Lessors that agree short-term fixed lease rental holidays with their airline customers due to the Covid-19 pandemic are not doing particularly “smart deals” because they take no account of the duration of the crisis, Avation chairman Jeff Chatfield believes.
Speaking on an analyst call on 12 May, Chatfield said that lots of lessors haven been offering their customers a short-term rent holiday, but suggested this was a short sighted approach.
“Those are not particularly smart deals because if the crisis goes on for a long time then there won’t be any catch up,” he said, adding: “A lot of lessors gave them holidays, we are getting cash every month, it’s very important that the airlines pay us money each month,” he says.
Avation has taken a different approach to the crisis, he says, by agreeing to reduce, but not freeze, monthly rental payments for 15 of its 19 airline customers by varying amounts each month.
A typical deal will see an airline convert part of its outstanding rent for three to six months into effectively a loan to Avation, which accrues interest.
The money owed is then paid back in six, nine or 12 months, Chatfield explains. During this period, the airline continues to pay maintenance reserves and continues to store and maintain the aircraft as necessary.
Chatfield says the lessor has no lease expiries before August 2021.
He stresses the importance that airlines pay some money each month in order to preserve cash flow.
He said Avation’s strategy was “superior” to other lessors in its approach as it gives it more time to react.
Avation says these agreements represent around 7% of annual revenue. Revenue to 31 March 2020 quarter increased to $100 million, up from $87 million in 2019.
Chatfield says the management job is to ensure that airlines pay the rent owed and Avation will need to be “aggressive on that”.
“We anticipate they will honour it,” he adds.
“We believed that the crisis could go on potentially for a long time. So in order to survive and prosper we needed to have agreements in place with our airline clients so that there was sufficient actual cash coming in to ensure that the operating costs of the company, the interest costs to the banks, the interest costs to the bondholders and so on, was covered”he says.
At the same time, the lessor has agreed to reduce the amortisation payments it owes to banks on a portion of its senior debt financings.
Avation has worked with senior lenders to adjust the amortisation profile of senior loans to “enhance near-term liquidity”, Chatfield says.
In principle, agreements are in place with its largest bank lenders representing over $370 million of senior debt. To date, banks have agreed to reschedule 31% of loan amortisation in 2020, representing $25 million.
While a couple of banks have yet to agree new terms, Chatfield indicates that “they will do something”.
He says the banks have been “really supportive” and notes that one European bank described Avation’s strategy as the best one adopted by any lessor to deal with the current crisis.
The lessor will not take any new aircraft in the foreseeable future in order to slash capital expenditure.
Chatfield says there are already signs of a recovery in air traffic demand, especially in Asia. He forecasts that there will be aircraft acquisition “bargains” to be had as a result of Covid-19.
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