Aviation leasing clears turbulence

The agency says generally favorable industry dynamics have been supportive of aircraft leasing company credit profiles thus far in 2017 and should continue to be supportive throughout the remainder of the year and into 2018. It predicts current trends continue to provide a solid industry and financial backdrop for aircraft lessors for the short-term at least.

The report found strong air traffic growth and low oil prices have supported the sector outlook for both airlines and aircraft lessors in recent years. Revenue passenger kilometers were up 7.7% year over year through July 2017, the highest rate since 2011 and well above the long-run average of 5.5%.

Oil prices, which have stayed around or less than $60/bbl since the beginning of 2015, have also been a credit positive for airlines, boosting their profitability.

For aircraft lessors, mostly robust airline industry financial performance has kept utilization rates high and repossession activity low. This has occurred at a time of increased aircraft leasing over ownership, with the percentage of the global aircraft fleet under an operating lease rising to 40% in 2016, around double what it was 20 years earlier.

The positive market trends have also contributed to accommodative funding markets with unsecured bonds, commercial banks and insurance companies continuing to be the primary sources of debt funding for aircraft lessors. The aircraft asset backed securities (ABS) market remains robust as well, particularly for smaller lessors.

Fitch believes that some of these favorable industry dynamics will moderate over the medium term. For example, air traffic growth is not likely to be sustainable at current levels and should decelerate. There are also some indications that aircraft demand may be beginning to slow, which could suggest that aircraft deliveries from the major producers could peak. That said, lower demand should not meaningfully affect aircraft lessors given already-high utilization rates.

Aircraft lessor asset impairments remained low, averaging 0.5% from 2012 to 2Q17. Impairments have been mitigated by most aircraft lessors through the resilience in the appraised values of certain aircraft as well as certain portfolios trading at premiums to book values. That said, there are signals that impairments could be normalizing (e.g. pressure on demand for certain widebody models), although within levels that Fitch considers manageable for rated lessors.