While previous inflationary cycles have deeply harmed some, they have also greatly benefited others. It is a sure bet that the current inflationary cycle hampering the economic recovery from the health crisis will not be much different from earlier ones. At ABL Aviation, we strongly agree that this cycle will have a negative impact on many asset classes, such as obligations or shares, which tend to perform poorly against inflation.
However, we believe that a sector such as aircraft leasing will have every opportunity to benefit from such a context. Certainly, the airline industry is being affected by the general rise in airfares, which is likely to dampen demand and slow the industry’s recovery. However, real assets, such as aircraft, will be less affected by inflation as they are able to generate attractive return premiums. Not only is inflation likely to help offset the decline in resale value of lessor-owned aircraft over time, but ownership of an aircraft is also likely to generate rental income until it is resold.
But that’s not all! A bit like real estate, inflation also causes prices to rise over time, including the value of an aircraft as it ages, which can help offset its depreciation. In the extreme, the value of an aircraft will depreciate more slowly than it would in the absence of inflation. At the best of all scenarios, it may allow the aircraft to be sold at a higher value than its original one.
Finally, it should be reminded that when operational leasing of aircraft was introduced in the late 1970s and early 1980s, aircraft were a huge cover against inflation. At times, aircraft were even sold at the end of their 10-year lease at a higher price than when they were newly purchased due to inflation. The fact that aviation was seen as a hedge against inflation was a major factor in the aircraft leasing boom of the 1980s. Back then, investors were lining up to enter the market.