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Fitch Ratings: Coronavirus No Near-Term Risk to Global Aircraft Lessor, ABS Credit

January 30, 2020, 08:00 AM
Filed Under: Industry News
Related: Fitch Ratings

The Wuhan coronavirus is expected to have a minimal impact on aircraft lessor and ABS ratings in the near term given the relative diversity of customer bases, solid cash flow generation derived from long-term leases and the fact that current ratings already reflect sensitivity to periodic exogenous shocks, Fitch Ratings says. Should a pandemic develop that materially disrupts the airline industry or slows down passenger growth in China and elsewhere, aircraft lessor and ABS ratings could see increased downside pressure. A prolonged ban on traveling from and to China may have more negative implications for lessors and ABS transactions over the medium term, depending on the severity and duration of the interruption and individual lessors' exposure to airlines in the region.

Pandemic diseases have negatively affected passenger demand for air travel in the past, including severe acute respiratory syndrome (SARS), bird and swine flu, the Zika virus and Ebola, among others. Pandemic diseases, or the fear of such events, can trigger government-imposed travel restrictions, negatively affecting passenger demand for air travel.

The new coronavirus was first identified in Wuhan, China, in December 2019. It has not reached pandemic status, according the World Health Organization. However, it is spreading rapidly and has sickened thousands of individuals, with growing fatalities in China and with cases now reported in the U.S., Europe and elsewhere. China is one of the largest growth countries for air traffic, to which many of Fitch-rated lessors have a significant exposure.

There should not be an immediate threat to lessor utilization rates and cash flows for aircraft lessors and ABS transactions, as airlines are locked into long-term leases, which require maintaining lease payments even with a reduction in revenue passenger miles. Lessors can also defer orderbook deliveries and reduce capital expenditures in the event of a temporary reduction in demand. However, a pandemic will start affecting lessors if there are elevated airline bankruptcies, if air travel is suspended for a prolonged period of time, if a ban of air traffic to a specific country creates a problem for aircraft lessors to repossess and redeploy aircraft to other regions or if airlines start refusing new aircraft deliveries.

A global air traffic slowdown may dampen currently elevated demand for mid-life and end-of-life aircraft and negatively affect secondary markets and residual values, resulting in potential losses from aircraft trading, lower lease rates for new leases for aircraft lessors active in this space and weaker performance for ABS transactions.

Fitch-rated aircraft ABS transactions issued from 2013-2019 have exposure to 39 aircraft leased to 20 Chinese airlines in 24 outstanding transactions, ranging from one up to five aircraft in a single portfolio. In aggregate, these aircraft represent only 6.8 percent of a total of 570 aircraft securitized during this period and rated by Fitch. Only 10 engines on lease to six Chinese airlines were securitized in three outstanding engines ABS deals, representing 5.4 percent of the total number of engines.

Last week, AerCap's CEO stated he expects a modest negative impact on Chinese New Year traffic that may hit the airline's 1Q20 earnings. However, if contained successfully, Fitch believes long-term growth or earnings outlooks would not be materially affected. For now, the trickle-down impact to aircraft lessors would be modest given the relative diversity of the cash flows generated by the portfolios.

Looking back to SARS in 2003, ILFC, the largest lessor at the time before being acquired by AerCap in 2014, came out of 2004 with minimal impact to credit. ILFC announced it would cut new aircraft delivery schedule by at least 10 aircraft in 2004. Additionally, airlines Cathay Airways and Dragonair cut weekly services by 45 percent and negotiated deferrals on their orders with manufacturers.

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