After a tremendous first nine months for lessor deal activity in the public markets, 2014 ended on a somewhat mellow note, with several aircraft financings having to be postponed and a much-anticipated initial public offering pricing lower than expected.
Increased market volatility – some of which stemmed from the end of the USA's quantitative easing programme: a chapter in the US Federal Reserve's history that included $4.5 trillion in debt purchases – altered the asset-backed securities (ABS) deal flow from October.
Although the end of QE was largely seen as anticlimactic in the aviation finance sector, it did create a drag on investor appetite due to uncertainty in the wider financial markets about how the global economy would digest the move.
Heightened concerns about chronic weakness in the European economy, the potential spread of Ebola and slowing growth in Asia also dampened investors' spirits.
Turbulent markets also affected the IPO of operating lessor Avolon Holdings, which priced at $20 a share – below the initial $21-23 per share range that the Irish lessor had initially expected for its listing on the New York Stock Exchange.
The good news is that over these first few months of 2015, lessor issuers – which shied away from ABS financings late last year – will finally come to market as a result of the return of a strong economic outlook, say banking sources.
This is important as Boeing anticipates lessors will fund about 40% of 2015’s deliveries, "while driving significant innovation in aircraft finance".
Global airlines will require $124 billion-worth of aircraft financing this year, says the manufacturer, or double 2010's delivery bill.
Boeing notes in its recent 20-year outlook that lessors are increasingly reliant on the capital markets to fund their growth. In 2012, the capital markets represented 32% of lessors' sources of financing. This year they will represent 53%.
In the aviation sector, the sharp drop in oil prices and stronger global economic growth are expected to bolster airline profits this year.
On 5 January, the cost of crude fell 6% to $53 a barrel, its lowest level in five-and-a-half years. Some analysts think the price of crude could drop to $40 a barrel.
IATA estimates that the world's airlines could report a 26% jump in collective net profit to a record $25 billion this year. That would be up from an expected $19.9 billion in 2014 and more than double the nearly $11 billion in combined profit in 2013.
However, a strong US dollar and possibly higher interest rates will also have an impact on the economic outlook this year.
The dollar index, which tracks the dollar against a trade-weighted basket of currencies, is up almost 15% since the end of the third quarter. This is a good sign for investors looking to put their funds into a strong US dollar, which will back lessor ABS deals.
In the first week of January, the euro hit $1.18, its lowest level against the dollar since March 2006 (and the figure is now sitting even lower, at $1.14). At the same time, the Japanese yen dropped 12% against the dollar and the Chinese yuan fell 2.4% – its first annual decline since 2009.
A strong dollar obviously is not good for airlines that have costs backed in the greenback, but whose revenues are in another currency.
Also, with a strengthening dollar and investors anticipating that US interest rates will start to rise, some market observers fear that emerging markets – and the airlines in those countries – will come under strain.
The Federal Reserve changed its interest-rate guidance last month at its policy-setting meeting, indicating that it is moving closer to raising rates. However, any rate move is not expected before mid-2015.
Air Lease's chief Steven Udvar-Hazy believes a stronger US dollar and higher interest rates are good news for the operating lessor community.
"Those developments will all lead to a greater emphasis on airlines leasing versus buying," he says, adding that "non-investment-grade" airlines will face "higher direct financing costs and barriers, which makes leasing more economical and flexible, as well as a less capital-intensive fleet modernisation solution".
Also, as part of a return to a more "historically typical relationship" between the cost of money and the cost of fuel, the aircraft market could rebalance as a result, says Ed Hansom, investment chief at Dublin-based Aviation Finance Company.
Low interest rates have been very favourable for new aircraft, he notes, as they have reduced the cost of ownership, "and this has allowed the manufacturers to weather the worst recession in 80 years with increasing rather than decreasing output".
Source: Airline Business
