The global aviation sector’s recovery is being led by airports and aircraft lessors, as these business models proved to be relatively more resilient to the Covid-19-driven downturn, while airlines remain the most challenged sub-sector with a full recovery projected to take years, according to Fitch Ratings.
The recovery of pre-pandemic airport traffic largely depends on the split between domestic and international travel, widely varying based on country and geography, and the role airports have in their areas, the ratings agency said.
Airports in regions where domestic travel is dominant, such as the US and the Asia-Pacific, are projected to recover faster compared to those dependent on international travel such as Europe, the Middle East and Africa, Fitch said.
“The pandemic has resulted in the worst event-driven crisis in aviation history … the downturn materially affected the financial and credit metrics of airlines, aircraft lessors and airports, as well as the performance of aircraft and engine asset-backed securities,” it said.
“Airlines are sensitive to further travel restrictions but the impact on the [credit] ratings largely depends on the duration and severity of the restriction. Longer-lasting travel restrictions could delay our expectations for airline credit metrics to return to levels that support the current ratings over the next one to two years and could drive negative actions,” Fitch said.
The rating agency added that along with managing higher debt levels, airlines are dealing with higher fuel prices, labour inflation and continued uncertainty with the virus that will limit near-term upgrades.
Investment-grade rated aircraft lessors, meanwhile, are less sensitive to further travel restrictions thanks to stronger balance sheets, continued access to capital markets, low operating cash burn and meaningful customer and geographic diversification, Fitch said.
“Remedial steps taken by airlines and government support mechanisms implemented since the pandemic should reduce lease defaults and deferrals,” Fitch said, supporting its improving sub-sector outlook for lessors.
Fitch acknowledged that airline recoveries have been slower than expected. But it has seen strong indications of renewed demand for air travel, supported by a healthy rise in bookings on the back of news around loosening border restrictions in certain areas globally.
“The underlying level of demand gives us confidence that airline recoveries should be sustainable even if the pace of the recovery has not been in line with our initial forecast,” it said. Fitch sees sufficient risks and uncertainties that widespread upgrades are less likely in the near-term.