Change is in the air

The next 12 months promise to be difficult again for the aviation sector. Most respondents expect further consolidation of airlines and leasing companies. Indeed, 58% point to “significant” M&A-related reconciliations in 2022, and a further 35% expect “moderate” consolidation.

58% expect significant airline and leasing company consolidation, and 35% expect moderate consolidation, in 2022.

Focusing on the regions of the world that respondents believe will experience the fastest growth in the aviation sector in 2022, Asia-Pacific (excluding Australasia) stands out and is highlighted by a large majority (85%) of respondents. The region’s fundamentals are strong: Asia-Pacific’s growing middle class and regional travel market are key drivers, as is China’s growing influence in the region. “China wants to become the most influential economy in the region, and its Belt and Road Initiative will help Asia’s aviation sector,” says a partner at a Korea-based private equity firm from South. Meanwhile, the new US focus on the Indo-Pacific region under the Biden administration could provide additional stimulus.

Ranking the other regions selected by respondents, Australasia and Africa take second place, each selected by 33%, followed by North America (26%). The Middle East, Europe and South America are the regions least likely to experience the fastest growth in the aviation sector according to respondents, cited by 16%, 7% and 0% respectively.

85% of respondents expect Asia-Pacific to experience the fastest growth and expansion in the aviation sector in 2022.

When asked which regions are most at risk of slowing growth or experiencing recession in the coming year, 64% of respondents point to Europe. This is perhaps not surprising. While IMF data suggests that the Eurozone could see GDP growth of around 4.3% in 2022, this still lags far behind emerging and developing Asia-Pacific (6.3%) and the United States. United (5.2%).¹ Meanwhile, more than half of all respondents (55%) expect slower growth in South America, where forecast GDP growth is 3% for the region in 2022 and just 1.5% for its struggling economy, Brazil.

Delivery delays and suspended operations of certain aircraft types continue to be a headache for many airlines and lessors. Almost three-quarters of respondents in these groups (74%) report negative impacts that last for weeks or months. One of the main reasons is COVID-related manufacturing bottlenecks. The grounding of Boeing’s 737 Max was another factor, although the suspension was eventually lifted in 2021.

71%

airlines and lessor operators have postponed all or part of their deliveries

For airlines and lessors facing lackluster passenger demand, manufacturing delays could be a blessing in disguise, especially for those who have ordered jumbo jets. Passenger traffic on long-haul routes that rely on such aircraft has been hit the hardest by COVID-19. Demand for narrow-body aircraft for domestic and regional operations was less affected. Globally, 71% of airlines and rental companies have postponed some or all of their deliveries, with 15% saying they have had to postpone all of them. Airlines and lessors based in APAC are the most likely to differ (80%) and those in North America the least (61%).

Looking ahead, pandemic-related restrictions are expected to be one of the biggest threats to the profitability of 63% of airlines and 71% of ECAs over the next 12-18 months. “Travel restrictions are a huge hurdle for the business,” says the finance manager of a Malaysia-based airline. “The number of passengers has dropped drastically, and that is the main concern.”

Concerns about the economy are also on the agenda. This is the biggest concern for lenders and banks (57% each), as they consider the threats of rising inflation and economic contraction. In this context, some fear that new trade barriers are not far off. “We see the protectionist attitude of governments increasing,” says the financial director of an EMEA-based donor.

Political instability is widely cited. A managing director of a US-based private equity firm says: “Political instability is something we cannot predict. Flights may have to be halted to some areas if the problem worsens. Meanwhile, European airlines are keeping a close eye on simmering tensions on Europe’s eastern fringe: “Some problems are cropping up and creating war situations,” warns the chief financial officer of an airline based in the Baltics. “Under these conditions, investment decisions become difficult.”

The dramatic contraction in passenger numbers since the start of the COVID-19 pandemic has raised questions about the number of aircraft currently on the market. Overall, only a minority (29%) of respondents believe that the number of aircraft currently on the market is too high.

Aircraft numbers cannot be easily changed. In addition, the considerable longevity of aircraft – 25.1 years for passenger aircraft and 32.5 years for cargo aircraft – requires a long-term view. “We cannot adjust or reduce the number of planes when there are temporary disruptions, especially when we don’t know how long these disruptions will last,” said the finance manager of a UAE-based carrier. .

In terms of future funding, airlines and lessor-operators are split on whether they see themselves entering the JOL/JOLCO market in 2022. A large minority of respondents from both groups (45%) plan to do so , but the remaining 55% say they don’t plan to or aren’t sure about the question.

71% use green bonds and 70% finance new equipment, in order to align with growing trends in energy transition and sustainability.

Addressing immediate challenges is a central concern for much of the sector. At the same time, there is a growing consensus that the industry needs to change, particularly when it comes to environmental performance and meeting ESG criteria. At the same time, a growing share of institutional financing, including sponsorship from export credit agencies, now comes with green conditions.

Aviation is the most difficult mode of transport to decarbonize.

Nevertheless, a migratory route is emerging. Measures include a shift to Sustainable Aviation Fuel (SAF), intelligent air traffic control, aircraft efficiency improvements and the use of Fixed Ground Power (FEGP) to reduce aircraft emissions. airports. There is also growing interest in greener propulsion systems, including the use of hydrogen and electricity, although practical solutions for large-scale aviation are still a long way off.

Our survey shows that seven in ten respondents view green bonds and new equipment funding as ways to align with growing trends in aviation sustainability and energy transition.

Green bonds are already being used to fund everything from fleet renewal to SAF research and sustainable airport buildings. The attractions are clear. “Green bonds are the best way to attract new investors,” says the managing director of an ECA based in North America. “There are domestic and foreign investors who take green investments seriously, and they don’t invest in companies that cause heavy damage to the environment.”

Financing new equipment (whether through bonds or otherwise) is also a key element of most respondents’ ESG platforms. “Our main focus has been to fund new equipment and projects aligned with green initiatives and sustainability,” says the finance manager of a Canada-based bank that invests up to $1 billion a year in the energy sector. aviation. “It also has a positive impact on our image.”

_{1 IMF, Global Economic Output Growth Projections: https://www.imf.org/en/Publications/WEO/Issues/2021/10/12/world-economic-outlook-october-2021}

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Facing headwinds

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