Aviation consulting firm, IBA,
considers the catalysts shaping 2019
Dr Stuart Hatcher, Chief Operating Officer at IBA, highlights several
factors that will affect the aviation industry in the year ahead
London/Dublin – January 22nd
2019: IBA,the
independent aviation advisory, valuation, and consulting firm analyses its
market intelligence and research data to identify a range of factors impacting
market growth and asset values as senior executives from airlines, aviation finance,
OEMs and leading lessors meet at the 2019 global aviation finance conferences
in Dublin.
According to Dr Stuart Hatcher - Chief Operating Officer at IBA, despite
the pain seen in India, Europe, South America and South East Asia which is hard
to ignore, aircraft pricing remains high. “Yet payment defaults are on the rise and contingency plans are being
prepared. Even though the market realises that it has been some time since the
last down-turn, most are under the impression that in this cyclical industry a
fall will precede a rise once again, so investors are continuing to angle for
good deals.”
The problem,
says Dr Hatcher is that as long as funding remains in such abundance, the
downturn could arrive and there will be so many buyers looking for a bargain
that pricing may not shift very much for
assets in high demand.
“Lease yields
are more susceptible to market forces” he adds. “If they collapse quickly after
rising for the first time in three years, IBA would hope that realisation sets
in quickly and not prolong the inevitable slow-down. Increasing defaults in the
asset-backed securities market could also be a defining trigger.” But will
investor confidence falter at all in 2019?
The IBA team of analysts pick out several key areas for consideration
that could contribute to a more conservative approach:
Economics & Traffic:
Oil price
certainly contributed to an increase in airline failures for 2018 and with
tighter cooperation between producers IBA expect less market elasticity. Brent pricing at US$50/b is unsustainable for
any exporter to balance their budget despite low extraction cost – so IBA
expects that pricing will settle at US$70-80/b.
While the USD
remains strong yields remain too low for sustainable profitability outside of
US market. 2019 is expected to offer some stability on oil price fluctuations,
but airlines must remain flexible to manage capacity and fares.
Slowing GDP will
lessen world trade and moderate passenger growth. And whilst raising interest rates will indicate an
improving economy and should improve lease yield says IBA, a strengthening
dollar will hinder airline profitability and bankruptcies will follow.Foreign exchange issues areexpected to remain while the USD
remains strong and airline failures and rising costs are expected to increase
unless oil price falls by >10%.
As Dr Hatcher
observes,“The airline failure
outlook for operators in countries bordering the Indian Ocean, South East Asia,
Argentina, and Mexico highlight significant challenges ahead. Those European
carriers unable to compete against the large legacy groups or LCCs will
continue to struggle and failure/consolidation
is inevitable; the value of slots remains a strong catalyst.”
OEM Performance:
Production is set
to get back on track for Airbus neo & Boeing MAX. Airbus expects A320ceo/neo to reach 60 per
month by mid-2019 which will push deliveries to 700 for 2019 and 720 for 2020.
Boeing’s 737 production is looking to reach 57 per month by mid-2019 which will
raise deliveries to >650 for 2019 and >680 for 2020.
The market remains
challenging for widebodies says Dr Hatcher “The drop in oil price increased
demand for older types and A330s have proved to be useful and cheap enough to
transition despite a large parked fleet because they remain flexible like the B767.
However I expect freight conversions of 767s and A330s to accelerate this year.
The 777-300ER remains a mainstay of the global fleet and demand for new 777-8/9
remains poor. The 787 and A350 remain top of the list and potentially will
shift the heart of the market away from the 777. For IBA the 777-300ER remains
on watch. Just how these assets trade in
2019 will be kept under close scrutiny especially as market is avoiding re-configuration at lease-end at
all cost.”
A further market disruptor says Dr Hatcher is
Boeing’s New Mid-Sized Airplane (NMA).
“This could make an appearance in 2019 to either give a boost to the
large narrowbody/small widebody market; or seal its fate. Boeing may not want to create the market
alone.”
In the regional
jet arena IBA predicts that OEMs will focus on scope in the first instance to
build an aircraft that is compliant rather than wait for a change to happen. Weight, seats and size must be addressed.
Lessors:
Leasing
continues to grow and the strongest signals for investing are emanating from
North America and Japan. Although Korea’s expansion into aircraft leasing is
imminent, the number of new Chinese entrants has reduced and many are preparing
for a possible market correction in
lease rates and values – both beneficial to start-up lessors. Dr Hatcher
remarks that the potential GECAS sale remains high on the agenda for 2019 as
does the potential IPO, partial
sell-down or complete disposal of several top 50 lessors. “Prices are high
so it would seem to be a good time.”
Retirements
According to
IBA, although retirements may be on the up for first time in seven years, age
continues to rise for narrowbody, widebody and regional jets, whilst for turboprops
it is declining. Demand for parts to maintain this ageing fleet will grow,
particularly engines which remain in
very high demand. Operators will find more cost-effective solutions to
maintain their fleets and refrain from taking on the operational risk and
higher ownership costs of new technology.
Lease Ends
The bow-wave of lease ends for narrowbodies
maintains its shift to the right and Dr Hatcher says that this could cause a
significant problem for both lessors and lessees alike as MROs are unlikely to
be able to handle return demand. “It is likely that both parties will have to
accept weaker physical conditions at return. This could suit lessors looking to
maximise cash at lease-end, but may lead to a higher number of
retirements/part-outs if the asset cannot be placed quickly. With a strong US
dollar, non-US based lessees will struggle to handle higher cash return
conditions if the aircraft is on lease-end compensation terms. Extensions will
maintain this trend, but the wave will simply get bigger until the aircraft
reach natural retirement.”
Fewer extensions
have been triggered with widebody leases. However the large number of parked
aircraft indicates further challenges
that lessors face in being able to place them. Configuration cost being a
strong factor.
IBA notes that
lease rates have shown some improvement after a long period of
decline/stagnation. New aircraft values have firmed as rising interest rates
take effect, but a strengthening market
has also firmed up older variants of the A320 and 737-800.
“Lease rate
factors remain very low and some buyers are possibly making rash decisions”
comments Dr Hatcher. “Market share, lower return on investment criteria,
ability to invest in dollar denominated assets, the ability to fund through
alternative methods, and attraction to high cash flows will work for some
participants. But for those that expect the market to remain bullish, or rely
on unrealistic market scenarios, time may be running out.”
He summarises
IBA’s views for 2019: “Values remain strong but how these evolve for 2019
remains complex for older assets in high demand as many of these saw an
increase >20% across the course of 2018. Oil is expected to rise, the US
dollar isn’t expected to weaken just yet and traffic demand is set to remain
firm. New technology will continue to be delivered at an ever-increasing rate
and freight demand for narrowbodies is set to continue.
“IBA is
expecting a market correction for values as new technology becomes more
available (and reliable). The bottom of the market needs this to happen to feed
into the freight programmes and parts markets. It could occur more quickly if
there is a sudden change in traffic demand, oil price or finance availability but
these are hard to predict.”
ABOUT IBA
IBA was established in 1988 to provide
independent expert business analysis to the aviation industry. IBA advises
commercial and business aviation clients, aircraft/engine manufacturers and
operators. Services include asset valuations, technical and engine management, advisory,
consulting and commercial services, industry and sector research and analysis. For
further information on the services offered by IBA please visit iba.aero
IBA
Media Contact
Melissa Whybrow
Tel: +44 (0) 1372 224488 E-mail: melissa.whybrow@iba.aero