KPMG is optimistic about the long-term future for aircraft leasing and about Ireland’s place at the centre of the aviation finance world. “COVID-19 is causing the greatest disruption that aviation has ever seen. However, it has always been a cyclical sector and it will recover. The key question is how long that recovery will take,” said KPMG’s Head of Aviation Finance, Joe O’Mara.
“We have seen airlines suffer huge financial losses as a result of not operating for several months and this impact has been felt in turn by lessors, as airlines seek deferrals and restructurings of their rental commitments. What has been a positive for aircraft lessors, is that they came into this crisis in a very strong liquidity position which has allowed the sector some breathing space. We have also seen over $120bn of government support provided to airlines so far and this has been effective in reducing the number of airline failures.”
KPMG is well placed to comment on the current status of the aviation finance sector and how its recovery may take shape. It was an original advisor to GPA (Guinness Peat Aviation) in the 1970s and has been involved in the sector for over 40 years. It is recognised as one of the most influential companies operating in the global aviation sector. The company’s team of over 200 aviation finance professionals have unrivalled experience, providing a range of audit, tax and advisory services to leasing companies and investors into the space. It has the biggest concentration of aircraft leasing clients of any firm in the world, and it has advised those clients though several different cycles.
Killian Croke, the head of KPMG’s aviation finance audit practice, has worked with leasing companies through the last two downturns, after 9/11 and the global financial crisis. “While this situation is more challenging for lessors, given there is limited ability to remarket any aircraft you repossess, you can take comfort from how the sector recovered after those previous macro shocks. Another more specific reference point for the sector is the SARS outbreak, which had a severe impact on Asian air travel in 2003 but a very recovery once the virus was contained. This has been mirrored in how China’s domestic travel has recovered over the course of 2020 to pre-pandemic levels. The recent vaccine announcements are giving hope to the sector that a recovery could be quicker than envisaged.”
However, Croke does not underplay the difficulties that are facing aircraft leasing companies. “Until such time as there is a meaningful recovery in air traffic, challenges will remain. COVID-19 will result in a negative impact on asset values and we have seen impairments push leasing companies into loss positions in their publicly announced Q3 results. While airline bankruptcies have been limited, this situation is heavily dependent on continued government support. We have seen our clients put a huge focus on liquidity since the outset of the pandemic and that will be critical in allowing them to manage this crisis.”
KPMG’s aviation finance team have had a very busy year said O’Mara. “Last year, our main focus was on helping clients close significant transactions, whether it was large capital markets deals, M&A activity or establishing new platforms. This year, it has been helping them navigate the challenges of their fleet being grounded or assisting them with significant fund raising, all while predominately working from home. The resilience of both our own team and that of our clients has been incredibly impressive”.
COVID-19 is causing the greatest disruption that aviation has ever seen. However, it has always been a cyclical sector and it will recover. The key question is how long that recovery will take.
While it’s clear that the aviation sector has been negatively impacted by the pandemic, there remains significant investor interest in aviation finance. Kieran O’Brien, who leads KPMG’s advisory team, has spent much of the last few months talking to investors who are trying to decipher the best time to deploy their capital. “Distress drives opportunity. While it is clear there will be financial losses for many as a result of the pandemic, those that invest at the right time in the cycle could see real returns. We have seen heightened interest in the sector, both from traditional and non-traditional sources of finance. The big decision is when to cut what will be a sizeable cheque. Determining relative value and securing bank debt is challenging in this market. But some parties will end up with first mover advantage and it will be interesting to see how that develops over the coming months. We are expecting a lot of activity.”
On the question of how that activity will take place, O’Brien expects some consolidation to occur in the leasing space. “Ten years ago, the top three lessors accounted for about 70% of the leasing market. Given the number of new entrants we have seen since then, this has diluted to about 30%. It is natural to expect that this crisis will drive M&A activity. Based on our experience of previous downturns, it could be the case that we will see companies combine rather than go under.”
Given the scale of additional debt that has been taken on by airlines, the importance of aircraft leasing as a funding source is likely to grow said Croke. “Given the additional debt they have assumed, most airlines will seek to protect their liquidity positions for the foreseeable future. As such, leasing will likely grow in importance. 20 years ago, aircraft lessors owned about 25 per cent of the world’s fleet. This is now around 45 per cent and it is highly possible that it could now push beyond 50%.”
What does all this mean for Ireland and its place at the centre of the aviation finance? “We are well placed to continue to be the market leaders”, said O’Mara. “Talent, track record and the tax environment are key for us maintaining our competitive advantage. These are the factors that have kept us ahead of competitor jurisdictions like Singapore and Hong Kong.”
O’Mara also strikes a note of caution, “However, we can’t be complacent. Aviation is of pivotal importance to our small open economy. When we get out of this crisis, there will come a time when people will look at how Ireland acted in the context of international travel, versus our peers. It is important that we act with appropriate foresight and an appreciation of our international reputation. I was pleased to see us sign up to the EU travel traffic-lights system. While we need to be careful in how we manage the reopening of the skies, we also need to be cognisant of the fact that Ireland's out-sized place at the centre of the aviation world is fragile.”
A version of this article was originally published in the Business Post and is re-produced here with their kind permission.
The aviation industry is facing severe challenges and requires informed decision making. For more on what’s next, please get in touch with Joe O'Mara, Head of Aviation Finance at KPMG in Ireland.