Grounded planes

Despite Challenges for Airlines, Investment in Planes Takes Off



Investors Rush to Aircraft Asset-Backed Securities

Demand for air travel is far from climbing back to pre-pandemic levels. Moreover, the airline industry is dealing with fresh travel restrictions as new strains of COVID-19 appear. Despite these downturns, some investors appear enthusiastic about investing in certain types of aircraft, or securities attached to them.

In the last month the world’s top jet-leasing companies borrowed around $15 billion at yields between 2% and 3%. Castlelake, a global private investment firm, also sold $595 million in aircraft asset-backed securities this month. Bitcoin, SPACs, and stocks like Gamestop have been dominating headlines in recent weeks with some analysts referring to them as “bubbles.” Now hot money is rushing into the jet-leasing sector, causing some to think the space is also overheating. AerCap (AER), Air Lease Corporation (AL), and Avolon are just a few names on traders’ radar.

Investors Hunt For Yield

There is much uncertainty surrounding when and how demand for air travel will recover. Analysts suspect that the recent uptick in aircraft investing is because of low interest rates rather than a particularly encouraging outlook.

Right now for example, US investment-grade corporate bonds are generating less than 2%. Less-risky aircraft-backed debt, on the other hand, is yielding 3.5%. Historically this is one of the best rates on commercial aviation asset backed securities ever. The extra 1.5% of yield is what is influencing investors’ debt-purchasing decisions rather than metrics like upticks in travel patterns.

COVID-19 vaccines have given the airline industry some hope of recovery, though it will likely be a slow and difficult road back to normal. Airline capacity sits at less than half of what it was at this time last year. Passenger numbers are not expected to reach 2019 levels until 2024.

Looking Ahead

Industry analysts say traders shouldn’t forget the asset’s resale value is ultimately what will protect their investment. For both the lessors and the airlines it’s what ensures liquidity. Uncertain times mean that big corporations aren’t immune to the difficult macroeconomic environment either.

For example, Chile’s LATAM airlines opted for bankruptcy to cut its debt last year, returning some of their jets. Norwegian Air Shuttle also recently shed 37 Boeing 787s. Due to the oversupply of planes, returning these aircraft to action could be difficult. The jet market hasn’t caused the commotion seen elsewhere with cryptocurrencies or blank-check companies, but investors’ outsized demand for jet-debt will be something to watch in the year ahead.

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