"If it's good, it's going to get bad," said Pam Hendry, an industry adviser, moderating a finance panel discussion at an aviation conference in San Diego earlier this month.
While airline profitability remains robust and an abundance of capital continues to flood into airlines and lessors, experienced industry players – those who have seen multiple cycles – are waiting for the other shoe to drop.
Historically, the typical aviation profitability cycle is seven years. By those metrics, aviation is at the peak or past it. There's no sign of a slowing in the influx of capital into the industry, particularly when investment-grade issuers like Air Lease and Delta Air Lines can secure money at under 3% in the unsecured markets, as they did in 2017.
The debt capital markets accounted for over $50 billion of aviation funding in 2017, and Boeing Capital says in its 2018 forecast that it expects "an upward trend in capital markets volume as lessors continue to use the space as their primary source of financing".
Aircraft leasing has been incredibly competitive during the past couple of years. Some experienced lessors won't touch sale-and-leasebacks because "the economics just aren't there", as one aircraft leasing chief executive tells FlightGlobal.
And those who have lived through downturns, in 2003 or 2009 for instance, are concerned that this abundant cheap capital will dry up eventually. A clue may lie in where the industry is in that cycle.
"The thing that concerns me right now, is that this industry is having to use price to incentivise demand," says Justine Fisher, a vice-president at Goldman Sachs. "It's early cycle when demand drives price, and it's late cycle when price drives demand.
"You're seeing price-drive demand in airlines because yields are declining, because planes are full. And the same thing in leasing where you're seeing airlines that wouldn't have done leasing before but they just can't help themselves because rentals are so attractive."
American Airlines, for instance, which has typically turned to the EETC market to fund large swaths of aircraft, closed a few aircraft last year because leasing was so competitive.
"We're intending to test the [SLB] waters with an RFP later this year and then see where that comes out," said Tom Weir, treasurer of the Fort Worth-based carrier, at the Airline Economics Growth Frontiers event in Hong Kong in November 2016.
"The general perception in the industry is that we continue to ride the up-cycle," Jeff Lewis, vice president, Fortress, tells FlightGlobal. "I do not share this view."
Instead, Lewis says the industry is creating a false market and demand with pricing, noting that airline growth and startups are being spurred by low aircraft rentals, especially with new aircraft, which he says are depressed.
"Desperate lessors, particularly in China, are doing deals in the 0.5 to 0.6 lease-rate factor range to place these assets, which is not sustainable in the long run," a situation he compares with the housing crisis in the United States in 2008.
During the Hendry-moderated panel discussion in San Diego earlier this month, AFIC's transaction and business development leader Bob Morin noted a "hyper-competitive situation" when it came to funding, adding that AFIC, after launching its insurance alternative to export credit, had to enhance its offering as a response.
"This is clearly a very good time to be a treasurer or CFO of an airline in terms of the different types and amount of financing and pricing of financing," says Morin.
"If I was an airline today I would be concerned about rising interest rates and leverage up with as much fixed rate debt as possible."
This is exactly what Domhnal Slattery, Avolon's chief executive, suggested when he delivered a positive outlook for the industry during a keynote address at the same conference.
Slattery, whose company is itself experiencing issues related to its liquidity-stricken parent HNA Group, says there will be a "constancy of capital" over the years. However, he also argues in favour of raising as much debt as possible before rates go up – because the price of money will rise.
While in the long term they may be a good thing – naturally driving rentals up, and asset values as well if inflation increases – rate rises in the short term will mean that lessors are borrowing at higher rates before lease rentals catch up.
"A number of factors, both industry and economically driven, will rationalise the market and we will realise how advanced we are into the late cycle," says Fortress's Lewis.
Source: Cirium Dashboard
