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Two aircraft lease ABS exposed to demise of Lithuanian airline

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At least two planes operated by Small Planet Airlines, the Lithuanian airline that was shuttered last month, are subject to leases that have been securitized, according to Deutsche Bank Securities.

Small Planet operated a fleet of 20 A320 family aircraft, 14 A320-200s and six A321-200s, with an average age of approximately 16 years. Deutsche Bank identified two outstanding current generation aircraft ABS transactions with exposure to the airline - Carlyle Aviation Capital (formerly known as "Apollo Aviation Group") AASET 2016-1 and the ACG-affiliated Merlin 2016-1.

Exposure to each of the transactions is “modest,” however, the bank said in a report published Dec. 4. A 1997-vintage A320-200 represents just 3.1% of the 32 planes $407.1 million of collateral for AASET 2016-1. And with a value of $7.9 million, it is an even smaller portion (1.9%) of the $407.4 million in total market value.

Similarly, the one 2006-vintage A320-200 accounts for 3.8% of the 26 planes backing Merlin 2016-1, though with a value of $15.9 million it accounts for 6.8% of the total market value.

Deutsche Bank believes that the A320-200 aircraft in the AASET transaction is more likely to be scrapped, given its age, while the younger A320-200 in the Merlin transaction is likely to return to service. “In each case, given market demand for both A320 engines/parts and A320 aircraft, we expect a material recovery of value relative to appraised market value,” the report states.

Deutsche Bank did not comment on Small Planet’s demise, except to note that it had struggled for some time, and that the midyear rise in fuel prices added to its challenges. The airline reportedly went into administration in October after its German, Polish and Cambodian subsidiaries filed for insolvency despite claiming “a successful and profitable operational performance” in 2018.

Small Planet’s demise once again leaves Lithuania without a scheduled airline. In November, LOT Polish Airlines was awarded a contract to operate flights connecting Vilnius to London City Airport. The route is being subsidized by and EU-approved special aid mechanism that will see LOT compensated if revenues do not cover the airline’s costs.

Small Planet isn't an anomaly. While the outlook for the global airline industry is generally good, Moody's Investors Service expects some some smaller European airlines whose business models rely on low fuel prices will likely face financial difficulties in 2019, potentially resulting in insolvency. In a report published last week, the rating agency noted that several small European low-cost airlines, in addition to Small Planet, filed for bankruptcy in the second-half of 2018, including Primera Air based in Latvia, Cobalt Air based in Cypress, Swiss airline Skyworks and VLM based in Belgium.

Overall, however, Moody's expects airline profitability will remain strong overall in 2019, albeit lower than 2018 levels, owing to higher passenger volumes and modest growth in fares and fees, which will mostly mitigate fuel, labor and other cost pressures.

Moreover, the growth in air travel demand will result in steady demand for current-technology aircraft, particularly the highly liquid A320 family and 737NG narrowbody aircraft, which in turn will help to ease the rate of decline in the values of aging aircraft in outstanding transactions, according to Moody's.

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Aircraft lease securitization Esoteric ABS Europe