The Friendly Skies
Aircraft leasing is one of the most compelling corners of ABL. Single aisle Boeing and Airbus commercial aircraft are mission critical assets for any airline. Today, roughly 53% of the global commercial fleet is leased (47% owned). Airbus and Boeing order backlog stands at approximately 15,500 aircraft, or roughly 8 years of production/back-order wait list time to take delivery. Given this dynamic, there is extraordinarily valuable in aircraft ABL, generating significant MOIC relative to other segments of ABL. Yet, there are risks.
Earlier this month, Spirit Airlines made the painful decision to cease operations and liquidate its fleet of aircraft. In bankruptcy, airlines have 60 days to affirm or reject aircraft leases under Section 1110, and they almost always affirm, since the vast majority of airlines that file for BK continue to operate as a going concern. Since 2000, the 3 major airlines used Chapter 11 to restructure (American, United, Delta all did) with exceptionally strong operating businesses today.
Spirit Airlines is the exception; it’s the first U.S. airline with 100+ planes to not emerge from BK. The last liquidation of an U.S. based airline flying 100+ aircraft was Eastern Airlines, when it shuttered in 1991. Spirit ceased operations with 173 planes.
Under Section 1110 of the Bankruptcy Code, airlines have 60 days to affirm or reject aircraft leases in the event of default. Aircraft is mission critical for any airlines, except for an airline that liquidates. If a BB-rated airline have a ~5% probability of default during the next 5-years, and in the event of default, a ~90% probability that the lease will be reaffirmed, which is typically the case for newer aircraft, then there is less than 1% chance that they aircraft will be repossessed. When things go south like the recent case with Spirit, the lessor will likely call the the repo man
Inflation is your friend because aircraft values hold value relative to depreciation schedules.
Three big questions that ABL investors may want to know are: 1) COVID- how did the aircraft portfolio perform during this period when few people were flying during the 1-year COVID lock-down?, 2) Russia- did my ABL manager lose any of its aircraft portfolio when Russia took possession of ~550 commercial airplanes in 2022 when it surprisingly invaded Ukraine?, 3) how many aircraft investments have resulted in loss due to counterpart risk?
The math is compelling: mission-critical assets, inflation-protected values, a multi-year production backlog, and structural demand that only grows. For experienced ABL managers with dedicated and highly experienced aviation teams, the skies are indeed very friendly.
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