Fitch: Aircraft Lessors Buoyed by Healthier Airlines

NEW YORK--(BUSINESS WIRE)-- The aircraft leasing sector continues to experience strong performance due to improving airline industry fundamentals, favorable credit markets and stable lease rates and margins, says Fitch Ratings in an industry report published today. Improving performance has also led to an influx of capital into the sector, which raises risks for lessors as lease pricing and terms are likely to ease over the near term in our view.

Aircraft financing is expected to remain broadly healthy in 2015, with aircraft lessors being the biggest beneficiaries. Robust demand for aircraft leases underpins the lessor markets' strength. Financial performance has remained steady for most aircraft lessors due to steady lease yields, improving aircraft values and strong airline industry operating fundamentals, leading to reduced lessee defaults and aircraft repossessions. In December 2014, the International Air Transport Association upgraded its profit outlook for the airline industry to $19.9 billion in 2014, up from $18.0 billion previously, citing declining fuel costs and strong global GDP growth as the primary drivers of the change.

Fitch expects banks and the capital markets (including lessor funding) to continue to play a dominant role in the financing of aircraft, at least over the near to intermediate-term. Strong liquidity and ample funding sources from capital markets (e.g. securitization financing and unsecured debt) and commercial banks are supporting lessors' pipeline of purchase orders for new aircraft inventory.

Over the past few decades airlines have increasingly been driving a structural market shift toward leasing, rather than aircraft ownership. According to Boeing Capital Corp., the percentage of the global aircraft fleet under an operating lease has increased to just over 40% in 2014 from approximately 12% in 1990. This trend is expected to continue as the mix of global aircraft on operating leases likely expands to 50% by 2020.

Fitch believes the upward trend is attributable to a mix of the following: capital constraints faced by certain airlines and record manufacturer backlogs; growth in global passenger air travel; growth of low-cost carriers; the expanding size of airline fleets; the increasing technological sophistication of aircraft; and the decline of government-subsidized export agency financing. Fitch believes leasing provides airlines with incremental operational flexibility while reducing capital commitments and risk.

Investors have responded to the growth of aircraft leasing by bringing an influx of capital to the market that we believe will lead to more competitive lease pricing and terms, while further fueling leasing growth. Competition may tempt some lessors to expand outside their core strategies in order to grow and increase earnings. Given the increasing number of aircraft lessors, Fitch believes further consolidation and ownership change is likely over the longer term as at least 20 major firms now fill the aircraft leasing sector.

Among the challenges aircraft lessors will need to navigate in the months to come are oil price volatility, competitive pressures, placing the delivery of large aircraft order books and rising interest rates. As profitability in the airline industry continues to improve on the heels of lower oil prices, the aircraft lessors should enjoy some near-term credit performance buffer. Fitch believes aircraft lessors would be net beneficiaries of a gradual rise in interest rates, as a rising interest rate environment would generally indicate that economic conditions were improving and asset inflation was present.

For a complete analysis of the aircraft leasing sector, please see the special report, "Aircraft Leasing Sector Review, Consolidation and Competition Amid Continued Growth," at www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research: Aircraft Leasing Sector Review (Consolidation and Competition Amid Continued Growth)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864762

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Fitch Ratings
Brendan Sheehy
Director
Financial Institutions
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33 Whitehall Street
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or
Matthew Noll, CFA
Senior Director
Financial Institutions Fitch Wire
+1 212-908-0652
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Elizabeth Fogerty, +1 212-908 0526
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Source: Fitch Ratings

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