Conference Insights: Thoughts from Deutsche Bank's Aviation Forum
The desk anticipates a continuing upward trajectory for the airline sector, supported by robust demand and an accelerating recovery post-COVID. Recent insights from Deutsche Bank's Aviation Forum indicate that air traffic has rebounded significantly, exceeding pre-pandemic levels, which implies an increased need for aircraft and rejuvenated investment in aviation infrastructure. This positive sentiment comes amidst challenges such as Spirit Airlines' recent bankruptcy, marking a crucial period for investors to gauge growth potential in a transforming market. Per the full note source, such dynamics align with a broader economic recovery narrative, which will be central to positioning in the FX markets.
What the desk is arguing
The desk frames this as a notable inflection point for the aviation sector, where demand is anticipated to continue its upward trend, necessitating increased investments in fleet and capacity. As highlighted in the recent Aviation Forum, air traffic has been on a steady recovery, suggesting that airlines may need to bolster their fleets to meet rising consumer demand.
With international air traffic capacity expected to continue growing, the desk notes the potential for increased investments to fuel this expansion, particularly as passenger levels have returned to and exceeded pre-COVID figures. There is a compelling case for understanding how these recovery patterns could influence currency flows related to countries with major airline operations and aircraft manufacturing.
Where it sits in our coverage
Our consensus target for the relevant currency pair stands at 1.075, with a range spanning from 1.04 to 1.12. In our coverage, jpmorgan targets 1.10 for March 2026, while bofa is more conservative at 1.04 for the same period, suggesting a divergence in outlook that may hinge on how this recovery progresses.
How other firms see it
Aligned firms view the ongoing recovery in aviation as a strong indicator for currency stability, reflecting optimism around growth in travel and associated economies. Notably, jpmorgan's position reinforces a bullish outlook. Conversely, firms like bofa signal caution, highlighting potential headwinds from episodic challenges like corporate bankruptcies and inflationary pressures.
The trajectory of EUR/USD could be particularly influenced by the dynamics at play within the aviation sector, especially as key economic indicators start to effectively signal a robust recovery.
01Air traffic has rebounded and exceeds pre-COVID levels, indicating a strong recovery.
02Increased demand for aircraft may lead to more investment in aviation and associated economies.
03Spirit Airlines' bankruptcy illustrates underlying risks in the sector, yet overall sentiment remains positive.
04The aviation industry typically demonstrates a longer-term growth trajectory, doubling capacity every 20 years.
Market implications
Observe trading patterns around the EUR/USD pair as feedback from the aviation sector continues to impact overall market sentiment. Any significant influence from U.S. economic data coming forward could provide clear signals for positioning in anticipation of sustained demand growth.
Risks to this view
Key risks include further disruption from airline defaults or external shocks such as geopolitical tensions that could dampen economic recovery and suppress air travel demand. Unfavorable regulatory changes that complicate recovery trajectories may also pose threats to currency stability tied to the aviation sector.
Welcome, you're listening to another episode of Podsept, the series where we discuss some of the best ideas coming out of Deutsche Bank research. My name is Matt Barnard, Director of U.S. Equity Research, and today I'm very excited to be joined by Doug Runty, Deutsche Bank's Head of Aviation Debt Research, Mike Lindenberg, Deutsche Bank's Global Head of Airlines Research, and Hilary Conconato, Lead of Deutsche Bank's Aircraft Laisseur Research.
It's great to have you all in the studio today. Great to be here. So we just wrapped up our 15th annual Deutsche Bank Aviation Forum, which is a three-day event featuring presentations and meetings with leading companies in the aircraft finance industry along with publicly traded companies in the airline, air laisseur, and manufacturing industries.
This year we had over 900 people attend the conference, which was really amazing. This year's event came at a very interesting time for the industry. In the last week, we saw Spirit Airlines file for bankruptcy for the second time in less than a year, which is already starting to have ripple effects across both the airlines and laisseurs.
And also given how sensitive airline demand is to consumer and more so business sentiment, it's great to get a real-time pulse check on how demand is trending. So with all that, let's start with Doug. Doug, what were your key takeaways from the conference?
Matt, first, thanks for the kind introduction and allowing me to join my equity research colleagues to discuss this important event. I guess one of the key takeaways is the keen interest of both investors and issuers in this space. It's an industry that's growing significantly.
Air traffic capacity and passengers double every 20 years. Notwithstanding the dramatic effect of COVID on air traffic demand, traffic has come back and is now well above where we were before the onset of COVID. What that means is we need more planes to fly more people further distances.
And I think one of my key takeaways is that the dramatic reduction in production that we saw from both Airbus and Boeing, which is slowly ramping up, despite significant improvements by Boeing, as well as some improvements by Airbus, production of new aircraft is not keeping pace globally with demand for new aircraft. And I think by further extension, what that means is that lease rates and values of commercial aircraft, passenger aircraft in particular, are poised to continue upwards over the next several years. That to me is a key takeaway.
Yeah. And I think that's a really interesting data point. And we'll get to Hillary next.
But as we thought about the demand for these aircraft, I mean, the rise in private debt and private equity funds, and I think Mike and I were talking about this just this past week, the number of investors that came to the conference this year is up significantly on the private side. I mean, what are the implications for that both today and where do you think it's going? That's a keen observation.
Flashing back to 15 years when we hosted, Mike and I, our first annual Deutsche Bank Aviation Forum, I would have said that the future would have a lot more IPOs, much more use of the equity market in order to finance the growing market for commercial aircraft. And roughly $125 billion of new airplanes in real cash dollars are delivered every year. Those airplanes need to be financed.
The 20,000 plus airplanes that are already flying often need to be refinanced. Fifteen years ago, I would have said that's going to require significant participation from the equity public markets. In fact, the opposite has happened.
Just before our conference 15 years ago, we had IPOs from Avalon. We had another public lessor, Aircastle. We were poised to see other new issuances on the equity side.
Air Lease had just done its IPO. And instead of there being more IPOs, we've actually seen the reversal. We've seen large pools of private capital, which 15 years ago, I would have said, is unimaginably big for the private side to get involved in.
Now, the bite size of the private side has become really, really big. There is still a keen need for capital, and it's going to require sourcing from lots of different places. The private side, certainly.
The public markets, I don't think it's gone. Public and private debt, all are going to be present. And capital markets broadly is going to be a significant contributor of capital to what is inevitably a growing business.
People want to travel. Air travel unites the world. It brings together people, economies, families.
It's essential to the life that we live. And it will continue to grow. It will continue to advance.
And it will also continue to become more fuel efficient and sustainable. Definitely. That's a great segue over to Hilary.
So Hilary, what were your key takeaways from the conference? Yeah. You know, I think consolidation was one of the very interesting topics this year on the back of SMBC Air Lease merger news.
The leasing industry obviously had been consolidating for a while, so it's nothing new. But it was particularly interesting because the news broke on the first day of our conference. So in the last year or so, we saw a bunch of acquisitions in the leasing space.
We saw DAE acquiring Nordic Aviation, Avalon purchasing Castle Lake's aircraft portfolio, and AviLease buying Standard Charter's aircraft leasing business, to name a few. So we think there will be more acquisitions as lessors try to achieve scale, which is very important in this industry. And given OEM delivery delays and shortage of aircraft, companies are looking to purchase a large portfolio of assets.
And those that could do it definitely have an edge. Several lessors have indicated that this is an industry where the big players will likely get bigger, but smaller players necessarily won't disappear. But they do have to have a niche or something that they're really good at.
So we thought that was very interesting. And then I think another key topic that was really interesting was obviously Spirit's bankruptcy filing, which was precipitated by AirCap's notice of default. Based on our conversation with investors and conference participants, I think this really highlights the importance of having lesser support.
And I think that airlines, once they lose the lessor support, it really highlights that there's more difficulty ahead. Right. And the timing of that was very interesting.
It was great that they did it right before our conference. There's a lot of buzz around that, for sure. But is there a little bit of inside baseball to be had here with the timing of the second filing, the bankruptcy filing, for Spirit and AirLease's deal?
How do you think that played out? How did it lead one before the other? Yeah, I don't think there's any relation.
There's no relation here. There's no... AirCap is not related to the situation with AirLease's merger with SMBC.
But I think it was very interesting that it happened on the first day of our conference. So let's leave it at that. I was very happy to see that.
Okay. Thanks, Hori. And Doug, actually, I want to go back to you.
I heard a couple of interesting data points at the conference. One was that there are some relatively new aircraft being parked and having their engines taken off because the engines essentially are worth more themselves than the whole value of the aircraft. Maybe you can tell us a little bit more about what you heard there.
Yeah, it's a fascinating point, Matt, and one that Hillary and I have been looking at with kind of eyebrows raised. We have seen quite a few instances where seven to 10-year-old airplanes are being parted out, meaning that the parts are worth more apart than they are actually together as a flying airplane with two engines. So generally, an airplane has a useful economic life of approximately 23 years.
That's when it tends to be parted out, broken up into pieces, useful parts sold and reused, engines move somewhere else. When you see airplanes seven to 10 years old turn from airplanes into two engines somewhere else, it means there's an odd arbitrage going on, and that comes back to some of the supply chain constraints that we've had where the engine manufacturers can't keep up with demand and also an idiosyncratic issue. The Pratt & Whitney geared turbofan engine produced by a subsidiary of RTX has had some issues.
It's had an issue where, because of various reliability issues, more than 600 nearly new GTF-powered A320neo family aircraft are grounded. That's not supposed to happen. It's made some difficulties for various airlines around the world.
And I think, Mike, you can say Spirit certainly suffered to some degree because of those problems. Yeah, absolutely. I mean, that's one of the things that was brought up in their bankruptcy filing.
I mean, actually their first bankruptcy filing and also their second filing of a week ago. The fact that they have a sizable portion of their fleet, I think it's over 50 airplanes that have been grounded, and some of those airplanes have been grounded for more than a year. Yeah.
Well, that's a good segue into maybe you can go through the key takeaways you gleaned from the conference. Yeah. So before I sort of jump into Spirit, because that was clearly the topic du jour and it was on the minds of not just only every investor, but it was also on the minds of a lot of airline management teams, because Spirit now filing for bankruptcy the second time and people concerned about whether or not they're going to even have enough cash to fund the bankruptcy.
There's clearly meaningful implications for others, given the fact that Spirit represents about 3% of industry capacity. But they're in a lot of markets, and they're also the biggest disruptor, number one. Number two was that from a demand perspective, we are seeing trends improve.
We are seeing passenger volumes pick back up. I think as many of you know, the airline industry went through a bit of a soft patch earlier this year. And in fact, we're in the midst of an earnings recession in the US airline industry.
As we look at the data, though, it does look like things are getting better. Part of it is that consumer confidence is starting to move back up. Corporate confidence is moving back up.
And higher corporate confidence was what we heard from carriers telling us that corporate travel is also coming back. And so while through the year we saw the consumer demand actually turn negative, we started the year in January with corporate demand running up double digit in January. And if you think back, you sort of go back eight, nine months in January, right before the market hit an all-time high, I think people were very positive about the new administration coming in.
We were looking at a pro-business government. We were looking at a low tax regime. We're looking at low regulatory or low regulations in place.
And so business travel was being driven by that. By the time we got to the spring, business travel was flat. We heard from several carriers that August and even into September, they were starting to see business travel up mid to high single digits.
So better corporate travel, better consumer travel, and also encouraging outlooks for the fourth quarter. That's great. And I think it was JetBlue that gave some guidance in front of the conference.
And they even went out, as far as the fourth quarter, to talk about corporate demand coming better. And clearly corporate demand has high margins, and that has a big implication across the board. So do you feel like that that is what's lifting the group here?
They've had a big run off the bottom, and that sentiment is starting to permeate through the group. Yeah, absolutely. And I think what's interesting is they guided to better revenue, lower costs.
The industry is also benefiting from lower fuel prices. And I should also stress that the supply backdrop is far more favorable right now than where we were earlier in the summer. Earlier in the summer, we were looking at seat growth domestically up mid single digits.
For the month of August, seat growth was down 1%. For September, it's down 2%. As we look to the fourth quarter right now, it's just up a bit.
But yet we haven't incorporated the reductions that we think are coming on the spirit front this last week. Spirit announced that they were going to pull out of 12 markets. Again, this is a function of the company recently filed for bankruptcy.
And so as we roll those numbers into it, we expect the seat count to come down, which will be favorable for pricing. And the last thing I want to just say is, and I think it's interesting. So if you think about where the industry was just a couple of years ago, it was the low cost, high growth carriers like a spirit that was really driving and seeing the big growth.
And it was the legacy carriers that were more of a question mark. That script is completely flipped now. And why do you think that's happened?
Yeah, there's sort of two reasons, two sort of key reasons. There's probably a few more that we can run through, but sort of two major reasons. Number one is that it's not like the low fare model is dead.
It's just we have eight airlines all pursuing the same customer who happens to be a very price sensitive customer. And if you think about over the last year or so, that customer has been the most impacted by whether it's the tariff concerns or concerns about inflation. So you have too many of a company that depends entirely on a brand agnostic customer who's the first to back off from travel the minute they feel their wallet being pinched, number one.
Number two is that over the last five or six years, we've gone through one of the sort of biggest inflation waves that we've seen since the 1980s. And so as a result, costs have moved up for everyone. So not only for the big airlines, the full service carriers, but for the small carriers.
The big airlines though plan a lot of different spaces where they can take their fares up, whether it's corporate travel, international loyalty, credit card, premium. When you're a low fare carrier, your entire business model relies around demand stimulation. And yet if your costs overnight are up 30 to 40% because you're dealing with the same headwinds that everybody else is, you have to take fares up.
But if you're taking fares up in order to get to the returns that you got in the past, that doesn't stimulate demand, that depresses demand. Which goes back to the fact that we have too many low fare carrier seats in the market. Yeah.
Well, one of them is seemingly potentially exiting the market. It will help. Thanks, Mike.
That was great. And thank you all for joining today. This was a great conference and we're really looking forward to next year.
Matt, thanks for that. And I just wanted to conclude by saying thank you very much to the more than 900 people who registered for our event. We had hundreds of investors looking for investment opportunities and places to put money.
We had dozens of CEOs from lessors, airlines, and manufacturers. We're very proud at Deutsche Bank, all parts of Deutsche Bank, to have had the opportunity to support and bring together so many industry leaders for these important discussions. Absolutely.
And if you'd like any more information on anything discussed here, please reach out to your Deutsche Bank sales representative. You've been listening to Podsept. Podsept, the podcast from Deutsche Bank Research.
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