From the grounding of the global fleet in 2020 to the summer travel chaos of 2022, the aviation sector has experienced more than its fair share of turbulence of late. As normality resumes, Eleanor Wragg explores whether there is sufficient liquidity in the aircraft finance market to meet demand for new planes.


One of the hardest-hit industries by Covid-19, the aviation sector is now staging an impressive recovery as travel restrictions have largely been lifted around the world.

The number of air passengers carried from January to August of this year increased by an estimated 55% compared to the same period in 2021, according to figures from the International Civil Aviation Organization, a United Nations agency, while despite economic challenges, cargo volumes are expected to set a record high of 68.4 million tonnes in 2022.

This is good news for airlines: the International Air Transport Association (IATA), a trade association of the world’s airlines, predicts 2022 industry revenues of US$782bn, a 55% increase on 2021, and just slightly below 2019 levels.

Although some regions are yet to return to pre-pandemic performance – China’s zero-Covid policy, for example, is still hampering aviation in Asia – Airbus predicts that air traffic will recover to 2019 levels between 2023 and 2025.


Out with the old

This uptick in traffic is translating to demand for new planes, according to IATA, which calculates a total expected net delivery of over 1,200 aircraft in 2022.

“Many of our customers have rebounded strongly,” Ben Faires, managing director of capital markets and outreach at US aircraft manufacturer Boeing, tells GTR. “This is a big contrast to 2020, where demand for new aircraft was pretty soft. It took a lot of effort for people even to come to Seattle or Charleston and take delivery of aircraft. That dynamic really shifted in 2021, and customers were wanting to come and take deliveries, although during that time, we were still dealing with travel restrictions and supply chain challenges. This year, the demand for new aircraft is greater than the supply, and it’s really for the new technology aircraft.”

As carbon emissions from air travel become a topic of particular concern, airlines are increasingly seeking to boost the efficiency and environmental performance of their fleet. According to Airbus, currently just 20% of the global fleet are new-generation aircraft. Following commitments made last year ahead of Cop26 by leading airlines, airports and manufacturers to reach net-zero emissions by 2050, this proportion looks set to increase rapidly.

“In the next 20 years, Airbus forecasts that the demand for new aircraft will progressively shift from fleet growth to accelerated replacement of older, less fuel-efficient aircraft. This will mean a need for over 39,490 new passenger and freighter aircraft, delivered over the next 20 years – around 15,440 of these will be for replacement of older less fuel-efficient models,” says the European aircraft manufacturer in its latest global market forecast, adding that more efficient models can also act as a “strategic hedge” against soaring energy costs.

As a result, headline-grabbing orders are beginning to trickle in, such as Delta Airlines’ recent purchase of 100 Boeing Max planes, which will provide fuel savings of around 20-30%. The deal, at a list price of US$13.5bn, marks the US carrier’s first large order with Boeing in more than a decade.

Malaysia Aviation Group (MAG), parent company of Malaysia Airlines, is also replacing its fleet, with a recent order for 20 Airbus A330neo – the new generation version of the popular A330 widebody – for its routes covering Asia, the Pacific and the Middle East.

“The acquisition of the A330neo is a natural transition from our current A330ceo fleet. The A330neo will not only provide fleet modernisation and enhanced operational efficiency, but will also meet environmental targets through reduced fuel-burn per seat,” said MAG’s CEO Izham Ismail in a statement.

It’s not just widebodies that are seeing demand.

In July, Airbus notched up a new sales record after Air China, China Southern, China Eastern and Shenzhen Airlines bought a total of 292 single-aisle A320neo jets worth around US$36bn at list prices, which the manufacturer says deliver at least 20% fuel and CO2 savings.


A new financing mix

Against the backdrop of a rampant inflationary environment, airlines are searching for the cheapest available sources of financing to fund these outlays, and what that looks like has changed in recent years.

“In 2018, which was a peak delivery year, we saw bank debt, capital markets, and then equity or cash from airlines as the top three sources,” says Boeing’s Faires. “If you look at where we’re at so far in 2022, it’s shifted. The biggest source has been cash, followed by sale-leasebacks and then bank debt and capital markets.”

A recent KPMG note outlines the extent of lessor activity since the pandemic, as airlines sought to monetise assets to raise liquidity in 2020 and into 2021. “In 2021, lessors took delivery of 60% of all Boeing and Airbus aircraft orders combined, all placed under some form of lease, be it sale-leaseback, order book, finance lease,” it quotes John Plueger, CEO of American firm Air Lease Corporation, as saying.

In fact, lessors weathered the Covid-19 storm surprisingly well. Although many airlines asked for and received lease payment deferrals, with global platforms able to move assets around the world, lessors soon shifted to bidding for new business, and all the investment grade lessors held on to their ratings throughout the volatility.

“One of the things that came out of the pandemic was it really proved that lessors could manage their businesses,” says Faires.

This resilience continued into 2021, although some consolidation took place, with merger and acquisition activity including Aercap’s bumper US$31.1bn buyout merger with GE Capital Aviation Services, creating a new industry behemoth with roughly 20% market share. Lessors also put in a good showing in the capital markets, netting US$8.7bn in asset-backed securitisation, according to Boeing’s Current Aircraft Finance Market Outlook (CAFMO).

This strength has also made lessors increasingly attractive to banks, adds Faires. “With lessors being more active, we see more of the bank debt going to the leasing industry rather than direct to airlines. This is a reversal from 2018.”

However, the picture varies from region to region. “If we look at Asia Pacific, that’s a region where you have some very strong banks that are very supportive of the local airlines. This can be said for Japan, for Korea, and for Singapore,” says Faires.

Overall, though, direct lending from commercial banks to airlines remains constrained, with loans extended mainly to stronger credits and strategic customers in their respective home markets.

“I expect when we see airlines returning to profitability and some balance sheet repair, then the calculus for the banks will change a bit and we’ll see more direct lending to airlines,” says Faires.

While the capital markets proved themselves as an attractive funding vehicle for the aircraft finance sector during the pandemic, activity is comparatively slower so far this year. This is due in part to market volatility as rising interest rates make debt less accessible, but also represents a normalisation from the flurry of activity in 2020 and 2021, when over US$120bn was raised by airlines and lessors both years – around three times the usual level.

“Pricing is very volatile right now, but over the last two years, those flagship airlines that have access to the capital markets really went out and borrowed a sufficient amount to get them through. The focus is now on improving balance sheets and getting financials back to where they were pre-pandemic,” says Faires.


Liquidity in abundance, for now

Although the financing mix may be changing, there are few signs that liquidity is tightening, at least for the time being.

Boeing’s latest CAFMO shows commercial aviation required about US$59bn in delivery financing in 2020, and US$64bn during 2021, and Faires says financing needs for all Boeing’s deliveries have been met since 2020. Indeed, he adds that there is actually more capital available than what is currently needed, especially as supply chain issues have stymied output.

“Probably the biggest complaint we get from financiers is they want more volume of deals to bid on,” he says. “Output of aircraft has been down over the past several years, whereas the number of participants in the market has stayed relatively flat, so you do have different aviation aircraft financiers looking for opportunities, and there are probably not as many opportunities as all of us would like.”

This is also reflected in the low levels of activity from export credit agencies (ECAs), which tend only to intervene when there is a lack of capital available. ECA-supported financing for Boeing aircraft made up around 5% of the total last year, primarily by the Export-Import Bank of the United States and with one deal supported by UK Export Finance (UKEF). It was a similar picture at Airbus, which saw 6% of its deliveries supported by ECA guarantees in 2021, down from 10% in 2020.

“It’s safe to say that the quantum of ECA support is at quite historically low levels,” Pat Cauthery, head of aerospace and defence at UKEF, tells GTR. “We’re happy about that. If they need to be financed, we will step up and do it. But if they don’t, then that’s the ideal situation.”


An uncertain outlook

Although the attractiveness of the aviation industry for financiers has surged as the realisation of pent-up demand pushes traffic figures up, not all is well in the sector.

The Russian invasion of Ukraine has pushed fuel costs up to US$192bn, and energy now makes up 24% of airlines’ overall costs, up from 19% in 2021, according to IATA research. This has been exacerbated by the increasing strength of the US dollar, which has pushed costs for non-US airlines even further and risks over-stretching those balance sheets that are yet to regain full health.

Re-routing the long-haul flights between Asia and Europe and North America that would usually overfly Siberia has also hurt airlines’ bottom lines. About 7% of international passenger traffic would normally transit Russian airspace, which is now closed to many operators.

Add to this the higher costs of borrowing, increased interest rates, inflationary pressures on wages, supplies and parts, and the bankability of many airlines comes into further question.

But despite these headwinds, IATA figures show airline financial performance is still expected to improve in all regions in 2022, although only North America is expected to return to profitability.

And with demand for new aircraft showing no sign of abating, the sector will continue to require vast sums of financing for the years to come – financing that, for now, remains readily available.