This detailed guide to risk highlights the typical areas to address across the asset, the operator and the jurisdiction, plus some mitigation factors that can be deployed to further reassure.
This article is in two sections. Section 1 explores the current leasing market, while section 2 explores the steps to take when analysing a new, or riskier, operator.
By October 2017, there had been numerous high profile airline failures in what is generally thought to be one of the safest jurisdictions for doing business – Europe. Monarch, VIM, airberlin, and Alitalia have all filed for bankruptcy this past year. Monarch might be the least surprising failure but
airberlin, an Etihad backed long-time favourite amongst lessors for its ease to work with, and Alitalia, a flag carrier with a history of government support that many thought would continue ad infinitum, were more surprising. Each of these airlines suffered for three main reasons: heavy competition, a lack of adaptation to competition, and the removal of financial support from their investors.
It comes as no surprise that some airlines are failing, particularly within Europe’s competitive market. While benign in operating terms, consolidation has been overdue as there are too many airlines
operating in Europe. Those that are slow to change or occupy a grey area in terms of business model are those that have struggled financially.
Along with weak financials, a number of other warning signs were also present upon deeper research: under utilisation and aircraft parked, murmurs from maintenance shops or forums, all which IBA fed back to lessors where appropriate.
How can lessors and investors alike feel confident in placing aircraft when even airlines in one of the most stable and aviation friendly regions of the world are susceptible to failure?
IBA maintains that financial analysis alone is not enough to fully understand the risks associated with operators. Annual accounts don’t always identify upcoming, or even current, issues. Similarly, operators display a wide range of values when benchmarking ratios. IBA tracks over 100 airlines as part of its IBAS airline risk service score. The table below highlights fixed charge cover variances across both the whole dataset and each tier, with a 22x variance for our tier 1 operators alone.