Aircraft Values & Lease Rates Recover Benefitting Aviation Secured Debt, EETCs & ABS

The demand for new and used aircraft has been robust over the past 12 months, which is expected to continue through year-end 2023. Correspondingly, a marked increase in asset values and lease rates for most single- and twin-aisle aircraft has occurred. Most sought after new-tech model plane values are historically healthy at or near 2019 levels, while the majority of existing aircraft values and lease rates continue to trend positively off depressed pandemic levels. DBRS Morningstar sees such higher asset values and lease rates supporting the performance of secured aviation debt transactions in 2023, including aircraft asset-backed securities, secured loan deals, and airline- and lessor-enhanced equipment trust certificates (collectively, secured aviation transactions).

Key highlights:
-- Ongoing Boeing and Airbus production issues have curtailed new jet supply to airlines and lessors; airlines cannot access new aircraft quickly enough to meet the strong consumer demand to travel in 2023. Given lower production levels, OEMs have not met delivery volume targets over the past three years.
--Current aircraft shortages have meant airlines are operating older aircraft longer, with even retirement-ready assets seeing extended usage, and also reinstating retired out-of-favor aircraft, such as the A380, to solve fleet shortages.
--Further, high inflation and interest rates, and rising costs (raw materials, labor among others) have steadily contributed to a rising aircraft pricing equation. Lessors are passing on such higher costs to their airline customers in the form of higher lease rates, or exercising existing escalation clauses in leases, thus driving up airline costs.

“Global airlines’ capacities have mostly or nearly fully recovered to pre-pandemic levels with robust demand for passenger and freighter assets across airlines, lessors, and global freight companies. We believe this positive rising asset values and lease rate trends will continue into 2024, supported by factors stated above and strong rebound in global travel volumes, ongoing decline of aircraft in-storage numbers, and production challenges that are plaguing manufacturers”, said Hylton Heard, Senior Vice President of US Structured Credit at DBRS Morningstar.