How Aviation Finance Supports Global Airline Operations

The aviation industry is the backbone of global connectivity, enabling the movement of people and goods worldwide. However, the scale of operations required to maintain and expand this global network comes with significant financial demand, and aviation finance plays a crucial role in ensuring that airlines can continue to operate efficiently and satisfy growing demand, particularly in a post-pandemic world.

The Current Landscape of Aviation Finance

As of mid-2024, the aviation industry is experiencing a strong rebound, with global airline seat capacity nearing pre-pandemic levels, achieving 99% of 2019 levels by the end of 2023, according to recent data from IATA. This recovery has been largely supported by effective aviation financing structures that have allowed airlines to rebuild and expand their fleets and adapt to new market realities​, such as Air France. (Centre for Aviation).

However, the industry faces significant challenges. The rise in interest rates over the past few years has increased the cost of capital, placing pressure on airlines, especially those with weaker financial positions. To mitigate these challenges, aircraft lessors have become increasingly important, offering flexible financing solutions that help airlines manage capital expenditures without substantial upfront investments (Aviation Finance).

The Strategic Role of Lessors

Aircraft lessors are essential to the aviation industry, providing flexible leasing options such as operating leases, finance leases, and sale-and-leasebacks. These options enable airlines to adjust their fleet size according to market demand without the financial burden of ownership. Lessors also play an essential role in driving the industry’s sustainability efforts by facilitating the transition to newer, more fuel-efficient aircraft. A prime example is ABL Aviation’s involvement in ESG-driven transactions, such as their deal with Wizz Air and El Al. These agreements include terms linked to environmental and social performance, aligning the financial benefits with the airlines’ commitment to sustainability and making it easier for them to secure capital while advancing their sustainability goals.

The Role of Bonds and Notes in Aviation Finance

Bonds and notes have become essential tools in aviation finance, providing airlines with access to capital markets to fund aircraft acquisitions and broader operational needs. Bonds, often secured by future revenues or existing aircraft assets, offer a stable, long-term funding source that supports fleet expansion, technological advancements, and overall operational improvements. This predictable financing enables airlines to plan strategically despite market fluctuations, offering investors benefits such as stable returns, diversification, and protection through asset-backed securities.

In contrast, notes, which are primarily short-term debt instruments, provide airlines with the flexibility to manage immediate financial needs, such as covering operational costs or funding short-term projects. By issuing notes, airlines can maintain liquidity and respond swiftly to market changes, a crucial advantage in the highly dynamic aviation industry.

Lessors play a crucial role in aviation finance by offering flexible financing solutions like Pre-Delivery Payments (PDPs) and leasing agreements that help airlines manage cash flow and capital expenditures. In order to provide airlines with attractive financing solutions, lessors have successfully tapped the unsecured bond markets in recent years, securing competitive rates. This approach has become critical for larger lessors to fund their operations, enhancing their appeal as partners. Also, their expertise in aircraft management and ability to structure tax-efficient deals further solidify their position as valuable partners in the industry.

Export Credit Agencies (ECAs): Bridging the Financing Gap

Export Credit Agencies (ECAs) are essential in global aviation finance, especially in regions with limited traditional financing options. ECAs empower airlines to acquire new aircraft from domestic manufacturers, even in high-risk or challenging economic environments, by providing guarantees, insurance, and direct loans. Agencies like the U.S. Export-Import Bank (EXIM) and the UK Export Finance (UKEF) have played an important role in supporting transactions, particularly in emerging markets with less developed financial systems. ECAs limit risk and reduce borrowing costs, allowing airlines to compete globally.

A notable example of ECA’s involvement in a significant deal is ABL Aviation’s delivery of a Boeing 777-200LRF to Atlas Air. This transaction, facilitated under the Aircraft Finance Insurance Consortium (AFIC) structure, is a testament to how ECAs can support significant deals in the aviation industry.

Institutional Investors: A Growing Influence in Aviation Finance

Institutional investors, including pension funds, insurance companies, and sovereign wealth funds, are increasingly becoming significant players in aviation finance. Attracted by the stable, long-term returns associated with aircraft and related assets, these investors have filled critical funding gaps in the industry, particularly through the purchase of bonds and notes. This trend has been particularly noticeable in the financing of large aircraft and long-haul routes, which require substantial capital.

A good example is the Qatar Investment Authority (QIA), one of the largest sovereign wealth funds globally, which has diversified its investments across various sectors, including aviation. QIA has not only invested in infrastructure projects but also in aviation-related assets, helping to provide financial stability and support for growth in the industry. Another example is the involvement of pension funds like Canada’s Ontario Teachers’ Pension Plan (OTPP), which is a significant investor in airport infrastructure, underscoring the broader trend of institutional investment in aviation​ (Centre for Aviation).

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The aviation finance market is more than just a support mechanism for cash-strapped airlines; it is the lifeblood that sustains and drives the global airline industry forward. As of 2024, about 53% of commercial aircraft in the world are leased, reflecting the critical role of lessors in the industry. As airlines navigate the complexities of rising capital costs and shifting market demands, diverse financing choices become increasingly important. Aircraft lessors like ABL Aviation contribute to this ecosystem by offering the flexibility required to manage fleets and seek new growth possibilities efficiently.

A key player in global aviation finance, the Japanese market has historically been and continues to be, a very efficient source of capital for airlines when financing their aircraft acquisitions. Top airlines have been able to secure 100% financing at rates that are not available from other sources. This trend is set to continue, and ABL Aviation remains one of the most active players in this market, having closed financing for several quality airlines in recent years, capitalising on the unique benefits of Japanese Operating Leases (JOL) and Japanese Operating Leases with Call Options (JOLCO). These structures not only provide favourable tax treatments but also offer airlines enhanced financial flexibility and reduced costs, reinforcing their ability to grow and adapt in a dynamic industry.

At ABL Aviation, we are committed to partnering with airlines and industry stakeholders to deliver tailored financial solutions that meet both immediate needs and long-term objectives. Leveraging our expertise in global markets, including our strong position in Japan, we help ensure that the global aviation industry continues to thrive, connecting people and goods worldwide.