After a two-year hiatus due to the pandemic, although things have returned to normal, it is important to note that the aviation industry has been exposed to a few new trends that will have a big long-term influence due to the constantly shifting sociopolitical landscape.
Notable investors suppliers and manufacturers believe that to have an optimistic future in the aviation business it is important to emphasis the importance of market volatility.
Here are the five key factors that will have a significant influence on the aviation realm for an extensive period.
1. The Resurgence of Asset-Backed Securities (ABS):
Despite a relatively subdued start to 2022 in the capital markets, attributed to factors such as the Ukraine/Russia conflict and escalating interest rates, a positive signal was the successful closure of GJC’s business jet ABS.
Forecasts suggest a return of ABS issuances secured by operating leases of commercial aircraft in the near term. These deals are expected to spotlight "pristine" portfolios, emphasising sought-after aircraft types in low-risk jurisdictions. While structural adjustments around Loan-to-Value ratios and amortisation profiles are likely, the ABS framework has proven resilient in facing the challenges posed by COVID and geopolitical tensions.
2. ESG Considerations Take Center Stage:
The Environmental, Social, and Governance (ESG) landscape remains a focal point, with solutions evolving for operators. Initiatives are poised to commence with carbon offsets, gradually incorporating Sustainable Aviation Fuel (SAF) as its supply increases and costs decrease.
The potential integration of electric Vertical Takeoff and Landing (eVTOL) aircraft for short-haul transport is also on the horizon, contingent on air traffic considerations. Industry-wide efforts to modernise fleets and corporate initiatives have already contributed to reducing the sector’s carbon footprint.
However, the need for enhanced communication of these efforts to stakeholders, including investors and regulators, was underscored. Equity investors, in particular, exhibit a strong inclination toward incorporating ESG solutions, though standardised metrics and incentives are yet to be clearly defined.
3. Diversification of Capital Sources:
Against the backdrop of rising interest rates and a backlog of COVID-delayed deliveries necessitating fresh capital, lessors prioritise diversifying funding channels. The expanding presence of private equity firms, unencumbered by the same capital adequacy requirements as traditional bank lenders, introduces heightened competition in the debt markets.
While traditional lenders maintain a cautious stance, alternate capital providers have demonstrated both willingness and capability to fulfill financing requirements. The industry witness’s investor appetite for aviation investments, accentuated by surplus capital. In this competitive landscape, investors place significance on origination capabilities, execution certainty, and attractive pricing and returns.
The entry of distressed lenders, while raising concerns for some, is viewed by others as a potential market stabiliser, especially for those seeking an exit strategy.
4. Potential for Industry Consolidation:
A recurring prediction from conference panellists is the likelihood of further consolidation within the industry. Small mistakes or isolated incidents could have catastrophic consequences for smaller lessors, prompting the identification of advantages in scale for less specialised lessors. Order books are seen as a potential motivator for acquisitions, a strategy likely to remain attractive until lease rate factors align with a higher interest environment.
5. Anticipated Surge in Aircraft Trading and Lease Rates:
Industry players express bullish sentiments regarding a significant surge in the aircraft trading market over the next 3 years. The expected increase in passenger numbers provides lessors with optimism about passing on some of the increased costs to customers, acknowledging the accommodations made during the peak of the pandemic.
In summary
The industry, subjected to a confluence of historical pressures—from the profound impacts of COVID and geopolitical tensions to fluctuating interest rates, rising fuel prices, and climate change imperatives—faces a critical juncture.
Adaptability emerges as a key determinant for industry participants navigating this complex landscape, underlining the collective resilience and forward-looking mindset of the aviation sector.
Participating in routine business operations and dedicating time to research industry trends can be incredibly stressful.
To avoid undervaluing your firm, it is imperative to have business professionals who can bridge the gap between market trends and business objectives. If we fail to take into account the market's dynamic state, the business could collapse.
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