Aviation Market Snapshot Q1 2022 - Investec
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Aviation Market Snapshot Q1 2022
Key market insights
1 2 3
Steady, but still non-linear global Impact to aviation of sanctions and Europe in particular is nearing pre-
recovery war in Ukraine pandemic levels of flying on the
back of pent-up demand
The demand recovery of 2021 has Sanctions targeting the Russian
continued into the first quarter of economy and its commercial aviation In European markets, success stories
2022, with positive trends emerging sector entail that Western aircraft include Ryanair, which carried more
across most regions. The strong leases be terminated by 28 March passengers in March 2022 than pre-
economic growth forecast in 2022 is 2022. At the start of the conflict pandemic (the first time that a major
anticipated to drive further air traffic there were 980 aircraft in the Russian European airline has done so) with
recovery. Governments have growing fleet, of which 515 were leased from predicted load factors returning to
faith in Covid-19 vaccinations, which international lessors. Lessors have 90% by June 2022. Data from IATA
has resulted in the progressive so far repossessed circa 70 aircraft and Eurocontrol show a growing
relaxation or elimination of travel at airports outside Russia. Several recovery in Europe as a whole,
restrictions in many markets. This Russian airlines, including Aeroflot which is approaching pre-pandemic
also entails that Omicron-related and S7, have halted international levels of capacity and demand. Also
flight cancellations have become less flights to avoid seizure of their positive is that the risk of another
prevalent, and industry optimism has airplanes. Given that only a limited Covid variant or crisis is no longer
further increased. Bouncing back to number of the leased aircraft are hampering airlines from gearing up for
pre-pandemic levels of global traffic likely to be available in the near- the summer. Europe’s largest airlines,
by 2023-24 feels a more achievable future, the impact on lease rates and including EasyJet, IAG, Lufthansa and
target than it did six months ago values is likely to be limited. Apart Ryanair, plan to fly at or near their
(and that target was already an from the loss of the Russian market to pre-pandemic European capacity
improvement on previous projections, place aircraft in, only a limited number peak during the summer.
which had looked towards a 2024-25 of the leased aircraft are likely to be
recovery horizon). made available in the short term, with There are some caveats, nonetheless,
a similar number of OEM aircraft on when analysing the aviation recovery
In terms of regional differences, North order to airlines in the region that in Europe. Despite the optimism,
Atlantic and intra-European markets will need re-placing in the next 18 long-haul travel, particularly to Asia,
continue to strengthen and improve months. remains below pre-pandemic levels.
the recovery pattern. However, The Ukraine war and higher energy
demand in Asia keeps lagging due prices are likely to have a medium-
to strict Covid-related government term negative impact. Sector-wide
policies, in particular China which is issues will emerge if the conflict rises
showing no sign of altering its severe energy prices to a level at which they
border policies. Airlines in most affect consumers’ purchasing power
regions have been faced with the and raise airlines’ fuel costs.
short-term challenges of Omicron’s
impact on their workforce, with
longer-term challenges including
increasing staff levels across the
industry. In the US, for instance,
airlines are already being forced to
pare back capacity expansion due
to staff shortages (Delta Airlines and
United Airlines).
2 Aviation market snapshot Q1 2022 Investec
Investec insights
Trends
Global air travel continued to recover Domestic air travel has seen RPKs “As travel restrictions continue
in February, with Omicron proving move up 60.7% YoY in February, to ease in the key US and
less of a burden on countries outside 78.2% of pre-pandemic levels in European markets, consumer
of Asia and the war in Ukraine not February 2019. The performance of spending is shifting from goods
having had a major impact of global key domestic markets was mixed to experiences including travel.
air traffic data to date. According to across regions. In the US, RPKs Coping with the resurgent
IATA reports, air traffic, as measured were 112.5% above February 2021 demand is becoming a challenge
by Revenue Passenger Kilometres and only 6.6% below February for some airlines, airports and
(RPKs), an indicator of global 2019 levels. Australia continues its related infrastructure. As new
passenger demand, grew by 115.9% upwards trajectory albeit from a low aircraft deliveries and lessor
YoY, but were only 54.5% of the levels base. Japan has been negatively trading pick up momentum,
seen pre-pandemic in February 2019. impacted by the spread of Omicron demand for debt financing will
and government advice to limit travel, grow across the aircraft age
resulting in RPKs only 35.1% above spectrum. Aircraft backed debt
February 2021. Domestic Chinese is an attractive space to deploy
RPKs are due to drop in March capital and Investec continues
following localised lock-downs and to structure transactions that
travel restrictions to contain Covid provide a premium in risk adjusted
outbreaks. returns.”
Derek Wong
Head of Aviation Debt Fund
A I R PA S S E N G E R T R A F F I C
Industry RPKs (billion per month)
900
Actual
800
700
600 Seasonally
adjusted
500
400
300
200
100
0
2017 2018 2019 2020 2021 2022
Source: IATA Economics, IATA Monthly Statistics
3 Aviation market snapshot Q1 2022 Investec
International air travel recovery alleviated the strain on economies traffic respectively. The closure
continues to gather momentum, and healthcare. More countries of Russian airspace to European
driven by growing vaccination rates have started to ease international and US carriers will lead to
and a relaxation of travel restrictions travel restrictions, including some delays, expensive re-routing
in many regions. RPKs rose 256.8% in the long-closed Asia Pacific and cancellations. However, the
YoY in February, but are only 40.4% of region. Bookings have rebounded significance of Europe-Asia and
pre-pandemic February 2019. quickly when restrictions have North America-Asia diminished
lifted. However, the China market during the pandemic due to
• Regionally, European airlines has soften following localised boarder closures in Asia.
performed best YoY, as the impact lockdowns and travel restrictions.
of the war in Ukraine has been • Pre the Russia-Ukraine war the
relatively limited so far outside of • Asia is gradually reopening after IMF forecast global GDP growth
Russia and countries neighbouring two years of some of the world’s of 4.4%. IATA forecasts a ~1%
the conflict. Ticket sales suggest toughest travel restrictions. reduction in GDP growth because
the fall in customer confidence was Singapore is the latest country to of the war. Russia and Ukraine are
modest and rebounded quickly. relax its Covid protocols, from 1st both large exporters of energy,
Latin America, North America April, fully vaccinated passengers precious metals, wheat, and other
and the Middle East all posted will not need to take a test on commodities, however combined
significant gains YoY. In Asia the entering Singapore, nor will they be they account for less than 2% of
recovery remains slow, with RPKs required to quarantine. However, global GDP. Most major economies
88% below February 2019 levels. passenger pre-departure tests have only limited trade exposure to
The recent news of easing travel are still required. Unvaccinated Russia (US 0.5%, China 2.4%).
restrictions in many countries in passengers can transit through
the region (South Korea, Vietnam, Singapore as long as they meet • Rising jet fuel prices are increasing
Thailand, Singapore, New Zealand the entry requirements of their pressure on fuel costs coupled
etc.) is positive. destination country. with additional challenges from
rising infrastructure costs and
• IATA noted a more optimistic • The war in Ukraine, rising staff shortages in the US. During
outlook for air travel after 2 inflationary pressures and 2021, jet fuel increased 68% YoY,
years of severe Covid-related increases in jet fuel costs will as demand increased with easing
disruptions. Global Covid infections negatively affect the recovery. lockdowns while OPEC supply
have declined and hospitalisation Ukraine and Russia accounted remained constrained. In the US
rates remain low, which has for 0.8% and 1.3% of global air airlines are optimistic ahead of the
Northern hemisphere summer that
strong pent-up demand will enable
them to pass on increases in fuel
I N T E R N AT I O N A L R P K s B Y R O U T E , F R O M P R E - C O V I D 2 0 1 9 costs to the consumer without
impacting demand. European
Seasonally adjusted RPKs (Indexed, Jan 2020 = 100)
airlines are utilising hedging
140
strategies and increasing fares via
fuel surcharges on long-haul flights
120
100
Middle East-Nth America
80
60
Within Europe
40 Eur-ME Nth Atlantic
Eur-Asia
20
Asia-Nth Am Within Asia
0
Jan 20 Mar 20 May 20 Jul 20 Sep 20 Nov 20 Jan 21 Mar 21 May 21 Jul 21 Sep 21 Nov 21 Jan 22
Source: IATA Economics, IATA Monthly Statistics by Route
4 Aviation market snapshot Q1 2022 Investec• Kroll Bond Rating Agency (KBRA) • During the quarter, Airbus reported • Air cargo’s long growth run slowed reported in the quarter, that whilst that it expects to deliver 720 in January impacted by Omicron aircraft lessors’ revenues remain aircraft, up from 611 in 2021. Airbus affecting crew scheduling and under pressure there were strong acknowledged that bottlenecks operations. The war in Ukraine signs of improvement in 2021 affected production in 2021 and poses a greater threat, with the as the sector started to recover that a tight labour market, snarled closure of Russian airspace to from the worst effects of the logistics and an increasing cost of airlines from most of Europe pandemic. KBRA noted that airline raw materials would affect 2022. and North America. Re-routing rent-deferral requests fell in 2021, To achieve the goal, production is causing longer flight times cash collection rates improved and rates will be raised across the and coupled with increasing fuel the Asset-Backed Securitisation board. The biggest and most prices is effecting the economic market returned at speed with challenging ramp-up will be for the viability of certain routes. However, $9.2 billion of issuances in 2021. A320 family, planned to rise to 65 shipping too is being affected by KBRA ‘remains cautious’ on airlines aircraft per month by the middle the war with reports of ships stuck short to medium-term credit of next year. To help achieve at anchor as Russian and Ukrainian fundamentals, but notes that this, the company is making sailors leaving their posts and lessors continued to absorb the all its production sites capable delays at ports as the content of remaining disruptions to cash flow of assembling the A320. At 31 containers are checked for goods through their strong liquidity and December 2021, Airbus’s backlog defying sanctions. Russian and access to capital markets. During stood at more than 7,000 aircraft Ukrainian seafarers make up 14.5% 2021, lessors issued $35 billion (10 years of production at current of the global shipping workforce of senior unsecured bonds up rates). (International Chamber of Shipping from $25 billion the previous year, Feb-2022). and there was a significant rise in non-bank lending to airlines and lessors. 5 Aviation market snapshot Q1 2022 Investec
• During the quarter, IATA reported options, is unsecured and provided
Market that the Global Airline share price by a syndicate of international
index started 2022 positively, banks. It replaces existing bilateral
responses rising 5.8% to mid-January driven credit lines of ~EUR0.7bn, thereby
by investor confidence that the increasing the airline’s potential
Omicron variant will result in liquidity by EUR1.3bn.
fewer hospitalisations and less
disruptions to previous variants. • Recent debt capital market deals,
Nevertheless, the airline stock include:
index remains ~30% below pre-
• 22 February, Vietjet Air priced
crisis levels.
VND3.0tn notes due in 2025.
• The war in Ukraine has dampened The issuance has a coupon of
activity by both issuers and 3.500% and is unrated.
investors in the capital markets.
• 18 February, China Aircraft
Across the existing aircraft
Leasing Group (CALC) priced
lessor ABS market, there are 30
RMB1.2bn notes due in 2024.
transactions with exposure to
The private placement issuance
Russian or Ukraine. The majority
has a coupon of 4.400%.
of the exposure is to Aeroflot and
Rossiya, in addition to regional • 13 January, Wizz Air priced
carriers such as Ural and S7. While €500m notes due in 2028.
aircraft in Ukraine are being taken The issuance has a coupon of
out of the country, the Russian 1.000% and rated BBB- and
aircraft may prove very difficult Baa3 by Fitch and Moody’s
to recover and could significantly respectively.
impact the value of transactions
with higher exposure levels. • 11 January, Singapore Airlines
priced $600m notes due
• In April, the Portuguese in 2029. The issuance has
government announced that it a coupon of 3.375% and is
plans to inject a further EUR990m unrated.
into flag carrier TAP in 2022. The
funds are part of the airline’s • Whilst capital market activity has
EUR3.2bn rescue package slowed, we expect airlines and
approved by the EU in 2020. lessors to return in due course,
The airline received EUR1.2bn of especially for issuers located in
public funds in 2020 and a further those areas recovering quicker
EUR998m in 2021. from the impact of Covid and
unaffected by the war. We
• In April, Lufthansa Group expect the bifurcation of the
announced that it has boosted its market to continue with spreads
liquidity with a EUR2bn revolving staying low for strong carriers
credit facility. The facility, which and significantly above pre-
will be available for three years Covid levels for the rest of the
with two one-year extension market.
6 Aviation market snapshot Q4
Q1 2022
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