased aircraft continues to trend upwards towards 50%, lessors are well placed to continue to thrive. Even though capital continues to flood into the sector and competition is fierce, there is also a belief that pricing is rationalising somewhat.
While the number of publicly-listed lessors is small and decreasing, aircraft leasing continues to become more mainstream and there is greater market confidence in the business model. This can be seen from the increased number of aircraft lessors that have achieved investment grade status, with unsecured funding now representing more than two thirds of the debt being raised by aircraft lessors.
One of the defining characteristics of the aviation financing market is the ability to continually innovate and create efficient and suitable funding to meet the market’s needs. In this respect, the tradeable E Note structure has helped drive the ABS market to a record year with almost $10bn worth of assets financed and the population of E Note buyers significantly widening. The common consensus is that this trend will continue in 2020.
Overall, the outlook of the industry leaders was cautiously optimistic, more so than 12 months ago, with an appreciation that while there remains some uncertainty, such an environment may also drive opportunity. I would like to thank all those who participated for their time and insights.