In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which assessed the general state of the industry based on interviews with a variety of industry leaders. Now that the aviation landscape has changed dramatically with the devastating impact of the COVID-19 pandemic continuing to ravage the industry, 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 Marc Iarchy, a partner at aircraft leasing company World Star aviation, about his thoughts on the impact of the crisis so far and for the future of the market.
Based in San Francisco and London, World Star Aviation is a full service lessor that currently owns or manages a portfolio of approximately 75 assets, mainly in the mid-life space. Iarchy and the team has been working closely with lessees to help them and the broader industry weather the current crisis, where they can make a difference.
“We are trying to be helpful where we can, and particularly where our help can make a difference,” he says. “There is limited value where we’ve got an old aircraft with a large airline that has 500 aircraft, because helping them makes zero difference to their chances of surviving. Whereas where we have two out of five aircraft with an airline, our help makes a very big difference to them.”
World Star Aviation’s main aim is to help airlines avoid bankruptcies where possible, therefore avoiding a repossession situation in a market where aircraft demand is so low. The lessor has negotiated deferral agreements that involved longer lease terms, power-by-the-hour agreements and other lessee friendly terms for a short period. As those three-month arrangements come to an end however, Iarchy notes that airlines are beginning to request another three-month or even longer reductions in rent obligations, which will begin to impact the chain more severely.
“A loss of three months cashflow was a bit of a problem for sure,” he says. “But we expected and hoped that things would recover by the summer so that we can also stand by our own obligations vis a vis our financiers and our investment partners… we now need to look at extending those arrangements for another three months or longer… We have also had one or two airlines wanting to talk to us about returning aircraft. That’s obviously a much more difficult conversation.”
The damage to airline balance sheets is becoming much more apparent now, says Iarchy, adding that the next round of renegotiating leases will have much greater ramifications for leasing companies and their own obligations.
“We have been in a deep freeze for three months, but now that airlines are trying to reopen and relaunch routes, it is becoming very painfully obvious that there’s going to be some deep, deep changes in the industry, as well as a decent amount of bankruptcies,” says Iarchy. “Airlines that haven’t paid their bills for three months are going to be catching up for the rest of 2020 and with a reduced capacity they simply aren’t going to be able to do it in that time. Unfortunately for many airlines, they may never be able to get there.”
Iarchy goes on to doubt even the ability of the big US carriers to avoid a Chapter 11 scenario: “Even though in the US the government aid is massive, it may be no more than a Band-Aid,” he says. “When companies like American Airlines borrow in double digits in the capital markets, then a Chapter 11 bankruptcy solution is probably not too far off. And what I’m particularly worried about in terms of the US is that when one of them goes Chapter 11, they all will.”
Iarchy talks in more depth about the aviation financing market including the impact of the crisis on asset-backed securitisation vehicles. “At the moment, for our SPRITE ABS we have paid all the tranches and have avoided a downgrade but the situation obviously is what it is and we can’t conjure money [if the airlines can’t pay].”
Despite the stressed environment, Iarchy remains surprised at the prices that aircraft are being sold in the market as expensive: “Maybe there’s some people that still have very low cost of capital, or they have money that they have to deploy before the end of this year.” World Star remains an active player in the aircraft trading market and is working on a number of acquisitions but Iarchy states that those are only opportunities “where we truly feel comfortable that in a mayday scenario, we’ll still end up okay”.
Listen to the full podcast for more from Iarchy on the broader aviation finance and leasing industry. On the whole, despite the extreme challenges facing the market, he remains confident in the future and the recovery of this industry.
“The demand for travel will remain; people like to travel and go on holiday. The middle class continues to grow. These trends remain and although there will be a dip that will take longer to recover from than previous crises, I have no doubt that we will.”