Christopher R. Barth and Ann C. Taylor offer an insight into the USA’s aviation sector, discussing forthcoming airport developments, increased passenger numbers and recent growth in the unmanned aerial vehicles market
1. Currently, what are the main issues (strategic and political) affecting those in the aviation sector in your jurisdiction?
The 2016 U.S. Presidential election will impact the aviation industry’s regulatory environment over the next four years. A Democratic victory likely means a continuation of heightened government oversight; a Republican victory typically results in some regulatory reduction. Airline mergers appear to have ended for now, leaving four major carriers serving U.S. passengers. No further consolidation is likely at present among these carriers, but regional operators are facing financial challenges resulting in some bankruptcies. Further, the developing shortage of licensed commercial pilots is affecting operations, including flight cancellations, and direct financial support of flight school students is coming into vogue as a means to alleviate this shortfall.
2. Where has your jurisdiction seen the most growth in the aviation sector over the past 12–18 months? And, if any, where do you anticipate growth coming from during the next 12 months?
The United States’ aviation sector has seen dramatic growth in the development and use of commercial and private unmanned aerial vehicles (UAVs) and unmanned aerial systems (UASs), commonly referred to as “drones”. This growth has outpaced the Federal Aviation Administration’s efforts to regulate such vehicles. Recent news reports predict a four-fold increase in annual sales, signalling a continued growing proliferation of drones in the U.S. skies.
3. Does the GDS distribution model continue unchallenged as the most popular model for flight distribution?
The GDS model remains the dominant means for U.S. domestic flight distribution.
4. In your jurisdiction, does airport capacity require boosting and, if so (and even if not), what plans and/or processes are in place to address this (or increase or re-organise airport capacity, as the case may be)?
Many major U.S. commercial airports have completed or are undertaking various expansion projects. Chicago’s O’Hare International Airport added a third main runway to increase its capacity. Los Angeles International Airport is currently in the midst of a multibillion dollar redevelopment project that includes major airfield improvements. Similarly, LaGuardia International Airport is about to undertake its own major redevelopment. All of these and other projects are designed to increase capacity and efficiency of U.S. airport commercial capacity.
5. Does the national "flag" carrier carry the most passengers into and out of the national airports and: (a) if so, what competition exists and how significant is it?; and (b) if not, what are your thoughts on the reasons for this, and why do competing airlines have higher load factors?
Last year, U.S. domestic and foreign airlines increased the number of passengers to and from the United States in comparison with previous years. In fact, 2015 set a record high of 199.4 million passengers on international flights to and from the United States. U.S. domestic carriers continue to carry more passengers than foreign-based airlines, with no statistical change in the last year. British Airways carried the most passengers on flights to and from the U.S. of any foreign airline.
6. What trends, in terms of regulatory intervention and involvement, has your jurisdiction observed over the past 12–18 months in relation to airline acquisitions and alliances? Do you anticipate a change in the regulatory environment of your jurisdiction during the coming 12 months, and if so, how?
The U.S. airline industry has experienced significant consolidations among scheduled operators. Today, there are four main carriers servicing the entire country, with regional airlines providing “feeder” services from small- to mid-size cities. The regulatory environment is not expected to change pending the results of the November 2016 U.S. Presidential election.
7. What trends are being observed in relation to new technologies – such as UAVs/drones – and what impact are these technologies having on the aviation regulatory environment?
The U.S. Federal Aviation Administration’s first foray into the regulation of drones occurred on 29 August 2016, when the new Small UAS Rule (Part 107) came into effect. It is widely expected that these regulations will require further refinement as the FAA gains experience in this area.
8. Legal issues in the “lease-to-part out” market. A major market development is the interest of investors purchasing mid–end life aircraft on lease for the purposes of making returns on a leasetail and component margin model. What challenges are inherent in this segment of the aviation finance market, and what techniques and disciplines are required to manage the risks involved?
Part-outs make up around 80% of the supply of used parts, with current demand estimated to be approximately $3.5 billion. The used parts market is projected to grow to $6.2 billion by 2023, resulting in an annual growth rate of 5.6 percent. The U.S. does not impose aircraft age restrictions, instead focusing on detailed maintenance requirements. The challenges faced appear more financial related, as U.S. operators are commencing major fleet replacement programmes which will likely reduce the value of parts from older aircraft. In response, newer model aircraft present a higher market value with more salvageable parts.
9. Manufacturer support in the new cycle of new OEM products, e.g. MRJ, E2, C-series, etc. In an increasingly sophisticated and competitive environment, in what way is the type of OEM financial and product support for this new era of aircraft more complex and far-reaching than in previous cycles?
In 2016, capital markets provide over 50% of the financing for new commercial aircraft purchases in the U.S., with lessors and the airlines constituting 75% of such financing. One factor complicating U.S. aviation manufacturer sales outside this country is the uncertainty associated with the continuing viability of the U.S. Export-Import Bank. The U.S. Congress allowed the Bank’s charter to expire in 2015, only to reinstate it a few months later, but only effective through September 2019. Consequently, banks have been cautious about agreeing loan terms with periods greater than 10 years or to those entities with higher credit risk without a government guarantee. Congress is again taking up the Bank’s charter in the fall 2016 term, but is unlikely to craft a long-term solution during the 2016 Presidential Election season.
10. The advent of cheaper oil and the knock-on effects. What are the consequences that arise as a result of the unexpected purchasing power of a number of third/fourth-tier airlines? What will challenge lessors and suppliers in particular as they are faced with speculative judgments on an airline's longer-term financial viability?
The U.S. airline industry has experienced significant consolidation among its “main line” carriers, so that in 2016 only four such carriers remain. Cheaper fuel prices have materially resulted in record net profits for these airlines. As a result, these carriers are accelerating their fleet renewal programmes, replacing older-generation aircraft with the latest models. Regional operators have similarly embarked on fleet renewal efforts, albeit to a lesser degree. With the increased availability of older aircraft, including those in long-term storage in the desert Southwest of the United States, older-generation aircraft and parts values have seen a decline in value within the U.S. as a result of oversupply. However, U.S. based older-generation aircraft and associated parts are in demand in markets outside the U.S., helping to keep pricing within a relatively stable range. The industry’s efforts to update their fleets with new aircraft, many times through lease arrangements, should reduce operational risks and costs, providing lessors and financiers ample opportunity to assist U.S. carriers with their efforts to operate off-balance-sheet aircraft.
11. Iran and the market return. What remain as barriers, including sanctions-related issues to navigate, where Iran and aerospace and aircraft transactions are concerned? What sort of jurisdiction is Iran from a risk perspective, and what techniques from a supply perspective are likely to be needed so that Iran's potential and promise for OEMs, lessors, suppliers and service providers is realised and does not become the latest example of a disappointing gold rush?
The U.S. Office of Foreign Assets Control (OFAC), part of the Department of the Treasury, administers and enforces “economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States”. As a result of certain recent international agreements, OFAC has lifted certain ”secondary sanctions” – but not all – directed at Iranian interests. Many restrictions remain in place, so transacting business with Iranian entities remains subject to OFAC regulations and approvals.