While the well-documented effect of the Covid-19 virus on airlines appears unmistakable, the leasing companies that finance a significant proportion of the airplanes that now sit on the ground will no doubt feel pain as well. Some of the world’s most prominent lessors find themselves exposed to regions hardest hit by the virus, at first most notably in China and now in Europe and around the world, as airlines ask for rent deferrals through either reduced payments or a halt in payments until the crisis subsides.
As a result, aircraft lessors must decide whether or not they will accept lower-than-contracted lease payments or allow lessees to default, in which case they would have to repossess, reconfigure, and remarket the aircraft in an environment where lease rates would likely move lower. A new report by New York-based Kroll Rating Agency on the effects of the coronavirus on global aviation places repossession, reconfiguration, and remarketing (RRR) cost at about $1.5 million for widebody aircraft and $750,000 for narrowbodies. Lessors, it said, must decide whether a temporary decline in lease payment revenue outweighs the potential RRR cost.
According to Kroll, most lessors have decided to remain “in a holding pattern” and have shown more interest in helping their lessees with better credit and/or parent company support. No matter how severe the effect of the virus proves in the near term, many lessors still hope that a rebound will happen as quickly as after other epidemics over the past 20 years.
Although Kroll head of aviation, transportation, and commercial finance Marjan Riggi expressed less concern about Covid-19’s influence on lessors than about its effect on airlines, she acknowledged that lessors will at least see a near-term revenue hit, while those exposed to airlines with comparatively weak credit ratings and no government support likely will need to absorb more outright defaults.
Fortunately for some lessors, their exposure to China largely involves the three big state-owned carriers, whose main benefactor—the Chinese government—harbors no desire to watch its vital transportation infrastructure collapse. Furthermore, those lessors must consider the health of their relationships with those airlines and their sponsors.
“There could be reasons that are a little bit more complicated than just, okay, well look, they don't have money to pay,” explained Riggi. “It might be that down the road it helps them with other negotiations. It's a negotiating tactic. But yet at the same time, they've also told us that let's say a very small, financially weak airline is asking for the same thing. They may very well say no and start repossession procedures.”
Although she said she couldn’t talk about which lessors the company rates, they could face downgrades as a result of the virus situation. “This is why we put this report out, [because] we're looking at the situation very closely and want the market to be aware of our process,” Riggi noted.