With almost two thirds of all aircraft financed by asset backed securities (ABS) now grounded due to the COVID-19 crisis, receipts of both aircraft rental and maintenance payments are likely to fall, according to leading aviation consultants IBA in a report today.
The report was launched at a webinar hosted by IBA and KPMG outlining how the recent downturn in passenger demand could impact finance modelling for ABS and other aircraft leasing models.
Data from IBA.iQ indicates that 62% of all aircraft in ABS finance structures created since 2015 are either parked or stored, compared to 48% of the overall global aircraft fleet. Within the ABS structures, widebodies make up the highest proportion of grounded aircraft due to the effects of COVID-19 on long haul travel.
This situation is likely to cause cashflow pressures within aircraft ABS structures as operators seek rental payment holidays and groundings cause uncertainty in the level of unplanned maintenance costs.
This uncertainty has the potential to cause defaults in ABS structures in the medium term (six to 12 months from now) once the total cost of unplanned maintenance impacts overall liquidity.
Data from IBA.iQ also illustrates that returning grounded aircraft to service in China is only just beginning and currently at a very low level. With the impact of COVID-19 in China reported to be 2-3 months ahead of other countries, IBA forecast that aircraft groundings in other regions will continue through the second quarter of 2020 (April – June).
Phil Seymour, President of IBA, says: “Aircraft ABS structures are set to suffer the effects of aircraft groundings in the year ahead. A combination of prudent cash management and active engagement with lessees will be crucial to effectively managing outlooks in the medium and long term.”
With unplanned lease ends set to increase as aircraft are grounded and operators face financial challenges, ABS structures will face significant costs which will not have been planned or modelled. These include ferry flights, maintenance, redelivery, reconfiguration and regulatory liaison.
Speaking about the potential impacts of the forecast, Brendan Crowley, Director in Consulting at KPMG Ireland, added: “In this exceptional environment, it’s essential that investors and other key ABS stakeholders identify, plan for and mitigate non-scheduled costs such as aircraft maintenance and transitions.”