Aviation downturns are tough to predict. They're usually caused by an exogenous shock that makes people not want to board aircraft.
At the moment, liquidity is plentiful as capital floods into the industry from traditional and non-traditional sources. But history suggests there must surely be one on the way.
At the ISTAT Americas conference in San Diego earlier this month, Avitas senior vice-president Adam Pilarski indicated that he expected the downturn to begin in 2018.
But given that exogenous shocks are unpredictable and can occur at any time, how can lessors prepare for the inevitable?
Speaking in San Diego, several top-tier lessors said that liability management would be the key to weathering any downturn.
"It's the actions you take now," said Peter Barrett, chief executive of lessor SMBC Aviation Capital. "If you manage your business prudently and take advantage of the current strong market, that will stand you in good stead when the downturn does come."
Lessors have enjoyed the abundance of liquidity over the past few years, raising money in both the capital markets and the bank market, which has provided historically low funding.
It is when market conditions are less benign that it is most important to manage the funding strategy, particularly when it comes to liabilities, Barrett tells FlightGlobal. "The challenges always come on the liability side of the balance sheet – that's where a lot of the focus has to be," he says, adding that while managing assets is important, ultimately aircraft will stay on lease.
During the financial crisis, ILFC – the largest aircraft lessor by portfolio value at the time – funded itself mostly with short-term and medium-term unsecured debt. In the wake of the US government's rescue of its parent AIG, and with the capital markets closed, ILFC had to turn to secured borrowing to cover nearly $4 billion of debt maturities coming down the pipeline.
Managing during the downturn also includes making strategic choices in aircraft trading, hedging, risk management and fleet strategy.
With the US Federal Reserve set to announce an interest rate rise on 15 March, it will be important for lessors to have hedges in place to insulate their businesses from sharp and fast hikes.
Portfolio management is critical, too, with top-tier lessors needing to focus on choosing the right counterparties, and on diversifying across geographies while investing in the most ubiquitous equipment and trading assets.
"The day you buy is the day you sell," says David Swan, SMBC Aviation Capital's chief operating officer. "We're thinking about our exit when we're considering our entry."
Source: Cirium Dashboard