Aircraft ABS: Global Travel Taking Off but Sector Risks Hovering
The global aviation sector activity jumped back to life in 2022 picking up steam as passenger travel spiked rapidly through late September, as airlines recover from the Coronavirus Disease (COVID-19) pandemic. This trend is supportive of aircraft asset-backed securities (ABS) and secured obligations given improving financial metrics of airlines, firming aircraft values and lease rates for certain narrowbody models, and stabilization in transaction collections. Despite the ongoing travel ramp-up, ABS remain behind on principal payments even as collections stabilized, while the majority continue to pay principal on only senior class A notes.Despite positive sector travel trends, DBRS Morningstar does not expect notable improvements in credit metrics for most ABS transactions in coming months, as these "mini leasing companies" appear to lag in recovering. This is particularly evident versus the benefit lessors and airlines are experiencing from the ramp-up in travel this year, including leasing activity moving higher and customer collections improving, and ultimately airline and lessor financial metrics improved in 2022.
The main risks to ABS in H2 2022 include deteriorating global macroeconomic conditions with rising recessionary risks across many regions, and the potential for geopolitical conflicts, and any resulting slowdown in the ongoing recovery that could dent airline credit and aircraft values, and consequently ABS cash generation.
Looking more broadly, the ongoing recovery across global aviation and travel may be challenged by meaningful headwinds, notably the unpredictable geopolitical climate, slowing GDP growth and recessionary pressures mounting. Additionally, airlines are experiencing escalating costs driven by labor shortages, high inflation, elevated and volatile energy/oil prices, and rising interest rates, among others. DBRS Morningstar believes the strong positive airline momentum may slow or even reverse during the historically slower travel season in the late fall/winter months potentially negatively affecting the speed of recovery.
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