The global aviation structured finance and asset-backed securities (ABS) sectors are looking at a stable outlook for 2024, buoyed by the improved financial health and credit quality of the global airline sector this past year. This optimistic view is further supported by a strong demand for aircraft, compounded by a limited supply of both new and used models, which in turn has led to increased asset values and higher lease rates.
One of the key factors contributing to this positive forecast is the nearly complete recovery in global air traffic volumes as we step into the first half of 2024, compared to pre-pandemic levels. This resurgence is expected to significantly benefit aircraft-backed transactions, enhancing their credit metrics, such as cash flow levels and loan-to-value ratios (LTVs).
The uptick in demand for aircraft, along with the constraints on new deliveries due to production issues, has created a favorable market environment. At the end of 2023, the demand for ready-to-fly aircraft far outstripped the available supply, leading to an upward trend in market values. This scenario is particularly positive for newer technology aircraft, while older models also see a resurgence due to the recovery in international travel.
However, the aviation sector does face some challenges, including a complex geopolitical landscape and the potential for macroeconomic downturns. Such factors could pose risks by potentially dampening global travel demand and weakening airline lessee credit.
Nonetheless, the overall health of the global travel sector appears robust as 2024 approaches, with domestic travel volumes reaching pre-pandemic levels and international travel steadily improving. The aviation industry is thus well-positioned to navigate any slowdowns, thanks to solid airline profit margins and the resilience of airlines’ balance sheets.
Additionally, despite positive market dynamics, the aviation ABS sector has only seen a marginal uptick in deal cash flows in 2023. This situation may see an improvement in 2024 as existing leases are extended at higher rates, or aircraft are sold at elevated prices, further boosting cash flows.
The aviation debt market, including aircraft ABS, secured loans, and enhanced equipment trust certificates (EETCs), is anticipated to maintain a stable performance throughout the year, driven by strong aircraft asset values and the ongoing robust demand from airlines and lessors.
Despite promising signs, several challenges remain, such as securing financing in a high-interest rate environment, and the competitive pressures on smaller aircraft lessors. Additionally, the freighter market has faced hurdles due to supply and demand imbalances, affecting cargo volumes and freighter asset values.
As the aviation sector cruises into 2024, it is primed to navigate through these challenges, supported by a stable outlook for aircraft asset values and credit ratings, amidst a backdrop of steady travel growth and robust market demand.
