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Strong market tailwinds promise bright future for aviation lending

By Jennifer Villa Tennity
President, Aviation Lending, CIT

The miracle of flight is one of the greatest wonders of the modern age. And the continued growth of an industry, which many in the U.S. are apt to assume is “mature,” is equally astounding. The world’s appetite for air travel continues to grow every year -- regardless of economic conditions, geopolitical tensions or anything else. It’s been going on for decades and the trend shows no sign of abating.

Bright future ahead

Some amazing statistics speak to the massive growth still ahead.

The number of air passengers will double over the next 20 years to 8.2 billion annually, according to the International Air Transport Association. Of those, 300 million people each year will be taking their very first flight on a commercial airplane. All this flying, Boeing says, will drive demand for nearly 43,000 new jets, valued at about $15 trillion, by 2037.

Just think about that for a moment: 8.2 billion passengers a year, 300 million first-time passengers annually, robust traffic growth and $15 trillion in new aircraft over the next 20 years. Now there’s a market opportunity that’s hard to ignore!

With numbers like those, it’s easy to see why we have high confidence in the future of commercial aviation. We are equally confident that it presents an attractive opportunity for collateral-based lending.

Deep industry knowledge

CIT has been helping finance the growth of commercial aviation for decades. Indeed, our aviation pedigree sets CIT apart by giving us perspectives and insights that other lenders simply don’t have. That’s important in any industry, but especially in a fast-moving sector like commercial aviation.

As president of CIT’s Aviation Lending business and a 21-year veteran of the firm, I can tell you that CIT is very active in financing aircraft. We are continuing to grow our aviation lending portfolio steadily, offering senior secured debt against fixed-wing commercial aircraft, both narrowbody and widebody. Our clientele is predominantly comprised of U.S.-based operating lessors, private equity firms, and hedge funds, with aircraft on lease to airlines all over the world. Our focus is on aviation lending, rather than the aircraft leasing business we sold in 2017, but we retain the deep industry knowledge that enables us to craft custom financings that others can’t.

Looking ahead, the positive outlook for passenger traffic convinces me that demand for aircraft and loans to finance them will remain strong. Air traffic is expected to continue to grow at its historical 5-7% rate per annum for the foreseeable future. And, fortifying the business case, aircraft have demonstrated remarkably low asset value volatility over extended periods, even through massive exogenous events like the Gulf War, the 9/11 terrorist attacks and the financial crisis.

Relationships and experience

Similar to other industries, the commercial aviation market has in recent years seen an influx of liquidity in search of productive investment. That can make for tough competition. So how do you navigate that?

For starters, it’s about maintaining strong relationships with key players. Borrowers appreciate the familiarity of working with experienced lenders with whom they’ve previously done business. For lenders, establishing good relationships and maintaining them is critical to success in both the present and the future.

Another essential element to successful lending in this competitive space is experience. Commercial aircraft are highly complex pieces of technology. Almost as complicated are aircraft lease agreements, part of our collateral in these transactions, which spell out numerous technical details on maintenance requirements and other factors. Properly valuing the assets in the midst of all this complexity is a significant challenge. Not every lender can manage that, but experienced ones can.

Lenders in this space also need to be experts in understanding the industry’s long-term trends. Our Aviation Lending team at CIT has spent the entirety of our careers in aviation. We know the manufacturers, we know the airlines and we know the lessors, PEs and hedge funds who invest in the assets. Smart and responsive lenders who can steer through the commercial aviation industry’s complexities and trends have a noteworthy edge over less nimble competitors.

Ongoing industry change

I was introduced to the commercial aviation industry as a youngster when my father worked for the catering arm of American Airlines at JFK Airport in New York. I spent quite a lot of time driving around the airport with him and I’ve never lost the sense of wonder and fascination that I had in watching planes takeoff, land and roll across the tarmac. I’ve grown up watching the industry expand and evolve and it has been an incredible journey.

Over the years, we’ve seen many airlines come and go through the inevitable processes of competition, merger, acquisition and bankruptcy, but we’ve also seen the airlines evolve to become much more robust and financially sound.

Similarly, we can expect the industry will change as much or more in the future. While the exact nature of those changes remains to be seen, lenders best pay close attention to where the industry is headed at all times.

It’s been more than 105 years since the first scheduled commercial airplane flight took place on Jan. 1, 1914 between St. Petersburg and Tampa, Florida. We’ve come a long way in the intervening century. While the future is always somewhat uncertain, we can be sure it will involve a lot more people flying. And that will require lenders with the agility and expertise to meet the borrowing needs of this dynamic industry.

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