With air traffic expected to drop by almost 50 per cent in 2020, institutional investors that use aircraft leasing as part of their investment strategies will see compelling investment opportunities, says Justin Bradburn, principal and head of aviation at CarVal Investors.
Even when traffic rebounds, airline ticket prices will likely be lower for longer, he says. “If I’m right and we’re back to, say, 90 per cent of traffic in 2022, it’s probably going to take two more years beyond that before we really see ticket prices back to where they were before.”
Bradburn also predicts the lower price of new aircrafts will lead to more compelling investment opportunities. Further, airlines will want to raise liquidity and lessors will be looking for ways to raise capital. “That’s all going to create distress that we take advantage of.”
While opportunities may present themselves, investors will need to be a lot more careful about who they’re leasing aircrafts to because, unlike past crises, the coronavirus fallout is global. “If you do have a default and your aircraft comes out, the downtime that you have to price into a transaction, like the time it takes to remarket that aircraft and put it somewhere else, it’s going to be not the usual . . . two to three months, it could be six to 12 months. When you’re thinking about transactions, you need to think about downside risk and price that into transactions.”
Even before the coronavirus crisis hit, 2019 experienced the highest level of airline defaults in history, says Bradburn, noting 2020 will likely see many bankruptcies and restructurings too. He suggests that investors avoid situations in which they overpay for the plane on the promise of attractive rent. “I always call that the bankruptcy option. You overpay for the plane to get into really attractive cash flow and then a few months down the line the airline folds. So you handed them $5 million more than you should have done, but you didn’t get any rent because they defaulted. I call that a ‘high-high’ — you paid a high price, you get a high rent.”
Instead, investors should be looking for ‘low-low’ deals, he notes. “We want to get a lower price, but a much lower rent and that insulates us from that particular risk.”
Investors should also focus on the right type of aircrafts because if an airline defaults, the investor may have to repossess the plane, Bradburn adds. “If you’ve got a good plane, which is relatively young, sooner or later, you will get it flying again. But if you’ve got either too old a plane or the wrong type of plane, there’s a very real chance that it can end up in the desert and not flying for a couple years or . . . never again.”
While the impact of the coronavirus crisis will be real, he believes aircraft values will eventually return to normal because “there’s no Star Trek transponder yet” and people who want to travel don’t have alternative options to planes.