• UCD Student Managed Fund

Out of the Storm, Into the Bird-Strike

Updated: Feb 20

By Murrough Murnahan, Equity Analyst at University College Dublin Student Managed Fund

It is no secret that the aviation industry has been under the cosh as a result of global travel restrictions. Since the start of the COVID-19 pandemic, more than thirty airlines have either been sold or declared bankrupt. Although during the first five weeks of 2021 no airline bankruptcies have been declared, it might be the case that this year will be even more disruptive for the aircraft asset market than 2020.

HNA Group’s bankruptcy proceedings became public in the first week of February 2021 and a whole host of airlines’, aircraft lessors’ and asset managers’ assets are implicated by the conglomerate’s financial woes. While HNA’s aviation brands look to be some of the most stable in their portfolio, at the very least, this crisis will result in consolidation of HNA’s airlines. Whether the result is consolidation, acquisition or failure, the market will see an increase in available aircraft. Widebody aircraft have been experiencing a more severe slump in market value than their smaller jet counterparts and that trend looks set to continue with widebodies looking to be the most exposed assets to any HNA subsidiary airline’s restructuring.

The HNA example looks like it may be a warning shot over the bow of the aircraft leasing trawler. As government funding and sponsored bailouts for airlines dry up, more airlines will be unable to service their debt and their assets will be put on the market. With distressed assets regularly appearing for sale or lease, anyone considering going to market to expand their fleet will surely wait to snap up a bargain basement deal, rather than pay a premium for immediate satisfaction. Well capitalised lessors and any airlines that have managed to come out of the pandemic in a strong position will be in prime position to profit from a buyer’s market and achieve some rapid growth. Low-cost carriers such as Ryanair and Southwest thrive by making the most of crisis situations. Ryanair is a prime example of how to “never waste a good crisis.”

In January 2002, when public anxiety over air travel was at one of the highest levels ever seen, Ryanair deployed $9.1bn placing firm orders for 100 737-800s with options for 50 more jets. In December of 2020, with Boeing suffering several crises at once, Ryanair placed an order for a further 75 Boeing 737-Max aircraft, bolstering the number of firm orders to a total of 210. For start-up airlines hoping to emulate the success of Ryanair and Southwest, building a fleet at well below market value will go a long way to aiding their quest for survival and future success in a brutal industry.

It seems we are in the eye of the storm, with tempered optimism of a summer travel boom and positive vaccine news almost every week maintaining the feeling that we may be emerging from this black swan crisis. For example, the latest news of the United States’ embarrassing public health management is that the country may be approaching herd immunity. However, when viewed through the lens of deferred airline collapses, mutant COVID-19 strains and closing travel corridors, one cannot be blamed for feeling pessimistic about the survival of small cap aircraft lessors and already-struggling airlines.

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