Finance

General funding outlook for international aviation finance | White & Case LLP

Aviation sector executives count on to take care of or enhance funding in 2022, regardless of persevering with headwinds attributable to COVID-19 and considerations concerning the international financial system

The yr 2021 was one other turbulent one for aviation, as governments raced to fight new COVID-19 variants with journey bans and border closures. From the rise of the Delta variant within the first half of the yr to the primary look of Omicron on the finish, 2021 was a yr by which disruption lurked round each nook.

Regardless of this, passenger demand started to get well. Estimates printed by IATA advised that whole revenues from international business airways had been more likely to attain US$472 billion in 2021.1 Whereas that is far beneath the US$838 billion income whole achieved on the eve of the pandemic in 2019, it represents a rise of greater than 26 p.c in contrast with 2020. Scheduled passenger numbers additionally staged a restoration. The passenger whole for 2021 is anticipated to succeed in 2.27 billion—an enormous enchancment on 2020 (1.8 billion), however nonetheless far in need of 2019’s 4.54 billion.

47%

of respondents count on funding
within the international aviation sector to extend in 2022

Whereas passenger visitors has been hit onerous by the pandemic, air cargo shines as a uncommon COVID-19 success story. The speedy reboot of economies and the race by companies to acquire—together with bottlenecks in ocean transport—helped to propel airfreight to new heights. The yr forward might be a document breaker with anticipated air cargo revenues of US$175 billion (in contrast with US$128.8 billion in 2020 and US$100.8 billion in 20192).

Our survey discovered that respondents are cautiously optimistic. Wanting first at expectations for the worldwide aviation sector as an entire, 81 p.c count on that funding will likely be maintained or elevated in 2022, with 47 p.c suggesting a rise. Solely 19 p.c of respondents count on aviation funding to lower.

Asia-Pacific stands out because the area the place sentiment is most constructive, with 60 p.c anticipating international aviation sector funding to rise within the yr forward—the best of any area. From the angle of APAC, this constructive sentiment will not be shocking: The area’s rising center class and favorable demographics assist development within the aviation sector. A managing director of a number one APAC-based financial institution says: “Investments will enhance in 2022, as a result of there are recent prospects for development within the aviation sector. The investments will derive optimum returns, as a result of improvement is happening in lots of areas. It will stabilize the sector and assist development.”

Respondents within the extra mature markets of EMEA and North America are extra cautious, with 50 p.c and 39 p.c, respectively, anticipating elevated funding within the yr forward—considerably decrease than APAC. That stated, quite a lot of respondents in these areas have a watch on rising alternatives—notably investments in decarbonization.

“The venture pipeline seems to be promising,” says the top of funding and capital markets at a North America–based mostly lessor. “There are numerous inexperienced funds rising that may assist these initiatives.” The managing director of an EMEA-based financial institution that invests US$1 to US$5 billion per yr in aviation provides: “The emphasis on ESG will immediate younger-generation investor audiences to speculate.”

Do you think overall investment in the global aviation sector will increase, decrease or remain the same during 2022?

View full picture: Do you assume total funding within the international aviation sector will enhance, lower or stay the identical? (PDF)

Turning to plane financing, respondents are upbeat concerning the yr forward. Globally, 69 p.c count on plane financing within the international aviation sector to extend in 2022.

69 p.c count on plane financing within the international aviation sector to extend in 2022.

Wanting extra carefully at particular areas, EMEA-based respondents have essentially the most constructive outlook, with 84 p.c pointing to an increase in financing, adopted by APAC with 80 p.c. Notably, no respondents in APAC count on plane financing to lower within the yr forward. North America–based mostly respondents are much less optimistic, with solely 55 p.c anticipating plane financing globally to rise in 2022.

Future will increase in plane financing will likely be decided, primarily, by the extent to which passenger numbers get well. However each survey information and feedback by respondents counsel that there are two new elements in play as effectively.

The primary of those is the necessity to increase the effectivity and environmental efficiency of plane fleets in opposition to a background of rising ESG imperatives. This level was made by quite a lot of respondents, together with airways, lessors, banks and different capital suppliers. “I count on plane financing to extend as a result of tools upgrades are required,” says the accomplice of an APAC-based PE agency. “Older plane must get replaced as a result of they’ve a excessive degree of gas consumption.” This level is echoed by the CEO of an EMEA-based lessor who expects spending on plane improvement to rise: “Put up pandemic, the emphasis on low-carbon plane will enhance additional.”

The second issue is the rise of recent sources of financing. Banks—historically a mainstay of aviation financing—have lowered their publicity to the sector because the onset of the pandemic. The vacuum they’ve left behind is being crammed with the whole lot from inexperienced bonds to personal fairness. Certainly, the previous two years has seen an upsurge in personal fairness and hedge fund exercise. Armed with ample dry powder, buyout companies have been on the hunt for alternatives, from debtor-in-possession mortgage financings, to organising plane leasing firms. “Many personal fairness companies have began collective funds for plane financing,” says the managing director of an EMEA-based financial institution. “Sustainable improvement targets specifically have been an vital a part of their choice to assist the low-carbon transition within the plane {industry}.”

Do you expect aircraft financing in the global aviation sector to increase, decrease or remain the same during 2022?

View full picture: Do you count on plane financing within the international aviation sector to extend, lower or stay the identical? (PDF)

The flexibility to faucet into wider and deeper swimming pools of capital bodes effectively for the aviation sector. However our survey information reveals that the distribution of investments by airways, lessors and PE funds has shifted because the peak of the cycle, with a pattern in direction of larger volumes of lower-value investments, reflecting altering danger appetites.

An attention-grabbing characteristic of this shift is that personal fairness and different different capital suppliers are actually competing proper throughout the worth spectrum—10 p.c at present put money into the US$50 to US$250 million bracket at one finish, whereas one other 10 p.c are investing within the US$5 billion-plus bracket on the different. This can be a broader unfold than has been seen up to now. On the similar time, the proportion of working lessors making high-value investments has declined, with slightly below 1 / 4 (24 p.c) at present investing US$1 billion or extra. In the same vein, fewer airline firms at present make investments greater than US$5 billion, down from earlier years.

What is your annual global aviation capital investment? (Airline companies, operating lessors and PE funds only)

View full picture: What’s your annual international aviation capital funding? (PDF)

Financial institution and export credit score company (ECA) financing has additionally modified, with respondents reporting much less exercise on the larger finish of the worth spectrum. For instance, our survey reveals that ECAs have stepped again from making the highest-value allocations, with no respondents offering finance in both the US$1 to US$5 billion or US$5 billion-plus classes. Financial institution lending has tended to be extra constant, and the proportion of respondents who report lending within the highest bracket (greater than US$5 billion) is just marginally lower than the pre-pandemic degree.

What is your annual global aviation finance investment? (Banks and export credit agencies only)

View full picture: What’s your annual international aviation finance funding? (PDF)

1 IATA Trade Statistics Truth Sheet: https://www.iata.org/en/iata-repository/pressroom/fact-sheets/industry-statistics/
2 IATA Cargo Market Evaluation: https://www.iata.org/en/iata-repository/publications/economic-reports/air-freight-monthly-analysis—october-2021/

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