The Reed Smith aviation team have returned to their offices in London, New York and Hong Kong but memories of this year’s Airline Economics “Growth Frontiers” Hong Kong conference are still fresh in the memory (or as fresh as they can be with jet lag!).
Hong Kong’s Grand Hyatt was packed to the rafters with all of the leading industry stakeholders. Many of the key players we spoke to touched on recurring themes that seem to be the focus of the industry’s attention. For those of you who missed out (or who enjoyed the conference too much…) here our some of the Reed Smith team’s key take-away points, scribbled down on the long flight home.
- The prevailing view (just about) seems to be that the cost of debt will increase next year, but don’t expect it any time soon – margins remain suppressed. Having said that, a significant number of players are predicting lower margins. Sign of how difficult the market is to read right now!
- Widebodies remain tricky and the market appears segmented between the “narrow widebodies” and the “wide widebodies”. It’s the wide-wides that people seem to be avoiding in favour of e.g. the A330 neo or the 787-8 or -9. This tallies with our first hand experiences – one of our clients has this autumn switched some its book from the A350-1000 to the A350-900. And Nick Hardge at Virgin Australia has been quoted in AFJ as saying they are “watching other airlines” and haven’t yet developed their plans for their new widebody order.
- Hard to avoid talking about Airbus and the CSeries. Generally seen as good – if it happens. Still some question marks – regulatory and challenges from various antagonists. Lenders and borrowers alike interested in the impact of the CSeries on asset values in competitors e.g. A318, A319, 737-700 have all felt pressure on lease rates over the last few years. EJets too. We all know Boeing’s view of life on this topic, but there was some surprise that less focus (or less air time?) given to Embraer.
- Aircraft-by-aircraft utilisation is up and this (and the low oil price) has fuelled stellar profits for the airlines. Predictably a lot of chat around the recent failures – Monarch, Air Berlin, Alitalia. This is in stark contrast to the otherwise strong fundamentals in the industry.
- Lots of discussions and excitement around the impact of China. 10 years ago there were no lessors with Asian owners in the top 10. Now there are four. Trend looks set to continue. Also interest in whether HK will follow Dublin as a major centre for aircraft leasing. Contrast Chinese lessors (international outlook by necessity) with Chinese airlines (even those on international routes will still borrow domestically more often than not – cost of capital is lower). Both airlines and lessors remain optimistic about opportunities in the region. Liquidity driving down pricing and yields. See our separate blog posts on these topics!
- Some leading players are predicting more mergers and consolidation over the next few years. Lessor market too fragmented? Private equity owners looking to sell interests? Will this give rise to economies of scale, particularly with the two leading manufacturers?
- Capital markets funding still a hot topic. Productive meetings for the Reed Smith team with a number of our fund clients who are active (or becoming active) in this sector – watch this space for deal announcements!
- Great “keynote” from Robert Martin (BOC Aviation CEO). Take away that “BRIC is back” – the economies of the BRIC nations (Brazil, Russia, India and China) are warming up again. This gives rise to great opportunities for aircraft lessors. India’s international market still hugely underdeveloped – which start-up airlines will capitalise on the increased ability to fly internationality on the lifting of the 5 years/20 aircraft rule?
All in all a great week was had catching up with old clients and meeting new – safe travels home to all and we look forward to seeing you at the next event.