Ie Aviation Report 2024

Aviation Leaders Report 2024
Demand & Disruption
www.aviationnews-online.com www.kpmg.ie/aviation
Leaders in Aviation Finance
Our Aviation Finance Team of tax, audit and advisory experts have unrivalled expertise
in aviation finance and aircraft leasing, contact them today.
Tax & Legal Audit & Assurance Advisory

Joe O’Mara Killian Croke Kieran O’Brien
Head of Aviation Finance Head of Aviation Finance Audit Head of Aviation Advisory
E: joe.omara@kpmg.ie E: killian.croke@kpmg.ie E: kieran.obrien@kpmg.ie
Brian Brennan John Arnold Chris Brown

Tax Partner Audit Partner Partner, Strategy
E: brian.brennan@kpmg.ie E: john.arnold@kpmg.ie E: christopher.brown@kpmg.ie
Gareth Bryan Terence Coveney Brendan Crowley

Tax Partner Audit Partner Risk Consulting Director
E: gareth.bryan@kpmg.ie E: terence.coveney@kpmg.ie E: brendan.crowley@kpmg.ie
Karen Conboy Conor Holland

James Kelly
Audit Partner ESG Partner
Tax Partner
E: karen.conboy@kpmg.ie E: conor.holland@kpmg.ie
E: james.g.kelly@kpmg.ie
Jed Kelly James Gleeson Gavin Sheehan

Tax Principal Audit Principal Deal Advisory Partner
E: jed.kelly@kpmg.ie E: james.gleeson@kpmg.ie E: gavin.sheehan@kpmg.ie
Emer McGrath Gillian Kelly

Amanda McHugh Head of Audit
Tax Principal Head of Consulting
E: emer.mcgrath@kpmg.ie E: gillian.kelly@kpmg.ie
E: amanda.mchugh@kpmg.ie
Caoimhe McLoughlin John McGuckian Patrick Murphy

Transfer Pricing Partner Audit Partner Consulting Director
E: caoimhe.mcloughlin E: john.mcguckian@kpmg.ie E: patrick.murphy@kpmg.ie

@kpmg.ie
Philip Murphy Niall Naughton Shane O’Reilly

Tax Partner Audit Partner Managing Director,
Sustainable Futures
E: philip.murphy@kpmg.ie E: niall.naughton@kpmg.ie
E: shane.oreilly@kpmg.ie
Tom Woods Colm O’Rourke Geoff VanKlaveren

Head of Tax Audit Principal Consulting Director
E: tom.woods@kpmg.ie E: colm.orourke@kpmg.ie E: geoff.vanklaveren@kpmg.ie

25
CONTENTS
2 Contributors
Airline Economics and KPMG spoke to 30-plus aviation experts and leaders
over the past three months from October to December 2023. Contributors
listed are only those that agreed to participate on camera or to be quoted in
this publication. This list omits all of those individuals that provided valuable
input to the report but preferred to remain anonymous. Thank you to all who
contributed to the 2024 report.
4 Foreword
Joe O’Mara, Head of Aviation Finance at KPMG Ireland.
6 Chapter One: Airlines Soar

Airlines have enjoyed a remarkably fast recovery in air travel, with most
jurisdictions now back to, or exceeding, pre-pandemic traffic levels.
Restrictions on capacity have kept yields high but threaten to curtail revenue
as airlines struggle to find extra lift to serve continued demand.
22 Chapter Two: Aviation Finance

Investment grade lessors return to the bond markets, although higher-for-
longer interest rates have deterred non-investment grade companies from
accessing structured financing products, increasing demand for commercial
warehouse and tax advantaged products.
34 Chapter Three: Lessors Dominate

Aircraft lessors are riding high on the back of increased demand for lift from
airline customers as well as the hike in lease rates feeding through from higher
interest rates.
46 Chapter Four: OEM and Fleet Challenges

Lingering supply chain delays have been compounded by the entry-into-
service issues with the GTF engine and manufacturing issues with the MAX.
THE AVIATION LEADERS REPORT 2024

For the seventh year running Airline Economics and KPMG have gained insights into the commercial aviation industry through a series of in-depth interviews with major aviation leaders
that delve into the real challenges facing the sector. This report details the main issues and perspectives shared by industry leaders in one insightful annual publication during one of the
most difficult periods for the aviation industry.
EDITOR & AUTHOR SUBSCRIPTION ENQUIRIES Copyright 2024 Aviation News Ltd
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victoria@aviationnews-online.com Airline Economics (Online) ISSN 2045-7162
DIGITAL ISSUE
CONTRIBUTORS Digital version production by All rights reserved. No part of this publication may be
reproduced by any means whatsoever without express
Joe O’Mara Zmags permission of the Publisher.
ADVERTISING & SPONSORSHIP ENQUIRIES PUBLISHER Although great care has been taken in the compilation of
Philip Tozer-Pennington Aviation News Ltd this Airline Economics Research publication, Aviation News
philipt@aviationnews-online.com Registered in England & Wales: 7351543 Ltd or KPMG do not take any responsibility for the views
Registered address: expressed herein.
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Dino D’Amore
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1 Airline Economics Aviation Leaders Report 2024 www.airlineeconomics.com

AIRLINE ECONOMICS RESEARCH
Aviation Global Leaders Report - Contributors

THANK YOU TO ALL OF THOSE EXECUTIVES WHO GAVE THEIR TIME TO ASSIST WITH THIS REPORT
THIS LIST DOES NOT INCLUDE THE MANY INDUSTRY EXPERTS, BANKERS, AIRLINE AND LEASING EXECUTIVES WHO PROVIDED THEIR
COMMENTS TO AIRLINE ECONOMICS BUT HAVE OPTED TO REMAIN ANONYMOUS.
CONTRIBUTORS TO THE 2024 AVIATION GLOBAL LEADERS REPORT
Tom Baker, Chief Executive Officer | Aviation Capital Group
Peter Barrett, Chief Executive Officer | SMBC Aviation Capital
Helane Becker, Managing Director | TD Cowen
Ali Ben Lmadani, Chief Executive Officer | ABL Aviation
Greg Conlon, Chief Executive Officer | High Ridge Aviation
Andy Cronin, Chief Executive Officer | Avolon
Richard Hough, President and Chief Executive Officer | Engine Lease Finance
Michael Inglese, Chief Executive Officer | Aircastle Advisor
Bobby Janagan, Chief Executive Officer | Rolls-Royce Partners Finance
Aengus Kelly, Chief executive Officer | AerCap
Robert Korn, President | Carlyle Aviation Partners
Greg Lee, Global Head of Transportation Banking | Goldman Sachs
Norman Liu, President & Chief Executive Officer | Nordic Aviation Capital
Robert Martin, Former Chief Executive Officer | BOC Aviation
Joe McConnell, Partner, Deputy Co-chief Investment Officer | Castlelake
Ryan McKenna, Chief Executive Officer | Griffin Global Asset Management
Paul Meijers, Executive Vice President - Commercial Transcations | Airbus
James Meyler, Chief Executive Officer | ORIX Aviation
Rob Morris, Global Head of Consultancy | Cirium Ascend Consultancy
John Plueger, Chief Executive Officer | Air Lease Corporation (ALC)
Marjan Riggi, Managing Partner | Stage Wing
Betsy Snyder, Director | S&P Global Ratings
Vinodh Srinivasan, Managing Director, Co-Head of the Structured Credit Group | Mizuho
Mark Streeter, Managing Director, REIT, Airline/EETC, Aircraft Leasing, Rail, Parcel, Freight, Shipping, Transportation HG/HY Coverage, North America
Credit Research | JP Morgan
Firoz Tarapore, Chief Executive Officer | Dubai Aerospace Enterprise
Steven Townend, Chief Executive Officer | BOC Aviation
Olivier Trauchessec, Head of Global Aviation | MUFG Bank
Austin Wiley, Chief Executive Officer | SKY Leasing
Austin Willis, Chief Executive Officer | Willis Lease Finance Corp.

Thomas Baker Peter Barrett Helane Becker Ali Ben Lmadani Greg Conlon
Chief Executive Officer Chief Executive Officer Managing Director Chief Executive Officer Chief Executive Officer
Aviation Capital Group SMBC Cowen ABL Aviation High Ridge Aviation
Andy Cronin Richard Hough Michael Inglese Bobby Janagan Aengus Kelly
Chief Executive Officer President and Chief Executive Officer Chief Executive Officer Chief Executive Officer Chief Executive Officer
Avolon Engine Lease Finance Aircastle Advisor Rolls-Royce Partners Finance AerCap
Robert Korn Greg Lee Norman Liu Robert Martin Joe McConnell
President Global Head of Transportation Banking President & Chief Executive Officer Former Chief Executive Officer Deputy Co-Chief Investment Officer
Carlyle Aviation Partners Goldman Sachs Nordic Aviation Capital BOC Aviation Castlelake
Paul Meijers
Ryan McKenna James Meyler John Plueger Marjan Riggi
Executive Vice President - Commercial
Chief Executive Officer Chief Executive Officer Chief Executive Officer Senior Managing Director
Transcations
Griffin Global Asset Management ORIX Aviation Air Lease Corporation Kroll Bond Rating Agency
Airbus
Vinodh Srinivasan Mark Streeter

Betsy Snyder Managing Director, REIT, Airline/EETC, Firoz Tarapore Stephen Townend
Managing Director,
Director Aircraft Leasing, Rail, Parcel, Freight, Chief Executive Officer Chief Executive Officer
Co-head of the Structured Credit Group
S&P Global Ratings Shipping, Transportation HG/HY Coverage, Dubai Aerospace Enterprise BOC Aviation
Mizuho
North America Credit Research
JPMorgan
Olivier Trauchessec Austin Wiley Austin Willis

Head of Global Aviation Chief Executive Officer Chief Executive Officer
MUFG Bank SKY Leasing Willis Lease Finance Corp.
ALL OF THE VIDEO INTERVIEWS, WHICH WERE CONDUCTED IN OCTOBER-DECEMBER 2023 IN VARIOUS GLOBAL LOCATIONS, ARE AVAILABLE
TO VIEW IN FULL HERE: WWW.AVIATIONNEWS-ONLINE.COM/AVIATION-INDUSTRY-LEADERS-REPORT/
www.airlineeconomics.com Airline Economics Aviation Leaders Report 2024 3

DEMAND & DISRUPTION

We are delighted to present you with our Aviation Leaders Report 2024: Demand & Disruption.
The report captures the views of industry leaders across the leasing, airline and banking
markets and includes input from rating agencies and analysts covering the sector.
Our report last year focused on the encouraging recovery OEM and Fleet Focus
that was taking place, primarily driven by US and European The great disruption within the sector has been the current
markets, and how the financing market was adapting to an state of aircraft manufacturing. As airlines clamour for
environment where interest rates had begun to materially rise additional lift to service demand, production delays and
for the first time in over a decade. equipment malfunctions are causing havoc.
The current environment is a very interesting place, where On the aircraft OEM side, order books are stacked and sold
the significant tailwind of passenger demand is tempered by out until the next decade, but ramping up supply chains has
the many headwinds, not the least of which is the significant continued to be a struggle. While Boeing and Airbus delivered
supply challenges the sector faces. almost 1,200 aircraft in 2023, this remains over 20% below
the peak of 2018. Given the continuing issues, the market lacks
Airline performance and air traffic recovery confidence in their ability to meet their stated targets.
A new cycle begins. From the nadir of 2020 where airlines lost For Boeing, there are further woes to manage for its 737
$140bn, IATA expects profits to return this year to the tune MAX and the fallout from the issues relating to the Alaska
of over $23bn. This represents a remarkable turnaround and Airlines malfunction in January of this year remain to be
brings profitability close to 2019 levels. As ever, profits have seen. As the company increases its focus on quality and safety,
been predominately driven by the US market (over $14bn), production rates are likely to suffer in the near term.
with European airlines driving the bulk of the balance ($7.7bn). Compounding the airframe issues are material concerns on
The recovery in 2022 was fragmented, with significant the engine side. The full scale of the reliability issues with the
challenges remaining across Asia-Pacific, not least of which Pratt & Whitney GTF engine came to light last September and
being the prolonged travel restrictions in China. With all will have a significant impact on those operating the A320neo.
restrictions now lifted, Asia has bounced back strongly and With already chronic backlogs in MROs and shop visits taking
2023 saw global air travel rise above 2019 for the first time. up to a year, it is forecast that there will be an average of 350
Given global GDP has increased significantly since that time, aircraft on the ground due to the GFT issues between 2024
there remains a lot of growth to recapture. and 2026, with the peak impact being felt in the first half of
While airlines around the world continue to be burdened with this year. The gross financial impact is forecast to be $6bn to
additional debt taken on during the pandemic, the strength $7bn and it leaves a number of airlines scrambling further for
of the recovery has meant that airline failures continue to be alternative lift. Compensation discussions will be interesting
at a relatively low level, given historic norms. Load factors to observe.
have been impressive and, assisted by the supply issues It is estimated that the pandemic resulted in some 3,000
discussed below, pricing has been robust. The evident pent-up aircraft not being produced, coupling this with the supply
demand and the increased appetite for premium leisure travel challenges and the robust demand environment we are
have been compensating factors against any reduction in unsurprising seeing asset values materially increase across the
business travel. board. Though it is worth noting that some lease encumbered
The industry is not immune to the evident macroeconomic assets may suffer from transactions that were written or
and geopolitical challenges, though after the challenges of extended nearer the outset of the pandemic.
Covid, it is almost reassuring to be talking about oil, labour, The wider trading environment has suffered from these
and finance costs. Labour has arguably been the most pressing OEM challenges, as larger lessors delayed divesting plans
of issues, with the global dearth of pilots driving that cost up as they are forced to wait on deliveries. The trading market
significantly and general work force shortages impacting improved somewhat over the course of 2023 and there is
performance. Maintenance and the access to lift have also broad hope that this trendline will continue into this year.
become increasingly challenging and place an ever-increasing
risk to growth and profitability. Aviation Finance
Despite these headwinds, the general view of participants Having seen sharp rises throughout 2022, interest rates
is that airline performance should continue to be robust in broadly settled by the second half of 2023 at around 5% in
2024, as the heighted desire to travel persists and any potential the US and UK and 4% in the Eurozone. While inflation
US slowdown being offset by opportunities driven out of the has declined sharply over the course of the year, there is an
Asian recovery. expectation that we are in a period of “higher for longer”.

That belief has provided more certainty to both lenders and Given the increasing evident benefits of scale, from the
borrowers and we saw an increase in issuances by the lessors access to deeper pools of capital to the ability to secure slots
in the unsecured bond market, with over $16bn raised in that with OEMs, there is also a general belief that where M&A
market by both investment grade lessors and some lessors who takes place it is likely to be larger players absorbing those that
hope to join that bracket in the near future. While interest have not achieved investment grade status.
rates reflected the heightened environment, it was interesting There will remain a place in the market for those outside
to note that spreads for lessors were not materially different that sphere, but the niches they operate in are becoming
than in recent years. increasingly specialised and require a high level of expertise
The wider commercial aviation debt market remains open to execute effectively.
for business, with many warehouse facilities closed over the
last year and the continuing theme of alternative lenders, The Climate Challenge
typically backed by US private equity, playing an increasingly The report delves less into the climate challenge than in
important role in providing many forms of debt financing prior years and that, in part, is due to a lack of new insights
across the capital stack. to give. The sector is aware of the challenges it faces and its
On the structured finance side, the market has not returned responsibility to reduce its carbon footprint, but the path
in a meaningful way, and this is impacting on asset managers remains murky.
ability to package and close transactions, whether in the form The availability of capital, either debt or equity, has not yet
of ABS structures, sidecars or joint ventures. been materially impacted by ESG concerns and the great white
As recently as 2021 the asset backed securitisation (ABS) hope of Sustainable Aviation Fuel needs to take a significant
market funded $9bn of aircraft purchases but it was effectively step forward in production if it is to play the key role that has
shuttered in 2022 after the Russian invasion of Ukraine and been designated for it. We no doubt will return to this agenda
the interest rate hikes that followed. There was some life in that in greater detail in future years.
market in late 2023 with issuances on the engine and aviation
loan side and there is hope that further activity will follow In Closing
through in 2024 for the notoriously sentiment driven market. Overall, the industry outlook remains positive. Disruption is
However, seeing that through will require a relatively clean nothing new to this sector and, while the challenges it faces are
portfolio, with attractive metal, stable lessees and leases that significant, they still pale in comparison to what was overcome
have been appropriately repriced for the current environment. during the pandemic.
As we enter the next aviation cycle, we do so buoyed by the
Lessors Dominate consumers increasing desire to travel and by the resilience the
Aircraft leasing companies have had a stellar year, with entire sector has displayed in recent times.
demand outpacing supply and leasing fundamentals improving I would like to thank all those who gave their time and
substantially, increasing the bottom line for many of the larger insights, and I hope you enjoy the read.
lessors. Lease rate factors (LRFs) traditionally lag interest
rate rises, but we are now seeing material increases in LRFs Joe O’Mara
as they reflect the heightened interest rate and wider demand Head of Aviation Finance, KPMG in Ireland
environment.
The demand for lease extensions has never been higher and
the larger lessors with orderbooks are seeing commitments
stretch a long way out. Together with the positive trend in asset
values, it bodes well for the larger lessors to continue to grow
their share of the market and drive shareholder returns.
The percentage of leased aircraft sits above 50% in terms
of the number of aircraft owned by lessors and above 55%
in terms of the overall value of the lease fleet. The dominant
view remains that this percentage will likely continue to move
towards the 60% mark over the coming years.

Chapter One
Airlines Soar
I
n times of volatility, economists airline industry grew at more than 5% a Bastian notes that “$300bn missing
search for constants to be able year between 1990 to 2010 – outpacing demand” from the pandemic period
to better predict future growth global GDP by almost double and well [Fig.1] is reflected in the rapid growth
patterns to inform current strategy. in excess of the industry’s long-term the industry has been experiencing
The airline industry is no exception and average. After the financial crisis, the over the past two years with so-called
arguably has endured cycles of volatility industry’s compound annual growth “revenge travel”. He adds that the
caused by exogeneous shocks that rate accelerated to 6.7% before the industry is only now “back to trend”
have increased in frequency in recent pandemic grounded the world fleet in implying that air travel has not yet
years. The pandemic was the deepest 2020. “made a dent into that $300bn”
recessionary shock the world economy Speaking at an investor conference predicting that airlines will continue
has ever seen, so it is unsurprising in December 2023, Delta Air Lines to see healthy demand over the next
that economists are seeking to modify chief executive Ed Bastian discussed several years.
established forecasting models for a his view that the relationship between Speaking with Airline Economics
post-pandemic world. air travel and GDP has endured despite in March 2023, American Airlines
Historically, aviation economists the “tremendous amount of volatility treasurer Meghan Montana made a
have assumed that the industry has a and variability and exogenous factors” similar observation that the industry
standard economic cycle of two to three that have influenced the industry. finished 2022 with revenue of 0.88
boom years followed by a downturn Bastian believes that the relationship of US GDP, indicating there was still
lasting several years before finally between the size of the US economy $30bn of lost revenue to recapture.
ticking back upwards. Many adhere to and the amount that’s spent on air While noting that it would not be
that premise despite a deep break in travel to and from the US specifically possible to recapture all of that lost
the cycle during the elongated period of has been consistent since the 1980s demand due to the continued supply
growth in the years from around 2004 at “about 1.3%” although he notes and demand imbalance of aircraft that
to the onset of the pandemic. Air travel this dropped during crisis years to continues to restrict capacity today,
growth continued despite the impact 1.1% in the aftermath of 9/11 and the she believes that it is possible for the
of the global financial crisis in 2008/9, financial crisis before being “broken” industry to eclipse that historic 1%
which possibly even contributed by the pandemic. “The only time it has of GDP revenue given the strength of
to the continued expansion of the meaningfully broken in our modern pent-up demand and the popularity
industry thanks to global central banks history of US travel is the Covid crisis,” of flexible working habits that in
suppressing interest rates for a decade said Bastian. “From the period of 2020 turn have provided more flexibility
at close to zero leading to an inpouring through 2022, there was about $300bn for travel.
of liquidity from investors searching for of missing demand when you look at the Expanding this hypothesis to the
higher yields. Air travel’s relationship to size of the economy, the wealth of our global airline market, Figures 2 & 3
global gross domestic product (GDP) consumers, and the fact that consumers overleaf show the trend line between
has been well documented but in those could not travel but they had the desire global GDP, air travel (measured in
boom years, however that relationship to travel. Just a substantial amount of revenue per passenger kilometres,
may have decoupled since the global demand was missing.” RPKs) and airline net profits from
Air Travel Revenue Returning to Long-Term Trend

Air Travel Revenue Returning
Industry Revenue to & from U.S.to Long-Term
As % of GDP Trend
Industry Revenue to & from U.S. As % of GDP
1.3% Historical Average
1.5%
1.4% 1.4% 1.4% 1.4% 1.4% 1.4%
1.3% 1.3% 1.3% 1.3% 1.3%
1.3% Historical Average 1.2% 1.2%
1.1% 1.5% >$300B of
Missing 1.2%
1.4% 1.4% 1.4% 1.4% 1.4% 1.4%
Demand
% 1.3% 1.3% 1.3%
1.2% 1.2% 0.8%
1.1% 0.7% >$300B of
Missing 1.2%
Demand
0.8%
1980 1990 2000
-
1989
-
1999
-
2008
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 0.7%
2022 2023E
Source: Delta Air Lines
FIG. 1: US AIR TRAVEL REVENUE V US GDP

1990 2000
- - 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
1999 2008
World Economic Growth, Air Traffic & Airline Profit Growth rates
80 80
70
60 60
50
40
40
30
20
20
10
0
Annual Growth % change
-10 -20
US$ billions
-20
-30 -40
-40
-60
-50
-60
-80
-70
-80
-100
-90
-100 -120
-110
-120 -140
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023E
2024F
RPKs y-o-y % change Cargo Growth, y-o-y % change Global GDP, % change (constant prices) Net profit $bn
Source: International Monetary Fund, World Economic Outlook Database, October 2023 | IATA Global Outlook for Air Transport - December 2023
FIG. 2: WORLD ECONOMIC GROWTH (GDP), AIR PASSENGER TRAFFIC (RPKS) AND AIRLINE PROFIT ($BN)
2000 to forecasts for this year. aircraft deliveries. The GDP forecast “We have changed the
This publication argued in its first lines on Chart Three show the air
report, Navigating the Cycle (2018), travel projections (blue line showing whole core economics.
that the growth of air travel had RPK forecasts) once again converging
become decoupled from global GDP with the black GDP forecast line. Net
It used to be that our
growth as the product became more profits are expected to remain elevated front cabins were our
commoditised with the onset of more as capacity constraints, pilot shortages
low-cost carriers, the growth of air travel and higher inflation work to keep fares loss leaders. Now our
in emerging markets and an elongated and yields elevated. front cabins are our
benign operating environment. The Since air travel resumed, the rebound
decoupling can be seen on Fig. 2 by in the industry has been nothing short profit centres [which is]
divergence of the black GDP line and of remarkable. Following such a sharp
a huge paradigm shift.
the yellow dotted net profit line from downturn, expectations were that the
2014-15 to the onset of the pandemic recovery would be a protracted process People underappreciate
where any relationship was broken. but airline yields have continually
Ed Bastian argued that air travel has outpaced most forecasts, the feared
the transition that the
been evolving from what was becoming risk of recession in world markets industry has gone
a commoditised industry and has has receded over the past year and
pivoted to place a greater emphasis growth has continued despite the war through in distributing
on premium travel revenue. “We in Ukraine, which is now entering a those premium products
lowered the price of using the premium third year. Full year results for 2023
products to attract more people,” he are expected to show a strong year after years of just racing
said. “We have changed the whole for airline profits driven by healthy
core economics. It used to be that our passenger revenue.
to the bottom on the
front cabins were our loss leaders. Now The International Air Transport commoditisation. And
our front cabins are our profit centres Association (IATA) reported in
[which is] a huge paradigm shift. December that total airline (passenger we’re still not done
People underappreciate the transition and cargo) revenue in 2023 is with that.”
that the industry has gone through in estimated to have recovered to 107% of
distributing those premium products pre-pandemic levels, with exceptional Ed Bastion
after years of just racing to the bottom 47% year-on-year growth pushing
on the commoditisation. And we’re still passenger revenue up to $642bn in
not done with that.” 2023 [Fig.4]. IATA expects net post-
Airline CEOs are again utilising tax profit to reach $23.3 billion in
economic performance as the best 2023, with a “slim” net profit margin of
indicator to predict future growth of air 2.6%. Although the recovery in traffic
travel notwithstanding the constraints has been swift and inflation has caused
on capacity from the lack of new yields to surpass forecast, IATA – while

World Economic Growth, Air Traffic & Airline Profit Growth rates
80 80
70
60 60
50
40
40
30
20
20
10
0
Annual Growth % change
-10 -20
US$ billions
-20
-30 -40
-40
-60
-50
-60
-80
-70
-80
-100
-90
-100 -120
-110
-120 -140
2020
2021
2022
2023E
2024F
RPKs y-o-y % change Cargo Growth, y-o-y % change Global GDP, % change (constant prices) Net profit $bn
Source: International Monetary Fund, World Economic Outlook Database, October 2023 | IATA Global Outlook for Air Transport - December 2023
FIG. 3: WORLD ECONOMIC GROWTH (GDP), AIR PASSENGER TRAFFIC (RPKS) AND AIRLINE PROFIT ($BN)
Passenger numbers, revenue and operating profit 2019-2024F

5000 800
4500 700
4000 600
Scheduled Px Numners (millions)
3500 500
3000 400
US$bn
2500 300
2000 200
1500 100
1000 0
500 -100
0 -200
2019 2020 2021 2022 2023E 2024F
Scheduled Passenger numbers (millions) Passenger Revenue ($bn) Operating profit ($bn) Cargo Revenue ($bn)
Source: IATA Industry Statistics, December 2023
FIG. 4: TOTAL MARKET GROWTH
still predicting a return to profitability reached 94.5% of November 2019 levels, Morris noted that Cirium was
in 2024 – is still somewhat cautious in while domestic traffic was 6.7% above expecting the airline industry to
predictions for the coming year. This is the November 2019 level. Although exceed IATA’s operating profit forecast
due to the mixed performance of some international global travel remains for 2024, which he commented was
regions, notably the slow recovery of 5.5% below pre-pandemic levels, IATA “remarkable considering where the
Asia, specifically China, but also with director general Willie Walsh said that industry has come from in a relativity
an eye to the increased geopolitical the gap is “rapidly closing”, adding short period post-pandemic”.
tension throughout the world with that current “economic headwinds Many airlines around the world
wars in Europe and the Middle East. are not deterring people from taking remain burdened by debt raised during
IATA forecasts airline net profit to to the skies”. IATA also noted that the pandemic and industry experts
reach $25.7bn in 2024 (industry net long-term airline profitability shows have been predicting a secondary wave
profit in 2019 was $26.4bn) with a 2.7% that while the industry is exposed to of restructuring or even bankruptcies
net profit margin (3.1% in 2019), but external shocks, it typically returns to considering the relatively low number
also expects growth in terms of RPKs profitability “relatively quickly”. of casualties following the pandemic
to reach more stable levels, predicting Robert Morris, global head of but that hasn’t happened – at least not
RPK year-on-year growth of 9.8% consultancy at Cirium Ascend yet – owing primarily to the growth in
for this year. Consultancy, commented that airlines demand, constrained aircraft supply,
The latest air travel data from had one of their best years in 2023. and with inflation pushing up fares.
IATA shows that passenger travel for “When you bear in mind that this Many of the larger airlines have worked
November 2023 globally has reached is the start of the next growth cycle, hard to reduce their debt stacks and
99.1% of November 2019 levels. it is surprising when you look at smooth out their debt maturities
November 2023 international RPKs their finances.” to provide comfort to investors and

shareholders that they are on a more With balance sheets under pressure, “The headwinds are
stable track. Smaller airlines may be rising costs are hitting profit margins
struggling with the heightened cost and capacity restrictions are impacting more normal in the
environment but lessors report that airlines’ ability to expand and
most customers are back to paying increase revenue.
sense that increased
their lease rentals on time. “The headwinds are more normal in interest rates and the
The world recovery has been the sense that increased interest rates
inconsistent. Much was discussed in last and the strength of the US dollar have strength of the US dollar
year’s report about the lag in recovery made it more challenging,” observes have made it more
in South East Asia and China but there James Meyler, chief executive officer
are now more positive signs of an of ORIX Aviation. “While the recovery challenging. While the
upturn in those areas despite ongoing has been very good, margins are still
macroeconomic and geopolitical tender – the industry average is about
recovery has been very
challenges. IATA data for November $3 per passenger in terms of profit good, margins are still
2023 shows that China domestic travel levels across the industry so it doesn’t
was particularly strong, rising 272% take a big increase in costs to eat into
tender – the industry
as it recovered from Covid restrictions that profit margin. Cost control is average is about $3 per
that were still in place a year ago. All going to be the big challenge.”
of the numbers are positive for growth Higher labour costs remain a pressing passenger in terms of
in air travel, especially in Asia-Pacific issue for airlines due to the continued profit levels across the
but headwinds are building and that lack of staff, coupled with union
has some being more cautious in their demands and renegotiated salaries industry so it doesn’t
forecasts for the coming 12 months. across pilots and cabin crew, and there
“All of the indicators are signalling has been a significant increase in labour
take a big increase in
concern – GDP growth projections or costs throughout the industry that has costs to eat into that
composite leading indicators – but I was now been embedded. Maintenance
signalling concern 12 months ago,” says costs have also been increasing due profit margin. Cost
Morris. “There was certainly concern to the similar staffing dynamics at control is going to be the
24 months ago when we were all MRO shops, as well as a shortage of
worried about recessions in developed slots driving up demand, and scarcity big challenge.”
economies. We’ve seen slow growth, of parts driving up turnaround times
but we have seen growth. We haven’t for maintenance visits. Fuel costs are James Meyler
Chief Executive Officer of ORIX Aviation
seen any recessions yet. Predictions are outside airlines’ control for the most
for growth globally to be between 2-3% part and they have been riding waves
in 2023 and slightly slower in 2024 of spikes due to the continued war
but still growth. In the context of those in Ukraine and now in Gaza, which
macroeconomics, that’s a positive.” threatens to destabilise the Middle
East and major oil producing regions.
ECONOMIC HEADWINDS AND Interest rates have risen rapidly
GEOPOLITICAL SHOCKS but now appear to be stabilising at
Airlines are carrying a higher debt a new level around 4-5% in the US
burden and although they are all now and Europe, while inflation has risen
generating revenue, those airlines that dramatically over the past year but
did not receive government support again is showing signs of becoming
may struggle to service those debts more stable and even beginning to fall
in the coming years. “Airlines have (see Fig.11: Inflation and Central Bank
rebounded but they are carrying a Interest Rates 2021-2023, Chapter
lot of debt on their balance sheets or Two, p23, where there is also a more
are in arrears with lessors and other in-depth look at the impact of interest
suppliers that they will need to find a rates on the sector.)
way to refinance or restructure their Higher inflation and interest rates
balance sheets,” says Robert Korn, have also been driving up lease rates,
president and co-founder of Carlyle which is aiding lessors while putting
Aviation Partners. “Those airlines are additional pressure on airline costs.
generating cash today but certainly not Aircraft supply and manufacturing
enough from an operating standpoint issues have become even more
to repay those amounts over the next significant over the past year despite
two or three years.” deliveries increasing from the original

Oil / Jet Fuel Prices Jan 2022-Jan 2024

220
200
180
160
140
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40
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23
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Cushing, OK WTI Spot Price FOB (Dollars per Barrel) Europe Brent Spot Price FOB (Doll ars per Barrel) U.S. Gulf Coast Kerosene-Type Jet Fuel Spot Price FOB (Dollars per Barrel)
Source: International Energy Agency (IEA)
FIG. 5: OIL / JET FUEL PRICES 2023
equipment manufacturers (OEMs). are no definitive answers yet as to why to a more normal delivery schedule.
Adding to the general difficulty the incident occurred, it is the latest Cirium’s Morris notes that there are a
in restarting production lines in a series of setbacks for the Boeing thousand-plus suppliers in the aviation
following the pandemic shutdown MAX aircraft, which will only delay manufacturing supply chain, which
with a lack of staff and supply chain production further. each had their individual issues having
challenges impeded production rates, On the engine side, manufacturing been damaged by the pandemic. “Based
manufacturing issues also came to issues with the Pratt & Whitney (P&W) on our projections from 2018, there are
light last year and into 2024 with issues Geared Turbofan Engines (GTF) 3,000 single aisle aircraft that were
relating to both airframes and engines. PW1100 powerplants had been causing never made,” says Morris, noting he
Many of the major manufacturing aircraft on ground (AOG) issues for believes that the structural deficit of
issues were centred on the Boeing 737 some time but the real scale of the aircraft will continue through 2027.
MAX aircraft type. In August 2023, problem emerged in September 2023 That dearth of new equipment has
Boeing disclosed a manufacturing when P&W parent RTX confirmed restricted aircraft availability for
defect in its 737 MAX aft pressure that 600 to 700 incremental geared airlines, which have turned to lessors
caused by incorrectly drilled holes by turbofan engines would have to be in the search for lift to serve the rapid
supplier Spirit AeroSystems, which removed from aircraft for quality increase in demand. This supply-
required inspections of inventory checks between 2023 through to 2026 demand imbalance has pushed up
aircraft. At the end of the year, the at a cost to the company of $3bn. (More lease rates and asset values, increasing
Federal Aviation Administration (FAA) detail on the manufacturing and supply airline costs further.
disclosed it was closely monitoring chain issues are examined in Chapter The geopolitical environment
possible loose bolts in the 737 MAX Four, OEM and Fleet Challenges.) has also worsened over the past 12
rudder control system. On January Given the various supply chain issues months. The Russian-Ukraine war has
6, 2024, a door plug on a 737 MAX 9 and the fact that aircraft are taking continued with no real conclusion in
became detached onboard an inflight longer to get out of maintenance than sight and the terrorist atrocities carried
Alaska Airlines leading to the rapid they have historically, the constraints out by the Hamas militia in Israel on
decompression of the cabin and an on capacity are expected to continue October 7, 2023 prompted a hot war in
emergency landing. There were no into 2025, with some predicting 2026 Gaza that threatens to destabilise the
fatalities and the aircraft landed safely. before the production lines are back entire Middle East region.
However, the incident triggered an to full force and delivery streams John Plueger, chief executive officer
emergency airworthiness directive have recovered. at Air Lease Corporation, comments
(EAD) from the FAA for all of the “The supply chain and orderbook that current geopolitical issues are
aircraft types to be grounded and delivery stream is broken,” says Meyler. foremost in board discussions. “We
inspected. Some 171 aircraft were “Any hope of having a fix coming in soon are watching the current geopolitical
grounded. Following inspections both has been thrown out of the window situation very closely,” he says. “We
Alaska Airlines and United Airlines with various new challenges like the were hurt a little in Russia but there
reported issues related to the door GTF engine issues, the continued was no way of predicting its invasion
plug installation such as loose bolts, certification delays and issues with the of Ukraine and certainly no one could
while the US National Transportation Boeing product.” Meyler expects it to have predicted the Hamas attacks
Safety Board (NTSB) is continuing be more like three to as many as five in Israel. These are the realties
with its investigation. Although there years before the manufacturers return we deal with.”

Over 50% of World GDP going to the Polls in 2024

In 2024, elections will take place in countries that collectively account for more then 50% of the global GDP.
These electoral events have the potential to create distractions for these governments and may result in policy changes.
European Union | June

Legislative Election
United States | November

General Election
Indonesia | February Ukraine | March

General Election General Election
Q1 Q2 Q3 Q4
Russia | March Mexico | June

General Election General Election
UK | before Jan 2025

General Election
Iran | March India | May
Legislative Election Legislative Election
Source: BOC Aviation
FIG. 6: 2024: THE YEAR OF ELECTIONS
Geopolitical issues are omnipresent globalisation among some of the major “Every few years we
and part of the normal operational world economies. When you layer
environment for the world’s airlines. onto that some significant upcoming run into geopolitical
“Every few years we run into elections, with an electorate that is
geopolitical issues and we tend to get moving away from the centre, there
issues and we tend to
through them,” says Aengus Kelly, chief could be some potentially big shifts in get through them. We
executive officer of AerCap. “We are a economic policy.”
global industry. Every year, excluding IATA’s January 2024 key risks report are a global industry.
Covid, more people will travel than also noted the importance of the Every year, excluding
the last. That has continued since the upcoming elections since the results
dawn of aviation. That structural trend could lead to an impediment in trade Covid, more people will
is definitely there.” and increased oil-price volatility.
travel than the last. That
Lessors were adversely impacted by Geopolitical issues are the main
Russia’s invasion of Ukraine since their driver of fuel price volatility. In third has continued since
aircraft on lease to Russia airlines were quarter earning calls many airlines
trapped in the country, with insurers noted jet fuel prices as a major
the dawn of aviation.
refusing to pay out. In the past year headwind to profitability but in the That structural trend is
however, many lessors, including Air fourth quarter that tailed off slightly.
Lease Corporation and AerCap, have The crack spread between the price of definitely there.”
begun to recoup some of those losses crude oil and jet fuel has also remained
Aengus Kelly
with insurance payments. stubbornly high.
Chief Executive Officer of AerCap
Geopolitical uncertainty is These headwinds and perceived risks
particularly high this year since aside have impacted investor perception of
from the two wars, 2024 is being airline value, with share prices lower
tagged as the Year of Elections. There across the board. “Airlines are doing
are significant elections being held really well but their stock prices are
in Indonesia, Russia, India, Mexico, performing poorly,” says TD Cowen’s
the EU, the US and the UK, which Helane Becker. “They are below March
Avolon chief executive Andy Cronin 2020 lows, which I find amazing
is concerned may lead to a shift in considering how well the airlines
economic policy that could impact have recovered.”
aviation. “We have to be aware of the The supply-demand imbalance
potential for escalating trade conflict,” for aircraft limits earnings growth
he says. “We have seen a growing anti- for airlines but in the interim it has

“On a global basis,

domestic travel has
returned to 2019 levels
but global GDP relative
to 2019 is still way
ahead by at least 10
or 15% - airline traffic
should be a multiple
of that so we have
not recovered yet to
the pre-Covid traffic
trend. When we talk to
investors we explain
that we are more bullish
enabled them to raise fares leading to macroeconomic picture despite record
on the aircraft side than
healthy yields over the 2023 summer profits being recorded by many large the airlines, which is a
period. That said, capacity constraints airlines. “There is concern from
will begin to impact income growth as investors about the stability of demand function of that long-
availability of aircraft becomes even at these elevated yield levels,” he says, term pull to trend on
more scarce and more costly. “because of the cost of living and rising
JP Morgan’s Mark Streeter explains interest rates, which means that the traffic and the supply-
why the current market dynamic has consumer has less disposable income.”
demand imbalance for
made him bullish on aircraft rather A good demonstration of this
than on airlines. “On a global basis, negative investor perception can be aircraft.”
domestic travel has returned to 2019 seen in equity investors’ reaction to
levels but global GDP relative to 2019 Delta Air Lines recent record full year Mark Streeter
is still way ahead by at least 10 or 15% 2023 results. Delta delivered earnings of JPMorgan
- airline traffic should be a multiple of per share (EPS) of $6.25 and a pre-tax
that so we have not recovered yet to the income of $5.2bn, which was almost
pre-Covid traffic trend,” he says. “When double the 2022 result, however the
we talk to investors we explain that we company lowered its EPS guidance
are more bullish on the aircraft side for the first quarter of 2024 to $6.00
than the airlines, which is a function of to $7.00. While the mid-point of
that long-term pull to trend on traffic that range was right at the consensus
and the supply-demand imbalance estimate of $6.50, the outlook was
for aircraft.” below Delta’s (DAL) long-term profit
Streeter argues that air traffic should target for several years of more than
have recovered to levels beyond 2019 by $7.00 EPS. The Delta team said on the
now based on its relationship to GDP January 12 earnings call that they were
but it has been restricted by the lack of cautious on future guidance due to
aircraft. “We haven’t had the aircraft rising costs, with fuel and maintenance
availability to stimulate lower fares and costs predicted to be up in 2024, added
more traffic because those brakes have to the disruption caused by supply
been put on the market by the Boeing chain issues and a “testy” geopolitical
and Airbus supply chain issues and the environment. Delta’s stock opened
GTF engine problems.” more than 7% lower following its
AerCap’s Kelly agrees that investors results announcement, despite Delta’s
are concerned about airlines’ forecast for free cash flow of between
rising cost base and the weakening $3bn to $4bn.

Regional Review
NORTH AMERICAN STRENGTH but over the past year a new phenomenon smaller airlines like Spirit and JetBlue
The North American market has been has emerged where travellers appear to have been subpar relative to the big three
the major driver of traffic growth and be willing to spend more to travel further network carriers.”
profitability for the global industry over afield and for better service, which has The flip in fortunes for the LCCs with
the last year, which is expected to continue translated to increased traffic and yield for the legacy carriers is due to a number of
into 2024 despite some softening of the legacy carriers. factors, primarily cost convergence. LCCs
domestic demand seen in the latter half “What we’re seeing is almost a tale of historically had a lower cost base than
of 2023. The region accounts for 56% of two cities,” says Greg Lee, Global Head legacy carriers but following the pandemic,
IATA’s total industry profit forecast for of Transportation Banking at Goldman there has been an increase in labour costs
2024 amounting to $14.4bn – about the Sachs. “Some of the larger airlines with across the board, as well as pilot shortages
same as the $14.3bn estimated for full significant international operations, bumping up their salaries which has led to
year 2023. premium business, long haul services, operating costs of LCCs and legacy carriers
The region was the first to emerge from have been performing better than airlines converging eliminating that traditional
the crisis and was back to profitability in with more of a domestic and low-cost “low-cost” advantage. Aengus Kelly also
2022 much earlier than other jurisdictions carrier model. In the most recent series of notes that the fixed cost base for airlines
and in summer 2023 demand also earnings calls, we have seen a divergence has been increasing rapidly, particularly
returned for transatlantic travel. between premium and the front of the noting that the industry now has the
“Airlines have done really well, especially cabin and the lower cost side of the cabin.” first “million-dollar pilots”, with captains
in North America,” says TD Cowen’s “We are seeing something different of widebody aircraft earning base pay of
Becker. “Over the past three years, we happening than we would have seen over $400 an hour in addition to pensions
have seen a predictable recovery… previously,” agrees Betsy Snyder, S&P and healthcare benefits. Rising fuel costs
locally, domestically, regionally and now Global Ratings. “Typically low-cost are an ever-present issue for all airlines
internationally. This summer [2023] airlines have done well due to their lower but the collective increase in labour costs
we saw very strong demand on the cost base and they did do well in the has severely challenged many carriers
North Atlantic routes as people looked beginning when short-haul traffic started and continues to be a concern, with most
to recreate experiences they had pre- to come back after the pandemic. But in agreements having been resolved recently
pandemic or just that pent-up demand 2023 we have seen a change with the with substantial increases.
for not have been able to travel for so pent-up demand for international travel. The macroeconomic environment
long.” Becker characterises 2021 and The big three airlines – United, Delta and has also contributed to this reversal in
2022 as years where domestic markets American – all have global operations fortunes for the US LCCs, since as Betsy
recovered, specifically in North America and have been the beneficiaries in terms Snyder suggests, they have a different
and European markets, with Asia-Pacific of demand. Whereas the other airlines customer base than legacy carriers whose
being slower to recover. International that focus on domestic travel have seen “disposable income is not growing as fast
traffic recovered throughout 2022 and demand reduce… they also have exposure as other segments of the economy”, which
into 2023, and she regards 2023 and 2024 to higher fuel prices and labour costs have she says has been hurting LCC demand.
as the year of transatlantic recovery. “2025 been increasing and there is a shortage In the airline’s third quarter earnings
is probably the first year where we get a of pilots that have been leaving smaller call on October 31, 2023, Joanna Geraghty,
normalised, balanced travel year,” she says. airlines for the larger carriers. They have JetBlue president and chief operating
Low-cost carriers (LCCs) benefitted been adding more capacity than some officer (now announced as the next CEO
from that early return of domestic travel, of the larger airlines so their earnings to take over on February 12, 2024), noted
especially in the North American market, have been under pressure. Earnings for that the airline had suffered from a “softer

than expected off peak and close in leisure and international routes, serving both “What we’re seeing
demand in September” although she business travellers and increasingly
called the airline’s premium Mint offering leisure customers. is almost a tale of two
a “bright spot” in the third quarter results The continued success of airlines to
with year-on-year revenue improving attract leisure flyers to premium products
cities. Some of the
by 4.5%. “We continue to see strength in has endured past the point where many larger airlines with
Mint, even with our Mint capacity up 19% had expected so-called “revenge travel” to
year-over-year”, said Geraghty. JetBlue have petered. significant international
was able to benefit from its transatlantic Delta’s Bastian believes there is operations, premium
services using its A321LR aircraft to enduring demand for premium air travel;
London and Amsterdam, expanding to he says that the post pandemic premium business, long haul
Dublin and Edinburgh. cabin passenger is the same person but
services, have been
Spirit Airlines also reported a loss for who is travelling for different reasons.
the third quarter of 2023 amid “softer He commented that people who had performing better than
demand” for its services. Chief executive travelled in premium for business reasons
Ted Christie commented that the airline pre-pandemic were continuing to do
airlines with more of
had not seen the “anticipated return to a so for leisure reasons now and that the a domestic and low-
normal demand and pricing environment airline had seen “incredible stickiness”
for peak holiday periods”. The airline also for its premium products. For this reason, cost carrier model. In
referred to challenges caused by higher Bastian notes, that Delta is trying to keep the most recent series
fuel prices and Neo engine availability premium travel affordable so people can
issues leading to a lower than expected use it for business and leisure travel. of earnings calls, we
margin for the fourth quarter. Delta has rolled out a premium economy
Frontier and Allegiant echoed their product on long-haul international routes,
have seen a divergence
LCC competitors reporting softening which Bastian described the revenue between premium and
of demand for the fourth quarter and generation as “above our expectations”.
increasing operating challenges including Delta is also seeing an increase in corporate the front of the cabin
elevated fuel and labour costs, as the sales, which accelerated by the end of the and the lower cost side
financial impact from adverse weather and year, including double-digit year-over-
capacity constraints. But the low margin year growth in December. The US carrier of the cabin.”
airlines are not flying empty – load factors said that technology and financial services
Greg Lee
remain healthy but the differential for business were driving momentum for
Global Head of Transportation Banking
lower cost carriers has always been a focus business travel. “We are finally starting
of Goldman Sachs
on high aircraft utilisation, which has been to see tech companies traveling again,”
hampered by adverse weather earlier in said Bastian. “The return to office that is
the year, airport/ATC delays and capacity driving some of growth.”
constraints as aircraft are grounded due The large US carriers have had the
to engine issues. The key for low margin biggest recovery in both specialty and
airlines going forward into a more difficult profitability and have been able to fill the
operating environment will be balancing front of their aircraft with premium leisure
load factors with price. passengers. ORIX Aviation’s Meyler
The picture is different for US legacy observes that this trend has continued
carriers that have all reported increased “very resiliently throughout 2023”. He
demand for premium products as well noted though that there is an East-West
as their basic offerings as travellers who divide on this current trend toward
can afford to pivot to more premium premium travel with Asian carriers not
services. United Airlines, Delta and observing a growth in premium traffic
American Airlines have all posted potentially as a consequence of the lag in
strong third quarter 2023 numbers and the recovery in Asia, which he adds is now
yields for their premium products and beginning to change.
are also benefitting from a return of The change in fortunes for the
business travellers. traditional LCCs has led to a new moniker
In its third quarter earnings, United for the group – namely low margin airlines
Airlines chief executive officer Scott (LMAs) – although Allegiant has revised
Kirby said that passenger numbers were this for its business model to Profitable
up, from its basic economy product all Leisure Focus Carrier or PLFC, according
the way to more premium products, to chief Barry Biffle in the airline’s
including first class, on both its domestic November earnings call.

North American airlines have been that the very good summer demand “Typically low-cost
seeking mergers to strengthen their had extended into October, with
offerings. The JetBlue-Spirit merger strong demand during the Christmas airlines have done well
however has been stymied by the season on both short-haul and long-
ruling of US District Judge William haul flights remains high, especially
due to their lower cost
G. Young on January 16, 2024 that among leisure travellers. The company base and they did do
the merger – first announced in said that the trend toward more
July 2022 – would substantially bookings in premium classes, meaning well in the beginning
damage competition. business class or first class, was when short-haul traffic
Alaska Airlines announced its continuing although chief executive
intention to merge with Hawaiian Carsten Spohr noted on an earnings started to come back
Airlines on December 3, to resounding call in November 2023 that business
after the pandemic.
support from the industry but with travel was not yet back to full force but
the usual concerns over the reaction that premium cabins were more often But in 2023 we have
of regulators. TD Cowen’s Becker, said being filled by private, i.e. leisure,
at the time of the announcement that travellers. Lufthansa has increased its
seen a change with the
she expects the regulators to approve premium cabin offerings on board its pent-up demand for
this deal noting that the combination A350, 777-9 and 787-9 aircraft with
“makes a lot of sense, and it should be its new long-haul product, Lufthansa international travel.
approved”. JP Morgan’s Streeter also Allegris, investing a total of €2.5bn by The big three airlines
said at the time that due to Hawaiian’s 2050 – demonstrating the company’s
relatively small size and the fact that conviction that demand for premium – United, Delta and
after the merger Alaska would only by services from leisure travellers is
a quarter the size of the big three, he set to continue.
American – all have
did not expect any regulatory issues. Air France-KLM recorded a 9% global operations
increase in third quarter operating
EUROPEAN CONSOLIDATION result to €1.3bn over the prior year and have been the
European airlines have recovered quarter with passenger numbers beneficiaries in terms of
well following the pandemic with up by nearly 8% year-on-year. The
airlines already back to profit. IATA airline group credited the success to demand.”
is predicting European airlines will an increase in load factor on the long-
Betsy Snyder
post a record net profit of $7.7bn for haul, short and medium-haul routes
Director of S&P Global Ratings
the full year 2023, with the positive and Transavia, as well as an increase
trajectory expected to continue into in yield on the North Atlantic, Africa,
2024 with $7.9bn 2024 net profit Caribbean and Indian Ocean and
forecast. Passenger revenue growth is short and medium-haul services.
expected to slow in 2024 to 10% from Air France is also continuing with a
22% last year but from a high base in “premiunisation” journey to upgrade
2022 of 102%, which shows growth its premium classes with new cabins.
rates are normalising for the region. IAG – parent company of British
All airlines, including legacy Airways, Aer Lingus, Vueling, Iberia
carriers are riding high on the back and Level – reported a healthy profit
of sustained demand for air travel, of €2.15bn for the nine months of
especially for premium services. 2023 on revenues of €22.3bn. The
Lufthansa Group posted a very group has reported “very strong
strong third quarter profit thanks to leisure demand across all our airlines”.
a “record summer” helping the group British Airways has also invested in
achieve €10.3bn in revenue with an its premium cabins, with an average
operating profit of €1.5bn, making it of 56 business class seats per aircraft,
the second best third quarter result but with a reduced first class cabin
in its history. Net income was €1.2bn. from 14 seats to approximately eight.
Lufthansa stated that at 25% above Nicholas Cadbury, CFO at IAG, said
the 2019 third-quarter level, third that the company expects premium
quarter yields reached a new record capacity to rise above 2019 levels by
high with demand for leisure travel about 2025 and that the premium
remaining strong “particularly in leisure market was strong. In its
the premium segment”. The German third quarter results, Aer Lingus
airline group indicated in November reported particularly strong premium

leisure on its transatlantic network, government and Castlelake. Air “Europe is consolidating
which drove “record load factors in France-KLM has the option to become
business cabins”. IAG is continuing a controlling stakeholder after two real time. It is a real
to invest in lower fare brands and at years. Benjamin Smith, Air France-
its capital markets day in November KLM chief executive, said at the
land grab; extremely
2023 announced that it was applying time the deal was announced: “With competitive”
for an independent airline operating its well-established position and
certificate for long-haul, low-cost Scandinavia and strong brands, SAS Joe McConnell
brand Level to operate enhanced offers tremendous potential.” Deputy Co-Chief Investment Officer of
services out of Barcelona. IAG confirmed in November 2023 Castlelake
Although the legacy carriers have that it anticipates completing its
been enjoying a period of profitability purchase of Air Europe by the end
thanks to higher fares and great of 2024. The acquisition is currently
demand, European low cost carriers being reviewed by the European
have also been profitable. Commission. TAP Air Portugal is also
Ryanair reported strong first half up for sale.
financial year results in November This move toward consolidation has
2023, with profits up to €2.18bn on led industry observers to predict that
the back of a “very strong Easter” and the European market may be moving
“record summer traffic” with a steady towards a similar situation seen in
average load factor of 95%. Chief North America, which is dominated by
executive officer Michael O’Leary three large airline groups – potentially
noted that the airline was operating IAG, Air France-KLM and Lufthansa –
in a “constrained market” that was with low fare market being dominated
“good for traffic, good for load factors, by the market leader, Ryanair. The
and good for average fares”. Ryanair’s manufacturing issues with aircraft and
costs have been rising however, with the GTF engine though will continue
fuel up 29% for the first half of its to curtail capacity growth, elongating
financial year that the airline manages the timeframe for that consolidation
with a thorough hedging programme. prediction to play out.
O’Leary expressed his frustration at
the continued disruption with Boeing MIDDLE EAST & AFRICA
delivery delays but said the airline was Middle East airlines have recovered in
confident it would receive 45 of the 50 step with the rise in demand for long-
aircraft due for delivery by end of June haul air travel, which has also assisted
in time for the summer peak in 2024, with the recovering in demand for
which he says are “critical to traffic widebody aircraft. Airlines in the
growth” for this year. region are reporting a return to
However, it is clear that some profits and are back to ordering
airlines have been struggling to aircraft. With the push for economic
recover following the pandemic, transformation of the Kingdom of
which has stimulated airline Saudi Arabia realised via Vision 2030
consolidation in Europe. At the end of - the ambitious program to drive
May 2023, Lufthansa announced an national economic transformation
agreement to acquire a 41% stake in and achieve positive and sustainable
Italy’s ITA Airways for €325 million, change in the country – the growth in
which was agreed with the Italian the region is beginning to ramp up.
Ministry of Economy and Finance The mission has been entrusted to the
in June including options to take a Saudi sovereign wealth fund, Public
greater share at a later date. At the Investment Fund (PIF), which is
end of November, Lufthansa sought promoting the launch of Riyadh Air as
antitrust approval from the European well as backing the new aircraft lessor
Union (EU) with a decision expected AviLease that has captured market
by mid-January. share quickly with the acquisition of
In October 2023, Air France- Standard Chartered leading business.
KLM acquired a 20% stake in Africa retains its historic challenges
SAS Scandinavian Airlines with a with passenger travel, with the main
consortium involving the Danish flag carriers still struggling to recover.

SOUTH AMERICA across the Chinese market – loss making “We have seen
Latin America has recovered well from in fact,” he says. “While most kind of
the pandemic slowdown, indeed Mexico banking institutions will forecast a domestic capacity
was one of the first countries to recover return to profitability of China in 2024,
their domestic traffic. Carriers continue we’re not really seeing it play out yet.”
surpass pre-Covid
to face challenges, however. In Brazil, Although the market is still waiting for levels for some time
GOL is currently working to renegotiate a big reopening of international traffic
its lease agreements, for now outside of a from China, domestic traffic patterns in now but the long-haul
bankruptcy filing, but Azul has emerged China have been robust. International build-up has been
stronger from its broad recapitalisation carriers are all reopening routes to
program, which included an unsecured Chinese mainland, preparing for a spike slower than anticipated.
dollar notes exchange agreement as in demand for long-haul trips.
That is rapidly catching
well as the $800 million new issuance United chief commercial officer
of new money notes secured by its Andrew Nocella noted that demand for up now, with that
loyalty program, brand IP and tourism Atlantic and Pacific travel for the third
operator. LATAM also continues to quarter of 2023 was “truly outstanding”
pent-up demand still
benefit from its restructuring and now which United forecasts continuing into feeding through in
has a positive trajectory. the fourth quarter. He added that United
had taken advantage of the resurgence Asia.”
ASIA-PACIFIC RESURGENCE in demand across the Pacific by adding
Andy Cronin
The Asia-Pacific region has experienced capacity to key markets including
Chief Executive Officer of Avolon
the strongest growth in airline revenue resuming daily flights to Beijing and
in 2023, with growth accounting for half Shanghai from San Francisco and
of the 47% global increase to $642bn. adding routes to Manila.
IATA figures show passenger traffic India is again being forecast for
(measured in RPKs) is up by 98% over substantial growth in air travel. India
last year, on the back of a 78% rise in has lagged behind other parts of the
capacity. Profitability is also returning world for some time in terms of the
to the region. development of the aviation sector.
Avolon’s Cronin says that the post- That is changing, and changing rapidly.
Covid recovery that started about a year “In India, you have to appreciate the
and a half later than in North America, is growth of the population, the growth
continuing to spread through Thailand, and maturity of the middle class, and
Malaysia, Indonesia and some of the the number of new airports under
bigger economies in the Asia-Pacific construction,” says Carlyle Aviation’s
region although the Chinese picture he Korn. He sees growth in India coming
says is a little more mixed. “We have from the low-cost carriers as well as
seen domestic capacity surpass pre- large airlines with access to capital
Covid levels for some time now,” says placing large aircraft orders.
Cronin, “but the long-haul build-up A little over a year following its
has been slower than anticipated. That takeover from the Indian Government
is rapidly catching up now, with that by the Tata Group, Air India placed an
pent-up demand still feeding through historic order for 570 aircraft Boeing
in Asia.” and Airbus aircraft (140 A320neos,
SMBC Aviation Capital’s Peter Barrett 70 A321neo, 34 A350-1000, six
sees “good momentum in Asia” with A350-900s, 190 737 MAXs, 20 787s
airlines showing increased demand, and 10 777Xs). Not to be outdone,
increases in capacity and he notes that rival Indigo announced an order
“cash collections are very strong” adding for 500 A320 Family aircraft at the
that the only lag remaining in the region Paris Air Show.
was perhaps cross border business out India is also revitalising its aviation
of domestic China but he expects that finance offerings, with the closing
to recover in step the Chinese economy. of the first finance leases through
In early December, ORIX Aviation’s Gujarat International Finance Tec-City,
Meyler was more cautious on the popularly known as GIFT City. Air India
Chinese recovery, specifically relating to financed six A350-900s via GIFT City
airline profitability: “From a profitability by the end of 2023. (For more details,
level, 2023 has been very poor really see Chapter Two, Avation Finance).

Aviation
Aviation Growth in Growth in Asia
Asia and and Middle
Middle East Faster
East Faster thanthan
RestRest of World
of World
Consumer classConsumer
growth, class growth, population
population expansion,expansion, andeconomic
and faster faster economic development
development willwill propel
propel
Asian and Middle Eastern aviation growth at double the global growth rate
Future growth of top 15 Traffic flows CAGR

2019-2042
uture growth of topRPK
15growth
Traffic2019-2042
flows CAGR
K growth 2019-2042 2019-2042
Domestic PRC 5.3%
Domestic PRC Domestic USA 5.3%

2.1%
Domestic USA Western Europe - USA 2.3%

2.1%
India - Western Europe 1.5%
Western Europe - USA 2.3%
Domestic India 7.4%
ndia - Western Europe 1.5%
Domestic - Asia Emerging Aviation Growth in Asia and Middle East Faster than Rest of World 6.0% Asian gro
Domestic India Consumer class growth, population expansion, and faster economic development will propel 7.4% is 5.2% C
Western Europe - Middle East 3.5%
Domestic - Asia Emerging
Asia Developed - Asia Emerging 6.0%
3.9% Asian
says Carlyle Aviation’s Korn. He sees growth in India coming from the low-cost is 5.2
3.5% carriers a
Aviation Growth in Asia and Middle East Faster than Rest of World The rest of
FutureCentral
Western Europe - Middle East Europe
growth of top -15
Western Europe
Traffic flows 4.9% CAGR
Consumer class growth, population expansion, and faster economic development will propel 2019-2042 traffic flows
RPK growth 2019-2042
Asia Developed - as large airlines with access to capital placing large aircraft orders.
Asian and
Indian Subcontinent Middle
- Middle Eastern aviation growth at double the global growth rate
East 5.0%
Asia Emerging
Domestic PRC
3.9%
5.3%
2.4& CA
Asia Emerging - PRC 5.9%
Central Europe - Western Europe
Domestic USA The res
2.1% 4.9%
rowth of top 15 Traffic flowsAsia Emerging - Middle East
Western Europe - USA
CAGR
says Carlyle Aviation’s Korn. He sees growth in India coming from the low-cost carriers as5.0%
well traffic
2.3% flo 4.9%
A little over a yearasfollowing its takeover from the Indian Government by the Tata Group,
th 2019-2042 2019-2042
ndian Subcontinent - Middle East
ic PRC
PRC - USA
India - Western Europe large airlines with access to capital placing large
5.3%aircraft orders. 1.5% 6.0% 2.4
Asia Emerging - PRC Domestic
ic USA placed an historic order for 570 aircraft Boeing and Airbus aircraft (140
Asia India
Developed - USA 2.1% A320neos,5.9%
2.1%
7.4%
70
Asia Emerging - Middle East A little over a year following its takeover from the Indian Government by the TataAsian
Domestic - Asia Emerging
Asia Developed - PRC
growth
Group, Air India
4.9%
6.0%
5.0%
A321neo, 34Korn.
A350-1000,
He sees growth in six A350-900s, 190 737 MAXs, 20(140787s and 10
70 777Xs). Not
n Europe - USA 2.3%
says Carlyle Aviation’s India coming from the low-cost carriers as well is 5.2% CAGR
Western Europe
PRC - USA placed an historic
Western Europe - Middle East
order for 570 aircraft
RPKs inorders.
2019
Boeing and Airbus
Additional Growth to 2042
aircraft A320neos,
1.5% 3.5%
6.0%
as large airlines with access to capital placing large aircraft
ic India
outdone, rival Indigo
Asia Developed - USA
A321neo,
Asia Developed - Asia Emerging
says announced
34Aviation’s
Carlyle A350-1000, ansixorder
Korn. He for 190
A350-900s,
sees growth 500 in737
IndiaA320
MAXs,
coming20Family
787sthe
from and
Asian growth
aircraft
10 777Xs).
7.4%
low-cost carriers
The
atastothe
Not
rest of top
be Paris Ai
3.9%
15well
2.1%
ic - Asia Emerging Central Europe - Western Europe
A little over a year following its as outdone, rival
large from
takeover theIndigo
airlines announced
with access
Indian anthe
to capital
Government by order for 500
placing
Tata Group, AirA320
large Family
aircraft
India 6.0%
aircraft at the
orders.
4.9%
Paris
traffic flows Air Show.
average
Indian Subcontinent - Middle East is 5.2% CAGR5.0%
Asia Developed
n Europe - Middle East- PRC
placed an historic order for 570 aircraft Boeing and Airbus aircraft (140 A320neos, 70 3.5% 2.4& CAGR 5.0%
Fig. 8: India GDP Growth

veloped - Asia EmergingA321neo,
Source: BOC34 A350-1000,
Aviation, Nov. 2023 six A350-900s, 190GDP
737 MAXs, 20 787s and 10 777Xs). Not to3.9% be
Asia Emerging - PRC 5.9%
Fig.
A 8: over
little India a in
year Growth
following its takeover from
Europe - Western Europeoutdone, rival
Asia Emerging Indigo
- Middle East announced an order RPKs
for 500 2019
A320 Family Additional
aircraft atGrowth
the to the
Paris 2042
Air
Indian Government
Show.
4.9%
by
The rest of top4.9%
15
the Tata Group, Air India
FIG. 7: AVIATION GROWTH IN ASIA & MIDDLE EAST
placed an historic order for 570 aircraft Boeing and Airbustraffic
aircraft (140
flows averageA320neos, 70
Subcontinent - Middle East PRC - USA 5.0% 6.0%
Fig. 8:Developed
Asia India GDP
- USA Growth
A321neo, 34 A350-1000, six A350-900s, 190 737 MAXs, 202.4& CAGR
787s and
2.1%
10 777Xs). Not to be
erging - PRC 5.9%
Asia Developed - PRC
outdone, rival Indigo announced an order for 500 4.9%
A320 Family aircraft 5.0%
at the Paris Air Show.
erging - Middle East says Carlyle Aviation’s Korn. He sees growth in India coming from the low-cost carriers as well
SA as large airlines with access to capital
RPKs placing
in 2019 largeAdditional
aircraftGrowth
orders.
to 2042 6.0%
veloped - USA
Fig. 8: India GDP Growth 2.1%
veloped - PRC A little over a year following its takeover from the Indian Government by the Tata5.0%
Group, Air India
placed an historic order for 570 aircraft Boeing and Airbus aircraft (140 A320neos, 70
RPKs in 2019 Additional Growth to 2042
A321neo, 34 A350-1000, six A350-900s, 190 737 MAXs, 20 787s and 10 777Xs). Not to be
outdone, rival Indigo announced an order for 500 A320 Family aircraft at the Paris Air Show.
Fig. 8: India GDP Growth
Source: BOC Aviation, Nov. 2023

Source: BOC Aviation, Nov. 2023
India is also revitalising its aviation enance offerings, with the closing of the erst enance leases
India isTec-City,
through Gujarat International Finance also revitalising its aviation
popularly known as GIFTenance
City. Air offerings, with the closing of the erst enance leases
India enanced
six A350-900s via GIFT City bythroughthe end of 2023. (For
Gujarat more details,Finance
International see Chapter Two, Avation
Tec-City, popularly known as GIFT City. Air India enanced
Finance).
six A350-900s via GIFT City by the end of 2023. (For more details, see Chapter Two, Avation
***BOX*** [in Asia sec.on] S Finance).
ource: BOC Aviation, Nov. 2023
Fallout from GoFirst insolvency
India has not been all about growth***Binis
India O2023.
Xalso
***Itrevitalising
[also
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sia the
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First. The Indian with the closing of the erst enance leases
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carrier cancelled all of its flights out and
through fGujarat
romeledGan
oInternational
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irst insolvplea
eFinance
ncbefore
y the Nationalpopularly known as GIFT City. Air India enanced
Tec-City,
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rce:Tribunal (NCLT),Nov. 2023 with debts of nearly $798 million.
reportedly
India
six has not been
A350-900s all about
via GIFT City growth in 2023.
by the end It also
of 2023. saw
(For the details,
more demise see
of Go First. The
Chapter Two,Indian
Avation
SoSource: : BOC
urcBOCeAviation, Aviation,
Nov. 2023
Nov. 2023
carrier cancelled all of its flights in May and eled an insolvency plea before the National
Finance).
FIG. 8: India
GoFirst blamedis also
INDIA GDPthe revitalising
situation
GROWTH its aviation
on Pratt & Whitneyenance offerings,
for its non-supplywithofthe closing of the erst enance leases
engines.
through Gujarat International Company FinanceLawTec-City,
Tribunalpopularly
(NCLT),known reportedly
as GIFTwith
City.debts of nearly
Air India enanced $798 million.
“GoFirstsix A350-900s
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this **City
step *due
BOby X*the
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ia se(For
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] ofdetails,
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engines Two, Avation
supplied
India is also revitalising its aviation enance offerings, with the closing of the erst enance l
by PrattFinance).
& Whitney’s International
alAero
lout Engines,
FGoFirst rom GLLC,
fblamed Firswhich
othe has resulted
situation
t inso lveon y in &GoFirst
ncPratt having
Whitney fortoits non-supply of engines.
ground 25 aircraft, equivalent to approximately 50% of its Airbus A320neo aircraft fleet as of 1
through Gujarat International Finance Tec-City, popularly known as GIFT City. Air India e
www.airlineeconomics.com
May 2023,”***BtheOXairline
*** [in Asiina asIndia
said c.onhas
epress release.
Airline Economics Aviation Leaders Report 2024 19
] not been all about growth in 2023. It also saw the demise of Go First. The Indian
“GoFirst has had to take this step due to the ever-increasing number of failing engines supplied
Fallout from GoFirst carrier
insolvencancelled
cy all of its flights in May and eled an insolvency plea before the National
Fallout from GoFirst insolvency

India has not been all about growth However, On October 3, 2023, the to register and export aircraft in
in 2023. It also saw the demise of Go Indian Ministry of Corporate Affairs accordance with the terms of Indian
First. The Indian carrier cancelled issued a notification to amend law’, but confusion remains. At
all of its flights in May and filed an Section 14(3)(a) of the Insolvency the time of the Aviation Working
insolvency plea before the National and Bankruptcy Code 2016 (IBC Group’s Watchlist Notice Update
Company Law Tribunal (NCLT), 2016) stating that the provisions No.2, ‘CTC remedies have not been
reportedly with debts of nearly shall not apply to transactions made available to lessors nor have
$798 million. under the Cape Town Convention lessors been able to access aircraft
GoFirst blamed the situation on relating to aircraft, aircraft engines, to determine that their aircraft are
Pratt & Whitney for its non-supply airframes and helicopters. being maintained in accordance
of engines. The announcement was greeted with the leases,’ highlighted the
“GoFirst has had to take this step favourably by the aircraft leasing Aviation Working Group in a recent
due to the ever-increasing number community as it provided more statement. Indeed, the time period
of failing engines supplied by Pratt clarity that the Cape Town (210 days and counting) since
& Whitney’s International Aero Convention would take precedence the commencement of GoFirst
Engines, LLC, which has resulted in in future insolvency hearings insolvency proceedings is more
GoFirst having to ground 25 aircraft, involving aircraft assets. The than double the period in which
equivalent to approximately 50% of Aviation Working Group (AWG) remedies should be available, adds
its Airbus A320neo aircraft fleet as issued a positive notice in response the statement.
of 1 May 2023,” the airline said in a to the ruling. However, the AWG The nature of the Indian court
press release. subsequently issued a negative system is also allegedly further
“The percentage of grounded ruling on India’s compliance with compounding these problems, with
aircraft due to Pratt & Whitney’s Cape Town since the lessors in difficulties in scheduling dates and
faulty engines has grown from 7% in the GoFirst case remain waiting further delays adding to lessors’
December 2019 to 31% in December for a ruling to initiate a corporate misery. However, despite regular
2020 to 50% in December 2022. This insolvency resolution having already communication channels with
is despite Pratt & Whitney making terminated aircraft leases and filed both government and bankruptcy
several ongoing assurances over the deregistration applications with administrators, the requirement for
years, which it has repeatedly failed the DGCA. primary legislation (underpinning
to meet,” GoFirst added. Although the National Company the Cape Town principles) remains
The airline has been facing Law Appellate Tribunal (NCLT) crucial. The ongoing ambiguity
problems with the unavailability of upheld the admission of GoFirst’s surrounding the Section 14
aircraft for many quarters. All of its application and the imposition of moratorium – in particular, delays
A320neo aircraft are powered by the moratorium (intended to allow imposed in resolving legislation
Pratt & Whitney engines. Air India swift repossession of the aircraft), seen by many lessors as essential
and Vistara, the other two A320neo it ‘left to the NCLT the question of – could also do profound damage
family operators in India, are whether the leased aircraft…. fell in a market already experiencing
powered by CFM engines. IndiGo within the scope of the moratorium’. exponential growth.
opted for CFM as part of its follow- Although changes to the Indian Citing the over-double waiting
on order, while GoFirst selected Insolvency and Bankruptcy Code period having already passed,
Pratt & Whitney for its second round were intended to make it easier for ‘failure to make remedies available
of orders too. lessors to repossess their aircraft in to creditors is non-compliant
Responding to Go First’s the event of an insolvency (placing with the Cape Convention,’ notes
accusations against Pratt & Whitney, the country’s legislation in line with the AWG, adding that ‘material
the engine manufacturer said that the Cape Town Convention), without non-compliance is compounded
GoFirst had a “long history” of specific underlying core legislation by significant delays in court
missing payments. having been passed by Parliament, hearings while the aircraft remain
Previously, GoFirst had been concerns remain as to whether in possession of the debtor and
found to default on payments to these will be applied prospectively insolvency administrator’. With
operational creditors including $146 or retroactively. no ‘express recognition’ of the
million to vendors and $318 million The AWG notes that ‘beginning on timetables and ‘no near-term end
to aircraft lessors. 18 May 2023, certain lessors brought to the litigation,’ India’s outlook
Lessors have been struggling to writ petitions seeking orders by the for CTC compliance has been
repossess aircraft from GoFirst. High Court compelling the DGGA downgraded to ‘negative’.

Airline bankruptcies and restructurings FIG.9: AIRLINES BANKRUPTCIES/RESTRUCTURINGS IN 2023

have continued over the past year
as smaller airlines have struggled to Airline Country
resume profitable operations following Airline Country
the crisis with little government support Cascadia Air Canada
or access to affordable capital. The
Flybe UK
most prominent of 2023 bankruptcies
has been the GoFirst case in India, still Flyr Norway
working its way through the courts, Novair Sweden
which the airline blames squarely on the
Aeromar Mexico
grounding of its aircraft due to the GTF
issue (see sidebar for more detail). Viva Air Colombia
When the scale of the GTF issue was Ultra Air Colombia
revealed, some experts were predicting
Niceair Iceland
more airlines could follow suit but
since that time as Pratt & Whitney has GoFirst India
put in place its fleet management plan Fly Gangwon South Korea
and worked to compensate affected Air Moldova Moldova
companies, there is more of a sense that
Thai Smile Thailand
the issue will be resolved with too many
airline casualties. Buta Airways Azerbaijan
Swoop Canada
MY Airways Malaysia
“From a profitability JC International Airlines Cambodia
Source: AllPlane
level, 2023 has been Equair Ecuador
very poor really across Hi Air South Korea
the Chinese market FIG.10: NEW AIRLINES IN 2023

– loss making in fact. Airline Country
While most kind of Ghana Airlines Ghana
banking institutions Aerus Mexico

Centrum Uzbekistan
will forecast a return to Air Samarkand Uzbekistan
profitability of China in Sky Vision Airlines Egypt
2024, we’re not really Air Moana French Polynesia
seeing it play out yet.” ESAV Airlines Ecuador

Yazd Air Iran
James Meyler
JetSMART Colombia Colombia
Chief Executive Officer of ORIX Aviation
City Airlines Germany
Silk Avia Uzbekistan
Air1 Iran
Global Airlines UK
Mexicana (2.0) Mexico
Discovery Germany
Valetta Airlines Malta
AJet Turkey
BeOnd Maldives
NG Eagle Nigeria
Source: AllPlane
Naysa Canary Islands, Spain

Bermudair Bermuda

Chapter Two
Aviation Finance
A
irlines have been busy repairing and spending patterns. There is the in the US was near the cycle peak at
balance sheets and working to concern that interest rate rises have ~5%). Checking back in with him in
decrease debts accumulated not yet been materially passed through January for this publication and clearly
during the pandemic period. Higher to consumers and that air travel spend the forecast for rates has shifted down
interest rates are redefining aviation may reduce to accommodate the since the Fed “pivot” in December
finance. There were modest levels of general increase in borrowing. Low 2023. With rates “not as high for not as
capital markets issuance during the first cost airlines – especially in the US – long”, the 10yr is now ~90bp below the
half of 2023, which only started to tick have referred to a softening of demand October high and JP Morgan forecasts
up again towards the end of the year. as the low fare sector is impacted by the 10yr to fall further from the current
The interest rate chart shows central lower discretionary spending. Air travel ~4.10% to 3.65% by YE24. 5yr all-in
bank base rates from the US, the EU is expected to continue to grow with coupons for the lessors in the US$ bond
and the UK, which shows a steep many industry experts very positive market have correspondingly rallied
increase from almost zero at the end of for the future, but that growth rate with BOC Aviation recently printing a
2021 to the end of 2022, followed by a experienced immediately after the 5.0% coupon, Air Lease 5.1%, Avolon
shallower increase to the middle of last pandemic is expected to “normalise” to 5.75%, and Aircastle 5.95% amongst the
year when central banks began to hold pre-Covid levels. deals issued year-to-date in 2024.
rates around 5% for the US and the UK, Towards the end of 2022, when interest Ryan McKenna, chief executive of
and at 4% in the Eurozone. rates were ticking up and inflation was Griffin Global Asset Management
The consensus appears to be that increasing, many aviation professionals (Griffin), has been forecasting higher-
interest rates will remain higher for had expected demand to fall off as for-longer rates for some time but he
longer and that they will remain stable spending reduced. Vinodh Srinivasan, has also been expecting recessions,
for the near term so long as inflation co-head of the Structured Credit Group which has not materialised thus far in
remains under control. The chart shows at Mizuho Americas, admitted that last the US or larger economies. “It will be
the steep rise in inflation to mid-2022 year he “underestimated the desire for an incredible success for policy makers
when it started to decline as interest rate everyone to spend this last summer” and if large economies are able to avoid a
rose. The volatile geopolitical situation that one of the main reasons interest recession given all of the macroeconomic
remains an inflationary risk, with fuel rates have remained high is because headwinds,” says McKenna. “Inflation
prices spiking on the back of escalating “the US consumer has not stopped remains a serious problem and the
conflict in the Middle East and the Red spending”. Srinivasan, along with many geopolitical issues with Russia and
Sea area, where Houthis rebels are aviation bankers, believes that rates will Ukraine have been prolonged. The
restricting trade through the Suez Canal stay at the current high level for longer. addition of the unfolding situation in the
disrupting the supply of food and goods. “I don’t see it going up materially, but I Middle East adds even more pressure to
The steady rise in inflation has caused don’t see it coming down either,” he says. the global economy. Yet with all of that,
the cost of living to rise substantially. Back in October when his interview global consumers – with US consumers
Even though inflation has begun to was recorded, JP Morgan’s Streeter leading the way – have continued to
decline, that sharp rise is only now mentioned that the market was bracing spend. That’s really amazing in the
starting to feed into consumer loans for higher for longer (the 10yr Treasury face of such high interest rates and the
Inflation & Central Bank Interest Rates 2021-23

12.0% 6.0
10.0% 5.0
8.0% 4.0
6.0% 3.0
4.0% 2.0
2.0% 1.0
0.0% 0.0
Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Nov-23
Inflation rates UK CPIH Inflation rates US CPI Inflation rates EU HCPI Interest rate rises UK Interest rate rises EU Interest rate rises US
Source: IATA; International Monetary Fund, World Economic Database, October 2023
FIG. 11: INFLATION & CENTRAL BANK INTEREST RATES 2021-23

Air Lease celebrates inaugural sukuk

ALC’s inaugural sukuk issuance joint lead manager and bookrunner Africa region. However, the bank
represented the first ever offering for the sukuk. was eager to capitalise on its unique
of its kind into the Middle East Bank ABC, along with a number geographical footprint operating
market from a North American of regional and international out of Bahrain with a global reach
corporate and the largest sukuk banks listed above, announced the into the US and Asia to explore
from a US-based borrower in transaction on February 27, which more deals that brought in clients
history. The issuance forms a part of was followed by a deal roadshow from outside the region in order to
ALC’s funding strategy to diversify covering investors in the UAE, connect them with local investors.
its investor base and tap into new Qatar and the Kingdom of Saudi “We had a natural link with ALC
pools of liquidity. Arabia (KSA). As a 144A/Reg S since it has 10% of its asset base
The offering consisted of US$600 issuance listed on the London deployed in the MEA region and
million 5.85% trust certificates due Stock Exchange, the sukuk was was already a client with our US
April 1, 2028, paid semi-annually, also open to the global investor branch,” explains Wilmot, speaking
pursuant to Rule 144A and community. With the strength of to Airline Economics shortly after
Regulation S. The notes are rated the JLM group, strong market the deal was closed.
“BBB” by both S&P and Fitch with appetite for sukuks, and investment Verwholt notes that the ALC
a Stable Outlook and listed on the grade credit, the transaction closed team had begun conversations with
London Stock Exchange. 3.5x oversubscribed and priced Bank ABC back in 2018 on future
“This inaugural sukuk offering is successfully on March 6 at 5.85%. partnerships after the bank became
a testament to ALC’s strong credit Commenting on the landmark part of the lessor’s group of lenders
profile and further evidence of our transaction, Christopher Wilmot, as part of the company’s annual
commitment to a well-diversified, group head of treasury and financial extension to its revolving credit
global funding program,” Gregory markets at Bank ABC said on the facility. “The whole genesis of Bank
B. Willis, executive vice president deal’s closing: “With ALC’s robust ABC entering the credit facility
and chief financial officer of Air aviation business and solid financial was to enhance our Middle East
Lease Corporation, said in an position, the issuance presented banking relationships and the fact
official statement upon closing. “We an attractive Shari’a compliant that they were open to investing in
are grateful to our banking partners investment opportunity for regional new companies at the time. Bank
for their commitment and support investors. We are committed to ABC’s team spent real time getting
in structuring and executing this opening this avenue of funding for to know ALC as a company and
landmark transaction.” our clients in our core US market, understanding our financial needs.”
Bank ABC, DIB, Al Rayan, Citi, enabling them to access a wider The two companies continued
Deutsche Bank, Emirates NBD, JP pool of liquidity.” to build upon their relationship
Morgan, KFH Capital and Warba Greg Willis noted that the until the global pandemic hit
Bank served as joint lead managers. “quality and depth of demand for and discussions halted. Once the
Allen & Overy and Clifford Chance the transaction” had exceeded industry reopened, ALC realised
provided legal guidance. ALC’s expectations, and that the that the Middle East region was
“We are proud to highlight the deal highlighted the opportunities flushed with liquidity and was
strong liquidity in this region and strong liquidity that exist in the worth exploring further.
and the opportunity for other Middle East region. “We had floated the idea [of a
investment grade borrowers to The hugely successful sukuk, sukuk] to ALC before Covid but
raise funds at cost efficient rates. like so many new aviation deals, only got back in touch with them
This transaction complements our took several months to prepare in September 2022 when we
strong airline relationships in the and close, which was built on arranged a non-deal roadshow to
Middle East and we look forward solid relationships and aligned gain feedback from local investors,”
to further developing our funding strategies. Bank ABC, while active says Wilmot. “The response
presence in this region,” stated in aviation finance for the best was encouraging that a deal
Verwholt at the time. part of two decades, traditionally was possible.”
Bank ABC, one of MENA’s leading had focused more on regional “Bank ABC did a tremendous
international banks, acted as the credits such as GCC flag carriers job shepherding us through the
sole arranger, structurer as well as and airlines in the Middle East and process and we found a very

ALC’s inaugural sukuk was celebrated at the Airline Economics Middle East & Africa Aviation 100 Overall Deal of the Year at Growth Frontiers Dubai in September 2023.
warm welcome from investors,” of that interest, we brought in “We raised $600 million and had
says Verwholt. Unlike a typical several banks to assist with a wide over $2.25bn in demand – 90% of
banking relationship that usually distribution around the region. For that demand came from investors and
starts with a simple product like a example, we brought in Masraf Al banking partners that we had never
loan, Bank ABC suggested a sukuk Rayan bank to broaden interest engaged with before and which had
transaction that would get the in Qatar.” never invested into ALC before. This
market comfortable with ALC’s Following a true deal roadshow, is true diversification. It makes a big
credit profile and open banks and the team was predicting a book difference if you can raise capital at
other Middle East investors up to size of around $1.2bn for an issue or inside comparable levels without
more unsecured deals in the future.” size of US$500 million. “We were cannibalising demand.”
Despite the warm investor pleasantly surprised that we built a The sukuk priced at 5.85%,
reception, as Wilmot says, “the devil book of $2bn and needed to upsize which based on ALC’s previous
was in the detail”. What followed the issuance to US$600 million to capital market issuance looks high,
was several months of structuring keep all those investors onboard,” but in the new higher interest
work marrying an Islamic Shari’a adds Wilmot. rate environment, the price is
format transaction with a US With such a large book, the deal essentially flat to slightly inside
corporate entity as an issuer. “ALC’s could have been upsized further ALC’s established issuance curve
large, unencumbered asset pool but, as Wilmot attests, as a new despite the expectation that there
enabled us to structure a 100% entrant to the region, the emphasis may have been a new issuer premium
tangible asset transaction, which is was on ensuring those anchor and on this first deal in the region. “The
rare in the region where the average initial investors were happy with pricing was five basis points inside
is between 30-50% tangible assets,” their ticket size and also allowing of what US banks were quoting for
explains Wilmot. them and other investors to assess a conventional investment grade
Bank ABC brought in another the deal’s secondary performance. deal at the same time, and in line
bank, DIB, to work together on “Many investors were keen to with money we raised in the capital
the complex structuring process, ensure that this wasn’t a one-off markets at the end of last year when
which had to consider multiple deal, that ALC would become a rates were lower,” says Verwholt.
jurisdictions with the region. “Once repeat if not regular issuer in the “We have had to reframe our
we had a feasible structure in place, region. We certainly hope that this expectations in the higher interest
we were then in a position to go out is a starter programme for ALC, and rate environment.”
to investors and have more concrete we now have a proven programme The deal also paved the way
conversations with investors for more lessors from outside the for future US or other foreign
to better assess demand,” said region to come and tap a new pool investment-grade corporate issuers
Wilmot. “Once we were assured of investors,” says Wilmot. into the region.

pressure from central bankers to cool the FIG.12: AIRCRAFT LESSOR NEW BOND ISSUANCE 2023
economy. The economy remains strong,
but I am particularly concerned about Issuer ($MM)
the post Covid bounce back turning into AerCap 4,250
a recession.”
Griffin 1,700
Higher interest rates have impacted
aviation finance product selection Air Lease 1,675
during 2023. Some companies BOCA 1,650
have held back accessing financing,
SMBC Aviation 1,650
especially in the capital markets, with
the expectation that interest rates Aviation Capital Group 1,600
were going to fall. Since rates are Avolon 1,150
poised to remain higher for longer and
Aircastle 1,025
more stable, many aviation finance
professionals expect to see more capital Macquarie AirFinance 1,000
markets activity in 2024. In this new
Source: JPMorgan
FTAI 500
operating environment, airlines and
Castlelake -
lessors appear to have become more
discerning in terms of the types of TOTAL 16,200
products they consider. Many stronger
credits even paid cash for assets last year of 5.30% five-year senior unsecured “If you are investment
as they remain focused on deleveraging medium-term notes due 2028, and
and insulating themselves from completed its inaugural US$600 grade rated, like in
exogenous events. million sukuk offering, consisting of
Tom Baker, chief executive of 5.85% trust certificates due 2028. Later
all other times, the
Aviation Capital Group (ACG), believes in the year, ALC went back to the capital money’s available.
that the leasing industry can use the markets to issue C$500 million of 5.4%
higher interest environment to better senior unsecured medium-term notes. The global debt capital
understand their real cost of capital. “If you are investment grade rated, markets remain open;
“A better understanding would create like in all other times, the money’s
more discipline around pricing; more available,” says Plueger. “The global they are robust. You just
discipline around the competitive debt capital markets remain open; they have to be willing to pay
dynamic in sale leasebacks or repricing are robust. You just have to willing to
second or third leases. ACG is ready pay what the market will give you.” what the market will
for higher rates; we believe they will BOC Aviation has been a prolific
accentuate our competitive advantage. issuer in the capital markets and
give you.”
When rates were compressed, it was very closed several large bond deals in 2023 John Plueger
hard for disciplined lessors with flexible – $500 million unsecured five-year Chief Executive Officer of Air Lease
capital structures and disciplined notes, coupon of 4.5%, all-in yield of Corporation
pricing to differentiate themselves when 4.627%, and $500 million unsecured
spreads were so tight. Now that things ten-year notes, coupon of 4.875%, all-
are really starting to differentiate, we in yield of 5.015%, in May; followed
think we will outshine our competitors.” by $650 million unsecured five-year
notes, coupon of 5.75%, all-in yield of
CAPITAL MARKETS 5.917% in November. Rounded off with
There are two tiers of companies within a $1.375bn club loan, the largest in its
the aviation finance sector – investment history, in October.
grade and non-investment grade “We have that lowest incremental cost
airlines and lessors. The larger scale of borrowing of anybody in the market,”
investment grade lessors have been able commented Steven Townend, the new
to continue to raise capital in the bond chief executive of BOC Aviation, who
markets in 2023 despite the higher took over the reins on January 1, 2024.
rate environment. “Interest rates have “For investment grade lessors like
climbed much faster than expected but ourselves, we see a very strong market.
the debt capital markets are still there At the same time as raising funds in
for investment grade rated companies,” the bond market, we have also been in
says ALC’s Plueger. In the first quarter the bank market. What is interesting
of 2023, ALC issued $700 million for both of our most recent issuances

is the source of capital. Recently, we on any news item that deterred some “For the last two years,
have seen a broader base in the bank longer-term investors. Kelly explains
markets. We have attracted investors that the AerCap team made a very a very significant
from North America, Europe, Middle significant effort in the years from
East and Asia in the bank facility, and 2017 to 2019 to attract more long-term
effort has gone into
for most recent bond issues, about 80% investors to the stock and away from broadening the investor
of investors were from Asian markets.” the volatility caused by the hedge funds.
On the equity capital markets, Leveraging on the hard lessons base for aircraft leasing
AerCap was the most active player learned after the AIG sale, AerCap equity. We needed
since the company completed the sell took a more measured approach to
down of all remaining shares owned the GE share sale. “For the last two to make sure that we
by General Electric (GE) following years, a very significant effort has gone
weren’t in a situation
the lessor’s acquisition of GECAS in into broadening the investor base for
November 2021. aircraft leasing equity,” says Kelly. That where there was that
The secondary offering of 26,721,633 effort has proven to be very successful
of its ordinary shares by GE Capital US since GE sold down close to $9bn in
much supply coming
Holdings, a wholly owned subsidiary of a relatively short eight month period, into a market where
GE, were sold at a price to the public which needed a steady supply of
of $65.25 per ordinary share. The 30- investors. “We needed to make sure that there were not natural
day option for a further 4,008,245 we weren’t in a situation where there buyers.”
additional ordinary shares was was that much supply coming into a
exercised in full completing GE’s exit market where there were not natural Aengus Kelly
from AerCap. buyers,” says Kelly. “What we really Chief Executive Officer of AerCap
Goldman Sachs, Citigroup, Deutsche wanted were the long only investors
Bank, BNP Paribas, BofA Securities, and that has been the dramatic change
JPMorgan, Credit Agricole CIB, and what has driven up the stock price
Mizuho, MUFG and Société Générale post the GE sale, which is the outcome
acted as joint bookrunners, with BBVA, we all really wanted and worked very
ING, UniCredit, Santander, Academy hard to achieve.”
Securities, R. Seelaus and Siebert At the same time as the GE share
Williams Shank acted as co-managers sale, AerCap completed a successful
for the secondary offering. exchange offer for all holders of several
AerCap’s Kelly said that the team existing notes due 2024 for new 6.450%
had learned valuable lessons from senior notes due 2027. AerCap elected
the acquisition of International Lease to exercise its option to adjust the cash
Finance Corporation (ILFC) a decade component of the total consideration,
earlier from AIG, which had also been in respect of the 1.750% senior notes
structured as a share sale format with due October 29, 2024, from $54.00 to
AIG owning a large stake in AerCap $45.00 and, in respect of the 1.650%
following the sale of ILFC. Those shares senior notes due October 29, 2024,
were subject to a nine to 15 month lock- from $68.00 to $57.50. As a result of
up period but it was assumed that AIG the offering, AerCap also succeeded in
would eventually sell its stake. smoothing out its debt maturities.
“We knew AIG was going to sell and Airlines have continued to tap into
we put an investor relations programme the equity capital markets to raise
in place, but I don’t think we understood capital. TUI Group was a substantial
the impact of AIG selling 45% of the issuer in 2023 with a €1.8bn rights
biggest lessor in the world into a market issue. TUI used the net proceeds
that wasn’t very liquid,” admits Kelly. from the fully underwritten capital
AIG shares were picked up by hedge increase to fully repay the remaining
funds looking for short-term returns by aid from the Economic Stabilisation
capitalising on the upside in the stock Fund (WSF).
price. Kelly describes those hedge fund TUI paid off €420 million WSF’s
buyers as a “bridge between the strategic Silent Participation I – the group had
owner in AIG to longer-term” investors. already repaid the €671 million Silent
However, he says, the company didn’t Participation II in 2022 - and the
account for the volatility in the share remaining €59 million Warrant Bond
price caused by hedge funds selling was also redeemed. WSF received a

Ashland Place closes inaugural loan ABS

Ashland Place Finance (Ashland Place) 47.6%, a WAL of 2.93 years, and priced AMS is the managing agent, with UMB
priced its inaugural aviation loan asset with a +355bps spread, 7.86% coupon Bank acting as back-up servicer and
backed securitisation (ABS), APL and 7.99% yield. The $21.92 million trustee. Allen & Overy served as legal
Finance 2023-1, in December, which C notes, rated BBB-, have a loan advisor to Ashland Place, and Milbank
offered four tranches of notes secured balance LTV of 89.3% and collateral served as legal advisor to ATLAS
by a static pool of aviation loans. LTV of 51.2%, a 2.93 year WAL, which SP Partners.
The quality of the portfolio of aviation priced at a +475bps spread and 8.5% APL Finance 2023-1 will also
loans resulted in tranches A through C coupon/9.19% yield. The BB- rated D feature an esteemed group of board
being rated investment grade by KBRA, tranche, worth $10.87 million in total, members, including: Elizabeth Barry,
and the deal being oversubscribed. A has a loan balance LTV of 92.4% and former director & head of corporate
healthy mixture of traditional aviation a collateral LTV of 53.0%, a 2.93 WAL, affairs at Airbus Financial Services;
ABS investors as well as investors new which priced with a 5% coupon/12.69% Anthony Diaz, former president at CIT
to the asset class are reported to have yield, an +825bps spread and sold at Aerospace; and Mark O’Kelly, group
bought into the deal. 81.96% of par. All four tranches of chief financial officer at ASL Airlines.
Formed in September 2021, the notes have a final maturity of July 2031. All loans in the portfolio were
Ashland Place platform, backed Affiliates of both Ashland Place, originated under the Ashland Place
by Davidson Kempner Capital which remains as the servicer of APL platform and are limited recourse, first
Management LP (DKCM), was set up Finance 2023-1, and DKCM are lien, senior secured loans. The loans
with the specific aim of originating retaining 100% of the equity of the are structured with maturities shorter
aviation loans. The team, led by subject transaction at closing. than or equal to the lease maturity of
veteran aircraft leasing and banking The proceeds of the notes will be the underlying aircraft. There are also
executive Jennifer Villa, has built up used to acquire a portfolio of 11 limited additional protections in place for the A
the Ashland Place portfolio with well- recourse loan facilities comprised note holders.
structured loans to quality borrower of 26 loans, which are secured by 19 “We’ve sought to structure the
and underlying lessee credits and the narrowbody aircraft, three widebodies underlying loans conservatively relative
specific long-term view of eventually and four narrowbody host aircraft to what you often see in this space,”
securitising sections of the loan book. engines on lease to 12 lessees located says Villa. “The underlying airline
“This was always the plan,” says Villa, in 11 jurisdictions. The three largest counterparties are mainly flag carriers
speaking to Airline Economics on the lessees by loan balance are Corsair and tier one credits, with strong
day the deal priced. “We intend to be a International, TUI Airways and borrowing counterparties across the
continuing issuer in this space.” Ethiopian Airlines. spectrum of the leasing community,
DKCM had this strategy in mind The collateral has a weighted each with equity in the assets.
ahead of the formation of Ashland average age of 10.0 years (excluding Furthermore, there is no remarketing
Place and has been pleased to see this the engines) and an initial appraised risk in the portfolio like you typically
idea come to fruition. Villa commented, value of approximately $612.2 million face in vanilla lease ABS, as these
“We see many opportunities for based on the average of half-life base loans are all either shorter than or co-
Ashland Place – we are continuing to values provided by three third-party terminus with the underlying leases.”
originate and underwrite new loans appraisers as of the second quarter of The static loan pool is one of the
even in this heightening interest 2023. The appraisers are Collateral main appeals of the Ashland Place
rate environment. There is a need Verifications, Avitas and Morten, Beyer aviation loan ABS and what assisted
for the type of lending provided by & Agnew. with the investment grade rating
Ashland Place, as demonstrated by our As of the deal’s cut-off date, the for the first three tranches including
repeat customers.” loan portfolio had an initial aggregate the subordinated C notes – a major
The $324.3 million securitisation loan balance of approximately $350.8 achievement. “We received investment
includes $238.2 million A notes, rated million, an average asset balance of grade ratings for the A, B and C
AA by KBRA, with a 67.9% loan- $13.5 million and a weighted average tranches, with the D rated BB-; you
to-value (LTV) ratio based on the remaining loan term of approximately don’t really see that in the lease ABS
securitisation loan balance and 38.9% 2.8 years. The portfolio has a weighted transactions,” says Villa. “What we
based on the collateral balance, with average seasoning of 18 months. The believe really resonated with investors
a weighted average life (WAL) of 1.61 initial portfolio balance includes $6 from a risk-reward perspective is that
years, which priced at I-curve +285 million for incremental extensions, and on a metal LTV basis, the entire capital
basis points (bps) with a 7% coupon advances for certain assets that have stack of this loan ABS fits inside the
and 7.705% yield. The $53.32 million taken place after the cut-off date. A note of a traditional lease ABS, and
B notes, rated A-, have a loan balance ATLAS SP Partners is the sole why the transaction has been so well
LTV of 83.1% and collateral LTV of structuring agent. Pivotal Corporate received in the market.”

final amount of €750 million including Apollo partner Jamshid Ehsani said
compensation for the conversion rights at the time the deal closed: “We are
and accrued interest and coupons. very pleased to be part of this inaugural
“What we believe TUI’s payments to the German state European mileage capital investment
for providing the WSF stabilisation with Air France-KLM. The transaction
really resonated with measures during the pandemic for was well received by our investors, both
interest, coupons and as compensation those within the broad Apollo platform
investors from a risk- for conversion rights amount to around as well as select third-party investors,
reward perspective €381 million. including sovereign wealth funds and
Sebastian Ebel, CEO of TUI Group, multinational insurance companies.”
is that on a metal LTV described this as a pivotal moment As part of the transaction, Air
basis, the entire capital for the company, which had been France-KLM also committed to spend
“strengthened” and is now focused on €100 million on sustainable aviation
stack of this loan ABS “profitable growth”. fuel over the next four years.
fits inside the A note of In a quasi-equity raise, Air France-
KLM monetised its Flying Blue loyalty STRUCTURED FINANCE
a traditional lease ABS, programme with a $1.5bn transaction Structured aviation finance deals are
in November in 2023. still not back to full force and issuance
and why the transaction Under the deal, Apollo-managed is likely to remain subdued for some
has been so well funds subscribed to perpetual bonds time in the higher-for-longer interest
issued by a dedicated operating affiliate rate environment. There was a single
received in the market.” of Air France-KLM that holds the aviation asset backed securitisation
trademark and most of the commercial transaction closed in 2023 from Willis
Jennifer Villa, Ashland Place
partners contracts related to Air France Lease Engine Finance, with the seventh
and KLM’s joint loyalty program (Flying iteration of its WEST series of engine
Blue) as well as the exclusive right to financings. Austin Willis, chief executive
issue “Miles” for the airlines and their of Willis Lease, says that the ABS deal
partners. The perpetual bonds will bear was “very well received” by investors
a coupon of 6.4% for the first four years, because “our ABS deals have historically
with the ability to redeem with an overall outperformed almost any other deal
financing cost of 6.75% on the first in the market through the pandemic,
Ashland Place 2023-1 is only the call date. which is a testament to the performance
second aviation loan ABS to come Air France-KLM will continue to of the company”.
to market. The first aviation loan manage and operate its loyalty program The broader ABS market is open but
ABS (SALT) was issued by Bellinger Flying Blue, and Air France and KLM the economics for aviation assets – due
Asset Management and Stonepeak will keep full ownership rights of their to the high interest rate and lagging
Partners LP in 2021, which secured customer database. lease rates – currently do not compare
the portfolio of aviation loans they The financing is accounted for as to commercial banking products or
acquired from National Australia Bank equity under IFRS. Air France-KLM alternative lenders.
(NAB). APL Finance 2023-1 is an ABS said that this deal “materialises the steps For leasing companies, the
loan structure but is a very different implemented by the Group to restore its environment is still not conducive to a
transaction. The NAB book acquired IFRS equity to positive by year end”. successful aviation ABS issuance. “The
by the issuers in SALT had more loans The transaction was upsized from ABS markets, unfortunately, are still
of varying sizes, with minority lender €1.3bn to €1.5 billion on the back not fully functioning,” says Goldman
and a mix of secured and unsecured. of what the issuers said was “strong Sachs’ Lee. “There is some private
APL Finance 2023-1 was designed investor confidence and the quality placement issuance, but that market
with the capital market refinancing in of Air France-KLM Flying Blue Miles is very dependent on the quality of the
mind and, as such, has been carefully issuance activity”. underlying lessees, the age of the aircraft
constructed with strictly secured loans, Steven Zaat, Air France-KLM and the structure of the leases. This has
with one sole lender and primary chief financial officer, said that the made options for the sub-investment
originator in Ashland Place and, thus, upsizing of the quasi-equity financing grade leasing companies pretty limited.”
similar documentation throughout represented a “significant step further Mizuho’s Srinivasan explains the
which spoke to the rating agencies and to strengthen Air France-KLM’s balance problem with new aviation ABS issuance
ultimately the investors. sheet at attractive funding terms” as in more detail: “Prior to the pandemic,
The transaction priced on December well as “a strategic milestone and clear lessors could issue single-A bonds at
12, 2023, with competitive yield across recognition of our successful Flying 65% LTV at 2.5% yield,” he says. “Today,
the debt stack despite the choppy Blue program miles activity as well as you can barely get to 65% LTV on an on
market environment. its potential scalability”. a decent aircraft portfolio at 7.5% yield.

The cash flows coming in have not really In 2023, Griffin began the year with an have made it very clear that getting larger
changed because lease rates haven’t gone upsizing of its $1.5bn warehouse facility is required for investment grade issuers
up enough to compensate. The only to $2bn with 12 leading banks. Soon and we are going to add scale in a very
places where you could see an ABS deal is after, Griffin began its corporate ratings methodical way,” he says. “We don’t need
on older aircraft, where you can still find process with Fitch and S&P resulting to do something transformational to
enough yield. Structural enhancements in the company’s inaugural corporate get there. We have a very clear path for
aren’t going to move the needle; it’s a ratings of BB and BB-, respectively. The growth with the new aircraft delivering in
matter of how much cash the aircraft financing team led by chief financial our pipeline and we will continue to focus
generate. There’s just a dearth of cash officer John Beekman, also negotiated on our unsecured funding structure.”
flow to support a higher amount of debt.” the terms of Griffin’s inaugural unsecured With the resumption of new aircraft
Until those economics change, bond issuance. The $1bn unsecured deliveries, it was assumed that airlines –
Srinivasan notes that banks are being notes issuance closed in June, which is specifically US carriers – would again turn
very understanding and have been significant volume for a debut issuance by to raising debt using the tried-and-tested
supporting the sector by providing an aircraft lessor. Soon after the inaugural enhanced equipment trust certificates
warehouses that are being “renewed and bond, Griffin also closed an inaugural (EETCs). However, over the past few
renewed again”. corporate unsecured Revolving Credit years cash rich airlines have chosen to use
Although lessors are struggling to tap Facility (RCF), which had commitments cash to fund new deliveries or existing
into the ABS market, financiers have from 12 leading banks for $575 million. debt stacks. This trend continued into
found success using the loan version of In the meantime, the company closed 2023, with only one largescale EETC
the secured transaction. Following in the a $400 million credit facility in August being issued by United Airlines in June,
footsteps of SALT, which closed in 2019, with four banks dedicated to a new although there was a private deal closed
Ashland Place came to market at the end partnership with Rolls-Royce that by first-time issuer Republic Airways
of 2023 with a new loan ABS product, acquired 17 engines. The team rounded of secured on a portfolio of spare parts
which it expects to have an enduring the year with its second unsecured bond in July. ASL Aviation also raised $155
future in the aviation finance stable of offering for $400 million, which closed million with an enhanced equipment
products (see section on previous page for in November and was subsequently trust loan transaction in April, which
more detail on APL Finance 2023-1). followed with a $300 million tap to that was a unique structure that supported
Sub-investment grade lessors have security at the very end of the year. the conversion of passenger aircraft
opted mainly for warehouse financings, “We tried to navigate a challenging to freighters.
which Lee comments, is “effectively market for raising capital, but guided by
buying time for another market where a clear objective of achieving investment COMMERCIAL BANKING MARKET
rates are more constructive”. He also sees grade ratings, ” says Griffin’s McKenna. Airlines and lessors have continued
other determined leasing companies that “We took meaningful steps towards to develop relationships and issue
have been willing to “take near-term hits unencumbering our balance sheet with more debt in the commercial banking
to their P&L with higher interest rates an unsecured funding structure and market in 2023, despite the increase
so that they can get to an investment remain committed to our investment cost. As Greg Lee notes there has been
grade rating”. grade financial metrics.” an abundance of warehouse facilities
Griffin is one of those companies McKenna notes that Griffin’s portfolio closed over the past year. However, the
seeking to both fund its growth metrics with a long average lease term cost of debt using these structures is also
trajectory as well as place the company and a young average age, are already in rising, which Castlelake’s McConnell
on a first footing on that journey to step with the company’s investment grade comments is creating challenges for some
investment grade. peers, the issue is scale. “The agencies leasing companies.

“The warehouse market is challenged,” two airlines and alternative lenders have “The warehouse market
says McConnell. “The ABS market is also recognised a market opportunity.
extremely challenged and it is unclear if Castlelake has invested in this product is challenged. The ABS
it will really come back. We believe that family with the creation of Itasca Re.
many investors that are reliant on that “Itasca Re is an NPI provider that
market is extremely
funding model are struggling to close enables what we believe to be the lowest challenged and it is
transactions. We have seen or heard of cost of debt financing to airlines and
many differenttransactions that fail to leasing companies through an insurance unclear if it will really
close after LOI execution due to funding wrapped structure with a single A rating,” come back. We think
issues.” McConnell sees these companies explains Joe McConnell. “This is a unique
losing access to sources of both debt product and this business is rapidly many investors that are
and equity, leading in some cases to the scaling and when banks are pulling
reliant on that funding
forced sale of assets. This situation has back and when alternative lenders in
increased the importance of execution many cases are relatively expensive, we model are struggling
risk for aircraft transactions, which believe Itasca Re is a great solution for
favours larger players with a strong track owners and buyers of aircraft that want
to close transactions.
record and certainty of execution. This a lower cost of debt financing, and they We have seen or heard
is essential in such a hot trading market want it from a party that can provide
where airlines are clamouring for lift. closing credibility and a creative, custom of many different
Alternative lenders have been filling the tailored structure.” transactions that fail
void for both equity and debt financing, Engine assets have increased in
which has continued over the past year popularity with investors and there have to close after LOI
as certain banks retrench to protect been some very large engine portfolio
balance sheets and focus on fuel efficient financings in 2023.
execution due to funding
new equipment and relationship clients. Shannon Engine Support (SES) – a issues.”
There is the sense that these alternative 50/50 joint venture between AerCap and
lenders tend to play in more niche areas Safran – concluded an $875 million engine Joe McConnell
where there are higher yields. portfolio financing in a club-deal of eight Deputy Co-Chief Investment Officer of
Greg Lee believes that a gap remains banks. This landmark transaction, which Castlelake
between where “the alternative or is the largest aircraft engine portfolio
private credit sources of capital need financing closed in the market to date,
to earn their cost of capital and what finances a pool of the latest technology
economically makes sense given the LEAP-1A and LEAP-1B engines, designed
low these rate factors”, which he says is to meet the challenges of decarbonising
what has prevented alternative capital air transport.
from becoming a bigger part of the This was the first secured financing
market to date. by SES. Credit Agrciole-CIB acted as
Non-payment insurance (NPI) global coordinator on this deal and was
products have also continued to grow in mandated lead arranger and bookrunner
popularity, in some cases replacing the with Natixis-CIB; BNP Paribas, CIC,
export credit-backed transactions that Natwest, Société Générale, and SMBC
are popular for lower tier credits. were also MLAs, with Bank of America
Several companies now offer NPI as a lead arranger.
products from Marsh’s AFIC and Griffin and Bain Capital Special
Balthazar products, to newcomer Itasca Situations (Bain Capital) have also entered
Re as well as ACG’s Aircraft Financing the engine market with an agreement to
Solutions (AFS) guarantee. These are acquire 17 new technology Rolls-Royce
complementary to the bank financing Engines, including Trent XWB-84s,
market and are now widely regarded as Trent XWB-97s, Trent 1000s, and Trent
a substitute for export credit financing, 7000s. The engines will be owned by
which is becoming more selective and a newly-formed standalone entity and
export credit agencies are now acting used as spares by the Rolls-Royce global
within their original missions as lenders customer base.
of last resort. Bank of America led the acquisition
Both NPI and export credit supported financing of the engines, with key
transactions require banking support, commitments to the facility from
which has continued over the past year. Mizuho Bank, Citibank, and Goldman
These products are popular with tier Sachs Bank.

SUSTAINABLE FINANCING Paribas and HSBC. Natixis acted as “Some lenders have
Sustainability-linked loan financing sustainability structuring bank. CA-CIB
has expanded in the past year and also acted as agent of the facility. Milbank set targets to finance
is being driven by the commercial acted as counsel to the lessor, while Allen
aviation banks. & Overy (London) acted as counsel to
only new, fuel-efficient,
In December 2023, CDB Aviation, the lenders. JunHe and Matheson acted more environmentally-
a wholly owned Irish subsidiary of as PRC and Irish counsel, respectively.
China Development Bank Financial “Delivering on our platform’s ESG friendly equipment.
Leasing (CDB Leasing), entered into an vision and responsibilities, this facility If you want more
inaugural Sustainability Linked Loan advances the sustainability of our
(SLL), anchored with a $625 million business and enhances our ability to accessibility to finance,
syndicated term loan facility. contribute to progress in reaching
you will need to focus
“This innovative facility marks a the industry’s net-zero target. We’re
landmark transaction for the aviation committed to being a leader on ESG on those assets that
finance space,” said Jie Chen, CDB matters and efforts, managing our
Aviation’s Chief Executive Officer. impact as a business and maximizing our
are in demand. We
“We’re thrilled to have leveraged influence to help drive positive change see strong push back
our comprehensive sustainability in the aircraft leasing community,”
strategy, with a particular focus on the said Chen. from the banks to
activities across the Environmental Other issues in the SLL space this encourage us or provide
and Social aspects of our operations, to year have been Turkish Airlines, Cathay
secure this first major sustainability- Pacific, Wizz Air with a sustainability- benefits for purchasing
linked loan syndicated facility among linked Japanese Operating Lease with
aircraft lessors.” Call Option, Air France-KLM with a
and financing new
The SLL parameters of the facility sustainability-linked RCF, and easyJet technology aircraft But
are contingent on the satisfaction of with an ESG-linked EDG facility, which
Sustainability Performance Targets has KPIs related to a reduction in the we need to take a step
(SPTs), which are based on the lessor’s carbon emission intensity of easyJet back and realise that
three Key Performance Indicators in line with the Group’s SBTi validated
(KPIs). These include two strong target. And many more. the industry doesn’t
Environmental and one Social KPIs Mainstream banks are committed
have enough assets
related to reducing the carbon intensity to sustainability targets and, in line
of CDB Aviation’s fleet, focusing on the with this strategy, are focused almost to service demand so
most fuel-efficient aircraft; increasing exclusively on new technology assets.
the share of new generation aircraft in “Some lenders have set targets to
premature retirement of
the lessor’s fleet, pursuing its target to finance only new, fuel-efficient, more older aircraft is
reach 60% of new generation aircraft (by environmentally-friendly equipment,”
number of aircraft) by the end of 2025; says Carlyle Aviation’s Korn. “If you not feasible. ”
and increasing the level of Diversity, want more accessibility to finance, you
Robert Korn
Equity, and Inclusion (DEI)-related will need to focus on those assets that
President of Carlyle Aviation Partners
training for the workforce. are in demand. We see strong push
Moody’s Investors provided the back from the banks to encourage us
Second Party Opinion as to the or provide benefits for purchasing and
appropriateness of the KPIs and SPTs, financing new technology aircraft.
confirming the conformity of the facility But we need to take a step back and
with the Sustainability Linked Loan realise that the industry doesn’t have
Principles (SLLPs), with a best-in-class enough assets to service demand so
SQS2 rating. premature retirement of older aircraft is
The facility was financed by a group not feasible.”
of mandated lead arranger banks, Many of the larger aviation
including: Crédit Agricole-CIB (CA- commercial banks are signed up to the
CIB), BNP Paribas, HSBC, Natixis, Climate Aligned Finance Initiative with
China Minsheng Banking Corp., RMI and the Renewable Low Carbon
China Guangfa Bank and China Fuel Alliance roundtable sponsored by
Construction Bank. EU Commission, which will reveal its
CA-CIB acted as sole sustainability framework later this month solidifying
agent, as well as lead sustainability sustainability financing measures for
structuring advisor jointly with BNP aviation assets.

Navigating
Change. Together.
kpmg.ie/aviation
Chapter Three
Lessors Dominate
A
ircraft leasing companies have in the following chapter – have created that’s strained and piling more on top of
experienced a stellar year in immense demand for aircraft from it, things rarely go well.”
2023. With demand outpacing airlines keen to expand capacity to tap Cognisant of the continued supply
supply, leasing fundamentals have into that continued spike in demand. chain pressures, airlines are seeking to
improved substantially, translating “Providing a top class service to our secure capacity outside of their normal
to a solid bottom line for many of the customers is vital,” says Kelly. “The real fleet plans to plug the gap caused by
largest lessors. issue with delays is when a customer productions delays and AOGs due to the
“I cannot remember a time in my has a flight schedule booked for next required engine maintenance. “On the
almost 40-year long career when I have summer, they have hired pilots, ground new aircraft side, airlines are extending
seen such strong demand and such crew, catering airport slots based on a their commitment horizon up to 2030-
tightening supply,” says ALC’s Plueger. certain level of capacity. If that capacity 2032 to lock up slots,” says Avolon’s
“Manufacturers are sold out for years does not show up, if they don’t get the Cronin. “We have seen manufacturers
ahead, which is causing all sorts of aircraft or if they get the aircraft and being more assertive around taking slots
additional planning requirements for it breaks down, that’s a huge issue, back from airlines that they don’t think
the airlines.” because they can’t get out of their fixed need them. We are seeing scarcity of
ALC is now 100% placed for all of cost base. That’s the real issue with lessor orderbooks and rentals and asset
its deliveries to 2025, which includes the delays.” values rise. We are also seeing enormous
all passenger widebody aircraft, and Throughout the pandemic period, demand on the used end of the market,
is also reporting strong demand for airlines have proven to be adept at with the value of greentime in particular
its older aircraft on the secondary dealing with adversity and pivoting engines increasing. But also generally
trading market. quickly to continue generating revenue aircraft lives are being extended
Most lessors have a much more positive or raising debt even in the deepest crisis. and residual values are rising across
outlook for airlines than equity investors However, dealing with such surprise the board.”
and are confident that demand for air delays is a big problem. Kelly has called The defining trend in aircraft
travel will continue to grow so long as on the OEMs to ensure they inform leasing over the past year has been the
they can access additional capacity even customers of delays with as much notice proliferation of existing lessees seeking
with continued production and delivery as possible so they can plan on longer to extend leases rather than hand back
delays as well as aircraft groundings periods of downtown, something he says aircraft at the conclusion of a lease
caused by manufacturing defects. they have not been doing to date. term. Plueger reports 100% renewal
“There is no problem around demand,” “[The OEMs] have a blatant disregard rate for ALC’s leases as airlines seek to
says AerCap’s Kelly. “From speaking to for their customers,” says Kelly. “They’re retain capacity.
airline CEOs, the demand is there. The not going to hit the production targets at The extension of existing leases has
question is at what price level. From an Airbus. Pratt & Whitney are not going to been a common theme in interviews
aircraft lessor’s perspective, whether an meet the turn times on their shop visits with all chief executives of aircraft
airline makes a billion dollars or zero this year…. The most important thing lessors for this report.
doesn’t impact how much they pay a for customers is to be able to plan with “Airlines are keeping the aircraft they
lessor. What we need to make sure is certainty. And the OEMs have to realise have because they cannot get the new
that demand is being serviced.” that there is a ceiling on what they can aircraft from the manufacturers,” says
The supply chain challenges and produce. The engine guys have to realise ORIX Aviation’s Meyler, who confirms
disruption caused by manufacturing there is already tremendous strain in the that ORIX has extended the leases of
and engines defects – discussed in detail MRO network. When you have a system approximately 50 aircraft over the past
FIG.13: TOP 10 AIRCRAFT LEASING COMPANIES (BY PORTFOLIO VALUE)

Rank by Indictive CMV Regional Turbo Total
Operating Lessor Single-Aisle Twin-Aisle Backlog
Value (HL$bn) Jet Prop Portfolio
1 52.0 AERCAP 1,425 301 87 16 334 1,829
2 26.8 SMBC AVIATION CAPITAL 667 75 265 742
3 19.6 AVOLON 455 124 7 423 586
4 23.5 AIR LEASE CORPORATION 429 133 2 332 564
5 16.5 ICBC LEASING 433 55 39 130 527
6 16.8 BBAM 375 112 487
7 17.8 BOC AVIATION 368 93 207 461
8 11.1 DAE CAPITAL 301 53 67 63 421
Source: Cirium
9 11.3 AVIATION CAPITAL GROUP 369 15 108 384

10 7.8 CARLYLE AVIATION PARTNERS 344 38 20 382

FIG. 14: TOP 30 AIRCRAFT LEASING COMPANIES (BY PORTFOLIO NUMBER)

Regional Turbo Total
Rank Operating Lessor Single-Aisle Twin-Aisle Turbo Backlog
Jet Prop Portfolio
1 AERCAP 1,425 301 87 16 1,829 334 52.0
2 SMBC AVIATION CAPITAL 667 75 742 265 26.8
3 AIR LEASE CORPORATION 429 133 2 564 332 23.5
4 AVOLON 455 124 7 586 423 19.6
5 BOC AVIATION 368 93 461 207 17.8
6 BBAM 375 112 487 16.8
7 ICBC LEASING 433 55 39 527 130 16.5
8 AVIATION CAPITAL GROUP 369 15 384 108 11.3
9 DAE CAPITAL 301 53 67 421 63 11.1
10 BOCOM LEASING 265 32 6 303 92 10.4
11 CDB AVIATION 231 43 19 293 164 9.9
12 JACKSON SQUARE AVIATION 192 25 217 21 8.2
13 CARLYLE AVIATION PARTNERS 344 38 382 20 7.8
14 CES INTERNATIONAL FINANCIAL LEASING 129 45 1 175 7.7
15 AVIC INTERNATIONAL LEASING 141 25 33 20 219 7.1
16 CASTLELAKE 198 52 8 9 267 6.8
17 CMB FINANCIAL LEASING 153 22 7 182 67 6.6
18 ORIX AVIATION 167 37 204 6.2
19 AIRCASTLE 227 20 19 266 11 5.7
20 AVILEASE 164 2 166 5.5
21 CHINA SOUTHERN AIR LEASING 111 35 7 153 5.4
22 CHINA AIRCRAFT LEASING COMPANY 175 16 2 193 158 5.1
23 CCB FINANCIAL LEASING 134 18 152 110 4.8
24 GRIFFIN GLOBAL ASSET MANAGEMENT 47 14 61 5 4.0
25 JP LEASE PRODUCTS & SERVICES 80 11 91 3.7
26 MACQUARIE AIRFINANCE 185 12 2 199 66 3.7
27 ALTAVAIR 45 68 4 117 3.5
28 AERGO CAPITAL 72 41 46 159 3.1 Source: Cirium
29 ALM - AIRCRAFT LEASING & MANAGEMENT 67 11 12 90 3.0

30 NORDIC AVIATION CAPITAL 13 104 167 284 34 2.7
two years. “Airlines know if they don’t to extend an aircraft lease with an of roughly 3,000 aircraft, and also
seize the opportunity to keep what they existing lessee. There’s no downtime; acknowledge that with the continued
have, those planes will be taken up by there are no surprises around engine supply chain delays and manufacturing
other airlines,” he says. borescopes and other things that can defects, that shortage will only continue
Mike Inglese, chief executive officer creep up.” Inglese adds that extensions to increase. “Airlines are going to have
of Aircastle, observes that in a normal are even more welcome since to keep midlife planes flying longer;
cycle year, a ratio of extension to transitioning leases is taking much aircraft that would have been returned,
transition of an aircraft on lease is longer to complete in this market due maybe with a balloon payment that’s
normally 40:60 but in the last year to the supply chain constraints in the due or which would have been sold to
he says this has increased to 70:30. MRO market, which is making shop repay debts, will also be extended,” adds
“The number of customers looking to visit lead times much longer. Meyler. “Debt terms will be refinanced
extend is a much higher percentage Aircraft leasing company chief and extended, which in general is a
for us, which is a great outcome,” he executives all refer to the production good situation for all parties, save for
says. “Transition costs are much less gap created during the pandemic the manufacturers.”

Meyler notes that lease extensions Engine leasing has evolved with costs to be passed on. However, where
for older equipment will be at a lower aircraft leasing but the number of lessors have placed aircraft on long
lease rate than new aircraft deliveries, a dedicated engine lessors remains small leases with airlines before the interest
positive for airlines’ cost base and they due to the technical nature of the rates spiked with no escalation policies,
will be able to extract more value from product raising the bar for entry and that dynamic has led to a lag in lease
their existing fleet. success. “Engines are a proportionately rate increases.
While the enhanced demand and much more technically challenging Although lease rates are rising, it
trend for lease extensions is a positive product to invest in than aircraft,” says remains a very competitive market for
for lessors in that lease rates and asset Hough. “You can lose more of your total aircraft lessors, which makes passing
values are rising, Plueger says that he asset value very quickly through the on those higher interest rate costs
would trade some of that demand for engines maintenance and LLP [limited more difficult. Moreover, the pace of
“more stability and getting aircraft life parts] value, particularly if you the interest rate rises over the past two
on time” to be able to deliver them to don’t have the paperwork right, or the years made it even more difficult to pass
his customers. condition is compromised. You need on those costs to the customer.
His sentiments are echoed many specific technical expertise to be able to “The question for many lessors
times by his peers. “Growth will be a manage an engine portfolio.” is the pace for repricing leases and
challenge. Access to metal will be a Many of the engine lessors benefit matching those rates with the cost of
challenge; it’s just something we will from strong parent companies, which capital that has been moving rapidly,”
need to manage,” says ACG’s Baker. “We means they do not need to raise says Griffin’s McKenna. “There is
are seeing increases in our asset values. funding. Hough notes that elfc’s strong certainly demand for lease extensions
We are seeing strong demand in our parentage with Mitsubishi HC Capital given the constraints on new delivery
secondary market trades, despite higher (MHC) has been an advantage for the volumes It will be interesting to watch
interest rates, and very strong bids in company and facilitates access to the how production rates move relative
the single aisle market. But we would Japanese investor pool for JOLCO to fundamental market demand
prefer more orderly deliveries from leases. “The appreciation of the US for aircraft.”
the manufacturer.” dollar against the Japanese yen has, has With interest rates now more stable,
The GTF issues have created increased seen the cost in yen increase,” he says, lease rate calculations are reported to
demand for spare engines and lease rates “which combined with the higher prices be increasing. “Airlines are accepting
have also increased but the same issues for latest technology engines, places that ultimately they do need to pay
have also resulted in a deficit of spare those products in a sweet spot for small more for their leases based on the
engines creating a challenge for engine investors in Japan who want to put increase in interest rates,” says Meyler.
lessors. “The latest technology entry-to- their money to work in this sector.” “Those planes are delivering this year
service durability and reliability issues Much has been discussed in recent or next that have locked in those rises.”
have made it very difficult for us to get months about the lag between the He explains further that rates are now
our hands on new engines because sharp rise in interest rates and the rising on sale-leaseback deals, which
the OEMs are channelling them to the much slower increase in lease rates. had been an anomaly to this trend
customers that need them the most,” says The supply chain squeeze on capacity since most deals continue to attract
Richard Hough, chief executive officer has served to accelerate the growth in competitive bids from several lessors.
of Engine Lease Finance Corporation aircraft and engine lease rates with all Meyler says the current supply-demand
(elfc). “It is not a properly functioning companies reporting a strong uptick. challenge is altering the competitive
market. The engine OEMs are trying “Lease rates are up 25-30% in dollar dynamic with sale-leaseback rates,
to keep as many of aircraft flying as terms,” says SMBC Aviation Capital’s adding that they “have definitely moved
possible. At present, we replace that Barrett, “which has been driven by a up from where they were, but are not
inability to get new engines from the number of factors including the rise in dollar for dollar where they should be”
manufacturers by financing additional interest rates as well as the increase in due to lessors with locked-in capital at
sale-leasebacks of engines that are being demand for airplanes.” low interest rates still able to outbid
delivered to customers. The supply The main costs for aircraft lessors the market.
of used equipment has also dried up are the price paid for aircraft and Engine lessor Willis Lease Finance,
due to shortages of supply caused b a interest rates on debt. Those costs which has been experiencing increased
combination of greentime burnoff and are then passed through to the airline demand for spare engines due to the
blockages in the MRO supply chain, customers. Lessors with leases expiring issues with the GTF, follows a policy of
which has pushed up lease rates.” or on shorter leases have been able keeping half of its fleet on shorter-term
Hough notes that engines have to successfully increase their rates leases. “We have been taking advantage
always been a very resilient product - following transition to new customers of the strong market to improve lease
they are liquid and retain their value or in some instances when executing rates,” says chief executive Austin Willis.
well throughout cycles, which is why extensions, other companies have “But not into a range that’s considerably
the sector has been attracting more escalation policies written into their higher than what it was pre-pandemic;
investment over the years. longer leases, which again enables it has just been more of a recovery. We

products. “There will be more of a balance between operating, leasing and owned aircraft going
forwards,” he says. “I don't see another big jump in operating leasing share because airlines are
leaving tax beneets on the table if they just use operating vessels.”
Fig. 15: Leasing Market Share
Source: Cirium
FIG. 15: LEASING MARKET SHARE

Source: Cirium Ascend Consulting
have historically had about 50% of our pandemic and the period just after that “Around three times as many aircraft
portfolio on short-term leases, which the number of aircraft owned by lessors were sold off lease to airlines in 2023
The leased proportion of the global fleet is generally considered to have exceeded 50%, with
has served us well. We are putting some would go up significantly as it has. But than were sold the same period in
some
more ofsaying it hasonreached
the engines as high
longer term onceaswe60%reachduring the pandemic.
the point Cirium
of airlines 2022,” Ascend
says Consultancy
Morris. “That will drive a
measures
leases, but thetheintent
leasedis tofleet
reallyby the turning
keep number of passenger
profitable, aircraft
particularly in thein leasing
temporarymanagement
blip downwards, but that’s
that balance of
compared toabout 50% andfleet.
the global “ForUSA
it helps sureand
thatUK, there are tax
exceeded 50% duringmeasured
benefits in units, says
the pandemic,” whichRobis about
us in a few different ways. It keeps us for people owning their aircraft where 52.1%. Measured in value, the share
Morris, but notes that in 2023 the share reduced by 1.5 percentage points. Morris attributes this
in front of the customer, so we have our they can take accelerated depreciation is about five percentage points higher
decline
finger on tothethe recent
pulse of what’strend
goingofon
lessors
in theselling aircraft
first year.” off this
Given lease to airlines
trend, becausetolessors
provide are airlines
typically with
owning
certainty of a fleet and cost control.
with the customers all the time, which during his time at BOC Aviation, he new aircraft.”
conversely enables us to be better buyers saw a lot of demand in 2023 for finance Morris notes that leasing companies
of assets. It also helps us to reprice our lease products. “There will be more of have been acquiring 60% of new
assets based on demand.” a balance between operating, leasing technology equipment through new
Lease rates are ticking upwards but and owned aircraft going forwards,” he deliveries, about 25% as deliveries
Meyler says many are accepting of says. “I don’t see another big jump in from their own orderbooks, and about
the new rate environment due to the operating leasing share because airlines 35% through sale and leaseback
constrained supply. But it is also true are leaving tax benefits on the table if transactions. Due to the backlog in
that airlines still have a lot of options they just use operating vessels.” deliveries, however, Morris says it is
for securing aircraft rather than The leased proportion of the unlikely that the leased share of the
operating leases. global fleet is generally considered world fleet will reach 60% based on
Robert Martin, who retired as chief to have exceeded 50%, with some units “anytime in the next five, six,
executive of BOC Aviation at the end saying it has reached as high as 60% or seven years” but he expects it to
of 2023, noted that the Singapore- during the pandemic. Cirium Ascend continue to grow “incrementally”.
based lessor had seen a change in Consultancy measures the leased fleet Firoz Tarapore, chief executive
the preference for leasing aircraft by the number of passenger aircraft in officer of Dubai Aerospace Enterprises
once airlines again turned profitable. leasing management compared to the (DAE), recognises that airlines are
“Higher interest rates and the supply global fleet. “For sure that exceeded rebuilding their capital profitability
and demand element has pushed up 50% during the pandemic,” says Rob but believes that airlines strong multi-
lease rentals and lease rental factors,” Morris, but notes that in 2023 the year performances for that profitability
he said. “During the pandemic and share reduced by 1.5 percentage points. to translate to “deployable capital”,
post-pandemic, we have seen that the Morris attributes this decline to the meaning they will seek to finance
percentage of leased aircraft in fleets recent trend of lessors selling aircraft their own aircraft rather than lease.
has ticked upwards and that proportion off lease to airlines to provide airlines “If airline profitability continues on
has grown… Our belief was during the with certainty of a fleet and cost control. for another two or three years, we will

measured in units, which is about 52.1%. Measured in value, the share is about eve percentage
points higher because lessors are typically owning new aircraft.”

Fig. 16: Aircraft Sales from Lessors to Airlines
250
Passenger Aircraft Sales from Operating
200
Lessors to Airlines
150
100
50
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Single-Aisle Twin-Aisle
SSource:
ourCirium
ce: Cirium
FIG. 16: AIRCRAFT SALES FROM LESSORS TO AIRLINES
The chart (Fig.16) seeks to visualise the growth of sales of aircraft from operating lessors to airlines by drawing data from Cirium’s database that shows where the ownership of an aircraft has moved from a lessor to an
The chart (Fig.16) seeks to visualise the growth of sales of aircraft from operating lessors to airlines
airline. It should be noted that there is a lag in this data set as aircraft are re-registered and researchers identify new owners of aircraft. By the end of the first quarter of 2024, the data is expected to be higher than shown
for 2023. But even in this chart shows clearly that there were 50% more single-aisle sales to airlines in 2023 than in the two preceding years.
by drawing data from Cirium’s database that shows where the ownership of an aircraft has moved
from
see a lessor
airlines to their
flexing an airline.
capital It shouldcan
muscle bepreserve
noted that there
your cash byis a lagaircraft
leasing in this data setOver
months. as aircraft
the pastare re-
year, the largest
and at that point they will have many and also lessors have slots. Also a lot lessors have all
registered and researchers identify new owners of aircraft. By the end of the Drst quarter of 2024, the reported strong gains
more choices. In this interest rate of those mega orders, from Indigo etc, on sales of used aircraft due the asset
data is expected to be higher than shown for 2023. But even in this chart shows clearly that there
environment and with new technology have relied heavily on leasing for various values being boosted by the short supply
were 50% more single-aisle sales to airlines in2023 than in the two preceding years.
aircraft, they might decide to keep the factors but ultimately it is a residual of aircraft.
metal exposure, or they might decide to risk game.” “Aircraft values are strong,” says
fund themselves. It’s a little bit unclear Although some of the major airlines SMBC Aviation Capital’s Barrett. “The
to us as to
Morris whether
notes thatthis is a structural
leasing companies are have
flush with
beencash and have
acquiring 60% been tightness
of new in the equipment
technology market is flowing
change or change that was necessitated seen to pay for aircraft deliveries through to aircraft values, even in a
through new deliveries, about 25%, and about 35% through sale and leaseback transactions.
by the marketplace. Either way, for us without financing, the leasing channel high interest rate environment. This is
Due
as to thelessor,
an aircraft backlog in deliveries,
it doesn’t make too however,
will alwaysMorris
form sayspart ofit isa unlikely
diverse that the leased
informing share
our aircraft of the
trading strategy.
worldoffleet
much will reach
a difference 60%the
because based
pie on unitsfinancing
portfolio “anytime in theatnext
strategy, least eve,
for six, or seven
We have years”
always been but he
an active trader of
expects
keeps it to continue to grow “incrementally”.
on growing.” larger airlines. aircraft – we have an excellent trading
The growth in the leasing share of “Airlines do have a lot of cash,” says team based around the world – and we
the world fleet has been boosted by a Marjan Riggi, managing partner will lean into that market if we think
Firozvolume
high Tarapore, chief executive
of sale-leaseback (SLB)ofecer of Dubai
StageWings, “butAerospace
they are also Enterprises,
much there’s recognises
good value that airlinesin the
represented
are rebuilding
transactions their capital
between airlines proetability but believes
and more leveraged. that airlines
In a normal strong
cycle, they multi-year
market performances
relative to the long-term cycle
for that
lessors proetability
following to translate
the pandemic, whichto probably
“deployablewould capital”,
have donemeaning
more sharethey butwill
weseek to to
will try enance
strike atheir
balance. If
isown aircraft rather than lease. “If airline proetability continues on for another two or three years, to
predicted to continue into the near- buybacks but they haven’t even though prices are good, we will continue
term future since access to the capital they are so flush with cash.” Riggi points trade into that market.”
we will see airlines flexing their capital muscle and at that point they will
markets remain limited to investment to the fact that although lessors own
have many more
There is a sense that the rapid
choices. In this interest environment and with new technology
grade players and as airlines seek half of the world fleet, they only account escalation in aircraft, they might decide
interest to keep
rates and inflation
thediversify
to metal exposure, or theywhile
their portfolios, mightfordecide
20% oftothefund themselves.
orderbook with OEMs, It's a that
little made
bit unclear to us
it difficult forasowners
to to
whether this is a structural change or change that was necessitated by the marketplace. Either
enjoying access to 100% financing that which means sale-leasebacks with accurately price their assets, leaving
remain a major funding buyers and sellers wary about taking on
way, for us as an aircraft lessor, itairlines
leasing offers.
doesn'twill make too much of a difference because the pie keeps
“I see the leased share of the fleet option for airlines. interest rate risk, has abated somewhat
on growing.”
continuing to creep up,” says Norm Liu, Pressures on aircraft supply are with the stabilisation in rates. “People
chief executive officer of Nordic Aviation driving up asset values. With the larger are starting to be more active,” says
Capital. “People recognise leasing as lessors unable to access a steady stream Aircastle’s Inglese. “They are using age-
100% financing. This isn’t just operating of new deliveries since the pandemic, old tricks to contain the movement in
leases, for JOLCOs and finance leases as secondary market trading seized up price between agreement and actually
well are all growing in popularity. You initially but it has eased in recent closing transactions.”

Goldman Sachs’ Lee offers a reminder

that there are two sides to every trade
and that even though lessors are
reporting strong trading activity and
gains on sales, buyers that can afford
those higher prices will be fewer than
pre-pandemic. “The numbers of buyers
interested in buying aircraft are lower
given higher interest rates; the prime
buyers of aircraft in this market are
companies that have strong balance
sheets and access to investment grade
debt,” he says. “When values are higher,
volumes are lower.”
Spot market prices for aircraft depend
very much on the asset type but also
its remaining lease term, says Carlyle Simon Cooper, CEO of Corporate, Commercial & Institutional Banking and Europe & Americas at Standard Chartered,
Aviation’s Korn. “Values have certainly shakes hands with AviLease CEO, Edward O'Byrne.
gone up, but whether they have gone up

by 1% or 20%, neither buyer nor seller automatically be higher,” he says. “It driven by sellers “trying to both manage
has found to answer that question,” is true for aircraft that are coming off their portfolio metrics for a weighted
he says. “There is definitely upward lease within the next 12 to 24 months, average age at lease term, and their debt
pressure on lease rates and upward but interest rates are a lot higher, maturities and profitability metrics”.
pressure on prices due to the supply- some 300 or 400 basis points higher. Wiley sees this trend continuing into
demand situation. Selling an aircraft When you own long-term contractual 2024 with sellers trading aircraft
with a five or six year lease remaining cash flows, if you’re not hedged on because they need to generate liquidity,
– with that contracted cashflow – the the liability side, that creates a real manage refinancing or their P&L,
buyer is buying a residual that will be compression in your net interest margin or if they are exiting the industry.
normalised in the next five or six years and as liabilities mature and need to “Ultimately this is creating an attractive
so it shouldn’t have a significant effect be refinanced. So you need to really buying opportunity for us,” adds Wiley.
on the value of the asset. If you’re take a holistic approach to investing in Consolidation is always a feature
selling an aircraft that has a one year this industry.” of the aircraft leasing market and in
remaining lease, it could certainly have This is where match funding is so 2023 there were three significant M&A
an effect on its value given the demand important for lessors, says McConnell. deals along with other large portfolio
for aircraft.” “We are not going to speculate on sales. The largest of these was Standard
For Cirium, the recovery in asset interest rates. We believe that is a fool’s Chartered’s sale of its aviation business.
values has been slower but they are errand,” he says. “We feel good about Standard Chartered announced in
now back to levels seen pre-pandemic the assets we own today, long term January 2023 that it was searching for
on a fleet weighted constant age basis, contractual cash flows and interest strategic options for its global aviation
but values of lease encumbered assets rates being hedged. Inflation in this finance business, which included the
are more difficult to estimate since it industry is real. OEMs are increasing sale of aircraft leasing business, its
depends when the lease was negotiated. prices; LLPs [life limited parts] in the secured aviation lending portfolio
“A significant number of the leases that engines are increasing by ten or 12% and its 10% shareholding in joint
are committed today were either written per year and so we do think residual investment company, SDH Wings
pre-Covid or restructured during values will continue to rise for the International Leasing.
Covid,” says Morris. “If lessors had their foreseeable future. But you need to take At the end of August last year,
time again and knew what they know that holistic approach to understand Standard Chartered announced that it
today, they might have preferred not that discount rates are also higher. had reached an agreement to sell the
to agree to such a long extension of Financing costs for new aircraft are also leasing business to AviLease, the Saudi
that restructured lease because of the more expensive. And so at Castlelake, Arabian new market entrant backed by
opportunity today to place aircraft into we look across the entire capital stack the Public Investment Fund (PIF), the
leases at much higher rents, which will and what we are seeing today, in some Saudi sovereign wealth fund, along with
bring lease encumbered valuations up.” situations, is unlevered asset yields its 10% share of SDH Wings for $3.6bn,
Castlelake’s McConnell recognises the pricing inside the cost of debt financing. while its $900 million aviation secured
complexities with aviation asset values. That doesn’t make a whole lot of sense.” debt portfolio was sold to Apollo and
“Lease rates are a lot higher today than SKY Leasing chief executive Austin PK Airfinance. Both deals closed on
they were over the last few years but that Wiley believes that trading levels in the November 2 for total sale proceeds to
does not mean that asset values should midlife and the secondary market are Standard Chartered of $4.5bn.

On the date of the official closing, JOL/JOLCO loans. The transaction has “We have a committed
Edward O’Byrne, chief executive added significant scale and airline reach
officer of AviLease said that the day to Apollo’s aviation finance businesses. aircraft portfolio of 40
marked an important milestone for the The deal was financed with a $491
company. “With the completion of this million senior secured, non-recourse
aircraft – and have
acquisition, we are strengthening our facility. The facility, which has an 80% delivered 30 to date –
position in the global aircraft leasing loan-to-value ratio (LTV) with an
sector, in line with our ambition to additional advance via a Class B loan, all of which are brand
become a top-10 global lessor by 2030,” includes a drawdown and amortisation new aircraft. Adding the
he said. “Through the expanded scale period and various step-ups in margin
and synergies, we aim to accelerate over time. Mizuho Americas served as maturity of the Standard
our path towards an investment-grade lead arranger and advisor on the PK
Chartered book to
rating. We are pleased to welcome our Airfinance transaction, while Redding
new colleagues to the AviLease team.” Ridge Asset Management served as our portfolio was a
The $3.6bn landmark deal has structuring agent and Milbank served
catapulted AviLease onto the global as lead counsel.
positive exercise since
leasing stage only 16 months after its In June 2023 Macquarie AirFinance it improves yields and
formation. The combined business UK (MAFUL) closed a $2.2 billion
now owns and manages 167 latest acquisition of 52 aircraft from the accelerates the maturity
technology, fuel efficient aircraft leased Kuwaiti lessor Alafco. of the P&L as well as
to 46 airlines worldwide, with market The acquisition was part of
rumours swirling that it remains Macquarie’s plan to decrease its fleet other benefits for the
interested in other leasing portfolio or age, enhance earnings performance,
platform acquisitions. and transition its capital structure to
company in terms of
AviLease has acquired an all- unsecured with the goal of eventually technical skills inherent
narrowbody portfolio that features reaching investment grade ratings.
new technology Boeing 737 Max and This deal was funded with a in managing older
A320neo aircraft as well as classic $1.65bn three-year financing facility aircraft.”
aircraft types. O’Byrne sees the older that supported the acquisition and
vintage of the book as a major positive refinanced two newly-delivered 737 Edward O’Byrne
for AviLease. “We have a committed MAX aircraft. BNP Paribas, Citi, Chief Executive Officer
aircraft portfolio of 40 aircraft – and MUFG, Natixis were lead arrangers of AviLease
have delivered 30 to date – all of which and underwriters, with 11 other banks
are brand new aircraft,” he says. “Adding in syndication. Lead legal advisors were
the maturity of the Standard Chartered Clifford Chance and Vedder Price.
book to our portfolio was a positive In July, it was revealed that Voyager
exercise since it improves yields and Aviation Holdings (VAH) had reached
accelerates the maturity of the P&L as an agreement with Azorra to sell
well as other benefits for the company substantially all of VAH’s assets and for
in terms of technical skills inherent in Azorra to assume and maintain ongoing
managing older aircraft.” employee and business arrangements
AviLease financed the acquisition with VAH’s employees and aircraft
with a $2.1bn bridge financing, arranged lessees. VAH entered Chapter 11 with
by BNP Paribas, Citibank, HSBC and the sale agreement with Azorra in place.
MUFG, which that was syndicated to At the time VAH’s executive
a group of ten banks: Al Ahli Bank of chairman, Hooman Yazhari said that
Kuwait, Abu Dhabi Commercial Bank, the “agreement with Azorra presents
First Abu Dhabi Bank, Mizuho Bank, the best opportunity for our airline
Natixis and Standard Chartered Bank. customers and employees”.
Allen and Overy were the legal advisors, The combined fleet melds a widebody
with KPMG Ireland providing tax and fleet on lease with “prominent”
accounting advice. passenger airlines with a solid fleet of
Apollo Global Management (Apollo) regional jets and A220s.
and PK Airfinance acquired Standard VAH’s client base includes Air
Chartered’s portfolio of secured aviation France, Breeze Airways, Cebu Pacific,
loans, comprising 46 loans backed by 46 ITA, Philippine Airlines, Sichuan
underlying aircraft (across 14 obligors), Airlines, and Turkish Airlines. Azorra
with 76% commercial loan and 24% currently owns and manages a fleet of

83 aircraft on lease to 25 operators in pre-delivery payments already paid. “Scale allows us to have
19 countries around the world, with Approximately 20% of the acquired
total commitments of more than 140 portfolio is on lease to airline clients more of a relationship
aircraft including orders for new Airbus that are also existing clients of DAE
A220-100/300 aircraft and Embraer allowing the company to expand
or a solutions-based
E190/195-E2s. those relationships. discussion with our
Yazhari was replaced at the helm by At the time DAE’s Tarapore said that
Robert Del Genio from FTI Consulting the deal increased the percentage of clients, and also gives
who took over as chief restructuring new technology, fuel efficient aircraft us the opportunity to
officer. VAH was advised by Milbank, in DAE’s owned fleet to approximately
Vedder Price, Greenhill & Co, and 66% from 50%. have a different kind of
FTI Consulting. “This transaction will add certainty
discussion with each
Azorra financing the acquisition of to our growth trajectory,” said Tarapore.
the VAH aircraft with a $300 million “This transaction will also allow us to of our counterparties
limited recourse, six-year term loan, further deepen our existing relationship
underwritten by BNP Paribas and with Boeing and CFM International.
like the OEMs. There
Deutsche Bank, which acted as global Since inception and including this is still potential left for
coordinators and bookrunners, as transaction, DAE has acquired and is
well as mandated lead arrangers committed to acquire approximately the top 10 lessors to
with MUFG. 500 Boeing aircraft.” grow even larger by
John Evans, Azorra’s CEO and At the time, CALC declared that the
founder, described the strategic novation arrangement represented a inorganic methods,
financing as marking a “significant “good opportunity for the Group to
milestone in Azorra’s continued growth adjust its Boeing fleet portfolio so as
but even organically
and diversification as we respond to to provide flexibility to the Group’s the orderbooks are all
market opportunities”, adding that existing operations and contribute to
by expanding Azorra’s portfolio, it is its long-term sustainable development”. stacked in favour of top
“meeting the rising demand seen for CALC added that it would still 10 lessors.”
widebodies as airlines rebuild their “continue to consider from time to
international capacity”. time the acquisition of further aircraft Firoz Tarapore
This was one of the more distressed from Boeing (pursuant to any future Chief Executive Officer of Dubai
transactions that closed during 2023, agreements or otherwise) or other Aerospace Enterprise
where Azorra – backed by Oaktree aircraft manufacturers”.
Capital Management – successfully DAE has made no secret of its
navigated its way through the desire to build scale in a competitive
acquisition and transfer of assets and marketplace. Tarapore believes that
people from VAH amid a complex scale is becoming even more important
Chapter 11 bankruptcy process. given the growing size of the top ten
There were also a number of large leasing companies. “Scale allows us
portfolio sales during 2023. Castlelake to have more of a relationship or a
acquired Wings Capital’s assets, while solutions-based discussion with our
DAE acquired China Aircraft Leasing clients, and also gives us the opportunity
Group’s (CALC) orderbook. to have a different kind of discussion
DAE acquired the rights, interests, with each of our counterparties like
and obligations of a portfolio of 64 the OEMs,” he says. “There is still
Boeing 737 MAX aircraft from a potential left for the top 10 lessors to
wholly-owned subsidiary of CALC, grow even larger by inorganic methods,
which included 737-8, 737-9 and 737- but even organically the orderbooks are
10 variants. Delivery of the aircraft is all stacked in favour of top 10 lessors.
scheduled to occur between 2023 and Inorganic growth is also going to play a
2026. DAE was advised by Milbank and much larger role because there are still
KPMG Ireland. platforms that would benefit by being
On August 14, DAE announced that part of a much larger organisation
the company had agreed to novate where that size advantage can translate
the purchase agreement to DAE of into a better financial return.”
64 Boeing aircraft by transferring its As the world’s largest lessor, AerCap
interest in 12 special purpose vehicles already realises the full benefits from its
for a payment determined by the scale but from its vantage point observes

that opportunities remain for smaller Boeing. Then you also need to operate “If you’re going to go out
lessors to become more competitive in scale to be able to take a significant
and for larger lessors to attain that all- number of deliveries directly from and raise benchmark
important investment grade rating. the manufacturers, but also be able to
“There will always be room for leasing support them in other ways using either
bond issuances of half
specialists in used aircraft, engines sale leasebacks or all financed lease a billion dollars and
or certain types of freighters,” says product or even our engine finance
AerCap’s Kelly. “But those niches are lease product.” above, then you need
becoming more and more specialised, The size of the top five aircraft scale. You can’t do that
and require a higher level of expertise... lessors has grown exponentially over
Like a lot of industries, we are moving the past decade as the industry has if you’re a $2bn to $3bn
toward larger scale businesses.” matured. With AerCap ahead of the
lessor. Scale is also
Larger scale opens the door to pack with an estimated portfolio value
investment grade ratings, which is a of $40bn-plus, the top tier lessors all required to be relevant
game-changer in the world of aircraft control between $10bn to $20bn in
leasing that can considerably cut costs assets. Reaching such a scale by organic
to the two biggest
of funding, enhancing competitiveness methods is difficult, which leads new stakeholders, Airbus
in a very crowded marketplace. SMBC entrants or smaller lessors seeking to
Aviation Capital is one of the largest enhance market share seeking to grow and Boeing. Then you
lessors in the world, owned by two of via acquisitions of larger portfolios or also need to operate in
the largest corporations in Japan, and other platforms.
enjoys a BBB+/A- rating. The company As demonstrated by its recent scale to be able to take
acquired Goshawk in 2022 and has acquisition of Standard Chartered’s
continued to integrate the business leasing business and rumours swirling
a significant number
last year and grow organically. Peter that the Saudi company is targeting of deliveries directly
Barrett, commented: “Being investment another large lessor, AviLease is forging
grade makes a difference; being able to a market share via in organic growth from the manufacturers,
raise funds at competitive rates makes a and is also pursuing that investment but also be able to
difference,” he says. “Twenty-plus years grade rating once it reaches a certain
ago, the barriers to entry were much age and size. Other companies, support them in other
lower in this business and getting to with strong backers, are following a
ways using either
scale has become much harder. That different path.
will continue. In another five or ten “The rating agencies have made is sale leasebacks or all
years, there will be a much smaller clear than to reach investment grade
number of large lessors.” you need the right scale and the right
financed lease product
For ACG’s Tom Baker, scale is much age,” says Griffin’s McKenna. “We have or even our engine
more than the size of the aircraft crossed the four year mark and are
portfolio. “Scale speaks much more looking to reach that goal step by step.” finance lease product.”
to that,” he says. “It speaks to a global McKenna stresses that Griffin did not
Robert Martin
technical and global marketing set out to build specific scale, “we set out
Former Chief Executive Officer
capability, with access to and to make thoughtful investments and the of BOC Aviation
understanding of different markets. team has grown organically, which will
Scale is really the quality of a global continue to evolve over time”.
platform to be able to support that kind S&P’s Snyder says that the rating
of complexity and sophistication.” agency has “always thought of scale as
Investment grade rated lessors are important, even in a low interest rate
all large scale entities relative to the environment, and that hasn’t changed”.
rest of the market, which is essential She also notes that the agency also
for accessing the debt capital markets does not have a specific size that
to raise large amounts of capital and would constitute the right scale for an
for exercising influence with suppliers: investment grade rating: “It’s hard to
“If you’re going to go out and raise say because it could be $6bn but what
benchmark bond issuances of half a if that portfolio is all widebody aircraft?
billion dollars and above, then you need We look at the composition of the fleet
scale,” says Robert Martin. “You can’t and the average age, for example. The
do that if you’re a $2bn to $3bn lessor. portfolio size in terms of dollars is
Scale is also required to be relevant to not what we focus on. We also look at
the two biggest stakeholders, Airbus and the level of unencumbered assets in

the portfolio, which is very important. have been a number of commercial banks “It is striking that we
The whole rating agency community seeking to exit the market, which some
typically requires no more than 30% of say could continue given the constraints keep seeing new equity
[a lessor’s] assets encumbered. Many European banks are operating under in
of the non-investment grade lessors regards to both balance sheet limits and
coming into the sector.
still have a lot of secured debt in their ESG policies. The good news for the sector We see sovereign
capital structures.” is any lost capital is being replaced rapidly
A good example of a company by new entrants to the space. wealth funds, private
reassessing the mix of portfolio to secure “It is striking that we keep seeing asset managers, all
an investment grade rating is Macquarie’s new equity coming into the sector,” says
acquisition of Alafco. MUFG’s Trauchessec. “We see sovereign setting up new entrant
Another determining factor for lessors wealth funds, private asset managers,
lessors. This means that
chasing investment grade is the ownership all setting up new entrant lessors. This
of the company. Investment grade lessors means that the market will continue to the market will continue
today are characterised by either a strong be fragmented and there will be some
parent in the case of SMBC Aviation consolidation but more in specific
to be fragmented and
Capital and ACG, or they are public like situations where lessors have taken on there will be some
AerCap and Air Lease Corporation. too much leverage or haven’t been able to
In the higher-for-longer interest rate grow enough.” consolidation but more
environment, access to cheaper funds Aircraft leasing demonstrated its in specific situations
will be essential for leasing companies resilience throughout the pandemic and
going forward as they refinance existing even when many assets were trapped in where lessors have
debts or seek to raise new capital to Russian following sanctions imposed
fund growth. after the invasion of Ukraine. Although
taken on too much
Snyder observes that given the amount the write-downs booked in 2022 for the leverage or haven’t
of M&A activity in the leasing sector trapped Russian aircraft did little to deter
over the past few years, the only targets investors at the time, the fact that many been able to grow
remaining are more medium-sized leasing companies are now beginning enough. ”
portfolios that would not require a large- to receive payouts from their insurance
scale investment unless, she says, some companies is another demonstration of Olivier Trauchessec
more bank portfolios come up for sale. the long-term resilience of the sector. Head of Global Aviation of MUFG Bank
There are a number of bank portfolios up Aircraft leasing is a long-term business
for sale – Helaba and KFW are seeking and one that is constantly looking many
an exit from the space – which could years ahead to be able to predict demand
be a tempting acquisition for smaller for airplanes and to ensure the industry
lessors if they can access funding at the will remain sustainable in the years to
right price. come. The emphasis on sustainability,
Mizuho’s Srinivasan agrees that the but also more about the social and
majority of large lessor M&A activity has governance aspects of the sector, has
already happened, with new start-ups continued throughout the past year as
now competing for scale. “The question lessors increasingly realise the need to
is whether they can get to a point where embrace ESG concepts to future-proof
they are sustainable,” he says. “Many their businesses.
have capital behind them to allow them Although airlines are the prime source
to grow and there will be some further of carbon emissions, sustainability and
consolidation because of the interest broader ESG challenges remain front and
rate environment. There is going to be a centre issues for aircraft lessors. Many of
squeeze, and some of the equity backers the larger lessors are already committed
will exit the market at some point.” He to investing in the most fuel-efficient
adds that the geopolitical situation could new technology aircraft and engines, but
cause “more seismic acquisitions” but many are also investing in additional
most likely that consolidation will remain programmes and products to further
among the smaller players. aviation’s decarbonisation journey. “The
Investor appetite has remained strong lessor community has done a nice job
for the leasing sector but the type of rallying recourses around ESG initiatives
investors has ebbed and flowed with the and have internalised a commitment
macroeconomic environment. Over the to driving changes,” observes ACG’s
past year, as previously mentioned, there Tom Baker.

The framework, which has been

established initially for LCI’s joint
venture leasing operation with SMFL,
has been developed in accordance with
the internationally agreed Social Loan
Principles developed in 2023 by the Loan
Syndications and Trading Association
(LSTA). The LTSA Social Loan Principles
require any funds to be used for eligible
and verified Social Projects, which
in LCI’s case will include search and
rescue (SAR) and emergency medical
services (EMS).
LCI and SMFL, led by Alan O’Rourke,
chief financial officer of LCI, have
been working on this framework since
the beginning of the 2023 and have
liaised closely with the LTSA as well as
SMBC Aviation Capital has put a that has a dedicated funding level for the Japan Credit Rating Agency. “We
lot of work and thought into its ESG sustainability, including providing SAF wanted to design the framework to be
programme, initiating investments in for its aircraft deliveries. as internationally focused as possible,
carbon credits, SAF and work around Willis Lease Finance has gone one which is why we based it on the LTSA
improving diversity and inclusion in step further and directly invested in a Social Loan Principles, but given our
the industry. “We are very focused on power-to-liquid (PtL) SAF production relationship with Japanese investors via
all three letters of ESG [environment, facility in the UK, which forms part the SMFL joint venture, we also worked
social and governance],” says Barrett. of the company’s broader strategy to very closely with the Japan Credit
“We create financings, structures contribute towards the decarbonisation Rating Agency to explain what roles
and incentives that are all focused on of aviation. Chief executive Austin the assets play and how they fit into the
ESG, be it the carbon intensity of our Willis shares the thinking behind the social principles.”
fleet or around gender diversity in investment: “We believe PtL is more LCI and SMFL’s Social Loan
our business.” scalable, and by investing in it, we can Framework has received the highest
SMBC Aviation Capital – and the help deliver meaningful volumes of SAF rating of “Social 1(F)” from the Japan
entire aircraft leasing community – in the years to come.” Credit Rating Agency. Social finance
has been a prolific supporter for the One of the determining factors for products specifically raise funds for
adoption of sustainable aviation fuel Willis Lease’s investment in the plant projects or assets that are utilised for
(SAF). “SAF is the pathway that can was the funding provided by the UK positive social outcomes. Helicopters
make the most difference as an industry,” government, which Willis says made it financed by LCI and SMFL will be
says Barrett. However, as explained clear that the UK “wants to be a leader exclusively used for search and rescue
in detail over recent years, SAF in the production of SAF and PtL” and and emergency medical services,
production is constrained and nowhere which “shares our vision that it’s going providing affordable essential services.
near the levels the airline industry to be a very important component to the The ESG focus will continue to be
needs on an annual basis, which also delivery of SAF in the future”. foremost within all aviation sectors as
makes SAF prohibitively expensive for Switching to the S in ESG. Helicopter the industry is pressured to delivered
most airlines. leasing company, LCI has created the on its targets to decarbonise in line with
Many lessors are investing in joint first social loan framework for the net zero agreements. “ESG policies and
venture agreements to invest in SAF aviation industry. LCI is a signatory of strategies are critical for lessors,” says
production. Aircraft Leasing Ireland’s ALI’s Sustainability Charter and has a NAC’s Liu. “Lessors need to ensure they
(ALI) Aircraft Leasing Ireland (ALI) commitment to driving forward and have the most fuel-efficient fleets and also
announced the funding of a new four- achieving ESG related goals. LCI and have a long-term understanding of the
year research project on SAF production Sumitomo Mitsui Finance and Leasing developing technological shifts from a
during the association’s second Global (SMFL) have developed the world’s first residual value standpoint. Because we’re
Aviation Sustainability Day Conference social loan framework for helicopter in the residual management business, the
at the Convention Centre Dublin in leasing, finance and operations. fleet and the technology shifts directly to
November. The study was created LCI with SMFL have their own ESG the lessors. We also need to understand
to investigate potential avenues for programmes that reflects SMFL’s the whole SAF situation, because we
manufacturing SAF in Ireland. long term commitment to the UN’s have to be very realistic about the issues
Air Lease Corporation set up a joint Sustainable Development Goals as part with supply availability, refinery capacity
venture agreement with Airbus in 2021 of the company policy ‘The SMFL Way’. and cost.”

Chapter Four
OEM and Fleet Focus

T
he title of this report, Demand FIG. 17: OEM ORDERS & DELIVERIES 2023
and Disruption, is a fitting
description for the current Aircraft Type Orders Deliveries
state of aircraft manufacturing. As Airbus A220 Family 141 68
evidenced in the opening chapter of
Airbus A320 Family 1,675 571
this publication, air travel demand
has returned, and more rapidly than Airbus A330 Family -3 32
predicted, with airlines clamouring Airbus A350 Family 281 64
for lift as production issues translate
AIRBUS TOTAL 2,094 735
into constant delivery delays. Airlines
have also embarked on refleeting
programmes to phase out older aircraft
Boeing 737 Family 987 396
and upgrade to new technology, more
fuel efficient equipment in order to Boeing 767 Family 30 32
meet their sustainability targets, which Boeing 787 Family 313 73
has enhanced the aircraft order cycle
Boeing 777 Family 126 26
over the past year.
Airbus ended 2023 with orders BOEING TOTAL 1,456 527
for 735 commercial aircraft – an
11% increase over 2022. Airbus chief that is increasingly impacting trade “We have never sold as
executive Guillaume Faury called routes exacerbating an already
2023 a “landmark year” for Airbus’ fraught situation. many A320s or A350s
Commercial Aircraft business, with Paul Meijers, executive vice president
sales and deliveries at the “upper end - commercial transactions at Airbus,
in any given year, not
of our target”. Faury credited a number says that after a “very challenging to mention welcoming
of factors for the increase including period” in 2022 with suppliers saw
“increased flexibility and capability of some stabilising in 2023 that reflected seven new customers
our global industrial system, as well in Airbus meeting its delivery objectives for the A350-1000.
as the strong demand from airlines last year with 735 aircraft. “Airbus
to refresh their fleets with our most is monitoring its supplier base more Travel is back and there
modern and fuel-efficient aircraft”. deeply to anticipate problems but a
is serious momentum! ”
Faury further noted that the European number of concerns persists, including
manufacturer had anticipated aviation with BFE suppliers, shortages of spare Guillaume Faury
to recover in the 2023-2025 timeframe engines and logistical issues,” he says. Chief Executive of Airbus
but 2023 showed the return in demand A proliferation of entry-into-service
for both single-aisle and widebody (EIS) issues with new equipment,
return “much sooner than expected, predominately engines but also airframe
and with vigour”. He added: “We have manufacturing issues, especially with
never sold as many A320s or A350s the 737 MAX, has plagued the industry
in any given year, not to mention in recent years.
welcoming seven new customers for the Airframe manufacturer Spirit
A350-1000. Travel is back and there is AeroSystems – which constructs
serious momentum!” fuselages for Boeing MAX aircraft and
Despite the dearth of some 3,000 the Airbus A220 – has dealt with a
aircraft that were not produced during number of so-called “quality escapes”
the pandemic period, the OEMs over the past year that have resulted in
are still struggling to deliver their a number of manufacturing problems.
backlog of airframes and engines, In April 2023, Boeing identified a
plagued by continuing supply chain manufacturing issue with the MAX’s
and manufacturing issues as the vertical stabiliser fittings caused by a
industry struggles to restart after the subcontractor to Spirit AeroSystems.
pandemic. Some two years following The repairs were quickly addressed but
the resumption of air travel, the caused delays to deliveries during the
manufacturing sector has yet to return summer season. Then in August 2023,
to full force due to ongoing shortages of Boeing disclosed a manufacturing
skilled labour, resources, raw materials defect in its 737 MAX aft pressure
and inflationary costs coupled with bulkhead caused by incorrectly drilled
a tense geopolitical environment holes by supplier Spirit AeroSystems.

restart after the pandemic. Some two years following the resumption of air travel, the
manufacturing sector has yet to return to full force due to ongoing shortages of skilled labour,
resources, raw materials and inflationary costs coupled with a tense geopolitical environment
that is increasingly
AIRLINE ECONOMICS impacting trade routes exacerbating an already fraught situation.
RESEARCH
Fig.18 Passenger Aircraft Deliveries
Source: Cirium
Source: Cirium
FIG.18 PASSENGER AIRCRAFT DELIVERIES
Spirit AeroSystems confirmed that its discovered an additional undelivered “Safety is our top priority
Fig.
737 19: Passenger
fuselages, shipped fromAircraft Retirements
its Wichita aircraft 2023
with a nut that was not
facility, had been affected by a problem properly tightened. and we deeply regret the
involving elongated fastener holes on On an earnings call on November 1,
impact this event has
the aft pressure bulkhead but noted that 2023, Patrick Shanahan, president and
only certain units were affected. Spirit chief executive of Spirit AeroSystems, had on our customers
AeroSystems inspected its inventory said that his mindset was that the
of 60 aircraft relatively quickly, despite company can “eliminate all defects”
and their passengers.
having to extend inspections to a greater and that it has a “very robust quality We agree with and
section of aircraft. Boeing had 250 management system” but it requires
completed aircraft to inspect that was time and attention and that there was fully support the FAA’s
targeted for completion by the end of “no silver bullet or different procedure” decision to require
November. The company implemented that it could implement since it required
changes to its manufacturing process the focus of the entire organisation on immediate inspections
and resumed delivery of MAX 8 fuselage manufacturing excellence.
units to Boeing by the end of October. Boeing and Spirit AeroSystems woes
of 737-9 airplanes with
Boeing’s 787 was also hit by production continued into the new year. On January the same configuration
delays when a flaw was discovered in 5, 2024, a suspected manufacturing
June 2023 to its fitting for the aircraft’s issue may also have led to the mid-air as the affected airplane.
horizontal stabiliser. depressurisation of an Alaska Airlines In addition, a Boeing
At the end of 2023, the Federal 737 MAX 9 aircraft shortly after take-
Aviation Administration (FAA) disclosed off when a door plug blew out in mid- technical team is
it was closely monitoring possible loose air. Flight 1282, carrying 171 passengers
supporting the NTSB’s
bolts in the 737 MAX rudder control and six crew, was forced to make an
system. Boeing had issued a multi- emergency landing and returned safety
Source: Cirium investigation into last
operator message urging operators of to Portland International Airport with
“newer single-aisle aircraft” to “inspect no injuries.
night’s event. We will
specific tie rods that control rudder The FAA took the decision to ground remain in close contact
movement for possible loose hardware”. the aircraft type following the incident
Boeing recommended the action after and issued an emergency airworthiness with our regulator and
an international operator discovered a directive (EAD) requiring all MAX customers.”
bolt with a missing nut while performing 9 operators to inspect aircraft before
routine maintenance on a mechanism in further flight. Data from Cirium shows Boeing
the rudder-control linkage. The company there are 215 737MAX 9s in service. As

Source: Cirium AIRLINE ECONOMICS RESEARCH
Fig. 19: Passenger Aircraft Retirements 2023
Source: Cirium
FIG. 19: PASSENGER AIRCRAFT RETIREMENTS 2023

Source: Cirium
well as 65 aircraft in service with Alaska, Boeing president and CEO David quality oversight, with examination
other major operators are United with Calhoun defined the issues as of options to move these functions
79 of the aircraft in service, and Copa concerning a “discrete set of airplanes under independent third-party
with 29 in service. with a very discrete plug,” highlighting entities, the FAA will also implement
Boeing said in a statement: “Safety that despite having a “proven design,” a increased monitoring of 737-9 MAX
is our top priority and we deeply “quality escape occurred”. in-service events.
regret the impact this event has had The FAA has announced what it The investigation is ongoing at the
on our customers and their passengers. terms ‘new and significant actions to time of publication but the MAX 9
We agree with and fully support the immediately increase its oversight of incident seems like a culmination
FAA’s decision to require immediate Boeing production and manufacturing’. of manufacturing issues for the
inspections of 737-9 airplanes with This comes a day after the FAA formally Boeing MAX product. Boeing has
the same configuration as the affected notified the aircraft manufacturer been working hard over the past few
airplane. In addition, a Boeing of an investigation into its ‘alleged years with its suppliers to smooth out
technical team is supporting the NTSB’s noncompliance’ regarding 737-9 MAX supply chain issues and shore up its
investigation into last night’s event. We component issues. production process. There were signs
will remain in close contact with our As part of these actions, the FAA will that the manufacturer was on a better
regulator and customers.” conduct an independent third-party trajectory into 2024 before the Alaska
Alaska Air immediately grounded audit of the 737-9 MAX production Airlines incident, which will only serve
its MAX 9 fleet to begin inspections line and its suppliers ‘to evaluate to delay production further. Boeing had
and later reported its engineers had Boeing’s compliance with its approved intended to move closer to its goal of
discovered “loose hardware”, while quality procedures’. The results of this producing 50 aircraft each month by
United Airlines also referred to audit analysis will determine whether 2025 to 2026 but that target may have
“installation issues relating to the door additional audits are necessary. moved once more as the team focus on
plug” upon inspection of its aircraft. “It is time to re-examine the manufacturing quality and safety.
Initial National Transportation Safety delegation of authority and assess Airbus has not had such severe
Board (NTSB) investigations indicated any associated safety risks,” said FAA manufacturing issues but it too has
that “all 12 stops [on the door plug] administrator Mike Whitaker, adding been impacted by supply chain delays
became disengaged, allowing it to blow that “the grounding of the 737-9 and and certain of its A320neo aircraft have
out of the fuselage”. It is also unclear the multiple production-related issues been grounded due to the reliability
whether the “four bolts that restrain it identified in recent years require issues with the Pratt & Whitney GTF
from its vertical movement” were fitted [the FAA] to look at every option to engine. Problems with the engine have
there, something a closer inspection of reduce risk”. been rumbling along for several years,
the door plug in the NTSB’s Washington As well as assessing safety risks with a steady uptick in AOGs in 2022,
laboratory will seek to ascertain. around delegated authority and but the scale of the problem was revealed

737 MAX Production and Delivery Rates

Produced Delivered On Ground
500
450
400
350
Number of Aircraft
300
250
200 183
150
100
50
0
Sep-17
Mar-23
Mar-20
Mar-18
May-18
Sep-18
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-19
Mar-19
May-19
Jul-19
Sep-19
Nov-19
Jan-17
Mar-17
May-17
Jul-17
Nov-17
May-21
Jan-21
Mar-21
Jul-21
Sep-21
Nov-21
May-22
Jan-22
Mar-22
Jul-22
Sep-22
Nov-22
May-23
Jan-23
Jul-23
Sep-23
Nov-23
May-20
Jan-20
Jul-20
Sep-20
Nov-20
Jan-24
Jan-18
Jul-18
Nov-18
Source: AviationValues January 2024
Source: AviationValues
FIG. 20: 737 MAX PRODUCTION AND DELIVERY RATES

The investigation is ongoing at the time of publication but the MAX 9 incident seems like a
in culmination
September 2023 of manufacturing
during an investorissues for theofBoeing
an interval betweenMAX product. Boeing
approximately has been
The impact working
of the fleet inspection and
call from P&W parent company RTX, 2,800 and 3,800 cycles, and part
hard over the past few years with its suppliers to smooth out supply chain issues and shore life management plan will be significant
up for
which confirmed that 600 to 700 limits of between approximately 5,000 GTF operators, especially those with
its production process. There were signs that the manufacturer was on a better trajectory into
incremental geared turbofan engines and 7,000 cycles, for HPT discs and larger fleets.
2024
would havebefore the Alaska
to be removed from Airlines
aircraft incident,
HPC discs.which will only serve to delay Theproduction
majority offurther.
the GTF PW1100
forBoeing
qualityhad intended
checks betweento move
2023closer Thetogross
its goal of producing
financial impact of50 theaircraft
engineseach havemonth by 2025for
been removed to shop
2026 but that target may have moved once more as the team focus on manufacturing quality 2023
through to 2026. fleet inspection and management plan, visits in the fourth quarter of
The engines are being inspected which includes customer support as well and into early 2024. The workscope
and safety.
due to a manufacturing issue with the as the accelerated workscope, is forecast for these shop visits is heavy in nature
powder metal coating on high pressure to be $6bn to $7bn, with a net operating since they incorporate the inspection
Airbus
turbine has discs
(HPT) not had such severe manufacturing
and high-pressure profit impact of $3bn issuesto but it too
$3.5bn. The hasandbeen impacted
replacement by compressor
of the supply and
chain delays
compressor (HPC)and discs.certain of its A320neo
A contaminant cost to Prattaircraft have been
& Whitney grounded
for its 51% turbine due discs
to the reliability
on the engines. issues
waswith the Pratt & Whitney GTF engine. Problems with the engine have been rumbling along
discovered in the powdered net share of the PW1100 programme President and chief for officer
operating
metal used on certain components is a pre-tax operating profit charge
several years, with a steady uptick in AOGs in 2022, but the scale of the problem was revealed of at RTX, Christopher Calio, confirmed
in 2020 that could result in cracks approximately $3bn. on an earnings call at the end of October
in September 2023 during an investor call from P&W parent company RTX, which confirmed
being formed during manufacturing. These figures are based on estimates 2023 that the plan outlined in September
that 600 to 700 incremental geared turbofan engines
A subsequent investigation into of potential compensation and other was proceeding. would have to be removed from aircraft
He also noted that
a for quality checks
compressor disc failure between 2023consideration
in 2022 through to 2026. for customer fleet the first engine removals had occurred
and further ongoing testing led to disruption and the one-time Estimate- with several proceeding to project
larger
The cracks
engines being
arediscovered.
being inspectedRTX at-Completion
due to a manufacturing(EAC) impact issue withof visit
the workscopes
powder metal that coating
had an average
on
announced its intention in July 2023 estimated incremental costs to long- turnaround time of 35 days, which Calio
high pressure turbine (HPT) discs and high-pressure compressor (HPC) discs. A contaminant
to accelerate approximately 1,200 term maintenance contracts as a described as “encouraging” although this
was discovered
PW1100 shop visits to in the powdered
inspect metal The
the parts. result. usedincremental
on certaincosts components
to the is in 2020
only thatstep
a shorter could result
in the in shop
overall
Incracks being announcement,
the September formed duringRTX manufacturing. A subsequent
company’s long-term investigation
maintenance into a compressor
visit required for each engine. disc
failure in 2022 and further ongoing testing led to larger cracks being discovered. RTX
announced incremental checks for 600 contracts include the cost of additional RTX estimated that each workscope
to announced
700 engines and confirmed that any inspections, replacement of parts
its intention in July 2023 to accelerate approximately 1,200 PW1100 shop and will take between 250 visits
and 300to days
affected discs would be replaced with other related impacts. from when the engines are removed from
inspect the parts. In the September
new discs with full certified life thus
announcement, RTX announced incremental checks for
Pratt & Whitney has confirmed that the wing until they are returned to the
600 to 700 engines and conermed
eliminating the need for repetitive the majority that any ofaffected discs costs
the estimated would of beoperator
replaced with new As
(wing-to-wing). discs
a result, RTX
with full and
inspections certieed
a longer lifetime
thus
on eliminating the need
wing. the fleet for repetitive
inspection inspections
and management andan
forecasts a longer
average time
of 350on aircraft on
wing.
Pratt & Whitney’s fleet management plan (some 80%) would be on the ground rate for the GTF-powered A320
plan for the affected PW1100 GTF customer support requirements, with fleet from 2024 to 2026 – with a peak of
engines requires a combination of the remainder on the workscope mainly 600-650 aircraft on ground during the
Pratt & Whitney’s fleet management plan for the affected PW1100 GTF engines requires a
first half of 2024.
a repetitive inspection protocol, at on materials and labour costs.
combination of a repetitive inspection protocol, at an interval of between approximately 2,800
and 3,800 cycles, and part life limits of between approximately 5,000 and 7,000 cycles, for HPT
50 discs and HPC
Airline Economics discs.
Aviation Leaders Report 2024 www.airlineeconomics.com
737NG and 737 MAX Monthly Production Since 2014
737 MAX 737NG
70
60
50
Number of Aircraft
40
30
20
10
0
Oct 14
Oct 18
Oct 16
Oct 19
Jan 17
Jul 17
Oct 17
Apr 21
Jan 21
Jul 21
Apr 22
Jan 22
Jul 22
Apr 15
Apr 23
Jan 15
Jul 15
Oct 15
Jan 23
Jul 23
Oct 23
Apr 20
Apr 14
Jan 20
Jul 20
Oct 20
Jan 14
Jul 14
Jan 24
Apr 18
Jan 18
Jul 18
Apr 16
Apr 19
Jan 16
Jul 16
Jan 19
Jul 19
Apr 17
Oct 21
Oct 22
FIG. 21: 737NG AND 737 MAX MONTHLY PRODUCTION SINCE 2014
The accelerated removals and 737 MAX Backlog

incremental shop visits will result in MAX 7 MAX 8 MAX 9 MAX 10 MAX TBD
higher aircraft on ground as well as add 7%

to an already strained MRO capacity.
Pratt & Whitney has also completed 19%
the analysis of the impact of powder

metal on other engine models within its
fleet. Calio further confirmed that P&W
would institute a fleet management plan
for the PW1500 and PW1900 engines
that power the A220 and Embraer E2
aircraft that would “largely fit inside
the shop visit plans that are already in
place for these fleets”. Part of this please
23%
includes shortening the expected life 48%
of certain parts for the PW1500 and

PW1900 engines, which will cause
“some incremental AOGs” of Airbus
A220s and Embraer E2 aircraft “in the
3%
first half of 2024”.
RTX has had a fleet management
plan in place for the V2500 since 2021 Source: AviationValues
which Calio said would be augmented FIG. 22: 737 MAX BACKLOG
by accelerating certain inspections
but says it would have “little impact increased costs and a shortage of parts. engine leasing sector is divided into
operationally or financially”. The GTF inspection process will long-term spare engine leases – around
A key sticking point in RTX’s fleet include a heavy workscope replacing 10-12 year leases – or shorter term lease
management plans for the GTF life limited parts, which extends the used to cover short-term requirements
engines is maintenance capacity. Post- shop time. P&W is predicting between such as MRO shop visits. Currently,
pandemic the MRO sector has already 250 and 300 day turnaround time per we’re seeing a significant shift in demand
been stretched to capacity as demand engine but there are some that put a patterns due to the labour shortage
picks up, while the MRO shops are question mark around that estimate. in the MRO sector and a scarcity of
experiencing the same challenges as the Aircraft and engine lessors are parts, which has led to extended shop
rest of the industry with staff shortages, witnessing the impact first had. The visit durations. “Previously, a full
Assessing the impact of the GTF issue

Gary Crichlow, Head of Commerical Analysts at Aviation Values,
comments on the impact of the GTF issues on A320-family operators
The issues of durability, and hence Integrated Bladed Rotor 7, and 8, Some recent market lease rate
operational reliability, of new as well as the Aft Hub indicators include:
technology engines have been well • In December 2023 the FAA
publicised and is thought to affect proposed a requirement for • 2004 build (20 year old) A320-
close to the entire fleet of aircraft accelerated replacement of the 200 with an extension lease
they power. above components, plus: rental of USD 120k, an increase
The table to the right presents • High Pressure Turbine Stage of c.10% in 12 months.
a snapshot of the A320neo fleet’s 1 air seal, Stage 1 & 2 blade • 2009 (15 year old) build with
status, by operator, as at January retaining plates and Stage 2 a lease rental of USD 170k per
15, 2024. The data is sourced from rear seal. calendar month, an increase of
AviationValues’ Activity module, c.22% in 12 months.
which uses a minute by minute Ultimately, it’s a durability • 2014 (10 year old) build lease
global feed of Automatic Dependent problem: Life Limited Part (LLP) rental of USD 230k per calendar
Surveillance Broadcast (ADS-B) limits have been reduced, and our month, an increase of c.25% in 12
signals to determine whether understanding is that this procedure months.
each aircraft is in active service, is here for the foreseeable future. • Market Values for A320ceo
temporarily parked or in longer The ramifications are significant, aircraft have also increased in the
term storage. with reports of hundreds of engines last 12 months:
There are any number of reasons being inducted for inspection • 20 year old fixed age A320-200
that an aircraft can be withdrawn programme shop visits through at Market Values have increased
from service: for example, Go least 2026. 6.8% in the 12 months to 15
First’s 100% storage rate is clearly CFM have also had issues with the January 2024.
due to that carrier’s collapse. LEAP-1A engine although 2023 has • 10 year old fixed age A320-200
However, the company noted as seen several announcements that Market Values have increased
a significant proximate cause the will rectify issues such as Fuel Nozzle 4.6% in the 12 months to 30
engine reliability and availability coking, and HPT Blade and Nozzle October 2023.
of MRO support in India for its durability in harsher environments. • 5 year old fixed age A320-200
Pratt & Whitney powered fleet. It is thought that enhancements will Market Values have increased
It’s worth noting that the issue of be present in the fleet during 2024. 3.5% in the 12 months to 30
reliability had been contentious Despite these issues, the strength October 2023.
between the two companies of the underlying demand has meant
from 2017 due to early problems that market values for A320neos Given the timeframe over which
with the fan blades, oil seals and have continued to increase. On a new technology engine issues,
combustor lining. fixed age basis, Market Values have particularly for Pratt & Whitney,
Pratt & Whitney’s Geared increased by between 1.8% and 3.5% are anticipated to be resolved, the
Turbofan family has endured the depending on age over the past 12 expectation is that relatively high
most public scrutiny of the new months. Transaction activity for storage rates for the A320neo will
technology engine models. Further new technology engine aircraft on persist for some time yet. Whether
details can be obtained from FAA/ the second hand market continues, this leads to a moderation in lease
EASA Airworthiness Directives, but notably A320neo family sale and rates and acquisition costs remains
the most recent Pratt & Whitney leasebacks by Lufthansa Group and to be seen, as demand appears to
PW1100G contaminated metal Spirit Airlines in the last month. yet show no sign of abating. The
powder issues with Life Limited The impact has been even more clear beneficiary, both in terms of
Parts relate to: pronounced in aircraft powered observed lease rates and values,
by classic technology engines: is aircraft powered by classic
• High Pressure Turbine Stage AviationValues has tracked technology engines, and this
1 & 2 Hubs significant upward pressure on appears to be the norm for the
• High Pressure Compressor lease rentals for the A320ceo. foreseeable future.

FIG. 23: A320-FAMILY OPERATORS (SORTED BY LARGEST PW1100 ENGINE OWNERS)

Active Parked Stored Total Percentage of
Operator Installed Current fleet
LEAP-1A PW1100G LEAP-1A PW1100G LEAP-1A PW1100G Engine Fleet Stored or Parked
IndiGo Airlines (India) 278 176 4 98 556 18%
Spirit Airlines 160 2 20 182 12%
Volaris 108 2 32 142 24%
Wizz Air Malta 100 18 118 15%
Sichuan Airlines 100 2 6 108 7%
Delta Air Lines 96 96 0%
Air China 64 88 12 164 7%
VivaAerobus 82 2 12 96 15%
Lufthansa 76 2 18 96 21%
Wizz Air Hungary 62 6 4 72 14%
Turkish Airlines 60 24 84 29%
Juneyao Air 2 58 60 0%
Shenzhen Airlines 2 56 2 4 64 9%
jetBlue Airways 52 4 4 60 13%
Frontier Airlines 164 50 214 0%
Cebu Pacific Air 50 2 6 58 14%
China Southern Airlines 168 48 2 218 1%
LATAM Airlines Brasil 48 2 50 4%
VietJet Air 48 48 0%
Aegean Airlines 2 46 8 56 14%
Qingdao Airlines 44 2 46 4%
All Nippon Airways 42 8 16 66 36%
Vueling Airlines 40 4 14 58 31%
Air Astana 40 40 0%
Vietnam Airlines 38 2 40 5%
JetSMART 36 4 40 10%
ITA Airways 32 32 0%
Hawaiian Airlines 30 6 36 17%
Scoot 30 30 0%
China Express Airlines 28 2 30 7%
Air New Zealand 26 8 34 24%
Wizz Air UK 26 2 28 7%
Anadolujet 24 22 46 48%
Air Transat 24 6 30 20%
Tianjin Airlines 4 24 28 0%
China Airlines 20 20 0%
Korean Air 18 18 0%
HK Express 8 16 4 28 14%
Swiss International Airlines 14 2 4 20 30%
Air Macau 12 2 2 16 25%
FlyArystan 12 4 16 25%
Tigerair Taiwan 12 12 0%
Middle East Airlines 10 8 18 44%
Philippine Airlines 10 6 16 38%
LATAM Airlines Chile 10 2 12 17%
West Air China 10 2 12 17%
Wizz Air Abu Dhabi 10 2 12 17%
Iberia Express 14 8 2 24 8%
Lufthansa CityLine 8 8 0%
United Airlines 8 8 0%
Austrian Airlines 6 4 10 40%
Volaris Costa Rica 6 6 0%
Volaris El Salvador 6 6 0%
Azerbaijan Airlines 4 2 6 33%
HiSky Europe 4 4 0%
Marabu Airlines 4 4 0%
Nordica 4 4 0%
Pegasus Airlines 170 2 2 174 1%
Gulf Air 34 2 36 0%
EgyptAir 28 2 30 0%
Jetstar Airways 20 2 22 0%
Tunisair 8 2 10 0%
Aircalin 2 2 4 0%
JetSMART Peru 2 2 0%

refurbishment might take between industry will need to “work harder “Previously, a full
90 to 120 days, but now we’re looking and faster, smarter to get this done
at more than 180 days,” says Bobby quickly because the MRO capacity is refurbishment might
Janagan, managing director of Rolls- pretty tight”.
Royce Partners Finance (RRPF). RTX has promised to replace as many
take between 90 to 120
“This change has naturally increased HPT and HPC discs as possible with full days, but now we’re
the demand for short-term engine life discs during shop visits to maximise
leases, with customers now seeking time on wing. There have been doubts looking at more than
spare engines for longer durations to around whether the company can 180 days. This change
accommodate these extended MRO produce the increase quantities of discs
turnaround times. The MRO shops in a shortened timeframe but Calio has naturally increased
are filled with engines awaiting parts, said in October that the company was
the demand for short-
effectively blocking capacity. The MRO accelerating its baseline forecast for run
and supply chain are diligently working rate capacity disc production. term engine leases,
to optimise capacity and source parts RTX chief executive Gregory Hayes
as quickly as possible, and increasingly said in October that he believes the
with customers now
target used parts, yet the demand for company has its “arms around the seeking spare engines
parts continues to outpace supply.” operational and financial impacts
Greg Conlon, chief executive of High of the powdered metal issue” and is for longer durations
Ridge Aviation, said that finding engine now focused on executing those fleet to accommodate
MRO slot availability was difficult management plans.
and taking much longer to complete. Regarding the recent challenges with these extended MRO
“Typically pre-Covid, it took 45 days new equipment, RRPF’s Janagan notes:
to get any engine through a shop visit “Issues at Entry into Service (EIS)
turnaround times.”
prior to the GTF issues. Now we are with new equipment are somewhat Bobby Janagan
getting quotes from 210 to 270 days to anticipated in our industry,” he says. Chief Executive Officer of Rolls-Royce
shop an engine.” “However, the magnitude of the GTF Partners Finance
RTX said in October that it has issue is really unfortunate for our airline
made progress with increasing MRO customers. That said, Pratt & Whitney
capacity by accelerating investments has identified a solution and is working
in its GTF network, with capacity in close collaboration with customers
added to Singapore facility and Iberia to rectify the situation. To Pratt’s
Maintenance joining the aftermarket credit, they have been very cooperative,
network at the end of 2023. The providing essential information to
network at full force will have 16 sites all key stakeholders. However, the
around the world, with plans for a plan to rectify the situation, while
further three shops to come online necessary, will inevitably lead to further
by 2025. P&W says it will be able to supply constraints. As a result, we’re
conduct more than 2,000 annual shop seeing strong demand for previous
visits in 2025 – a fivefold increase generation engines and an extension in
over 2019. the useful lives of older engines as the
MRO capacity is at a premium market adapts.”
but industry experts are agreed that RRPF’s Janagan expects the OEMs
the lack of parts and constraints and MRO shops to work through
in parts production is a significant the parts shortage by late 2024 and
variable in P&W’s published fleet into 2025 as the manufacturing
management plan. sector resolves shortages of resources
“Parts are a big problem for Pratt,” and supply.
says one expert. “Those parts cannot be
repaired so need to be produced. Pratt GTF CUSTOMERS RESPOND
will need to double the production of Spirit Airlines is the largest operator of
its discs and they are already behind in GTF-powered A320neo-family aircraft,
ramping up after the pandemic.” with the highest number of engines
Not every part in the affected engines produced during that affected period
will be rejected – maybe one part for between 2015 and 2021. Chief executive
every ten inspections, says one lessor, Ted Christie updated investors on how
who adds that to put in place the extra the issue was impacting the airline on
production and MRO capacity, the an third quarter earnings call at the end

CFM56 engines “bogus parts” investigation

The importance of engines parts
was thrown into sharp relief this
summer when it was revealed
than a parts supplier had been
providing engine parts with
falsified certification documents for
CFM56 engines.
On July 28, all CFM56 MRO
providers received a notice from
CFM International informing them
about certain falsified documents
had been identified for certain
CFM56 engine component parts.
CFM noted that it had been
contacted by an MRO provider
regarding the authenticity of an
EASA Form 1 document allegedly
issued by Safran Aircraft Engines
for a new CFM56 part. The MRO
provider had received the document
from AOG Technics Ltd. Following
an immediate investigation, CFM
confirmed that the EASA Form 1 in
question “was not issued by Safran
Aircraft Engines”.
The letter shares that further the world’s best-selling passenger Several weeks later the news was
EASA Form 1 documents provided aircraft engine (the CF56) and most- picked up by the mainstream press
to the MRO provider covering used cargo aircraft engine (the CF6) and the criminal investigation into
multiple CFM part numbers offer for since 2015. The parts were mostly AOG Technics reached a new high
sale were found to have “significant sold to overseas companies that point in December 2023 when
discrepancies” including EASA install airline parts, as well as some the UK’s Serious Fraud Office
Form 1 documents attributed to UK airlines, maintenance providers (SFO) announced that it had
Safran Aircraft Engines that were and parts suppliers. arrested one individual following
not issued by the company, as well In August 2023, UK Civil Aviation a dawn raid on premises relating
as a memo of shipment documents Authority (CAA), the United States’ to the supplier. SFO investigators,
that were also not issued by Safran. Federal Aviation Administration accompanied by officers from the
As a result of these findings, Safran and the European Union Aviation National Crime Agency, revealed
filed a Suspected Unapproved Parts Safety Agency issued alerts to that they had seized material
(SUP) notification with EASA aviation businesses that may have from a site in Greater London and
that identifies 29 EASA Form 1 bought or installed AOG’s parts. that one individual was currently
documents that were raised for Some planes were grounded in the being questioned.
22 separate CFM56 component UK and US, with several airlines The SFO said in December that it
part numbers. confirming they had suspect parts was working closely with the CAA
The CFM letter also revealed in their engines. Some 145 engines and other regulators to examine
further findings of a “FAA Form are reported to have been affected. the information obtained as it
8130-3 document received by an The use of unapproved parts advances its criminal investigation
MRO provider from AOG Technics in a CFM engine invalidate CFM into suspected fraud at this firm
LTD attributed to GE Engine warranties and guarantees and and determines whether there are
Services Distribution LLC that other obligations. Operators were grounds for prosecution.
accompanied GE CF6 engine parts forced to undertake unscheduled CFM launched civil action against
but was not issued by GE Engine maintenance work to verify all parts AOG Technics and its sole director
Services Distribution LLC”. in their CFM56 engines supplied by and shareholder Jose Zamora Yrala
Headquartered in the UK, AOG the parts suppliers and/or fitted by in September 2023 in the London
has supplied parts globally for the MRO company. High Court. The case is continuing.

is driving positive value pressure especially for spare engines – if you could end one because
AIRLINE ECONOMICS
airlines need RESEARCH
the asset flying to generate revenue.”
Fig. 22: Stored A320 Family Aircraft
PW1100G issues expected to ground significant number of A320 family aircraft through 2024,
>300 aircraft presently parked, expected to peak around 600-650 aircraft in H1-2024 which is
~3.5% of the global single-aisle fleet, contributing to continued capacity shortage
Airlines with 10 or more aircraft parked include Go
500 25%
First (49), IndiGo (47), Turkish (25), Air China (19),
Volaris (16), S7 (14), Shenzen Airlines (13), Qingdao
450 23%
Airlines (12), Wizz Air (12), Spirit (10)
400 20%
Share of Total Fleet Stored

350 18%
Stored A320neo Family Aircraft
300 15%
250 13%
200 10%
150 8%
100 5%
50 3%
0 0%
Se 9
Se 0
Se 1
Se 2
Se 3
9
N 9
M 0
N 0
M 1
N 1
M 2
N 2
M 3
9
Ja 9
Ja 0
Ja 1
Ja 2
N 3
24
3
Ja 3
M 9
M 0
M 1
M 2
M 3
-1
-2
-2
-2
-2
-1
-2
-2
-2
-2
l-1
l-2
l-2
l-2
l-2
1
2
-1
2
-2
2
-2
2
-2
2
-2
n-
n-
n-
n-
n-
n-
p-
p-
p-
p-
p-
ay
ay
ay
ay
ay
ar
ar
ar
ar
ar
ov
ov
ov
ov
ov
Ju
Ju
Ju
Ju
Ju
Ja
PW1100G-JM Stored LEAP-1A Stored PW1100G-JM Share LEAP-1A Share

Source: Cirium
Source: Cirium Core, aircraft classified as parked following 30 continuous days of inactivity and therefore subject to restatement in near-term
FIG. 24: CIRIUM.

1 ENGINES STORED / PW1100G V LEAP-1A MARKET SHARE
cirium.com
ofSOctober
ource:2023. CiriuHem confirmed that all financial settlement was not disclosed “Typically pre-Covid,
the GTF neo engines in Spirit’s fleet, but Varadi noted that the real impact
including the engines slotted for future was operational since the airline is it took 45 days to get
Delays in production and engines issues are driving many airlines to rely on older kit for
aircraft deliveries, are in the potential facing the grounding of 25% of its fleet
maintaining
pool capacity.
of engines subject The
to the trend is benefitting
inspection in 2024. the MRO market, with slots filledany for engine
years ahead.through a
“During
and Covid,
possible airlines were
replacement, of delaying
the shopsaid
Varadi visits and
that the burning
airline hadtheir
takengreentime,shop visit prior to the
grounding
airplanes,”
powdered metalsays Meijers. “When
high-pressure turbine the market ofpicked
a number actionsup, a lot ofcapacity
to protect engines had to go through the
MRO
and shops and
compressor the Spirit
discs. turnaround
said it timesgoinghad increased.
forward, With the
including GTF issues. Now we are
problems we are seeing now with
extending
anticipated an average
the durability of some of of
13 the
Neos new existing
in tech aircraftthere
engines, leases,iscontinuing
even more with getting
stress on the supply quotes from 210
side. For
January 2024 rising to 41 in December, accepting new aircraft deliveries – with
the next few years, this is going to drive up used asset values. We are seeing to that
270 already
days to quite
shop an
“averaging 26 grounded for the full 30 aircraft due for delivery in 2024.
extensively on the older technology aircraft but on new technology as well.”
year 2024”, which has impacted the “We are expecting to ground around engine.”
airline’s near-term growth projections. 45 aircraft as of January,” Varadi said.
Cirium’s
For the full Morris
year 2024,said thatestimated
Spirit he had heard “We ofwill“acertainly
24-yearlearn old A320 family aircraft that
how exactly was scheduled
Greg Conlon
for part out that will now probably go through a heavy check, another engine shop
capacity will range between about flat the programme is going to unfold in Chief visit, Officer
Executive to of High Ridge
toreturn
up mid-single digits compared to the terms of induction times of engines
it to service for a while longer”, adding that the trend to delay retirement will enable Aviation
continued growth of the fleet even and
full year 2023. recovery times in the shop, but this
in the face of such production and maintenance delays.
Spirit said it had begun discussions is a pretty good estimate”. Modelling
with Pratt & Whitney regarding “fair the workscope times for each engine,
Demand for for
compensation older equipment
financial damages is a common
Wizz Air observance
expects the made by aircraft
disruption to lessors. “Demand is
very strong,”
related to the says GTFAircastle’s
neo engine Inglese.
last “Because
18 months, of the supply
subject to MRO chain
shop and engine issues in the
market, we
availability are seeing
issues”, addingneo thatoperators
the andlooking
materials foravailability
ceo aircraft as to help
well as them with lift as they
amount, timing and structure of the turnaround times (TATs).
grapple with how they're going to deal with the groundings and their engine repair work.”
compensation that will be agreed upon Air New Zealand, which has 17
was “not yet known”. A320/321neo aircraft in its fleet of
This sustained impact on demand will impact capacity and curtail growth. Rob Morris notes that
Wizz Air is also badly impacted. Chief 108 aircraft, said that the RTX fleet
that growth
executive Jozsef will Varadi
be slower than in recent
announced years,plan
management butwould
adds“further
that this is a positive for airlines since
reduce
inconstrained
November 2023 supplythatenables them to
the airline continue
engine to “manage
availability” and has price upwards”.
caused it
had “just entered into an operational to revise its flight schedule. Air New
support and financial settlement Zealand has cancelled two international
agreement with Pratt & Whitney”, routes to Hobart and Seoul from
which had created “predictability for April 2024.
operations” and “predictability for the Air New Zealand chief executive
offsetting of the financial impact”. The officer Greg Foran called the impacts of

the Pratt & Whitney servicing schedule that it also operates LEAP-powered “This issue will have
change “significant” that could impact A320 Family aircraft as well as the
services for “up to two years”. Due to added benefit of its captive MRO shop, a fundamental impact
engine availability as a result of the Lufthansa Technik.
Lufthansa chief executive Carsten
on supply and demand.
P&W maintenance issues, he confirmed
that the airline would have up to four Spohr has confirmed that thanks to the With 3,000 engines
aircraft grounded at any one time. group’s countermeasures and its “direct
“Leasing additional aircraft is an option access to the scarce and extremely in-
needing inspection – an
we are looking at closely,” Foran said in demand MRO capacities” there was no average of 300 aircraft
November. “Our latest leased Boeing impact to the group’s capacity outlook
777-367ER aircraft is about to enter for 2024. The group still intends to on the ground at any time
service and we are considering other take delivery of 30 aircraft this year between now and 2026
lease options. and Spohr says that the company is
Lufthansa has a total of 73 A320neo “better positioned than others to grow – that’s 2% of the global
and A321neo aircraft are currently profitably in this environment”.
flying in the Lufthansa Group. Of IAG has identified 32 affected aircraft
capacity of single-aisle
these, 64 are flying with this engine at (less than 10% of IAG’s short haul fleet) aircraft with a peak of
Lufthansa Airlines, CityLine, Austrian and said it was “taking steps to mitigate
Airlines and Swiss. This means that prospective time out of service of those around 680 in the first
around 146 engines are affected within aircraft over the next three years”. half of this year. That is
the Group. “We currently expect Delta Air Lines CFO Dan Janki
around 20 A320neo family aircraft to commented that although the impact of driving positive value
be unavailable every day in 2024,” a the required inspections to the airline
pressure especially for
spokesperson told Airline Economics. would be minimal since its A321neos
“This represents less than one-third were later in the delivery cycle, he voiced spare engines – if you
of the Lufthansa Group’s A320neo concerns about the knock-on impact
fleet and less than five percent of the of the disruption to the production
could find one because
Group’s total A320 fleet of more than cycle for new engines and new aircraft airlines need the asset
420 aircraft.” deliveries considering the still fragile
Lufthansa has been extending the supply chain. flying to generate
service of existing A320 Family aircraft, All impacted airlines have been revenue”
procuring additional spare engines and negotiating with their existing lessors to
looking to wet lease arrangements. The extend current lease agreements to cope Rob Morris
company also has been aided by the fact with the AOGs and capacity constraints Global Head of Consultancy of Cirium

while their engines are inspected and engines fresh from the shop with full “The OEM has owned
parts replaced. For the most part, greentime, enhancing residual values.
airlines are reporting that their leasing The more pessimistic observers are the problem, they have
partners are being accommodating predicting this enforced AOG could
but there are also reports that while push some airlines into bankruptcy.
a plan and they are
lease rates may be holding steady, “For once the OEMs are facing the fixing it. We are getting
lessors are strengthening maintenance issue but the scale is so big it could push
reserves and lease return conditions some airlines into bankruptcy,” said there slowly but airlines
for lease extensions leading to one lessor. have been given a
potential increased costs further The larger airlines are working to
down the line. secure additional capacity and work planning horizon now
Availability of leased aircraft was through maintenance challenges but
so they can source
already reduced but this issue has smaller airlines may find the disruption
added further pressure on the leased too great to withstand. With less alternative capacity to
fleet. Airlines are reporting premium purchasing power and influence with
prices for new leases of in-demand lessors than the larger airlines, there
deal with the shortage,
narrowbody aircraft. This is good news is some concern that smaller airlines which is much better
for lessors since lease rates have been will disproportionately suffer from
lagging behind two years of interest elevated levels of aircraft groundings than uncertainty. ”
rate rises and additional demand will for maintenance issues.
Firoz Tarapore
help to correct that market dynamic. SKY’s Wiley commented that the
Chief Executive Officer of Dubai
However, the fallout from older aircraft company was spending more time Aerospace Enterprise
flying for longer means both fewer discussing contingency plans with
used serviceable material onto the its airline customers such as whether
market, and once they come off lease, they have sufficient spare and/or the
more engines requiring shop visits, right mix of aircraft that will enable
exacerbating the already strained them to continue to operate. “Smaller
MRO capacity. airlines have less access to spare engine
GTF customers are commenting solutions to manage the operational
that P&W is working with them to costs that come from [these] significant
both fix the issue with their engines groundings,” he says.
and providing compensation but such P&W is working with all operators
a large maintenance issues is already but the scheduling of the work from the
causing knock-on issues. Delta Air largest to the smaller operators, as well
Lines chief Ed Bastian commented that as the work needed on new engines,
P&W’s providers and suppliers had put is unknown. Austin Willis says that
all of their resources against the GTF although P&W is “doing what it can to
issue noting that situation also “strips support the customer base”, he adds
away resources from maintenance work that “Willis Lease is going what we can
on their existing business with us”. He to get the engines into the hands of
added that Delta was “working through the airlines that need them to try and
as efficient a manner with Pratt” also support the whole process and lessen
commenting on the state of the parts the impact.”
and repair side of the business that are Willis also posed the question of what
still struggling with a skills gap since the the long-term implications will be from
pandemic that is impacting turn times. the GTF engine maintenance issue once
“All of the suppliers in our industry lost the issue is resolved. “What the GTF
a tremendous amount of experience due market looks like after this subsides
to the pandemic; it is taking time to get is still to be determined but although
that back, to get the turn times down there is the potential for oversupply of
to where they need to be” said Bastian, engines in the midterm, the expectation
adding that higher turn times translate is the fleet will grow its way out of it.”
into delays and higher costs. Firoz Tarapore, who heads DAE,
The more positive industry observers which owns a share in MRO business
hope that in the best case scenario Joramco, said that the fact the P&W
airlines would emerge from this crisis GT maintenance issue now has a fix
with a healthy bank balance boosted and a “finite time horizon” is a positive
by compensation payments along with development and hopes it will result

in more reliable and more efficient Demand for older equipment is a “When the market
engines. “The OEM has owned the common observance made by aircraft
problem, they have a plan and they lessors. “Demand is very strong,” says picked up, a lot of
are fixing it,” he says. “We are getting Aircastle’s Inglese. “Because of the
there slowly but airlines have been supply chain and engine issues in the
engines had to go
given a planning horizon now so they market, we are seeing neo operators through the MRO shops
can source alternative capacity to deal looking for ceo aircraft to help them
with the shortage, which is much better with lift as they grapple with how they’re and the turnaround
than uncertainty.” going to deal with the groundings and times had increased.
Rob Morris, Cirium’s global head of their engine repair work.”
consultancy, says that the GTF issue This sustained impact on demand With the problems we
will have a fundamental impact on the will impact capacity and potentially
are seeing now with the
industry for some time, affecting both constrain growth. Rob Morris notes
capacity and lease rates, noting that that growth will be slower than in recent durability of some of the
the demand and supply imbalance is years, but adds that this is a positive
already having an impact on lease rates. for airlines since constrained supply
new tech engines, there
“This issue will have a fundamental enables them to continue to “manage is even more stress on
impact on supply and demand,” says price upwards”.
Morris. “With 3,000 engines needing the supply side. For the
inspection – an average of 300 aircraft SUSTAINABILITY next few years, this is
on the ground at any time between Sustainability goals are driving the
now and 2026 – that’s 2% of the global move to refleet. Production delays going to drive up used
capacity of single-aisle aircraft with a have made is arguably even more
peak of around 680 in the first half of essential for airlines to secure their
asset values. We are
this year. That is driving positive value delivery slots with large orders sooner seeing that already
pressure especially for spare engines – if rather than later to delivery on
you could find one because airlines need sustainability targets. quite extensively on the
the asset flying to generate revenue.” Lufthansa’s Spohr noted that older technology aircraft
The latest engines issues are driving “every new model aircraft uses up
many airlines to rely on older kit for to 30% less kerosene” saving carbon but on new technology
maintaining or growing their capacity. emissions. By 2030, Lufthansa group as well.”
The trend is benefitting the MRO airlines will take delivery of more
market, with slots filled for years than 200 new fuel-efficient aircraft Paul Meijers
ahead. “During Covid, airlines were and the company is also retrofitting Executive Vice President - Commercial,
delaying shop visits and burning their older kit with new technology such as Aircraft Leasing, Trading & Financing
greentime, grounding airplanes,” says AeroShark – the bionic film covering of Airbus
Meijers. “When the market picked up, the aircraft that optimises airflow and
a lot of engines had to go through the saves fuel. Lufthansa says it makes
MRO shops and the turnaround times the aircraft 1% more efficient but has
had increased. With the problems we the potential to save up to 3% with
are seeing now with the durability of future development.
some of the new tech engines, there is New equipment is only one part of
even more stress on the supply side. For the sustainability journey for airlines,
the next few years, this is going to drive many securing contracts for the supply
up used asset values. We are seeing of sustainable aviation fuel (SAF) and
that already quite extensively on the some are also finding other creative
older technology aircraft but on new ways to meet their sustainability
technology as well.” targets, such as carbon capture and
Cirium’s Morris said that he had heard carbon offsets.
of “a 24-year old A320 family aircraft The lack of supply of SAF has
that was scheduled for part out that will been widely discussed but airlines,
now probably go through a heavy check, manufacturers and oil refiners are
another engine shop visit, to return it working together on myriad ways to
to service for a while longer”, adding scale production. One such concept it
that the trend to delay retirement will the development of power-to-liquid
enable continued growth of the fleet aviation fuels. Lufthansa is collaborating
even in the face of such production and with Airbus, Munich Airport and MTU
maintenance delays. Engines to research P2L fuels.

Optimism Rules
The commercial aviation industry
seems to be beset on many sides
by a series of major challenges:
manufacturing defects, supply
chain and maintenance delays
caused by a shortage of resources
and labour, as well as higher interest
rates, higher inflation, a volatile
geopolitical situation, the constant
pressure of decarbonisation in a
worsening international picture in a
year of elections. Despite all of that,
the delays, the shortage of capacity,
consumers with less disposable
income, air travel will continue to
grow in 2024 and for the near-term
future - another global exogenous
shock notwithstanding. Optimism
levels are high - albeit with cautious
of the many headwinds building
on the horizon but after the deep
downturn of the pandemic, there
seems to be just relief that the
challenges and issues ahead are
of more “normalised” nature and
one that the aviation industry is
confident it can meet head on
and triumph.

GROWTH FRONTIERS
TOKYO
10-11 April 2024
Palace Hotel | Tokyo, Japan
FOR MORE INFORMATION AND BOOKINGS CONTACT:

PHILIPT@AIRLINEECONOMICS.COM OR CALL +44 (0) 1782 619 888
Navigating
Change. Together.
kpmg.ie/aviation

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Aviation Leaders Report 2024

Demand & Disruption

Tax & Legal Audit & Assurance Advisory

E: joe.omara@kpmg.ie E: killian.croke@kpmg.ie E: kieran.obrien@kpmg.ie

Brian Brennan John Arnold Chris Brown

E: brian.brennan@kpmg.ie E: john.arnold@kpmg.ie E: christopher.brown@kpmg.ie

Gareth Bryan Terence Coveney Brendan Crowley

E: gareth.bryan@kpmg.ie E: terence.coveney@kpmg.ie E: brendan.crowley@kpmg.ie

Karen Conboy Conor Holland

Jed Kelly James Gleeson Gavin Sheehan

E: jed.kelly@kpmg.ie E: james.gleeson@kpmg.ie E: gavin.sheehan@kpmg.ie

Emer McGrath Gillian Kelly

Caoimhe McLoughlin John McGuckian Patrick Murphy

E: caoimhe.mcloughlin E: john.mcguckian@kpmg.ie E: patrick.murphy@kpmg.ie

Philip Murphy Niall Naughton Shane O’Reilly

Tom Woods Colm O’Rourke Geoff VanKlaveren

E: tom.woods@kpmg.ie E: colm.orourke@kpmg.ie E: geoff.vanklaveren@kpmg.ie

6 Chapter One: Airlines Soar

22 Chapter Two: Aviation Finance

34 Chapter Three: Lessors Dominate

46 Chapter Four: OEM and Fleet Challenges

THE AVIATION LEADERS REPORT 2024

1 Airline Economics Aviation Leaders Report 2024 www.airlineeconomics.com

Aviation Global Leaders Report - Contributors

CONTRIBUTORS TO THE 2024 AVIATION GLOBAL LEADERS REPORT

Tom Baker, Chief Executive Officer | Aviation Capital Group

Peter Barrett, Chief Executive Officer | SMBC Aviation Capital

Helane Becker, Managing Director | TD Cowen

Ali Ben Lmadani, Chief Executive Officer | ABL Aviation

Greg Conlon, Chief Executive Officer | High Ridge Aviation

Andy Cronin, Chief Executive Officer | Avolon

Michael Inglese, Chief Executive Officer | Aircastle Advisor

Bobby Janagan, Chief Executive Officer | Rolls-Royce Partners Finance

Aengus Kelly, Chief executive Officer | AerCap

Robert Korn, President | Carlyle Aviation Partners

Greg Lee, Global Head of Transportation Banking | Goldman Sachs

Robert Martin, Former Chief Executive Officer | BOC Aviation

Joe McConnell, Partner, Deputy Co-chief Investment Officer | Castlelake

Ryan McKenna, Chief Executive Officer | Griffin Global Asset Management

Paul Meijers, Executive Vice President - Commercial Transcations | Airbus

James Meyler, Chief Executive Officer | ORIX Aviation

Rob Morris, Global Head of Consultancy | Cirium Ascend Consultancy

John Plueger, Chief Executive Officer | Air Lease Corporation (ALC)

Marjan Riggi, Managing Partner | Stage Wing

Betsy Snyder, Director | S&P Global Ratings

Firoz Tarapore, Chief Executive Officer | Dubai Aerospace Enterprise

Steven Townend, Chief Executive Officer | BOC Aviation

Olivier Trauchessec, Head of Global Aviation | MUFG Bank

Austin Wiley, Chief Executive Officer | SKY Leasing

Austin Willis, Chief Executive Officer | Willis Lease Finance Corp.

2 Airline Economics Aviation Leaders Report 2024 www.airlineeconomics.com

Vinodh Srinivasan Mark Streeter

Olivier Trauchessec Austin Wiley Austin Willis

www.airlineeconomics.com Airline Economics Aviation Leaders Report 2024 3

DEMAND & DISRUPTION

4 Airline Economics Aviation Leaders Report 2024 www.airlineeconomics.com

www.airlineeconomics.com Airline Economics Aviation Leaders Report 2024 5

Air Travel Revenue Returning to Long-Term Trend

Source: Delta Air Lines

FIG. 1: US AIR TRAVEL REVENUE V US GDP

www.airlineeconomics.com Airline Economics Aviation Leaders Report 2024 7

8 Airline Economics Aviation Leaders Report 2024 www.airlineeconomics.com

Passenger numbers, revenue and operating profit 2019-2024F