Global aircraft lessors face elevated impairment risk from current technology passenger widebody aircraft, given a longer and deeper pandemic-driven decline in international air travel relative to domestic travel and a smaller user base than narrowbody aircraft, Fitch Ratings says.
However, the majority of Fitch-rated aircraft lessor portfolios are well diversified and leased to flag/state-owned airlines, which should reduce default-related impairment charges, as should rated aircraft lessors’ focus on fleets of younger widebody aircraft with longer leases.
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The significant reduction in air travel demand driven by the global fallout from the coronavirus pandemic has resulted in the grounding of the majority of global passenger aircraft fleets.
Short- to medium-haul travel has begun to recover in certain regions, particularly domestic travel in China. However, long-haul international travel, which is the primary use for widebody passenger aircraft, is expected to remain stagnant over the near- to medium-term.
Valuations and lease rates will remain under pressure, especially for widebody aircraft, with expectations for continued weakness in demand amid a slower recovery in international travel.
For the Fitch-rated peer group, current technology widebodies averaged 12.2% of aircraft exposure by value as of 31 July 2020 when excluding two significant outliers: SMBC Aviation Capital Limited (SMBC AC; 0%) and Voyager Aviation Holdings (78%).
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By GlobalDataCurrent technology widebody aircraft (Airbus A330 and Boeing B777 families) valuations have fallen more than narrowbody aircraft (A320 and B737 families) valuations.
The market value of 10-year-old unencumbered widebody B777-300ERs declined by as much as 27% through 31 July 2020, according to aircraft appraiser Collateral Verification LLC, while similar A330 family aircraft declined around 23%.
Conversely, the market value of 10-year-old narrowbody unencumbered B737 and A320 family aircraft declined16%, at most, during the same period.
Demand for certain types of current technology widebodies such as B777-200 and A330-200 aircraft had been falling prior to the pandemic, with values already under pressure as airlines shifted toward the newer technology of B777-300ER and A330-300 variants. Several major airlines have already announced the early retirement of these aircraft due to weaker economics and higher maintenance costs.
Aircraft lessor impairments are expected to increase given an anticipated rise in airline bankruptcies, elevated repossessions and declining aircraft values.
In 2Q20, several Fitch-rated lessors reported impairment charges in the range of 0.2%-3.9%, up from the average range of 0.1%-0.5% from 2016-2019, driven by impairment tests on repossessed aircraft conducted in 2Q20. Lessors have also indicated that they are re-evaluating certain aircraft types for possible future impairments given weak demand.
The majority of Fitch-rated lessors with widebody exposures have solid customer and geographic diversification, which reduces the risk of outsized impairment charges related to customer defaults.
On average, the top ten current technology widebody lessee exposures comprised approximately 8.1% of estimated market value of the total fleet for investment-grade lessors rated by Fitch as of 31 July 2020.
Isolating the mark-to-market impact on current technology widebodies, Fitch estimates that most investment-grade-rated lessors would be able to withstand more than 30% in impairment charges on all CT widebody aircraft (exposures of up to 18% of net book value [NBV]) before breaching the agency’s leverage threshold of 3.0x.
Future impairment charges are expected to only impact a fraction of CT widebody aircraft portfolios given rated aircraft lessors’ relatively young and liquid fleets and the material lease exposure to flag carriers, both of which should mitigate aircraft repossession risks.
