Lift off: The case for aviation finance in institutional portfolios

May 21, 2025

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As traditional lenders retreat from aviation finance, Muzinich & Co. aviation portfolio managers Alok Wadhawan, Brian Lau and Thomas Light make the case for institutional investors to allocate to the asset class.

As institutional investors navigate a complex market and economic environment, the search for consistent, uncorrelated, risk-adjusted returns is becoming increasingly challenging. Against this backdrop, aviation finance is emerging as a compelling alternative.

In this article, we examine how structural changes in the aviation sector are creating opportunities for investors seeking diversification, potential yield enhancement and capital preservation.

Industry fundamentals: Solid in the face of headwinds

Despite geopolitical tensions and economic uncertainty, the aviation sector's fundamentals remain robust. Global airline industry revenues are expected to surpass US$1 trillion for the first time in 2025, a 4.4% year-on-year increase, with net profits forecast at US$36.6 billion (up from US$31.5 billion in 2024).¹

Passenger demand continues to grow, with revenue passenger kilometres increasing 2.6% year-on-year in February 2025. Growth has been particularly strong in Asia Pacific (up 9.5%) and Europe (up 5.7%), with only North America showing some moderation.²

In our view, one of the main factors supportive of an allocation to aviation finance is the persistent supply-demand imbalance in aircraft production. Total deliveries from Airbus and Boeing fell 10% year-over-year in 2024, with Airbus delivering 766 aircraft and Boeing 333.³ While aviation analytics firm Cirium estimates combined deliveries will reach approximately 1,500 in 2025, this remains well below demand for new aircraft.

The current backlog stands at 8,720 aircraft for Airbus (representing 10.4 years of production) and 6,319 for Boeing (11.1 years).⁴ This substantial order book creates a cushion against potential demand softness and supports aircraft values—a critical consideration for asset-backed lenders and lessors.

The situation is further compounded by extended maintenance periods, with engine overhauls now taking six-to-nine months versus the pre-pandemic norm of two-to-three months.⁵ These factors collectively contribute to a shortage of available aircraft, supporting valuations and lease rates.

Mitigating factors against economic volatility

While higher tariffs and a potential economic slowdown are legitimate concerns, we believe several mitigating factors could act as a buffer for the aviation sector:

1. Oil price decline: Crude oil has almost halved from its May 2022 peak of US$125.5 per barrel to US$63 in April 2025,⁶ significantly reducing airlines' operating costs.
2. Weaker dollar: The US Dollar Index, a measure of the strength of the greenback versus other major currencies, has dropped over 10% since mid-January 2025, benefiting airlines whose revenues are in local currencies while their costs (including aircraft purchases and fuel) are mainly in dollars.⁷
3. Stronger balance sheets: Unlike previous downturns, many airlines emerged from the pandemic with restructured operations and improved financial positions.⁸
4. Limited competition: Despite efforts by China's COMAC and others to challenge Airbus and Boeing, regulatory hurdles and production capacity constraints should keep this duopoly intact for the foreseeable future.

The industry demonstrated its resilience by weathering the COVID pandemic—arguably the most severe crisis in aviation history—and subsequently the inflation spike and period of rapidly rising interest rates in 2022 and 2023.

This gives us confidence that, even in a period of economic contraction, the structural shortage of aircraft should continue to support valuations and protect portfolios.

From bank domination to the rise of institutions

Another key consideration for institutional investors stems from the reshaping of aviation finance in recent years. Traditional bank lenders, who historically dominated the market, have steadily retreated over the past decade.

This exodus has continued this year, with a relatively new German entrant reportedly discontinuing its aviation finance business less than two years after launch.⁹ As a result, only a handful of banks remain significant players.

The retreat of banks has impacted loan pricing. Based on our experience and analysis of the market, spreads on individual loan transactions are materially wider than historical levels, a premium we believe is now structural rather than cyclical.

This has created a potentially attractive entry point for insurance and institutional capital. High barriers to entry—including the need for asset managers to have specialized origination capabilities and relationships across the aviation ecosystem—have limited new competition, which is helping maintain margins.

Aviation as strategic asset class

For institutional investors, aviation finance offers several compelling characteristics that, combined, differentiate it from other asset classes:

Asset-backed security with high recovery rates: Unlike corporate lending, aviation debt is secured by highly mobile, standardized assets with established global trading markets. This has historically translated into exceptional recovery rates during defaults. For Enhanced Equipment Trust Certificates (EETCs), a common aircraft financing structure, recovery rates from 1994 through November 2023 reached 98.8% for single-A tranches, 92.1% for single-B tranches, and even 89.5% for C-rated securities (Figure 2).¹⁰ By comparison, recovery rates for senior secured and senior unsecured corporate bonds were 58.1% and 44.8%, respectively.¹¹

Figure 2: Loss and recovery rates for EETCs in bankruptcy, 1994-2023

Source: Kroll Bond Rating Agency, as of November 29, 2023. Most recently available data used. For illustrative purposes only.

A growing leasing market: The aircraft leasing market was valued at US$192.45 billion in 2024 and is forecast to experience annual compound growth of 11.5% through 2034, reaching US$551.5 billion.¹² Leased aircraft currently represent 51.3% of the global fleet, a proportion that has more than doubled since the start of the millennium.¹³ At a broad market level, this has been reflected in consistent long-term investment returns.

Diversification benefits: Aviation finance has historically demonstrated low correlation with other asset classes (Figure 4). While correlation can rise during severe economic shocks, we believe the sector's distinct driver provide meaningful diversification benefits.

Risk: Diversification and asset allocation may not fully protect you from market risk.

Figure 4: Correlation matrix: Aircraft leasing versus other asset classes, January 2007-December 2024

Source: Muzinich analysis, as of May 8, 2025.  Ascend Aircraft Leasing Return Index, S&P Airlines Index, S&P Global REITs Index, Baltic Exchange Dry Index, MSCI World Transport Index, S&P 500, ICE Index Platform - ICE BofA ML US Cash Pay High Yield Index (J0A0), ICE BofA US Corporate Index (C0A0). Indices represent best proxies for respective asset classes. For illustrative purposes only.

Inflation hedge: As physical assets with replacement costs linked to inflation, aircraft can offer protection against inflationary environments—particularly newer, fuel-efficient models that become more valuable when fuel prices rise. Moreover, aircraft leases can be structured to include inflation-adjusted rent payments, while the ability of lessors to renegotiate terms periodically offers additional protection.

Flexibility: Insurers and pension funds typically view aviation as an asset class alongside infrastructure and real estate. But we believe aviation offers greater flexibility because aircraft are transferable across jurisdictions, unlike fixed infrastructure or property assets.

In our view, institutional investors should view aviation as core allocation within their private credit or real assets portfolios, combining the resilient cash yields and inflation protection of infrastructure with the standardization and mobility of transport finance.

For insurers, the long-dated nature of aircraft debt and leases can align with their own long-term liability profiles and meet their investment objectives of capital preservation, investment-grade ratings, and stable income.

Given higher return hurdles, pension schemes have historically been less active in senior aviation debt. However, as return expectations moderate and demand for low-volatility alternatives increases, blended strategies could offer a solution, offering the potential for attractive returns without sacrificing risk discipline.  

Navigating current challenges

Global trade tensions and shifting tariff policies have introduced additional uncertainty to the aviation sector. Higher tariffs on materials like steel and aluminium are increasing aircraft costs, while airlines face both supply chain delays and potential route adjustments.¹⁴

For institutional investors considering an allocation to aviation finance, we believe these challenges underscore the importance of:

1. Diversification across geographies and airline credits
2. A focus on fuel-efficient, modern aircraft in lease agreements and as collateral for secured debt
3. Conservative underwriting assumptions

Even in a slowdown, the fundamental shortage of aircraft should provide a buffer that did not exist in previous cycles. For asset-backed lenders at conservative LTVs, we believe the capital preservation thesis should hold even if we enter a prolonged challenging environment.

Although the latest bout of economic uncertainty will provide challenges, we believe the sector's proven resilience through severe shocks should offer confidence in its long-term stability and growth potential.

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of May 2025 and may change without notice.

References

1. IATA, "Strengthened Profitability Expected in 2025 Even as Supply Chain Issues Persist," December 12, 2024
2. IATA, "Passenger Demand Growth Slows Slightly in February," March 31, 2025.
3. Cirium, "Shaking out the Airbus and Boeing 2024 delivery numbers," January 29, 2025.
4. Forecast International, "Flight Plan, Airbus and Boeing Report March 2025 Commercial Aircraft Orders and Deliveries," April 10, 2025.
5. Bain & Company, “Aircraft engine maintenance and repair to peak in 2026, worsening capacity shortage for commercial aviation,” July 18, 2024.
6. Macrotrends, "Crude Oil Prices – 70 year historical chart," as of April 28, 2025.
7. ICE Index Platform, "US dollar index," as of April 28, 2025.
8. McKinsey & Company, ‘Aviation value chain: Strong recovery brings profitability into view,’ November 1, 2024.
9. Airfinance Global, "HCOB pulls out of aviation," April 8, 2025.
10. Kroll Bond Rating Agency, "EETC Resilience, Updated Historical Recoveries Through Pandemic and Beyond," November 29, 2023. Most recently available data used.
11. S&P Global, "U.S. Recovery Study: Loan Recoveries Persist Below Their Trend," as of December 15, 2023. Most recent available data.
12. Polaris, "Aircraft Leasing Market Overview," March 2025.
13. IATA, “More aircraft are leased than owned by airlines globally,” April 12, 2024.
14. S&P Global, "Global Airlines Brace For Tariff Uncertainty," April 22, 2025

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co are as of May 2025 and may change without notice.

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