Did COVID-19 Change The World Of Airliner Financing?
When famed investor Warren Buffet confirmed in May 2020 that he had exited airline stocks amid the onslaught of the novel coronavirus, would-be billionaires around the world took note. The Oracle of Omaha had turned heads by jumping on the bandwagon for commercial aviation in the decade leading up to the COVID-19 crisis, so his admission that he made a “mistake” frightened many.
But, apparently no one has told the rest of the aviation financing world.
- Despite the outbreak of coronavirus, Boeing never had to finance a customer in 2020
- Forecasters see healthy financing options in the post-pandemic era
A trove of new information is emerging on the amount of relatively easy financing available for anyone who wants to buy an airliner. One takeaway so far: While financiers were shaken in 2020 and commercial air travel may still be years from a full recovery, there seems to be as much interest or more in aircraft investing going forward.
“A hundred percent of our deliveries during 2020 were financed by third parties, which just speaks to the liquidity in the market and the options that our customers have,” Ben Faires, Boeing senior director, told reporters last month.
To be sure, commercial aircraft delivery funding fell off a proverbial cliff last year. Volume totaled $59 billion, 40% off 2019 levels and 53% below the 2018 peak, according to Boeing’s 2021 Current Aircraft Finance Market Outlook. The new report—the first that Boeing has published since 2019—reviews what happened in the year that COVID-19 broke out and Boeing 737 production stopped. And, due to those issues, Boeing declined to forecast the market ahead.
However, in executive commentary and in the report, Boeing stresses that an enticing business case remains and asserts how the pandemic really has not changed airliner financing much at the end of the day.
“We’re starting to see green shoots, certainly domestically in the U.S., in China and other major markets,” said Tim Myers, president of Boeing Capital. “And that speaks to people returning to the financing marketplaces as well.”
Not surprisingly, every financing mechanism was stressed last year, with some sources—such as commercial banks and tax equity financing—freezing up almost entirely, as the report shows (see chart). In turn, the primary sources of capital for Boeing’s deliveries were cash (38% of total funding), bank debt (32%) and capital markets (23%).
Yet, lessors also stepped up their participation. Boeing noted in the report that at the end of 2018 the overall share of the industry-wide leased fleet had grown from 40% to 41%, taking several years to move 1%. But that percentage had climbed to 46% by the end of 2020, and the pitch remains elevated.
“Many industry experts believe this number will eventually grow to around 50%,” investment group ABL Aviation said in its May newsletter.
Sale-leaseback (SLB) deals roared ahead as the year went on, according to the Boeing report. “The SLB market was very competitive before COVID-19,” the report states. “Many of the traditional players pulled back from the market because of pricing economics. SLB pricing firmed up during the crisis as risk premiums rose, which brought some lessors back to the market.” The number of SLB transactions for used single-aisle aircraft in 2020 was more than double the number of transactions in 2019. The used widebody SLB transaction count was up 40% over 2019 levels.
Also noteworthy was how capital market financing, which took a hit early in the pandemic, came back in a meaningful way. In 2020, the capital markets for aviation began to loosen up around early June and finished the year with volumes more than 70% ahead of 2019 figures, according to Boeing.
Since 2016, lessors have been the largest issuer group compared with U.S. and non-U.S. airlines. But this changed during the pandemic. In 2020, U.S. airlines—which as a group were enjoying record profits before the pandemic and enjoyed better balance sheets—were the biggest issuers, followed by non-U.S. airlines and lessors, respectively.
The type of issuances also changed during the pandemic, Boeing’s report says. In 2020, there were more equity and convertible debt issuances than in previous years. Indeed, the last time that the proportion of equity in the issuance mix was larger than it is currently was back in 2012. Also, more secured debt was issued last year compared with 2019.
Nevertheless, two other facts were rather surprising considering the gutting that commercial aviation took due to COVID-19. First, amazingly, Boeing itself did not have to support financing of any of its deliveries. “Institutional investors sought aviation exposure and filled in the gaps when certain financiers paused funding and credit spreads widened,” Jefferies analysts told clients in a recent research note. “Additionally, Boeing did not finance any deliveries in 2020, which is a positive signal.”
The other interesting development was how quiet export credit agencies (ECA) like the U.S. Export-Import (Ex-Im) Bank were during the crisis. By dollar volume, ECAs accounted for 2.6% of Boeing deliveries in 2020, up from 0.4% in 2019.
“Typically, export credit agencies are more prominent in periods of financially challenging times,” noted the Jefferies analysts. “2020 deliveries saw less share than in previous downturns, but the majority of transactions took place in the second half of 2020.”
Those trends, combined with the fact that last year saw the first deal supported by Ex-Im since the U.S. ECA had its charter reinstated, suggest continued growth ahead for ECA-backed deals. “There is a robust pipeline indicating export credit agencies will play a critical role in the next few years,” Jefferies analysts said.
Faires of Boeing agrees. “Export credit will play a very important role as we come out of the pandemic,” he said. “One of the things our customers are looking for is diversification in different options, and we know that export credit provides very efficient financing for certain customers.”
In the end, Boeing executives do not see much fundamental change in financing trends because of the pandemic. “I don’t think there’ll be any new trends,” Myers said. “I think there’s a lot of new players out there that have entered the market, but I still think we’ll see in the long run the traditional sale-leaseback [and] the capital markets. I think they’ll balance out as the market improves [and] we get through the pandemic, but I don’t see any new trends, really.”