Aviation financing managers and airplane lessors worked with their main customer, airlines, during the beginning of the COVID-19 crisis when air travel ground to a halt.
“Leasing companies, including our own, Genesis, worked with many of their airline customers to defer lease payments through the worst of the pandemic,” Mr. Elwood said. Barings formed Genesis in 2014 and four years later, in September 2018, the €14.5 billion ($14.6 billion) Ireland Strategic Investment Fund invested in Genesis.
“For the most part, the airlines have repaid the deferred amounts and are back to paying their lease payments on time and in full,” Mr. Elwood said.
But they have not completely recovered and Barings executives believe that airlines will lease more than they purchase airplanes as a percentage of their fleets, he said.
“Almost certainly leasing will becoming more dominant as airlines have seen the value of flexibility in fleet planning,” Mr. Elwood said.
As for the returns, they are similar to private credit in that it depends on where in the capital stack you invest, according to Mr. Elwood.
In 2020, 47% of airplanes were leased, up from 36% in 2010, data from IATA and aviation data provider Cirium shows. There were 31 aviation-focused funds on the market with a combined fundraising target of $20.8 billion as of Aug. 24, according to Preqin data.
Barings expects this to be the case “despite the fact that lease rates will need to rise due to increased appreciation of risks, such as pandemics and nationalization, as well as the increase in the cost of capital,” Mr. Elwood said.
What’s more, chastened by their experience during the war in Ukraine, “from now on, airlines operating from, or within, nations with less than friendly governments will have to pay higher lease rates (if leasing companies will even lease them planes) to compensate for the risk,” he said.
