Rising Tensions with China Bears Watching for Aircraft Lessors

This commentary reviews the recent escalation in tensions around Taiwan’s sovereign status and the effects this may have on the global aviation industry.

Key highlights include:

• The Chinese domestic aviation market is the 2nd largest aviation market in the world with 2,268 aircraft on lease (in-service and stored) as of Sept. 2022.

• The majority of Western aircraft lessors have meaningful exposures to Chinese airlines with AerCap and Air Lease accounting for more than 300 leases.

• DBRS Morningstar notes that Chinese airlines account for more than 9% of the combined backlog for Airbus and Boeing (1,141 aircraft on order or with signed LOI as of Sept. 2022).

• The prohibition on the sale/lease of Western aircraft to China would have a material negative long term impact on all participants in the aviation industry while potential nationalization of aircraft by China would have an immediate and meaningful impact on aircraft lessors and capital markets.

• DBRS Morningstar expects that lessors would have already adjusted risk management to account for Russia's actions which may partially mitigate the financial impact of the possible nationalization of aircraft by China.

“The recent escalation in tensions around Taiwan's sovereign status has increased the potential of China invading Taiwan, which would result in yet a third significant adverse shock to the global commercial aviation industry,” said David Laterza, Senior Vice President, Global FIG.