Aviation finance and COVID-19: now is the time to review and reset

06 November, 2020

The COVID-19 crisis is having an unprecedented impact on the global air transport industry. Health considerations and government-imposed restrictions on travel to and from quarantine zones are creating huge challenges.

Even prior to COVID-19, some lessors started to recognise that their input assumptions and pricing sensitivities might eventually be challenged, even in a good market. Enter the worst crisis to ever hit aviation, and we now have a level of distress for which even ratings agencies could not account.

After the current crisis subsides, there will continue to be opportunities for investors to enter into this asset class for attractive returns.  It will be key to have an “objective” model beyond half-life base values to see where the value drivers are.

An aerial photo of parked aeroplanes.

As deal margins became thinner over the past few years, there was more focus on internal pricing models.  Further, as the industry continues to grapple with the effects of this pandemic, the extension of credit, deferral of rentals and forbearance of payments in conjunction with the underutilisation of capitalised assets will create an unprecedented level of analysis in order to fully understand the financial implications of this crisis.

The intricacies required to support some exit and leasing strategies during COVID-19 and beyond are riddled with assumptions that must support highly refined structures. The structure of the model must be resilient as a means to manage the economics and risks. The ability to quickly sense check the assumptions will help manage the value of a portfolio and drive key decisions. Those who have been relying on substandard models may soon start to see the need for more robust projections and plans. 

Transaction modelling for the new normal requires a complete re-assessment of previous assumptions and methodology. Internal models should be analysed for appropriate sensitivities and accurate inputs. Now is the time to challenge previously held expectations and approaches and take a critical look at what worked, and what didn’t.

It might be harder than you think to challenge closely held norms and expectations. However, a third-party supported internal review will allow your team to effectively and efficiently pivot to a new type of operating and financing environment; and better manage aircraft economics in future transactions.

Thoroughly reviewing and challenging previously held assumptions that have been built over time which are embedded in a proprietary transaction model is a multi-pronged process that requires an expert review, usually from the outside looking in. 

As this crisis has and will continue to test the entire industry, now is the time to take stock of habitually incorporated norms and rebuild with confidence. Better internal outputs will help you understand and manage your aircraft economics more effectively in any future transaction. The key to this is having a model that’s error-free, that correctly incorporates commercial assumptions and sensitivities, and which can robustly visualise potential outcomes.

We are here to help you

PwC Ireland, in conjunction with our global network, is in the unique position of having an in-house aviation team with the real-world transactional experience, modelling capabilities, valuation expertise and technical knowledge to support you.  We can provide you with an approach that can be tailored depending on what you have and what you need – whether that is the specific mix of aircraft, maintenance reserves set up, the key insights you want to track and the visualisations you need. Contact us today.

Contact us

Yvonne Thompson

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 7147

Colum Carr

Aviation Finance Advisory Services Leader, PwC Ireland (Republic of)

Tel: +353 1 792 6158

Bryson Monteleone

Aviation Finance Advisory Services Senior Advisor, PwC Ireland (Republic of)

Tel: +353 1 792 6232

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