The answer to this question is just one of the many fascinating things the Reed Smith aviation finance team discussed around St Stephen’s Green this January, as members of our London, Paris and Miami teams attended aviation’s largest annual industry gathering in Dublin.
The presiding concern in discussions this year was where the industry is in its cycle. More and more money is being made available, by banks and private equity, to the point where we are now hearing that there is more money than there are aircraft to back it. We have heard, for example, of nascent leasing platforms that are fully funded but are struggling to obtain the necessary aircraft, and of end-of-life lessors/operators and cargo carriers having to take retired aircraft back out of the desert and refit them, due to the disruption caused by the necessity of keeping mid-life aircraft in service to meet capacity demands, to cover manufacturer delays affecting new aircraft and to provide assets capable of delivering the yields required by this influx of funding.
While the abundance of cash is causing certain stresses on the aircraft life cycle and pressure on margins, conference week also made it clear that this cash and those responsible for deploying it are increasingly asset-agnostic, drawn by the prospect of high single- to double-digit returns and long asset life rather than by the assets themselves. These investors tend to be already active in shipping, rail, real estate and even aerospace as they look for new opportunities in aviation. We spoke to people mandated to invest anything from US$2 to 8 billion in the industry over the next 24 months, so it seems there is quite the investment pipeline developing, with all of the attendant challenges and opportunities (and warning signs). However, it is not just about investing in ‘aviation’ across the board, but rather about finding the right airline, aircraft and region at the right time.
This combination of ready funds and potentially scarce metal, when considered in light of more macro factors relating to jurisdiction (for example, the as-yet-untested new economic substance rules in the Cayman Islands, ‘trade war’ issues, and general Brexit uncertainty), would seem to suggest that we will increasingly be seeing more asset trades rather than M&A activity, as it becomes more efficient and less risky to buy and sell the assets themselves rather than the entities or platforms that own them. (This tends to be the preferred approach in aviation, as size is not necessary for survival and M&A tends to be seller-driven – for example, in distressed situations.) This would, in some cases, include the financing arrangements attached to the asset, so that secondary debt trading may in tandem become more of a focus. The sale and leaseback market is also likely to continue apace as competition to finance and own the aircraft intensifies, with lease extensions and novations similarly continuing to tick over as operators try to hold onto or redistribute the capacity they already have.
It therefore seems that we are in for an interesting year, as new players come to prominence, financier attention shifts and grows, and we collectively deal with regional economic and political turbulence. Overall, we would say the atmosphere at the conference was wary but optimistic, and there was a general enthusiasm to tackle these emerging headwinds, as well as real enthusiasm from the financiers to get stuck in.
The answer, in case you are still wondering, is 67.