Risk of default on leases as well as strain on the values for certain U.S. aircraft types could increase as a result of the high fuel prices, Fitch Ratings reported earlier today.
Fitch said the record jet fuel prices the price for a gallon of jet fuel has risen over 50% year-to-date and waning demand for air travel, particularly in North America and Western European markets, has increased the pressure on airlines enough to hamper asset performance in certain U.S. aircraft securitizations.
Consequently, the rating agency has revised its outlook for aircraft securitizations to declining. Fitch has also placed a negative outlook on the sector, with downgrades expected to outpace upgrades over the next year.
The report said declines in airline profitability have resulted in plans for major capacity reductions, potential for fleet liquidations and bankruptcy filings and therefore more grounded aircraft. These grounded aircraft and record number of deliveries scheduled for the next several years could create a shift in the supply and demand balance for commercial aircraft.
Essentially, with more grounded, un-utilized aircraft, lease rates and values for certain aircraft types will deteriorate. Additionally, operating lease securitizations also risk increased frequency of default on existing leases made to lower tier operators.
Despite these challenges on lease securitization, Fitch believes that negative rating actions will be limited in the near term as Fitchs rating criteria assumes cyclical downturns occur every five years during the terms of a securitization.
For more recent transactions, Fitchs stresses assume deterioration similar to in 2002-2003, the most significant slump in aviation history. In addition, the long-term nature of most securitized lease portfolios helps to protect them from short-term cash flow deterioration.