MARCH 29TH, 2016
Fitch: Aircraft Lessors Largely Insulated from China Slowdown
Fitch Ratings-New York-29 March 2016: The expected economic growth deceleration in China through 2017 should not significantly hurt aircraft lessors’ credit profiles, Fitch Ratings says. While the Asia-Pacific region is a meaningful area of current exposure for most aircraft lessors, we expect that resilient consumer spending in China over the next few years and the Chinese government’s support for top airlines that are among the lessors’ top customers should suppress the fallout from a broader China slowdown. At Dec. 31, 2015, China averaged 10.5% of Fitch-rated pure play aircraft lessors’ exposure on a market value basis, with a maximum of 11.7%.
Fitch is projecting GDP growth in China of 6.2% in 2016 and 6.0% in 2017, after the country posted growth of 6.9% in 2015 and 7.3% in 2014. Implicit in our GDP projections for China over the next two years are consumer spending increases of 7.7% in 2016 and 8.1% in 2017, which is stable compared with 8.1% growth in 2015 and 8.4% growth in 2014.
The aviation industry is cyclical, tied to passenger travel, and therefore driven in part by consumer spending. The last time that China experienced a GDP decline of over 100 basis points was in 2012, when it fell to 7.7% from 9.3% the prior year. At that time, China experienced a 140 basis point decline in aircraft revenue passenger kilometer (RPK) growth according to IATA and a 100 basis point decline in average cumulative hours traveled by passengers in China, according to Ascend.
We believe that a similar dynamic of moderate RPK growth could play out over the next few years as the secular drivers of Chinese air travel – namely a growing middle class, low jet fuel prices and airlines’ increased use of leasing – persist. Another factor driving air travel is that China’s population is more than three times larger than that of the United States but Chinese aircraft values only represent approximately two-thirds of U.S. aircraft values according to Ascend. Recent Chinese airport infrastructure investments also support air passenger traffic, which grew 10.9% domestically in 2015, according to IATA.
For context, the market value of leased aircraft in China is $34.3bn according to Ascend, which represents approximately 17.1% of leased aircraft globally. Of the 44 lessors with exposure to China, the largest on a notional basis are ICBC Financial Leasing Co., Ltd. ($3.4bn, 41.4% of fleet market value according to Ascend), AerCap Holdings, N.V. ($3.1bn, 10.4%), GE Capital Aviation Services ($3.1bn, 10.6%), CDB Leasing Co., Ltd. ($2.6bn, 48.9%), and Bank of Communications Finance Leasing Co., Ltd. ($2.5bn, 69.0%).
AerCap, the only pure play publicly traded lessor in the top five, recently reported that 13.2% of its 2015 lease revenue and 14.5% of its long-lived assets as of Dec. 31, 2015, were derived from Chinese lessees. Certain smaller lessors entirely exposed to China include Comsys Aviation Leasing Co., Ltd., SPDB Financial Leasing Co., Ltd., and Tianjin Bohai Leasing Co., Ltd.
Another important consideration is that several of the largest lease customers include airlines supported by the Chinese government, such as Air China Limited, China Eastern Airlines Corporation Limited, China Southern Airlines Company Limited, and Hainan Airlines Company Limited. These four airlines represented 48% of the top five lessors’ Chinese fleets, and provide more reliable cash flow streams to lessors compared with non-government supported airlines.
Should consumer spending prove less resilient than expected, airlines could be pressured and lease terminations could accelerate, spurring weaker profitability and capital erosion for the lessors exposed to China. In such a scenario, Fitch would consider the impact of a China slowdown on global economic growth and passenger travel, along with lessors’ ability to re-lease planes to airlines in other regions. The timing of any slowdown (and subsequent recovery) would also be an important consideration, relative to the large order books that will be delivered to certain lessors over the next five to ten years, as an extended slowdown could pressure lessors’ ability to place these planes on favorable terms.