We are delighted to present you with our Aviation Industry Leaders Report 2019: Tackling Headwinds. 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 covering the sector.
The aviation industry has been thoroughly enjoying an extended bull run for the past decade. Airlines have had access to cheap finance as tough competition pushed down lease rates and debt costs. Lessors, while grappling with a very competitive marketplace with many new entrants, have also been capitalising on the availability of cheap finance and the demand for additional lift as passenger numbers continue to grow. Banks too are busy funding deliveries, and despite depressed margins and fierce competition, continue to find innovative ways to add value.
How long more can this bull run? It has been the question asked for the last number of years. The overall impression heading into 2019 is that while industry fundamentals remain strong – in particular high passenger growth, though cooling, – there are signs that building geopolitical, macroeconomic and industry headwinds will impact the industry over the next 24 months. Varying political tensions and potential trade wars, rising interest rates, volatile oil costs, a strong US dollar, slowing economies, increasing production rates, and MRO and infrastructure capacity constraints are all impacting the aviation sector. This report takes a look at how these headwinds are impacting the leasing, airline and banking markets today and considers the outlook for the rest of the year.
In summary, it is generally accepted that the industry cycle has peaked and is heading on a slow downward trajectory. Passenger demand, however, is not in contractionary territory. While growth is slowing it is off an increasing base and so absolute demand remains robust for now. As the economic environment becomes more challenging, weaker airlines will come under increased pressure. Those airlines that have used the elongated upcycle as a chance to strengthen their financial position will be able to weather the choppier environment ahead. Some liquidity is expected to leave the financing market as yields improve in other sectors. This could result in tighter financing terms in future. Banks are preparing for the impact of Basel IV, which could increasingly affect their ability to be competitive in the face of strong capital markets interest and banks that may not have to implement these rules. Some lessors see a weakening operating environment as a greater opportunity for value acquisitions. The stronger, more experienced leasing companies are expected to capitalise the most on these opportunities.
So 2019 brings with it a more cautious outlook with greater potential for more pronounced volatility and, with it, opportunity. I would like to thank all of those who participated for their time and their insights. I hope you enjoy the read.
Airline Economics and KPMG interviewed major aviation industry leaders in a series of in-depth interviews that delved deep into the real issues impacting the commercial aviation industry.
Airline Economics and KPMG conducted in-person interviews with 42 senior industry executives at leasing companies, banks and airlines, 32 of which were videoed at Airline Economics Growth Frontiers events located around the world between October and December 2018. The full video interviews are available online at http://www.aviationnews-online.com/aviation-industry-leaders-report/. The themes discussed in this report were presented at Airline Economics Growth Frontiers Dublin 2018 on January 21, 2018, which can also be viewed by subscribers and delegates at www.aviationnews-online.com after the event.
KPMG and Airline Economics would like to thank all of the industry leaders and experts that contributed to this report for their time.