Flight bans imposed by governments around the world to manage the coronavirus pandemic will significantly shake up aviation financing, according to Scope, a German-based credit rating agency and financial analyst.
In a statement, the group said: “The Covid-19 pandemic and disease-containment measures by governments, most drastically the US ban on flights from most of Europe, will shake up the aviation finance sector as airlines struggle to conserve cash amid a collapse in international traffic.”
The latest flight bans, imposed by the US, restrict travellers from 26 Europen countries from entering the US for 30 days, this comes on the back of falling share prices for the world’s largest airlines.
Scope Ratings said the rising risk of airlines defaulting on their debt payments will lead to a steep decline in aircraft values across the board.
“Investors need to brace themselves for a direct hit on aircraft values which will increase the credit risk of aircraft-financing transactions,” said Helene Spro, aviation finance analyst at Scope.
“Investors exposed to some highly leveraged transactions are likely to see a loss,” said Spro.
One caveat concerns the degree to which governments, particularly in Europe, will be willing to provide financial support for airlines – notably national carriers – to ensure their survival through the crisis.
Airlines for America, the trade body that represents the largest US passenger airlines, has called on the US government to provide $25bn (£19.4; €22.8bn) of loans and $25bn of grants to help the industry survive the coronavirus outbreak, the Financial Times on 17 March.
Scope Ratings said aircraft-leasing companies will find it increasingly harder to efficiently remarket their fleets.
The largest lessors, which have diverse customer bases and the cash resources to cushion their finances from a prolonged grounding of aircraft, will have some measure of protection from the market turbulence.
Small lessors which do not have in-house, technical asset management capacity will be hit the hardest, it said.
“The sector at large will find it hard to escape the consequences of a rapid slowdown in global economic growth and recessions in some major economies,” said Spro.
The remarketing finance sector is also likely to be affected by the resolution, or lack thereof, to last year’s global grounding of Boeing’s 737 Max fleet, Scope Ratings said.
If the Covid-19 crisis results in many airlines defaulting, the Boeing 737 Max might be recertified amid a glut of aircraft on the market – at least for a short period, the analyst said.
Airbus and Boeing face the additional headache that long-haul travel is proving particularly vulnerable to the efforts to contain the virus. “This could mean a quicker end to the service life of A380 superjumbos than previously expected,” said Spro.
The decision by US President Donald Trump to ban flights from Friday from much of Europe, including the Nordic region which is home to specialist long-haul airlines such as Norwegian Air Shuttle and Finnair, will lead to the grounding of even more wide-body aircraft.
“We expect older widebody aircraft such as the A330-300, B777-200 and B777-300 will see a significant decline in value, with potentially the retirement of some older models, whereas latest designs B787 and the A350 are likely to fare better even if their valuations will decline too,” said Spro.
The pandemic might also lead to regulatory changes to improve health safety on airlines, leading to design changes for aircraft coming to market in the future, the analyst said.
“New improved aircraft models typically result in increased depreciation of earlier models, though this is only something we will be able to judge fully after Covid-19 is deemed to be under control,” said Spro.
Scope is a privately-run rating agency based in Berlin specialising in the analysis and ratings of financial institutions, corporates, structured finance, project finance and public finance.