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2021 has been another turbulent year for aviation, as governments rushed to combat novel variants of COVID-19 with travel bans and border closures. From the rise of the Delta variant in the first half of the year to the first appearance of Omicron at the end, 2021 was a year in which disruptions lurked around every corner.
Despite this, passenger demand began to pick up. Estimates published by IATA suggest that total revenue for global commercial airlines is expected to reach US$472 billion in 2021.1 Although this figure is well below the total revenue of US$838 billion achieved on the eve of the pandemic in 2019, this represents an increase of more than 26% compared to 2020. The number of scheduled passengers has also recorded a cover. Total passengers for 2021 are expected to reach 2.27 billion, a huge improvement from 2020 (1.8 billion), but still a far cry from 2019’s 4.54 billion.
of respondents expect investments
in the global aviation sector is expected to increase in 2022
While passenger traffic has been hit hard by the pandemic, air cargo shines as a rare COVID-19 success story. Rapidly restarting economies and the scramble for businesses to get the hang of it, along with bottlenecks in shipping, have helped propel air cargo to new heights. The coming year could be a record high with expected air cargo revenues of $175 billion (compared to $128.8 billion in 2020 and $100.8 billion in 2019).2).
Our survey revealed that respondents are cautiously optimistic. Looking first at expectations for the global aviation sector as a whole, 81% expect investments to be maintained or increased in 2022, with 47% suggesting an increase. Only 19% of respondents expect a drop in investment in aviation.
Asia-Pacific stands out as the region with the most positive sentiment, with 60% expecting global investment in the aviation sector to increase in the coming year, the highest from all regions. From an APAC perspective, this positive sentiment is perhaps unsurprising: the region’s growing middle class and favorable demographics are supporting the growth of the aviation sector. A managing director of a major APAC-based bank says, “Investment will increase in 2022 as there are new prospects for growth in the aviation sector. many places.This will stabilize the sector and contribute to growth.
Respondents in the more mature markets of EMEA and North America are more cautious, with 50% and 39%, respectively, anticipating increased investment in the coming year, slightly less than APAC. That said, a number of respondents from these regions have their eye on emerging opportunities, including investments in decarbonization.
“The pipeline of projects looks promising,” says the investment and capital markets manager at a North America-based lessor. “Many green funds are emerging that will support these projects.” The managing director of an EMEA-based bank that invests between $1 billion and $5 billion a year in aviation adds: “The focus on ESG will entice younger generation investors to invest.”
When it comes to aircraft financing, respondents are optimistic about the coming year. Globally, 69% expect aircraft financing in the global aviation sector to increase in 2022.
69% expect aircraft financing in the global aviation sector to increase in 2022.
Looking closer at specific regions, respondents based in EMEA have the most positive outlook, with 84% indicating an increase in funding, followed by APAC with 80%. Notably, no APAC respondent expects aircraft funding to decrease in the coming year. Respondents based in North America are less optimistic, with only 55% expecting global aircraft financing to increase in 2022.
Future increases in aircraft funding will be determined, primarily, by the extent to which passenger numbers recover. But survey data and respondent comments suggest there are also two new factors at play.
The first of these is the need to strengthen the efficiency and environmental performance of aircraft fleets in a context of rising ESG imperatives. This point was raised by a number of respondents, including airlines, lessors, banks and alternative capital providers. “I expect aircraft financing to increase as equipment upgrades are needed,” says the partner at an APAC-based private equity firm. “Older planes will need to be replaced because they are very fuel-intensive.” This point is echoed by the CEO of an EMEA-based lessor who expects an increase in aircraft development spending: “After the pandemic, the focus on low-carbon aircraft will increase further. .”
The second factor is the rise of new sources of funding. Banks – traditionally a mainstay of aviation finance – have reduced their exposure to the sector since the start of the pandemic. The void they left behind is filled with everything from green bonds to private equity. Indeed, the past two years have seen an upsurge in private equity and hedge fund activity. Armed with ample dry powder, buyout companies have been on the lookout for opportunities, ranging from debtor-in-possession loan financings to establishing aircraft leasing companies. “Many private equity firms have created collective funds for aircraft financing,” says the managing director of an EMEA-based bank. “The Sustainable Development Goals in particular were an important part of their decision to support the low carbon transition in the aviation industry.”
The ability to tap into broader and deeper pools of capital bodes well for the aviation sector. But our survey data shows that the distribution of investments by airlines, lessors and private equity funds has changed since the peak of the cycle, with a trend towards higher volumes of lower-value investments, reflecting changes in risk appetite.
An interesting feature of this shift is that private equity and other alternative capital providers are now competing across the value spectrum: 10% are currently investing in the US$50-250 million range at a end, while another 10% invest in the United States. installment of more than 5 billion dollars to another. This is a wider gap than what has been observed in the past. At the same time, the proportion of lessor-operators making high-value investments has declined, with just under a quarter (24%) currently investing $1 billion or more. Similarly, fewer airlines are currently investing more than US$5 billion, down from previous years.
Funding from banks and export credit agencies (ECAs) also changed, with respondents reporting less activity at the higher end of the value spectrum. For example, our survey shows that ECAs waived making the highest allocations, with no respondent providing funding in the $1-5 billion or over $5 billion categories. Bank lending has tended to be more consistent, and the proportion of respondents who report having loans in the highest bracket (over $5 billion) is only slightly below pre-pandemic levels.
1 IATA Fact Sheet on Industry Statistics: https://www.iata.org/en/iata-repository/pressroom/fact-sheets/industry-statistics/
2 IATA freight market analysis: https://www.iata.org/en/iata-repository/publications/economic-reports/air-freight-monthly-analysis—october-2021/
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