With the COVID-19 pandemic hopefully firmly now in the past, the aviation industry has been riding the recovery wave with a number of false starts and strengthening headwinds. Once again and for the fifth year running, Airline Economics and KPMG, have begun their global state of the market review of the aviation industry by speaking to market leaders around the world on their experiences of the past 12 months and expectations for the short and longer-term future.

Ahead of the publication of the completed Aviation Industry Global Leaders Report 2023 in tandem with the Airline Economics Growth Frontiers conference in Dublin in January 2023, Airline Economics and KPMG have released a series of video interviews, each hosted by Joe O’Mara, Partner and Head of Aviation Finance at KPMG Ireland, with industry experts that were conducted between October to end November 2022.

In this interview, Andy Cronin, Chief Executive Officer, Avolon speaks to Joe O’Mara, Partner and Head of Aviation Finance at KPMG Ireland.

With the COVID-19 pandemic hopefully firmly now in the past, the aviation industry has been riding the recovery wave with a number of false starts and strengthening headwinds. Once again and for the fifth year running, Airline Economics and KPMG, have begun their global state of the market review of the aviation industry by speaking to market leaders around the world on their experiences of the past 12 months and expectations for the short and longer-term future.

Ahead of the publication of the completed Aviation Industry Global Leaders Report 2023 in tandem with the Airline Economics Growth Frontiers conference in Dublin in January 2023, Airline Economics and KPMG have released a series of video interviews, each hosted by Joe O’Mara, Partner and Head of Aviation Finance at KPMG Ireland, with industry experts that were conducted between October to end November 2022.

In this interview, Tom Baker, Chief Executive Officer, Aviation Capital Group speaks to Joe O’Mara, Partner and Head of Aviation Finance at KPMG Ireland.

With the COVID-19 pandemic hopefully firmly now in the past, the aviation industry has been riding the recovery wave with a number of false starts and strengthening headwinds. Once again and for the fifth year running, Airline Economics and KPMG, have begun their global state of the market review of the aviation industry by speaking to market leaders around the world on their experiences of the past 12 months and expectations for the short and longer-term future.

Ahead of the publication of the completed Aviation Industry Global Leaders Report 2023 in tandem with the Airline Economics Growth Frontiers conference in Dublin in January 2023, Airline Economics and KPMG have released a series of video interviews, each hosted by Joe O’Mara, Partner and Head of Aviation Finance at KPMG Ireland, with industry experts that were conducted between October to end November 2022.

In this interview, Robert Korn, President, Carlyle Aviation Capital speaks to Joe O’Mara, Partner and Head of Aviation Finance at KPMG Ireland.

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which assessed the general state of the industry based on interviews with a variety of industry leaders. Now that the aviation landscape has changed dramatically with the devastating impact of the COVID-19 pandemic continuing to ravage the industry, Airline Economics and KPMG are returning to those same leaders for their reaction to the current crisis in a series of podcast interviews.

In this latest podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Richard Moody, Global Head of Transportation financing at Deutsche Bank. Moody shares his views on the impact of the pandemic on the aviation industry, whose fortunes now rest on government policy, which makes this crisis unique.

“The decisions being made at that macro, governmental level are having direct implications on aviation,” he says. “In many ways the industry is not master of its own destiny; it’s relying on policies, procedures, regulation, etc., driven by governments and politicians, and the industry has to adapt to that. In addition there is the unknown of how long it will be before a vaccine becomes widely available.”

The crisis has often been compared to 9/11 for its direct impact on aviation but this is global crisis that cuts much deeper on an industry that is far larger and far more connected than it was in 2001.

“The big difference between this cycle and where we are today versus the financial crisis and even 9/11 is the sheer scale of the industry today and its global reach. The interconnectivity – the ecosystem – between all airlines, OEMs, lessors, banks and other industry participants is deeper than it’s ever been before. And so what we’re seeing is that you are not isolated just because you are an OEM, lessor or a bank. What happens in this industry more broadly, has implications for all industry players.”

“Restrictions in terms of people buying tickets, getting on planes, and flying has widespread repercussions across the industry. The interconnectivity of this ecosystem has enhanced the impact and affected a wider spread of the industry more holistically. And don’t forget as well that, in the last 10 to 15 years, we’ve become much more of a consumer-oriented society. People are more curious; they want to travel more; they want new experiences and they have the disposable income to do so . There’s been the invention of products like Airbnb that have encouraged people to explore more. You cannot ignore the interdependencies of all of the different constituents of the aviation and aerospace industry from manufacturing, financing, maintenance all the way through to the impact on tourism and business travel.”

Moody examines how the extreme distress in the airline sector and the shutting off of cashflows has necessitated government support, which has been significant and predominantly in the form of subsidies or loans and guarantees. With this lens, Moody discusses the change in the traditional view of a flag carrier. “There has been about over $160 billion of government linked support to the industry The traditional notion of a flag carrier that might be government-owned or government supported was that the airline was regarded of such strategic importance that it would always be supported in some capacity. This crisis has shown that that’s not necessarily the case anymore. This notion of a flag carrier that can rely on government support is a historic view. But, similarly, there is the realisation by some governments that airlines and the interrelated jobs they create are so significant that they have to be supported in some way. In the US there has been the CARES program, which has supported jobs, but you also have Singapore, where its government has provided a multibillion support programme for SIA given the strategic importance of the airline and the aviation industry to the economy. Other examples include Finland, Iceland, Germany and others who have provided some sort of support. It’s clear that this support is and will be hugely linked to the importance of having an airline in terms of the connectivity of that country globally and also the importance of employment and the knock on effects to the economy if that airline were to file for bankruptcy. What is surprising though is that government support seems less prevalent in the APAC and the African regions where perhaps it is needed the most.”

Deutsche Bank has a variety of aviation finance deals across the product spectrum in its portfolio, from revolving credit facilities through to letters of credit and more traditional aircraft financing such as structured products like Japanese Operating Leases etc. When dealing with clients, the bank’s approach has been to cooperate and collaborate to find a way through the crisis together.

“Our approach has been to acknowledge that we’re all facing this together. At the beginning of the crisis, even though we didn’t realise its magnitude at the time, we believed that the moral thing for us to do was to continue to support transactions when those less able to do that had asked for deferrals or other concessions,” says Moody. “There are certain borrowers and clients who are very aligned with their banks and lenders. Ultimately, the industry will come through this and survive and, despite the significant level of cancellations, airlines and lessors are still going to require significant amounts of capital. When borrowers come back to the market and airlines start taking aircraft again, and when the market needs leverage for sale-leasebacks, they will come to the financing community. And how those borrowers behaved during this period, will have a large bearing on whether those institutions decide to provide capital in the future.”

The capital markets have been used extensively by airlines and lessors to help shore up their liquidity positions, which Moody sees as a consequence of the government support for airlines that will eventually expire and suggests that the relative value in aviation investment compared to other sectors may be eroded at the time when borrowers are looking to refinance those deals.

“Clearly the unsecured and EETC markets are open but the big question is when will the ABS market come back in a significant way and what will it look like when it does return. In the interim, this is leaving a big gap for more flexible capital like credit funds that would have traditionally been provided by banks,’ says Moody. “The availability of bank finance will be dependant on the institutions involved, what they have in their books and what they’re battling through at the time.”

Moody sees institutional investors and hedge funds circling and waiting for the opportunity to enter the space but equally there are those banks that may be seeking to exit the sector altogether, although there isn’t the evidence of a major withdrawal trend just yet. He also notes that the COVID crisis has masked the future regulatory changes that still exist in the form of increased capital allocation for the sector via the BIS requirements and also increasing lending agendas that include ESG considerations, an area that is not that easy to meet.

He further comments on the future of the aviation ABS market, which had been prolific for the past three years in particular. He predicts that until that market comes back in a significant way, there will be a back-to-basics approach for structured aviation financing and when the aviation ABS product does come back it will be for lower leverage deals, very clean and robust structures, higher pricing and a collateral pool of stronger lessees based on their survivability. The same back-to-basics philosophy will be shared by the bank and other financing markets as well, says Moody.

“There will be a total recut of the ABS market. The level of leverage you get all the way through to the C notes will be significantly altered. And the E note market that we know today may never come back, or at least will not for some time yet.”

Deutsche Bank has been working on the aviation ABS 3.0 structure, which Moody says will require more input from all the participants from lessors, investors to rating agencies, to try and build a structure that works. “It’s in no one’s interest to try to launch a structure and risk an unsuccessful issuance. It will be well into 2021 before we see a large aviation ABS deal. And the first to come to market will be very clean, very uncontentious in terms of structure, with younger, predominately new technology assets and very good lessees. They will also be issued more for internal financing purposes with the equity strip being held by the lessor rather than being sold to an equity buyer.”

Airline Economics Podcast Insights Series 2020 – Bobby Janagan, Rolls-Royce Partners Finance

In the latest of the Airline Economics Insights Series of podcasts Bobby Janagan, Managing Director at Rolls-Royce Partners Finance, share his insights into the impact of the pandemic on engine lessors and their customers as well as the long-term future for certain engine types and values.

A series of podcasts from Airline Economics speaks to veterans of the commercial aviation finance and leasing industry, who share their thoughts on the impact of the pandemic crisis on the aviation industry.

In the latest of the Sage Series of podcasts, Victoria Tozer-Pennington, editor and co-founder of Airline Economics magazine, speaks to Harry Forsythe, a veteran of the aviation leasing industry.

A Principal of aviation consulting firm, AeroInterface, Forsythe has over 45 years of experience across the OEM and aircraft leasing sectors. He set up AeroInterface in early 2019 with five other experienced executives: Andrew Pearce, Jon O’Connell, Peter Greensmith, Lance Strong and Will Gramolt.

Before heading back to Sydney to establish AeroInterface, Forsythe was deputy CEO and chief commercial officer of Singapore-based Asia Aviation Capital (AAC), the AirAsia-owned aircraft lessor, where he was instrumental in the sale of the company’s 70+ aircraft & 14 engine portfolio to BBAM in 2018. Prior to AAC, he was EVP marketing for Macquarie AirFinance (MAF), in San Francisco, and he also held several other marketing roles with MAF in Australia & Singapore. From 1989 to 2006, Harry was with AWAS, initially in Hong Kong until 1999, then Sydney until mid-2005 and finally Seattle until September 2006 when he was VP marketing, responsible for the company’s global marketing activities.

Having worked for aviation OEMs and aircraft lessors since 1973, Forsythe is a well-known industry professional with deep experience of downturns in this cyclical industry. But he is also an optimist, and despite his clearly frustrated views on the actions of world governments that have aggravated a health crisis into an economic recession, he believes that people still long to travel. On the podcast, Forsythe shares his views on how airlines and lessors should navigate this crisis and predicts the future pain all sectors of the market will likely experience before the recovery occurs. Ending on another optimistic note, Forsythe reiterates his view that the market will come back, and come back strongly so long as the economic impact of the crisis also recovers.

A series of podcasts from Airline Economics speaks to veterans of the commercial aviation finance and leasing industry, who share their thoughts on the impact of the pandemic crisis on the aviation industry.

In the latest of the Sage Series of podcasts, Victoria Tozer-Pennington, editor and co-founder of Airline Economics magazine, speaks to John Feren, a partner at Split Rock Aviation, which boasts five industry veterans.

John Feren spent 30 years with Boeing in various sales and marketing roles for many aircraft types from the MD-80s right up to the 787. After Boeing, John spent 10 years with aircraft leasing company, Aviation Capital Group as senior vice-president of business development and as a member of the senior leadership team.

In 2018 Feren joined L3 Technologies where he supported commercial business development before forming Split Rock Aviation, an aviation advisory firm based in the US, with former ACG colleague Andy Mansell in late 2019. Tom Woodward, Clay Smith and Steve Welo complete the Split Rock Aviation team.

At troubled times like these for the aviation industry and the world, drawing on the experience of experienced industry veterans is a significant competitive advantage. For the Split Rock Aviation team, as Feren says in the podcast, those years of experience give a broader perspective on the current situation. After working through the period after 9/11 and then after the global financial crisis, the aftermath of the global pandemic is unprecedented. “[COVID-10] is global and it's an invisible disease, impacting the entirety of the travel experience,” he says. “The aftermath of 9/11 really only impacted a small component of the whole travel experience… Right now, the number of people traveling is at an insignificant number to sustain global operation. So not only do you have consumers quite traumatized by the disease, you also have a financial model that's really not working.” Added to those factors, says Feren, is the fact that the industry had been in a period of very high growth and airlines had been adding record amounts of capacity and ordering new aircraft for a growth curve that today may not be achievable for several years.

Feren shares his thoughts on the likely survivors of the crisis being those companies that prioritise strong cash management, act decisively and quickly to cut costs and capacity and that have a pragmatic plans in place that recognises strength, access to revenue generating channels and any controllable variables. Although government support at this time is needed and welcomed by airlines, that cannot be relied upon for the long-term, adds Feren, who suggests how airlines can manage their way through the next few months. Lessors, he adds, have slightly different challenges, not least managing their fleets, especially those with large widebody portfolios.

Despite the crisis and even though many investors have stalling their investment into the sector, Feren comments that for “every investor that wants to run from the space in downturns, there are many that want to get in because they think it's a good opportunity”. He comments on the private equity opportunists that see the aviation industry as a good place to deploy measurable amounts of capital. “It's a fairly well developed business. It's global. It's largely standardized, so airplanes are traded in dollars. It’s a very attractive investment proposition. And for long-term investors [looking over the] 15, 20 year horizon, [this] might be just the perfect investment time. I think that you'll see evidence of maybe five or six companies coming into the industry.”

On the flipside, however, there will be investors seeking to exit the business altogether that Feren expects may lead to a “changing of the old guard” in the aviation industry. Click here to listen to the full podcast interview with John Feren.

A new series of podcasts from Airline Economics speaks to figures from the commercial aviation finance and leasing industry, about the emerging issues in the aviation industry.

In the first of the Insights Series of podcasts, Aaron Woolner, senior reporter Airline Economics magazine, speaks to Elise Weber and Matthew Tringham, about Skytra – a wholly-owned subsidiary of Airbus, which is developing a series of indices and derivatives to enable aviation industry players to manage the risk of ticket price volatility.

In her 15 year career within Airbus, Weber has held various international management roles in communications, performance management, strategy and business development. Tringham has been working in the aviation industry since the 1990’s, first at an airline before starting at Airbus in 2004 as an Aeronautical Engineer developing new Aircrafts. He then went on to work in a variety of management positions both in Europe as well as India and China. Tringham has worked in business development and strategy since 2014 where he led the development of a number of major new projects before establishing Skytra alongside Weber.

During the podcast Weber explains the thinking behind Skytra development and the key problems that airlines face in terms of revenue visibility, with earning volatility an issue, even in normal times. “Our value proposition is about making these revenues less volatile with the help of new instrument that are based on our Skytra prices indices , this means in future airlines will be able to hedge both their fuel and their revenues,” she says.

Weber says the COVID 19 pandemic has highlighted aviation’s need for more risk-management tools, while Tringham said that the current “interesting times”, means that all normal market dynamics have changed with revenues and pricing move down markedly worldwide. This occurred first in intra-Asia in January, then Asia long-haul to both European and North America before finally both those region’s domestic market saw a decline. US domestic travel was the final the final market to be hit in March – but there was an exception to the trend, according to Tringham.

“One unexpected phenomenon on the long-haul market from Europe and US to Asia, was that we saw wave of reparations travel, where actually the pricing was much higher than normal and for certain carriers experienced higher revenues in the short-term.”

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which assessed the general state of the industry based on interviews with a variety of industry leaders. Now that the aviation landscape has changed dramatically with the devastating impact of the COVID-19 pandemic continuing to ravage the industry, Airline Economics and KPMG are returning to those same leaders for their reaction to the current crisis in a series of podcast interviews.

In this latest podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Bénédicte Bedaine-Renault, who is head of aviation finance within Natixis covering the Europe, Middle East and African regions. Her team, based in Paris and London, covers both airlines and lessors in the EMEA region. Natixis has four decades of experience in aviation finance and has a current portfolio of 850 aviation assets worth approximately $5bn.

Bedaine-Renault says that the quality of client relationships has been key for both operating lessors and banks during the past few months. “Banks, including Natixis, during this particular phase, has been to support to the strongest relationships, which are those that have been built in a trustworthy environment for the past few years,” she says. “It doesn’t always mean highly-profitable relationships, but must have that strong element of trust.”

Natixis has been supporting operating leasing companies with various facilities that were already in place as airlines turn to lessors for deferrals and other means of support, Bedaine-Renault believes that more airlines will now turn to the commercial banks for help as a second step in raising cash to survive this crisis. “It’s going to be interesting to see how that develops notably after the summer season.”

She notes the industry-wide challenge regarding asset valuations, which were already considered to be high before the crisis. She expects there to be an increased scrutiny of aviation asset exposures for banks. “It is difficult to determine what is the real exposure at risk. It will be interesting to see how the different financiers in the industry will react to the new level of risk, and if there can be a significant incremental amount of debt poured into this sector.”

Valuing aircraft is difficult in this market, she adds, suggesting that one way is to determine values and NPV from recent sale-leaseback deals conducted between airlines and lessors, which can be cross-checked with the different appraiser values. “To have a view on the asset class and the asset prices using the different metrics, it’s a call that you take on the airline creditworthiness, maybe looking at the level of state support it has received and how you value the firm with an NPV type of mechanism to determine aircraft residual value.”

Bedaine-Renault adds that the additional challenge to this will be ESG elements: “We clearly see a trend of moving towards younger, more efficient aircraft. And because some of the state guaranteed loans came with strings attached to regarding carbon emissions, there is an open question regarding residual value.” She notes that this is a challenge for airlines and banks but also present new opportunities in the field of green finance.

In terms of more immediate financing, Bedaine-Renault sees the increase in the importance of the export credit agencies, which she says will certainly “come back into fashion” noting the innovative transactions the ECAs have closes in the past few years using different collateral and financial structures. “There is an opportunity for certain players to gain market share and to keep exposure in the aviation sector, while limiting dramatically the risk, thanks to the offset of the export credit guarantee.”

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which assessed the general state of the industry based on interviews with a variety of industry leaders. Now that the aviation landscape has changed dramatically with the devastating impact of the COVID-19 pandemic continuing to ravage the industry, Airline Economics and KPMG are returning to those same leaders for their reaction to the current crisis in a series of podcast interviews.

In this latest podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Marc Iarchy, a partner at aircraft leasing company World Star aviation, about his thoughts on the impact of the crisis so far and for the future of the market.

Based in San Francisco and London, World Star Aviation is a full service lessor that currently owns or manages a portfolio of approximately 75 assets, mainly in the mid-life space. Iarchy and the team has been working closely with lessees to help them and the broader industry weather the current crisis, where they can make a difference.

“We are trying to be helpful where we can, and particularly where our help can make a difference,” he says. “There is limited value where we’ve got an old aircraft with a large airline that has 500 aircraft, because helping them makes zero difference to their chances of surviving. Whereas where we have two out of five aircraft with an airline, our help makes a very big difference to them.”

World Star Aviation’s main aim is to help airlines avoid bankruptcies where possible, therefore avoiding a repossession situation in a market where aircraft demand is so low. The lessor has negotiated deferral agreements that involved longer lease terms, power-by-the-hour agreements and other lessee friendly terms for a short period. As those three-month arrangements come to an end however, Iarchy notes that airlines are beginning to request another three-month or even longer reductions in rent obligations, which will begin to impact the chain more severely.

“A loss of three months cashflow was a bit of a problem for sure,” he says. “But we expected and hoped that things would recover by the summer so that we can also stand by our own obligations vis a vis our financiers and our investment partners… we now need to look at extending those arrangements for another three months or longer… We have also had one or two airlines wanting to talk to us about returning aircraft. That’s obviously a much more difficult conversation.”

The damage to airline balance sheets is becoming much more apparent now, says Iarchy, adding that the next round of renegotiating leases will have much greater ramifications for leasing companies and their own obligations.

“We have been in a deep freeze for three months, but now that airlines are trying to reopen and relaunch routes, it is becoming very painfully obvious that there’s going to be some deep, deep changes in the industry, as well as a decent amount of bankruptcies,” says Iarchy. “Airlines that haven’t paid their bills for three months are going to be catching up for the rest of 2020 and with a reduced capacity they simply aren’t going to be able to do it in that time. Unfortunately for many airlines, they may never be able to get there.”

Iarchy goes on to doubt even the ability of the big US carriers to avoid a Chapter 11 scenario: “Even though in the US the government aid is massive, it may be no more than a Band-Aid,” he says. “When companies like American Airlines borrow in double digits in the capital markets, then a Chapter 11 bankruptcy solution is probably not too far off. And what I’m particularly worried about in terms of the US is that when one of them goes Chapter 11, they all will.”

Iarchy talks in more depth about the aviation financing market including the impact of the crisis on asset-backed securitisation vehicles. “At the moment, for our SPRITE ABS we have paid all the tranches and have avoided a downgrade but the situation obviously is what it is and we can’t conjure money [if the airlines can’t pay].”

Despite the stressed environment, Iarchy remains surprised at the prices that aircraft are being sold in the market as expensive: “Maybe there’s some people that still have very low cost of capital, or they have money that they have to deploy before the end of this year.” World Star remains an active player in the aircraft trading market and is working on a number of acquisitions but Iarchy states that those are only opportunities “where we truly feel comfortable that in a mayday scenario, we’ll still end up okay”.

Listen to the full podcast for more from Iarchy on the broader aviation finance and leasing industry. On the whole, despite the extreme challenges facing the market, he remains confident in the future and the recovery of this industry.

“The demand for travel will remain; people like to travel and go on holiday. The middle class continues to grow. These trends remain and although there will be a dip that will take longer to recover from than previous crises, I have no doubt that we will.”