Following the fallout from the pandemic and Russia’s invasion of Ukraine, the past 18 months have seen a steady recovery in the aviation finance market, with strong prospects for 2025 and onwards, according to industry observers.
The recovery comes on the back of a healthier aviation sector. The International Air Transport Association (IATA) predicts that industry revenues will surpass $1 trillion for the first time this year, with traveller numbers forecast to grow to 5.2 billion, up 6.7 per cent on 2024 levels.
Aircraft deliveries will also increase significantly this year, helped in large part by a recovery at Boeing, with the manufacturer expected to bounce back from its recent troubles, says Dick Forsberg, senior aviation finance consultant at PwC Ireland, in a recent review of the sector.
These deliveries will be more than welcome, as airlines have been hanging on to their fleets for longer, with the average age of the commercial fleet now stretched to 14.8 years, the highest on record.
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Capacity constraint has been good news overall for the aircraft leasing sector, which now accounts for well over 50 per cent of deliveries in both aircraft volume and monetary terms, a share expected to grow further in the years ahead.
“Lease rates are substantially higher than a year ago across almost all aircraft types and vintages … While these increases are painful for lessees, the majority have accepted the reality of supply-demand pressures and since lease costs represent a relatively small proportion of their operating expenses, they have been willing to pay the asking price to secure capacity – the cost of not doing so being substantially higher,” says Forsberg.
Airlines and leasing companies use a variety of sources of funding and some airlines acquire aircraft directly from the manufacturer while others will lease aircraft from lessors as a way of financing acquisitions or as a way of providing flexibility in their fleet, explains Marie O’Brien, partner and head of aviation and transport finance at A&L Goodbody.
“These funding sources include commercial bank debt, capital markets, export credit agency financing, bonds, institutional investors and private equity. Jurisdictionally the funding sources are global and include US, UK, Asian and European sources,” says O’Brien.
“Many of these financings involve Irish companies as the borrowers and will often involve a portfolio of aircraft or engines. This can result in quite large transactions that are cross border in nature, as financing will need to take into account the location of the lender and borrower as well as the location of the assets.”
As the aviation finance industry has matured, more and more innovative funding mechanisms are being explored, says O’Brien.
“As the industry has evolved and the familiarity with the asset class has increased, more and more investors and institutions are interested in providing finance,” she explains. “The structures have evolved and become more innovative to respond to market needs. Recent trends have seen an increase in Islamic financing, structures involving institutional investors such as pension funds and sovereign wealth funds and an increased interest from private equity both in the leasing company aspects but also as direct financing.”
The aviation debt market – encompassing the traditional banks, structured products, the capital markets and alternative lenders – is in a healthy state. There is no shortage of debt capital, and several avenues are open to those seeking to borrow, says Joe O’Mara, head of aviation finance at KPMG.
“The larger investment-grade lessors have an advantage as they can access the unsecured bond market, which is the deepest well of debt capital available. The likes of AerCap, Avolon and SMBC Aviation Capital continued to successfully access that market last year, with the rates and spreads they were achieving tightening as the year progressed, which speaks to an increasingly receptive debt market for aviation finance,” he says.
Asset backed securitisation (ABS) is an important financing tool for aircraft leasing, O’Mara explains.
“That market had been very quiet over the last two years, on foot of challenges arising from the pandemic and then the theft of aircraft by Russian carriers after the invasion of Ukraine. The first green shots in the ABS aviation market were seen in the back half of last year, with over $4 billion of debt issued in aviation ABS in 2024.”
There’s a general optimism that this trend will continue into 2025, which will be positive for the sector, he says.
There has been much talk about sustainability within the airline industry in recent years with the move to more climate friendly, fuel-efficient aircraft, but O’Mara says this has yet to have a major impact on the financing aspect of the industry.
“Sustainability-linked financing remains a niche sport and, given the robust nature of the debt markets, there were only a handful of such transactions that closed in 2024. Ultimately ESG concerns are not yet having a material impact on the price of debt for aircraft lessors, or indeed the ability for those groups to attract equity investors.”
The decline in interest rates, however, will provide positive headwinds for the sector in the medium to longer term.
“Falling interest rates will impact which funding sources are more attractive to airlines and leasing companies and it will certainly increase the level of activity and the flow of transactions. The cost of funding and the flexibility of funding are key aspects that an airline or leasing company will consider,” O’Brien observes.
O’Mara agrees that falling interest rates will be positive for the industry, although this may take time to feed through to the market.
“Generally, lessors will seek to hedge their incoming cashflows against their debt mix and they are not in the business of taking on risk with respect to interest rates. That said, lease rates are generally driven by interest rates on a lag basis … Given the strength of the demand environment, falling interest rates may not immediately impact on lease rates, but if we continue to see rate cuts, it will be a positive for aircraft lessors.”
