Avation plc (LON:AVAP) Executive Chairman Jeff Chatfield caught up with DirectorsTalk for an exclusive interview to discuss leasing demand, arrears and cash payments in 2023, rising interest rates affecting leasing costs, availability of debt and equity capital, the potential for consolidation in the lessors market, and whether the impact of supply issues means lessors with order books have an advantage to grow in that market.
Q1: Jeff, how has Avation found demand in the leasing market for ATRs and narrowbodies in Asia and Europe through 2023, and how do you expect demand to develop into 2024?
A1: Well, I think, for obvious reasons, the market for all airline, all aircraft, if they’re there, is extremely strong. There’s a lot of supply issues from the manufacturers and so clearly the aircraft that are made, exist, are out there, are really valuable.
Probably, the best aircraft types in the world at the moment would be the A321, in terms of demand and appetite. COVID, the travel’s recovered, airlines need capacity, things like the A21 are really popular and A320s are really popular, and I think A220s super aircraft, given the big airlines are now starting to take them.
So, yes, things are going well.
Q2: Now, the company’s airline customers are mostly tier two and three airlines in developing parts of Asia and Europe. How have they performed in terms of arrears and cash payments in 2023? And how do you expect customers to perform this year?
A2: Well, I disagree with that.
I think EasyJet’s not a tier, EasyJet’s investment-grade. I mean, we’ve got a mixture of credits, I don’t think we’ve got many tier three airlines, as you’d call them. I think Philippine Airlines is a flag carrier, Alliance, which is Air India, that’s a flag carrier, Air Baltic’s effectively a flag carrier, Fiji’s obviously a flag carrier, and Mandarin’s a flag carrier. So I think they’re tier one.
We had a few that are in arrears from COVID, they are now clawing it back, we’ve had dramatically improved recoveries since a year ago. I don’t know the December ‘23 score yet, but I’m reasonably confident that there’ll be a dramatic improvement in collections of arrears.
So, I think overall the credit quality’s good, we do have some really good customers and anyone with arrears has been paying us.
Q3: So you think that’ll carry through to ‘24?
A3: Very confident, yes.
Q4: Last year, interest rates rose rapidly, raising the cost of leasing sharply. Do you see airlines willing to pay the higher rates or are they postponing aircraft additions until the rates ease down a bit?
A4: No, they want aircraft, definitely. They’re not really willing to pay more for them, to a degree they are, but not materially.
There is a view that the lessors financially are strong enough to lease them aircraft and therefore, some lessors will somehow swallow the cost and increase in interest rates, which is impossible to agree, so it’s a tough one.
There’s a dynamic there where you’re getting squeezed on yield and interest rate, where innovation has to improve relative to its peers, a challenge for us is to get that cost down so that our net yield increases and therefore we become more profitable.
It’s actually a big challenge that we’ve got, it’s the biggest challenge in a way. It’s easy to place aircraft, the challenge is to place them with sufficient yield to make sufficient money.
Q5: What was the availability of debt and equity capital like in 2023? Do you expect the capital financing markets to improve or worsen in ‘24?
A5: I believe that there’s a couple, I won’t get into it, but there’s a couple of big international capital markets transactions late in ‘23 that indicated the markets are well and truly open.
The traditional financing markets for guys like us are open again, and we did a refinance, we did a couple of big refinances last year with the MUFG and Investec.
So, the market for money is definitely open. For debt, debt finance is definitely open. No question about that, if that’s your question.
Q6: Now, a number of lessors are on the market for sale, is the company expecting the lessors market to consolidate further, and what does it mean for niche lessors in the wider market?
A6: Well, I think there’s always churning there. If you look at the Airfinance Top 50 Lessors in the world, there’s a couple of big ones and probably have half the market between them, and then there’s 47 others.
That’s the same year in year out, you talk about two or three being merged and acquired and all the rest of it, but then there’ll be new two or three.
So, I think there’s always churn in this industry, there’s always people coming and getting taken over and then there’ll be some new startups so there is a lot of deal flow, I guess, to keep the bankers happy.
Will there be much more? I think it’ll continue, I think each year a few get taken over and a few startups will be created.
Q7: Now, reports talk about supply issues causing delays of aircraft, does this mean that lessors like Avation with order books have an advantage to grow in that market?
A7: I think it’s fantastic if you’ve got existing aircraft that you want to transition and I think the existing aircraft values have gone up.
I think it’s not great if you were starting up from nothing, you’d really struggle getting aircraft because the manufacturers don’t have a lot to talk to you about, they don’t have any supply until the year 2027, or they don’t have any supply until the year 2028 or whatever it is. So, if you were just starting up, I think it’d be tough.
So, people with an order book or an option book or whatever it is, I do think they’re well-placed compared with startups, but more importantly, I think aircraft valuations have gone up because in reality, there’s some suppliers, some manufacturers have had a few technical problems, which has constricted supply.
