Despite the volatility that has affected the overall economy, the aviation industry has weathered the storms. Indeed, sector financing is set to grow, though there could be regional differences according to Justin Benson, Adrian Beasley, Simon Collins, Christian Hansen, Michael Smith and Richard Smith, partners of global law firm White & Case
Despite many of the global economy's warning signals flashing red, the prospects for the aviation finance sector appear undimmed. The aviation industry as a whole has demonstrated remarkable levels of resilience amid the uncertainty and volatility of recent years, with continued passenger growth offsetting a moderate decline in air cargo traffic during 2019. Financing has grown in lockstep with the industry and is expected to continue to do so. For example, Boeing predicts the value of global aviation finance will rise to US$181 billion by 2023, up from US$126 billion in 2018.
Our new survey of the aviation finance market suggests these types of forecasts may be realistic. The airlines and capital providers whose views it summarizes expect investment in aviation to continue growing, with a corresponding increase in financing activity. Although challenges certainly may lie ahead, including the deteriorating outlook for the global economy, optimism still prevails in this market. In particular, the increasing diversity of funding sources may provide some protection against setbacks in any one area.
That said, this report also identifies significant differences in sentiment by geography. In broad terms, respondents based in the Asia-Pacific (APAC) region are considerably more likely to have positive views of the outlook for 2020, while those based in North America and—in particular—Europe, the Middle East and Africa (EMEA) are less upbeat.
Clearly, while this is a global industry, with capital flowing freely across borders, there is no escaping the regional economic context. As European and North American economies seemingly move toward a period of slower growth—or outright recession if the most pessimistic predictions are confirmed—Asian markets may offer some respite, despite also being expected to slow.
This report focuses on both the global picture and these geographical nuances. We consider the outlook for investments in the aviation sector, and we survey the funding landscape that will support these investments. Our report also focuses on liquidity, airline consolidation and mergers and acquisitions (M&A) activity, while highlighting opportunities and risks facing this industry in 2020 and beyond.
In the fourth quarter of 2019, White & Case, in partnership with Mergermarket, surveyed 100 senior-level executives at entities that have either financed or invested in the aviation industry in the past three years. The aim of the survey was to analyze sentiment regarding aviation finance. Organizations surveyed included airlines, operating lessors, banks, export credit agencies, private equity and other alternative capital providers. Job titles included CEO, CFO, director level and heads of investment.
Our exclusive survey of senior executives who have financed the aviation industry in the past three years reveals that the overall investment outlook for the sector is bright, with one region in particular set for larger growth than its global equivalents
The multiplicity of financing sources such as asset-backed security, insurance and leasing companies has been crucial for the sector. In this section, we reveal the origins and sources of expected funding in 2020
Despite the sector's current strong performance, many survey respondents believe the industry needs even more capital and liquidity. In addition, most expect restructurings and insolvencies to increase in 2020
Economic volatility, political unrest and fierce competition are all seen as major challenges to the sector in the coming 12 to 18 months. Meanwhile, respondents are preparing for rising oil prices and growing industry consolidation
We explore key takeaways from our exclusive survey and what they could mean for the aviation industry and aviation finance
Our exclusive survey of senior executives who have financed the aviation industry in the past three years reveals that the overall investment outlook for the sector is bright, with one region in particular set for larger growth than its global equivalents
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61%
of respondents expect investment in the global aviation sector to increase in 2020
The outlook for investment in the aviation sector remains encouraging, despite a backdrop of mounting fears about a global economic slowdown amid various geopolitical tensions. However, while the big picture is one of cautious optimism, the mood varies markedly around the world, with some markets much less upbeat.
As our survey findings reveal, more than half of the respondents in this research (61%) expect investment in the sector to increase during 2020; only 26% anticipate a decline in investment.
But these headline figures mask significant regional variations. In the APAC region, more than three-quarters of respondents expect to see increased investment, while in EMEA and North America, less than half of respondents agree. Indeed, in both EMEA and North America, almost as many respondents foresee investment falling back over the next 12 months.
Half of the private equity firms in this research expect to invest US$1 billion to US$5 billion in the sector over the next year, with airlines and operating lessors also committed to significant levels of funding.
While overall investment in aviation and aircraft financing may be likely to increase, the flow to different regions could be disproportionate. In Asia, for instance, a large, growing middle class population is supporting demand for air travel, while emerging low-cost carriers offer lower fares. In contrast, within Europe, a combination of economic stagnancy and Brexit is having a sizeable impact on the industry.
Expectations of activity in the aircraft financing market are also mixed. Overall, 61% of respondents anticipate increased activity during 2020, while only 22% predict a decline. However, APAC-based respondents are predominantly optimistic about the outlook, with 83% predicting an increase in aircraft finance, while only 55% of their counterparts in North America say the same. Meanwhile, sentiment in EMEA is depressed, with the number of respondents who expect reduced aircraft financing activity this year (44%) higher than those who look forward to an increase (37%).
Inevitably, the contrast between APAC and Western markets—EMEA in particular—reflects a broader economic context. The International Monetary Fund's (IMF) latest World Economic Outlook report suggests the US economy is on course to grow by just 2.1% in 2020, due in part to the US-China trade dispute. In Europe, where the Brexit negotiations continue to cause uncertainty, the IMF's prediction is for only 1.4% growth in 2020. Asia's economies, by contrast, are expected to grow considerably more quickly, led by China, albeit at a slower pace than in recent years.
Local factors are also at play. For example, Europe's travel sector endured a torrid 12 months with a string of airline and travel industry failures, including the UK's Thomas Cook and FlyBMI, Germania, Iceland's Wow Air and Slovenia's Adria Airways. In the Middle East, concerns remain that the rapid expansion of the region's airlines may have resulted in overcapacity.
APAC, on the other hand, is where most aircraft are expected to be delivered over the next ten to 20 years.
Overall, there likely will be considerable capital flows into the aviation sector globally during 2020, with investment coming from a mixture of sources. Half of the private equity firms in this research expect to invest US$1 billion to US$5 billion in the sector over the next year, with airlines and operating lessors also committed to significant levels of funding.
"The demand for airline services has created long-term potential for investors," remarks the Director of Finance at one EMEA-based airline, who predicts continuing interest from private equity and others.
In the financing market, banks remain committed to providing significant sums to the aviation industry. Indeed, the aircraft financing environment remains remarkably robust, with investors attracted to a market that has seen passenger numbers grow every year since 2010. There are tremendous amounts of liquidity, and competition for assets and talent is fierce.
This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2020 White & Case LLP
Do you think overall investment in the global aviation sector will increase, decrease or remain the same during 2020? (PDF)
Do you expect aircraft financing in the global aviation sector to increase, decrease or remain the same during 2020? (PDF)
What is your annual global aviation capital investment? (PDF)
What is your annual global aviation finance investment? (PDF)
