17th April, 2020: With almost two thirds of all aircraft financed by asset backed securities (ABS) now grounded due to the COVID-19 crisis, receipts of both aircraft rental and maintenance payments are likely to fall, according to leading aviation consultants IBA in a report today.
The report was launched at a webinar hosted by IBA and KPMG outlining how the recent downturn in passenger demand could impact finance modelling for ABS and other aircraft leasing models.
Data from IBA.iQ indicates that 62% of all aircraft in ABS finance structures created since 2015 are either parked or stored, compared to 48% of the overall global aircraft fleet. Within the ABS structures, widebodies make up the highest proportion of grounded aircraft due to the effects of COVID-19 on long haul travel.
This situation is likely to cause cashflow pressures within aircraft ABS structures as operators seek rental payment holidays and groundings cause uncertainty in the level of unplanned maintenance costs.
This uncertainty has the potential to cause defaults in ABS structures in the medium term (six to 12 months from now) once the total cost of unplanned maintenance impacts overall liquidity.
Data from IBA.iQ also illustrates that returning grounded aircraft to service in China is only just beginning and currently at a very low level. With the impact of COVID-19 in China reported to be 2-3 months ahead of other countries, IBA forecast that aircraft groundings in other regions will continue through the second quarter of 2020 (April - June).
Phil Seymour, President of IBA, says: "Aircraft ABS structures are set to suffer the effects of aircraft groundings in the year ahead. A combination of prudent cash management and active engagement with lessees will be crucial to effectively managing outlooks in the medium and long term."
With unplanned lease ends set to increase as aircraft are grounded and operators face financial challenges, ABS structures will face significant costs which will not have been planned or modelled. These include ferry flights, maintenance, redelivery, reconfiguration and regulatory liaison.
Speaking about the potential impacts of the forecast, Brendan Crowley, Director in Consulting at KPMG Ireland, added: "In this exceptional environment, it's essential that investors and other key ABS stakeholders identify, plan for and mitigate non-scheduled costs such as aircraft maintenance and transitions."
To view the report from IBA and KPMG, click here.
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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 data intelligence, asset valuations, technical and engine management, advisory, consulting and commercial services, industry and sector research and analysis.
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Following the success of our recent webinar on the Aircraft ABS market, and in response to demand, Phil Seymour, Company President, from IBA Group and Brendan Crowley, Director, from KPMG Ireland teamed up to assess the likely impact of the current crisis on both narrowbody and widebody aircraft finance models. This session is a must for must for leasing companies, aviation investors and banks looking to further understand the potential impact on their portfolios, current leases and investments, and for those requiring further guidance on how to minimise and manage the impact. In this session, our experts discuss and address some of the most burning questions through scenario analysis and asset by asset modelling. Key discussion topics Phil and Brendan try to answer the following: • How will possible early returns, rental holidays and repossessions impact on previously expected/modelled maintenance events and cashflow? • What risks could lead to an unexpected Event of Default if not monitored? • What are the outcomes and options available to various stakeholders? • Will retirement trends change in the near term? • What is the impact on current market values and lease rates now and in the longer term? • How will models need to change to reflect the current climate and minimise the impact? The slide deck is available to download here. If you have further questions, please contact: Phil Seymour