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  • ANALYSIS: Finance industry remains calm despite pace easing

ANALYSIS: Finance industry remains calm despite pace easing

'Dublin week', as it's come to be known – when much of the air finance community descends on the Irish capital to discuss the year ahead and forecast what kinds of finance will be available – had a positive, yet more sober tone this year.

"It's been a strong environment, and now we're returning to normalised levels," AerCap chief executive Aengus Kelly told FlightGlobal in an interview on 23 January. "There's nothing that leads me to be unduly concerned about the market. Good sustainable structural growth, but with that comes the cut and thrust of a few airlines going away."

Like much of 2018, November was marked by "healthy but moderating global passenger traffic results", IATA wrote in a January report. International traffic rose about 6.6% year-over-year for the month, with domestic travel climbing 5.6%.

"Traffic is solid. But there are clear signs that growth is moderating in line with the slowing global economy. We still expect 6% demand growth this year [2019]. But trade tensions, protective tariffs and Brexit are all uncertainties that overhang the industry," notes Alexandre de Juniac, IATA's director general.

Lessors, which work directly with the airlines, have noted similarly satisfactory results whilst recognising the turbulence that started in 2018 and could bleed into 2019.

"Everything we see supports the notion that industry profitability will remain decent throughout the year, but we see signs of cracks in the global growth story that are becoming more visible every day," Dubai Aerospace Enterprise chief executive Firoz Tarapore told FlightGlobal on 22 January.

SMBC Aviation Capital chief executive Peter Barrett is somewhat more upbeat. The market "feels a little softer but generally okay", he notes.

"The tensions tend to be localised," Barrett told FlightGlobal in an interview on 21 January. "It's the marginal guys that get hit, and I think you're going to see that in the market."

Amid a more difficult operating environment for airlines – higher fuel prices for much of the year and the strength of the US dollar against other currencies – some faltered during 2018. But, for the most part, it was the carriers at the fringes who felt the heat.

WHAT WILL 2019 BRING?

"As we look at underlying demand and growth, they are still intact and they should result in a pretty decent 2019 with an open eye towards some of the things that could cause potential dislocation," adds Tarapore. "The airlines were caught by a headwind and bailed out by a tailwind."

Certain business models remain under pressure, like the long-haul low-cost one. Norwegian, for instance, today disclosed it would consider consolidation and is planning to defer and divest aircraft in an aim to reduce capital expenditure and cut costs.

Wow Air, on the other hand, is laying off staff and returning aircraft – including all its widebodies – to lessors as it looks to restructure.

"What we've seen in a lot of these airlines is that they've set up their business models in a very tight way. There's a lot of capacity that’s gone in, and any sort of ill wind coming their direction throws them off," Pat Hannigan, newly appointed president of CDB Aviation, told FlightGlobal on 21 January. "That's a concern for us, and we have to look at the airlines we work with and decide that they have the liquidity or the depth to survive these gusts of wind."

That said, the mid-year spike in oil prices in 2018 did not hit airline profits as terribly as some predicted.

"I was surprised on the upside because my personal prediction earlier last year in San Diego [was] that if oil was $70 on average for the year, the IATA forecast would be 30-40% lower," Avolon chief executive Domhnal Slattery told FlightGlobal on 22 January.

"While oil did average around that number, the airlines came in pretty well. I find that comforting because it means they're driving more and more through the ancillary revenue channel."

Slattery suggests, however, that the small, fringe airline failures of 2018 will be a continuing theme in 2019.

Kroll Bond Rating Agency wrote in a January report that while there were numerous airline bankruptcies in 2018, they tended to involve smaller airlines and, as such, the credit impact on lessors was more muted than in 2017.

Moreover, liquidity remains freely available for lessors and airlines alike.

"Despite recent market volatility, financing markets for aviation debt should continue to remain robust in 2019 given strong OEM order backlogs and healthy industry fundamentals, albeit at higher costs because of rising rates," writes KBRA in the January report.

So far in January, both AerCap and Air Lease have raised unsecured bonds with both pricing wider than their most recent equivalent bonds. BOC Aviation also raised an unsecured bond, its first fixed-rate issue since January 2018, pricing tighter than both the others.

"The supply of debt capital to the industry remains unabated, but the cost/spread has plateaued. It's not continued to go downwards, particularly for the banks on the secured side, as in previous years," Slattery affirms.

On 28 January, United Airlines launched its first enhanced equipment trust certificate of 2019 – a $1 billion bond to fund the purchase of 25 aircraft delivery through July. The 2019 deal priced about twice as wide as last year's.

On the upside, however, KBRA notes that "rising interest rates while not good for funding could help slow the inflow of capital into the industry and also moderate some of the negative effects of high competition owing to abundant liquidity".

LESSORS SEE RATE RISE TRICKLE DOWN

Over the past few years, lessors have complained of lease-rate factors falling significantly amid intense competition. Reports of lease-rate factors as low as 0.5 have been commonplace since 2017.

"What's clear is that the demand for sale-and-leaseback funding is enormous," Slattery says, noting a demand of about $40-45 billion for this type of funding in 2019.

By some estimates, there will be a capital need for $140 billion for new aircraft deliveries in 2019, and Slattery believes sale-and-leasebacks will account for about 30% of the total funding requirement.

"This is the year that it pivots due to rising interest rates, and the smaller lessors who were being super-aggressive in pricing will just run out of capacity," he contends.

This story has been updated to reflect that BOC Aviation also issued an unsecured bond in January.

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