With aircraft manufacturers significantly decreasing production and facing delivery delays, the market for both new and used aircraft has become increasingly tight in recent years. This shift has altered negotiating dynamics, favoring aircraft lessors and finance parties, particularly when it comes to defaults and restructurings. The current environment may even exacerbate existing financial distress within aviation companies, which could struggle to reach consensual resolutions and amend aircraft agreement terms.
As air travel demand returns to near pre-pandemic levels, airlines and aircraft operators are fiercely competing to secure either new aircraft from a limited supply or extend existing lease terms. However, the competition is coupled with soaring labor, interest, and fuel costs, straining the resources of many operators. Aircraft lessors are taking advantage of this situation by demanding higher lease rates, thus placing additional financial pressure on operators who must acquire and retain aircraft at premium prices. This escalation in lease and purchase costs may intensify financial stress experienced by aviation companies. Several airlines have recently issued profit warnings due to these heightened costs.
Given the current market dynamics, aircraft lessors and financiers are expected to act more aggressively in response to defaults. During the slower period of the COVID-19 pandemic, finance parties were more lenient, offering waivers, forbearances, and amended terms to operators. However, higher lease rates and improved economic terms are likely to make these creditors less willing to grant such accommodations moving forward. As a result, airlines and aircraft operators must adopt more cautious liquidity planning, vigilance in monitoring cash flows, and potentially hire financial and legal advisers to develop contingency plans proactively.
Operators are advised to seek waivers or forbearances proactively and avoid relying on informal assurances from counterparties. Should negotiations fail, an in-court insolvency proceeding with a stay on creditor remedies may be necessary to provide the breathing room required for effective restructuring. The pandemic saw numerous restructurings where lessors and finance parties were willing to negotiate; however, the same flexibility may not be present today due to the heightened demand for aircraft. The current market conditions are expected to compel these parties to enforce higher rates and stricter terms, which could pose additional challenges for successful restructuring efforts.
For aviation industry participants, close monitoring of the financial landscape, diligent planning, and seeking professional guidance are imperative. These strategies will help in navigating the tighter aircraft market and leveraging creative restructuring solutions to maintain operational viability.
Kelly DiBlasi, a partner in the restructuring department at Weil, Gotshal & Manges, emphasizes that understanding and responding appropriately to ongoing market trends are crucial for distressed operators aiming to develop effective restructuring strategies.