In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which took a general state of the industry based on interviews with a variety of industry leaders.
Now that the aviation landscape has change dramatically with the devastating impact of the COVID-19 pandemic continuing to ravage the market, Airline Economics and KPMG are returning to those same leaders for their reaction to the current crisis in a series of podcast interviews.
In this latest podcast, Joe O'Mara KPMG's Head of Aviation Finance, speaks to Firoz Tarapore, CEO of DAE Capital, about his thoughts on the impact of the crisis so far and for the future of the market. DAE owns and manages approximately 400 aircraft worth $15bn.
Firoz praises the rapid and substantial government intervention to date but feels more support will be required:
“Based on our figures, over $110bn of government-backed support has been announced – with 80% of that in the US and Europe,” says Tarapore. “About 60% of that total is the form of repayable loans, some which have come with quite a few conditions. While we are really encouraged by the quantum and the speed of government to support for a critical industry in a lot of these jurisdictions, what we haven't seen and most seen is governmental support in other parts of the world where airlines play an even a bigger role in national economic development. Those governments will need to step up sooner rather than later, and make sure that their national champions are well supported.”
This varied national response to the crisis means an uneven recovery and driven by health concerns first and foremost, observes Tarapore: “The recovery is going to be driven by how comfortable people feel on the health side compared to theirs reasons for stepping on a plane in the first place.”
The entire industry is focused on rebuilding confidence in flying, and for Tarapore the key will be for industry to work with governments and global organisations to ensure there are clear and standardised rules and precautions for ensuring safe flying. “There needs to be a good degree of uniformity in how different jurisdictions around the world approach that to make people feel more safe and secure that when they travel, and to know if something does go wrong, that that there is a solution available, be it treatment, vaccination etc., which then in turn will support a very decent trajectory in the recovery of our industry.”
For lessors like DAE Capital, which are well capitalised and have exercised strong financial underwriting discipline, Tarapore says have an advantage in the current environment but for those who haven’t been so diligent that it is “too late to fix” the portfolios now. “If you underwrote the asset that you wanted at the price that you wanted, and selected the lessee and put the right pieces into place, then I think your ability to navigate the current situation is actually quite good,” he says. “So even if an airline gets into trouble, if you have the right structure protection around the asset and the exposure, financially, those lessors will do fine. If on the other hand, you had excessive concentrations or excessive credit profiles, you are are going to end up hurting.”
DAE Capital has been approaching negotiations with lessees on a case-by-case basis, with the perspective that as the company is secure from a liquidity standpoint, it is able to offer its clients assistance at this time. “The approach that we have taken is that if our customer needs help, we are here to provide it because we have entered this crisis in a relatively decent position from a liquidity perspective, but all of those discussions need to be had around the concept of partnership because it just cannot be that one person does well and the other one doesn't.”
Tarapore acknowledges that the leasing fleet is currently between 35-40%, which he believes will increase as the airline industry seeks additional funding help. “Although leasing may be suppressed for a while, when the world deals with this health issue, the airline industry will want the flexibility that the leasing capital provides to further accelerate its growth over the next decade and the decade after that. Our primary message is that we have enabled an industry by providing capital that allowed them to grow. It's a difficult period for everybody. We're here to help, to the extent we can, but the solution always has to be where both people do well. Most clients have internalized this message and are looking to the future because ultimately it's not just that today you need to survive. The reason you're surviving today is that you want to prosper tomorrow. And so far that's the fundamental approach we've taken with our clients.”
For Tarapore and DAE Capital, the spikes in infection rates in certain jurisdictions hopefully will push the world to act together that will help “propel a more predictable path to recovery”.
During the podcast, Tarapore remarks on the manufacturers reaction to the crisis and any impact on the recovery, as well as the many challenges facing lessors and asset managers, including negotiating with clients, managing rent deferrals and managing returned aircraft, and financing, added to the potential opportunities the recovery will hold for an acquisitive company.