January kick-started the year for Capital Markets with one of the largest conferences in Aviation in Dublin, the Airline Economics Growth and Frontiers conference. Attracting over 3,500 delegates, this annual event brings together airlines, lessors, aviation finance professionals and traders.
This year, they covered topics such as macro-economic and political dynamics, fuel prices and the environment, with this year’s conference being a zero-carbon event for the first time, completely deleting its carbon footprint.
Our aviation finance team participated in the discussions and provide you with their key takeaways for areas to keep an eye on as push forward into 2020; what we do know is that this is an industry sector full of opportunity despite uncertainty and challenges.
Global Aircraft Trading System (GATS) is fully on the schedule for 2020
There’s no mistaking that GATS is a gamechanger for the aviation industry. Fully on the agenda for the end of Q1 2020, the system will alleviate the cumbersome manual trading and financing process associated with leased aircraft equipment. Bringing the outdated system onto an electronic platform, GATS uses a sophisticated e-platform and digitally executed standardised form documents. GATS has attracted support from many of the top global lessors, which have confirmed that all new aircraft will be placed in a GATS Trustee structure.
With our positioning in the aviation market and reputation for innovation and modernisation, it’s no surprise that Intertrust has been just recently been approved as a GATS Trustee for Ireland. Coming quickly on the heels of our recent acquisition of London-based Wells Fargo Trust Corporation Limited, we’re investing and committing to this industry for the future.
LIBOR is (still) coming
It’s been three years since the scrapping of LIBOR was announced and due to take effect end of 2021. However, it was noted that in many cases the market hasn’t addressed this issue in their plans, with some still referencing LIBOR as the basis rate in the new financing agreements. For the UK, Asia and Europe, the general consensus is to take on specific risk-free rates, but it’s more complex in the US, although the Secured Overnight Funding Rate (SOFR) appears to be the front running basis rate. Panellists expressed concerns over the cost of transition, in particular to bulk changes to legal documents, obtaining borrower consent and repapering collateral. Given the vast amount of work that’s anticipated, we expect LIBOR to remain firmly on the ‘to-do’ list until the 2021 deadline.
Despite macro-economic conditions, the industry can expect a softer rather than a hard landing in next couple of years
The proverbial headwinds continue to impact the aviation sector, however despite the macro-economic conditions globally, the aircraft leasing industry is better placed to withstand a global downturn. At the time of the last recession, the industry was heavily focused in the North American and European markets but is now more global and therefore less exposed to a downturn in Western economies. Whilst there’s been a rise of the Asian market in recent months, the impact of the coronavirus is yet to be fully felt.
Whilst the number of smaller airlines entering bankruptcy has grown, this is seen as a normal component of the leasing business. Stronger airlines have managed to absorb 350 aircraft from bankruptcies, driven by strong market demand (in part a result or the grounding of the 737-max). Also looming over economic uncertainty is the geopolitical turmoil in the middle east and trade wars with the US having a significant impact, particularly regarding commercial freight traffic.
There’s a need to focus on green efficiencies
Green issues and Environmental, Social and Governance (ESG) remain very firmly on the agenda. Whilst there are some concerns that discretionary flying may be impacted by ESG issues, airlines and manufacturers are keen to confront this issue head on, upgrading fleets to the next generation of aircraft, which are 15-30% more efficient in terms of fuel usage. Airlines will also focus on reducing the use of ‘single-use’ plastics. As the industry still carries negative press, attendees at the conference were conscious of the need to widely communicate their prioritisation of green efficiencies in their businesses.
The increase in ABS continues
The conference delegation agreed that 2020 will see a continued increase in issuance of aviation ABS, as investor demand remains buoyant, particularly given the low interest rate environment, the yield that the paper generates and its strong performance. This also has benefits of disintermediating finance solutions away from banks. The wider European securitisations market remains a foundation stone for the Intertrust business and we look forward to playing our role in the continued growth of this market.
At Intertrust we help airlines, lessors and financiers to manage their international leasing and financing operations through an integrated and professional approach. If you’d like to discuss any of the key topics raised from the Airline Economics conference, get in touch.