Capture Income and Diversification Potential with Aviation Finance
Text on screen: PIMCO
Text on screen: What is Aviation Finance?
Hinze: Aviation finance involves providing funds to airlines or leasing companies based on the value of the aircraft.
Text on screen: Sean Hinze, Portfolio Manager
This can take the form of secured loans or operating leases.
Images on screen: Aircraft engines, engine construction
Engines, one of the most expensive components of an aircraft, can also be financed. Some asset owners favor older aircraft, which can be sold off for parts.
Aircraft have long been subject to securitization and traded on the public market in the form of Enhanced Equipment Trust Certificates, or EETCs, or aircraft ABS.
Text on screen: Why is there a growing demand for aviation finance?
Aircraft are essential for transporting people and goods, forming a crucial part of global transportation infrastructure.
Text on screen: Currently there are over 25,000 jetliners in operation with demand expected to grow
Images on screen: Airplane in flight, airplane construction.
By the end of 2023, there were over 25,000 jetliners in operation, with demand expected to increase as the global economy grows.
Your typical narrowbody aircraft, new, costs between 50 and $60 million. Your typical widebody can run as high as 150 to $200 million.
Due to the high cost of these assets, financing, known as aviation finance, is often required.
With the global travel industry recovering to pre-COVID levels, supply and demand imbalances in the aircraft market are creating opportunities for investors.
FULL PAGE GRAPHIC: TITLE – Airbus and Boeing supply: below targets since 2019. The bar chart shows a subtitle on the left that reads ‘Actual versus target deliveries – no. of aircraft.’ The legend on the right shows aircraft makers Boeing in blue, Airbus in green, and Undelivered in gray. Both Boeing and Airbus had consistent actual vs. target aircraft delivery numbers from 2014 to 2018. The number of undelivered aircraft started in 2019, with the highest in 2020. The number of undelivered aircraft declined a bit in 2021 compared to 2020 but remained high through 2022 and 2023.
Although the industry has yet to fully recover from the supply chain disruptions due to the pandemic, idiosyncratic manufacturing quality control issues have further exacerbated the situation. Any new planes ordered today will only be delivered towards the end of the decade.
Text on screen: How does aircraft leasing work?
When purchasing an aircraft, investors often secure a loan using the aircraft as collateral.
FULL PAGE GRAPHIC: TITLE – How aviation leasing works: The graphic illustrates the step-by-step process of aviation leasing, starting with the Aircraft seller (shown as a person icon) on the left, who signs a Sales contract (depicted by an airplane icon) with the Investor as an Aircraft owner/lessor (represented by a person icon) in the middle. The Investor gets a loan (depicted by a hand and a $ icon) from a Financial Institution on the right (depicted by a building icon). The bottom half of the graphic shows a box on the left that says Lease agreement (depicted by an airplane icon), with two bullets under it that reads 1) About 10-12 years and 2) Fixed dollar amount. The Lease agreement is between the Investor, as the Aircraft owner/lessor and the Airline (depicted by an airplane tail icon) as the lessee. The box on the right (depicted by a $ symbol) says Income from lease, which is generated by the Investor from the Airline.
The term of an aircraft lease is usually 10 to 12 years, and the lease is typically a fixed dollar amount throughout the leasing term for commercial aircraft. Aircraft are generally retired at around 25 years, so their value gradually declines with age. However, this value can also fluctuate during the maintenance cycle and be affected by factors such as inflation, supply and demand and the quality of the leasing agreement.
Demand for operating leases has been growing for decades, with over 50% of the global fleet leased today.
Text on screen: Leases allow airlines to procure aircraft more quickly and avoid debt from purchases
Images on screen: Airplane in flight and landing
The benefits of operating leases include allowing airlines to procure aircraft in a timely manner, providing greater flexibility in their aircraft strategy, and enabling them to focus on operations without worrying about financing aircraft purchases or how that debt would affect their credit ratings.
Text on screen: What are the risks for aircraft owners?
As aircraft are expensive assets, the leasing agreements are generally structured to provide protection for asset owners because they take upfront risks by buying costly assets. Lessees or airlines, on the other hand, are obliged to take risks during the term of the lease even if the aircraft is grounded or damaged. Lessees are also responsible for taxes, insurance, and maintenance, as well as buying fuel for flights. This insulates asset owners from volatility and commodity prices, as well as passenger demand.
Text on screen: What are the potential benefits of investing in aviation finance?
Aircraft manufacturers are essentially duopolies of Boeing and Airbus, providing better visibility on the supply. Due to the heavily regulated nature of the industry, high development costs and long lead time to obtain certificates, the number of models is limited, making them relatively liquid when trading.
Another advantage is the minimal disparity in the quality and condition of each aircraft due to global universal standards.
Text on screen: TITLE – Potential benefits of investing in aviation finance: BULLETS – Income generation, Possible portfolio diversification, Backed by economically-essential asset, Relatively transparent, liquid, standardized market
The key benefits of investing in aviation finance are that you have an asset backed investment that's income generating in nature.
And we also have a hard little “I” infrastructure asset that's economically essential and hard to replicate.
Suggestion: Text on screen: What are PIMCO’s capabilities in aviation finance?
Since its founding in 1971, PIMCO has invested in bonds and loans for airlines, EETCs, and aircraft ABS in the public markets. As a natural extension of our capabilities, we have gained experience across the aviation industry, including restructuring airlines and lessors.
Aviation finance is one of PIMCO’s highest-conviction sectors in the growing 20+ trillion asset-based lending universe. PIMCO is largely focused on aircraft leasing of new and young narrow body aircraft, which we believe generates the best risk adjusted returns.
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Text on screen: PIMCO
Disclosure
This material (the “Material”) is being provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy interests in a fund or any other PIMCO trading strategy or investment product.
The investment strategies discussed herein are speculative and involve a high degree of risk, including a loss of some or all capital. Investments in any asset classes described herein may be volatile, and investors should have the financial ability and be willing to accept such risks.
Asset-backed securities are highly complex instruments that may be sensitive to changes in interest rates and subject to early repayment risk. Private credit involves an investment in non-publically traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. Structured products such as collateralized debt obligations are also highly complex instruments, typically involving a high degree of risk including default, liquidity, management, volatility interest rate and credit risk; use of these instruments may involve derivative instruments that could lose more than the principal amount invested.
Past performance is not a guarantee or a reliable indicator of future results. There can be no assurance that the trends discussed will continue or that the opportunities identified herein will materialize. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
Certain information contained herein concerning economic trends and/or data is based on or derived from information provided by independent third-party sources. PIMCO believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.
The views expressed herein are those of PIMCO as of the date recorded, based on information available to PIMCO as of such date, and may not have been updated to reflect real time market developments. Such views and opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
PIMCO and High Ridge Aviation (“HRA”) are separate legal entities.
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