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The ins-and-outs of aviation investment

Sep 27, 2018

By Rachel Frye

Commercial aviation investment comes in many shapes and sizes. As this sector continues to grow and mature, there is now almost something for everyone. The ability to participate in such a dynamic industry has never been easier as the risk/reward spectrum broadens to attract investors with all types of risk appetite. 

With over 47% of commercial aircraft now being financed or leased, up from 7% in the mid-1980s, the accessibility for investment in aircraft and related assets has increased almost seven-fold. The general acceptance of the fundamentals of commercial aviation as a viable investable industry has helped fuel this massive uptick in leasing. With that, lessors and lessees have been able to access varying amounts of secured and unsecured funding along with continued over-subscription by the capital markets.

Risk profiles

Long gone are the days of the “typical” investment profile. Transaction structures now allow investors to choose from a menu of different types of exposure. With varying lengths of tenor, amortisation profiles, and loan-to-value coverage, investors can take on different tranches that suit their needs (senior/junior/mezzanine/equity). The risk, however, must also consider the asset. Specifically, what is it? Is it an aircraft, an engine, a pool of spare parts, or all of the above? If it is an aircraft – is it a ubiquitous type commonly found in most operators? Is it secured by a lease? These are simple questions to answer the nuances of very complex relationships.

Risk vs. reward

With greater reward comes increased risk. The current environment remains ripe with opportunity. However, not all opportunities are created equal. Guaranteed promises of higher returns are commensurate to a higher level of exposure – either with the underlying elements of the transaction (credit, asset, structure) or perhaps something else. In some cases, this might be a lack of understanding of technical nuances, or lease terms and cash flows. Truth be told, in an environment of 5-8% normalised returns, promises of 25%+ shouldn’t pass the sniff test. Some new lessors to the space are filled with promises, and that is about it. Others have already handed over the keys and are anxious to exit as they didn’t realise the risks and didn’t have the required technical expertise. 

That being said, the organic origination of unique opportunities filling a specific need are still available, but unless you have an integral knowledge of the industry, the reward is based on pure trust of a party who represents that granular understanding along with their ability to remediate when things go the wrong way.

Due diligence

Greater complexity incurs greater oversight and understanding. No matter what the entry point or risk profile, proper due diligence must be completed.  As the saying goes – you can have a bad asset in a good structure and, conversely, a good asset in a bad structure. 

The premise that there is always a premium associated with a leased aircraft when incorporating a collateralise value is misleading at best, and some sellers/arrangers are hoping that investors won’t do their homework. 

Someone on your side

Currently, the competitive, “seller’s” market is ripe with opportunities. Those looking for the right piece of the puzzle need to know what types of questions to ask and to understand the real risks behind the proposition along with knowing how aggressively they want to enter the market. The higher the return the more investors will need an extra set of eyes to walk them through any hidden risks. Even with lower return opportunities, it never hurts to have someone on your side to talk to.

Rachel Frye is a PwC Aviation Advisory Finance Leader.