The disruption caused by COVID-19 will have unprecedented consequences for the airline industry, including significant and permanent structural changes. At the same time, record numbers of investors are lining up in anticipation of finding real value in distressed aviation-related transactions, arguably for the first time in over a decade. Capital should be available in scale as the recovery trajectory becomes better defined. This is according to PwC's Aviation Industry Outlook 2021 authored by Dick Forsberg, published today.
IATA predicts that the airline industry will lose US $118.5 billion in 2020 and a further US $38.7 billion in 2021. The extensive government support provided, estimated to be at least US $180 billion to date, has played a major role in saving a number of weak carriers from collapse, but in doing so has created a long-term unlevelling of the playing field.
According to the report, the extraordinary levels of additional indebtedness taken on by the airlines will permanently realign the finances of the industry. Airlines will need ongoing access to emergency liquidity—including government support—for the foreseeable future. There will be more airline casualties ahead and for those that survive the ability to subsequently thrive will be more challenging.
Dick Forsberg author of the report and Senior Aviation Finance Consultant at PwC Ireland said, "In order to survive and thrive in the post-COVID-19 world, airlines will have to fundamentally rethink their fleets, their business models and their finances. This will not always lead to change, but for most a return to business as usual is not going to be a viable option, for a number of reasons: Firstly, there are too many aircraft in the system and a market of 4.5 billion passengers will not return overnight. Secondly, airlines will not be able to simply pick up where they left off and the way that they serve their markets may have become uneconomic. Thirdly, a heightened duty of care towards customers and front-line staff will reshape customer service. Finally, the crippling debt burden that is building across much of the airline industry will require root and branch restructuring in order to bring long-term solvency and profitability".
The report notes that, in many cases, drastic surgery will be needed to right-size fleets, restructure business models and recapitalise airlines.
The fleet rationalisation process that is already under way will continue and accelerate. Few airlines are looking to add capacity. 2020 ended with 30% of the global passenger airliner fleet inactive—more than 8,500 idle aircraft—and 5,000 aircraft may be surplus to requirements.
Demand remains muted, making lease extensions and placements more difficult and Original Equipment Manufacturer (OEM) production rates may not return to 2018-2019 levels before 2025. 2020 is expected to have been the low point in the current cycle for aircraft deliveries, requiring an estimated US $50 billion of finance, half of the 2019 volume.
The report notes that managing liquidity will continue to be challenging for the airlines. Pressure on lenders, lessors, OEMs and other stakeholders will also extend well into 2021. As the crisis continues, an increase in lessor restructuring and M&A activity is expected. Incremental liquidity from a growing number of investors considering a role in the sector will be key to the continued ability of airlines to finance their aircraft and related assets.
Aircraft with the most efficient technologies will be the preferred fleet choices for airlines as they seek to minimise operating risk and cash outflows, and their residual values are unlikely to experience permanent reductions. Conversely, the largest and least efficient aircraft types will remain underutilised for longer with a higher risk of permanent value impairments.
Environmental issues and sustainability may have taken a back seat as airlines deal with the pandemic, but they have not gone away. The industry has set some extremely challenging green agenda targets and the actions needed to make real progress on this front need to be woven into the plans rising from the wreckage of COVID-19.
Dick Forsberg commented, "Once the virus is sufficiently tamed, passenger demand will return. There is already evidence that the desire to travel is firmly embedded in our DNA and, given the opportunity and the confidence to fly again, the majority will do so. The industry has demonstrated its resilience many times in the past and will survive and thrive again, albeit with some sorely needed changes to its structure".
"For investors considering opportunities in the sector, there is more real value out there now than at any time over the past ten years. However, timing and forensic due diligence will be critical factors in making sound investment decisions, guided by experienced industry professionals".
Yvonne Thompson Aviation Finance Leader at PwC Ireland concluded, "Despite the incredible stress that the industry is enduring, we believe it will return to growth. Aircraft leasing will survive and indeed 'thrive' as it yet again, fills the funding gap. We see both a variety of investors lining up in anticipation of securing value but also others who are absolutely committed to the sector. For some, it may well be too early to commit, but for others they are in and will do more, and we believe that capital will continue to be available in scale. This is good news for aviation and great news for Ireland, the home of aviation leasing".
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