The story of the year in aviation finance was the purchase by the number one lessor, AerCap, of the number two, GE Capital Aviation Services (GECAS). The $30 billion deal was approved by EU regulators in July.
Carlyle Aviation Partners was on the acquisition trail too, buying aircraft leasing company Fly Leasing, valued at just over $2.3 billion.
Both deals were huge votes of confidence at a time when their customer base, the global airline industry, was struggling to cope with the pandemic.
A number filed for bankruptcy protection in the US including South America’s LATAM in Argentina, Colombia’s Avianca and Aeromexico as well as, more recently, Philippines Airlines.
Closer to home, CityJet successfully exited examinership after the High Court approved its plan for survival.
The sector came into Covid-19 after a decade of growth which left many simultaneously facing structurally higher costs and plummeting revenues.
“It is advisable for airlines to have cash liquidity equivalent to at least 20-25 per cent, that is, two to three months, of annual revenues,” says Marina Efthymiou, assistant professor in aviation management at DCU.
Financial problems
“This is seldom the case. However, with the global average liquidity for airlines worldwide being two months, a number of airlines have financial problems.”
Compared with the US, Europe was ripe for consolidation going into the crisis, she points out. M&A activity after it will depend on a number of factors, including how fast the recovery comes and in which markets.
“A lot of airlines might not survive in the medium term. It is very probable that we are looking at European airline consolidation,” she says.
The creation of the behemoth from the merger of AerCap and Gecas will provide a stimulus to others contemplating M&A activity, predicts Caroline Devlin, co-head of Arthur Cox’s Aviation Group.
“The business is all about relat ionships, but it is a business, and efficiencies and keen pricing will prevail. It will not be without its challenges however, as these mergers navigate through finding the complementary partner, anti-trust rules, staff disruptions and financing challenges as banks hit their concentration thresholds more quickly.”
Carriers that had raised significant debt in the run-up to Covid, or which are completely reliant on government supports, could find themselves in a rival’s sights.
‘Level of baggage’
They may also face new threats as opportunities emerge for start-ups “without the same level of baggage” to compete from a lower cost base, points out Joe O’Mara, head of aviation finance at KPMG.
On the lessor side, apart from the Gecas and Fly Leasing acquisitions, “we haven’t seen much consolidation in the sector – but there is an expectation that we will”, he says.
Ten years ago, the top three lessors accounted for 70 per cent of the market. Prior to Covid the top three lessors held just 30 per cent of the market, O’Mara points out, as newer players emerged.
Overall the aviation finance sector has proven resilient, having come into the crisis in a very strong position, particularly with respect to cash and liquidity, after a decade of growth, he says.
Now, with the prospect of airlines having less money to buy craft, and therefore being more likely to lease, the future looks good too.
The trends are certainly in its favour. Two decades ago, one-quarter of aircraft were leased. Currently as many as half are leased, a figure O’Mara predicts will grow.
The fact that both Aercap and Avolon raised money on capital markets this year, at rates less than they were paying pre-Covid, bodes well too. “Investors never lost interest in leasing,” he adds.
