Navigating Covid-19: In this short and punchy 60 minute session, Phil Seymour was joined by Stuart Hatcher, COO MD Aviation and Mike Yeomans, Head of Valuations, to discuss key market indicators. Using Fleet and Values data from IBA's leading data intelligence platform IBA.iQ, the panel review OEM activity, Green shoots in the market and Leasing activity.
To benefit and support our clients and to help enable them to further understand how aviation stakeholders are responding, managing and succeeding in these unprecedented times, IBA are running a new series of fortnightly webinars focused on the aviation market.
In this analysis, our expert panel will consider the airline failures landscape currently and over the medium term. They will describe what they mean by 'The New Curve', reflect on market activity over the last few months and suggest the actions aviation industry stakeholders need to take both to meet today's challenges and take advantage of post-lockdown recovery opportunities.
Until 2019, the correlation between oil pricing and airline failures had been reasonably strong. Last year, however, a new record failure benchmark was reached despite a benign oil price, the fiercest industry headwinds concerning currency fluctuations, problematic new aircraft deliveries and the MAX grounding.
Over the last 30 years, IBA has repeatedly seen how the aviation industry behaves in response to periods of economic growth and depression: growing or falling passenger demand, fare discounts or increases, rising or diminishing yields, new aircraft ordering, market overcapacity, airline failures and market resurgence are all features of the same ten-step cycle of boom and bust. Market conditions promote expansion, ultimately leading to excess capacity until airline failures release pressure from the system and supply a boost to those left within it.
Whilst the particular shock whose waves force the industry into crisis may vary, the underlying components of the cycle remain intact. When aviation was US dominated, the fortunes of America coloured all other regions but since the emergence of three large regional markets, individual airlines and geographic areas can be positioned at different points of the cycle at any given time. For several years, the market has reflected behaviours inherent in the third and fourth steps of the cycle; increased demand has prompted capacity to swell and yields have fallen. Last year's economic landscape showed signs of deceleration, trade wars and currency variability causing havoc such that some airlines plummeted towards bankruptcy whilst others survived.
Covid-19's impact has cut through the familiar cycle to produce what we're calling 'The New Curve'. It has resulted in an unprecedented global crisis affecting every region of the world; no airline is immune, carriers everywhere suffering a catastrophic blow to their revenues as passenger travel has evaporated. A section of the public is keen to resume flying due to a combination of cabin fever and resentment at withdrawal of their freedom to travel. To progress from the curve's nadir after the summer however, airlines will need adequate financial resources, restriction-free travel policies and implementation of necessary safeguards to protect aviation industry staff and passengers. We have never before experienced such great operator risk and the question is, how long will recovery post Covid take?
Evidence of a strong desire to push ahead is apparent, though fear of a second wave hasn't entirely dissipated. The next few years will undoubtedly be tough. We don't foresee a return to profitability until 2022, and then only for some not all regions and operators. Further failures are likely but will generate welcome competition in the market as capacity shrinks and airlines' future survival will depend on factors both within and outside their control; efficient debt and capacity management will be crucial. A vaccine would be a tremendous enabler as would effective personal protective equipment. We anticipate smaller domestic and inter-regional airlines beginning the recovery process before longer range, higher capacity carriers. Although new deliveries will be pushed out, they will continue subject to airlines' and lenders' ability to afford them. The power of punitive lease termination clauses to persuade operators to reconsider returning aircraft before their lease end should not be underestimated.
OEM deliveries proved extremely difficult in March and April due to travel restrictions and we expect around a 58% reduction on 2019 numbers in 2020. Though we saw slight improvement in May, most aircraft delivered were narrowbodies for military and freight use and we forecast the decline in regional jet and turboprop deliveries over recent years will continue.
Restrictions in movement resulted in extensive depressed market activity during February and March with April the most obvious low. Having reached record numbers in 2019, no new ABS structures were issued post Covid and some look to unwind. Whilst we have seen some recent new lease, sale and leaseback and disposal activity, numbers are clearly down from the long-term trend. Since most contract terms were mandated before the pandemic, determining what the new 'normal' looks like is naturally more challenging. We can of course share our expectations of future performance but datapoints have been limited and in any case do not make markets.
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