Bustling airports became eerily quiet and the familiar sight of contrails in the sky all but disappeared during the early months of the Covid-19 pandemic. Now that passenger numbers are back to record highs it’s almost hard to recall just how dire a time it was for the aviation industry. The business of aviation has been the victim of major disruptions before – Sars, 9/11, and after the 2008 global recession – but it has always come surging back.
And the robust business model of aircraft lessors ensured that they weathered this storm better than most, meaning that when it came to helping beleaguered airlines survive they were able to provide a lifeline to those seeking support. Throughout this time of travel restrictions, the aviation leasing sector helped customers to survive the Covid shutdowns via innovative solutions such as rescheduling leases, offering sale and lease back deals on airline assets and other measures.
“Covid was like somebody had pulled the handbrake in the middle of the motorway and stopped the entire industry. And yet we survived; most players are still broadly intact even if some underwent a little restructuring,” said Marc Larchy, partner at World Star Aviation, in November 2022.
And while many leasing companies experienced a significant drop in revenue as a result of rental deferrals and restructurings, many were also part of the solution, supporting airlines until such a time as we could all take to the skies again. Observers note that aircraft lessors enjoy at least partial protection against defaults and deferrals of lease payments because of the security deposits and maintenance reserves they take from airlines.
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Aircraft lessors played an important role helping airlines navigate the pandemic, says Julie-Ann Sherry, partner in aviation and international asset finance with law firm Mason Hayes & Curran. “Lessors provided assistance in the form of payment deferrals, restructuring leases and delaying delivery of aircraft.”
The SMBC Aviation Capital annual report for 2021 explains that during 2020 airlines began to restructure or else sought delivery deferrals or tried to raise funding. Others sought to keep aircraft past the lease expiry date. SMBC Aviation Capital worked with airlines in all of these situations, the report notes. “In particular, we assisted airlines in generating cash by stepping in to buy aircraft and leasing them back to our customers… We acquired some very attractive assets at competitive prices while the airlines generated much needed cash.”
Rent deferrals were a simple means of helping airlines struggling with cash flow and these continued through 2020 into early 2021 but tapering off as airlines saw a return of demand in the summer. A 2022 survey found that 86 per cent of lessors agreed deferred aircraft lease rentals with their airline customers during the crisis, although half of those expected these deferrals of lease rentals or power-by-the-hour (PBH) to be a short-term measure. Repossession was a last report, although the same survey found that almost three out of 10 lessors had to take back more than 10 per cent of their fleet.
The pandemic also saw a trend towards amendment and variation of lease terms and temporary change to “power-by-the-hour” (PBH) payment arrangements. With PBH the airline pays rent only while the aircraft is operating, in marked contrast to the typical “hell or high water” clauses in leasing contracts. Lessors found these agreements, whereby some cash flow was still forthcoming, preferable in many cases to repossession, given the inherent difficulties in leasing airplanes to other customers at the time. In many cases this system also allowed airlines to continue to operate the aircraft to preserve access and slots in key international airports.
“The strength of relationships between aircraft lessors and airlines played a major factor in helping the industry weather the storm,” says Sherry.
This relationship will be key as demand surges. Bertrand Dehouck, head of transportation capital markets at BNP Paribas, says global passenger numbers, which had dropped to historic lows of 1.5 billion during the pandemic, are now projected to return to pre-pandemic levels of 4 billion annually by the end of 2024. “Projected forecast growth is matching pre-pandemic projections to a total of 8 billion by 2040.”