What a year it has been! At the start of 2017, Reed Smith had no aviation finance team. We have now established teams in London, New York and Abu Dhabi (and we’re not done yet!). Across the board we have structured and closed a diverse range of transactions for lenders, lessors and operators alike (and we still have one or two to go as we all race for the finishing line that is the Holidays).
Throughout, we have been grateful for the support of our clients who have stood by us during our respective moves, and we are excited to close the book on the first phase of our project as we move into 2018. The new year will see the continued development of our practice and will, we hope, give us the opportunity to form deeper partnerships with our existing clients as well as to establish new partnerships to support additional players in the aviation industry.
Establishing a new practice from scratch is inevitably somewhat turbulent for all involved and this got us thinking about the other turbulence and interruptions experienced on a sectoral basis by the industry this year. With this in mind, it seemed like a good moment for us to pause and take stock of 2017.
Whilst generally travel demand has been strong and airlines have continued to improve their load factors in 2017, it has not all been plain sailing. The fare environment remains a challenge for many and the upward trending fuel prices did little to help profitability.
US carriers have generated unwanted column inches by virtue of the overbooking stories and many of their third quarter revenue expectations were lowered as a result of aggressively competitive pricing. But who can forget American’s CEO Doug Parker proclaiming that he doesn’t think they will ever lose money again? President Trump’s (attempted) travel bans have also hit operators of flights to the US from mainly-Muslim countries and we saw a decline in UAE-to-USA capacity. Additionally, the resentment around what the US carriers consider to be government subsidies benefitting their competitors in the Middle East saw the US rivals demand a review of the USA/UAE and USA/Qatar “open skies” deals. The tension is simmering just beneath the surface, with American ending its codeshares with Etihad and Qatar. As a consequence of this, Etihad dropped its Dallas/Fort Worth service. It’s probably just as well that the effort by Qatar to take a stake in American did not go ahead!
The Middle Eastern carriers are the only ones who “enjoy” the rising oil prices given that it is such a driver of their wider economies. Qatar Airways continued to boost its presence, making investments in its Oneworld partners IAG, LatAm and Cathay Pacific (amongst others). The ban on travelling with certain electronic items on flights from the Middle East, fortunately, did not last long.
In Europe, British Airways suffered an IT failure (or a power surge…) that caused flights to be grounded and Ryanair cancelled significant numbers of flights this autumn as a result of a lack (or unavailability) of pilots – but has still been phenomenally profitable. Meanwhile, Monarch and Air Berlin stopped flying and Alitalia filed for bankruptcy. All three carriers were victims in no small part to excess capacity, so their demise could be seen as a positive reduction or natural rebalancing of this. In an attempt to see a silver lining to the Monarch cloud, we note that the UK CAA acquitted itself with aplomb when it successfully undertook what the UK government called “the biggest ever peacetime repatriation”, bringing over 110,000 stranded passengers home.
Africa saw political turmoil hamper opportunity (for South African Airways in particular). The political and infrastructure challenges remain huge but the potential is bigger. However, as IATA’s regional head for African and the Middle East, Adefunke Adeyemi, noted – despite projections of continued traffic growth, not enough has been done to address the problems or to liberalise the industry. In particular, cooperation between African carriers is very limited, with only Ethiopia and Kenya having connections to more than half the other countries in Africa. Africa’s inability to access foreign investment is directly proportionate to its limited direct airline connections.
In Asia, Cathay and Singapore Airlines have continued with their respective restructurings, in part in response to competition from state-owned carriers in China. Singapore Airlines in particular is very invested in low-cost and regional models (Scoot and Silk Air). A very enjoyable and informative Hong Kong conference saw us “launch” our new Reed Smith team to a number of key Asian clients and it would be remiss to mention Asia without noting the valuable and growing role played by Asian-owned lessors and Hong Kong’s move to establish itself as the “Dublin of the East”.
As Robert Martin noted in his keynote at the HK conference, “BRIC is back”. The economies of the BRIC nations (Brazil, Russia, India and China) are warming up again. The green shoots of a recovering Brazil, the bellwether for South America as a whole, are a particularly good and welcome indicator here. Argentina’s increasing liberalisation (and the improvements to its airport infrastructure) also bode well.
In Central Asia, however, geopolitics dampened demand in Turkey and other countries where travellers have security-based concerns (although the prospects for recovery look reasonable, and Turkish Airlines and Pegasus have returned to growth).
Globally, 2017 also saw the growth of the low cost long haul operators, such as Norwegian, aided by the still relatively low fuel costs (albeit higher than at the turn of the year), the continuing low interest environment and by the delivery of next generation aircraft such as the Boeing 737 MAX 8. Arguably the likes of “Level” (launched by IAG) and “Joon” (by Air France) are a direct response to the encroachment into their traditional markets by airlines like Norwegian. The “traditional” carriers such as British Airways have to fight back: their transatlantic services have grown by a little over 1% this winter. Norwegian’s, on the other hand, have grown by in excess of 110%. Icelandic carrier WOW is another example of this phenomenon.
We can’t fail to mention the manufacturers in this review. The Airbus-Boeing duopoly continues, but Bombardier has made real strides with its CSeries. The CSeries has been well received (notwithstanding some productions issues) by all – apart from its competitors. This is surely a sign of success, but it might not feel like that. The programme has now effectively been bought by Airbus and so the dominance of the leading manufacturers remains undisturbed. And the allegations levelled by the US at Canada of unfair subsidies and the retaliatory tariffs and duties on CSeries sales in America will hit US customers such as Delta unless overturned in the US trade court early next year. The impact of this in the UK on Bombardier’s wing production centre in Northern Ireland remains to be seen, but is an interesting counterpoint to Trump’s promise of a “beautiful” trade deal for the UK post-Brexit.
Away from Europe and North America, Russia’s Irkut MC-21 and China’s Comac C919 are interesting developments, even if they are not yet truly competitive. The Russian/Chinese “joint venture” in the shape of the CR929 manufactured by the fantastically named “CRAIC” (please tell us someone in Dublin came up with this…) is intended to challenge the widebody market within the decade. The combination of Russian expertise and Chinese money (and a huge domestic market) means these ventures cannot be ignored.
From a macro perspective, we seem to be weathering various political/geopolitical shocks well. Notwithstanding the more isolationist trends of President Trump in the US and Brexit in the UK, as IATA CEO Alexandre de Juniac has reminded us: “aviation is the business of freedom [making]…global mobility ubiquitous”. Interestingly, air travel between the USA and Mexico has risen this year.
And to conclude on a nostalgic note, after United Airlines retired its last 747 in the autumn, earlier this week we saw the final Boeing 747 international flight (for an American carrier, at least – British Airways and a few other European airlines will continue to operate them for now). After almost half a century of faithful service, Delta had originally planned to operate its final service last Sunday but operational requirements necessitated one further trip to Seoul and back. Like all silver-haired rock stars, the aircraft will now fly a farewell tour before heading off to warmer climes for her retirement in the new year. For the Queen of the Skies, this will likely be a “boneyard” in the Arizona desert. So, farewell to the Jumbo Jet in America: the aircraft that made aeroplanes seem bigger and the world seem smaller.
On behalf of the entire Reed Smith aviation finance team, thank you for your support this year, and we wish all of our clients and readers alike a very happy Christmas and a successful and enjoyable 2018.