Aircraft leasing companies are poised for favorable industry dynamics in 2017 and should benefit from strong growth of global air traffic, according to a new report from Fitch Ratings. Moderate increases in energy prices will reduce airline profitability relative to a strong 2016, though Fitch's airline sector outlooks in most regions, including Latin America, are stable for 2017 due to a better macroeconomic environment, moderate capacity increases and recovery in passenger yields.

"Airlines continue to adopt leasing as a form of financing to support growing air traffic and replacement needs, and Fitch expects that the largely supportive aircraft finance market will continue in 2017," said Sean Pattap, Senior Director, Fitch Ratings. The report notes that longer-term questions surrounding export credit agencies and Basel IV reforms are likely to persist in 2017, particularly given the delay in finalizing Basel III reforms.

Fitch expects large commercial aircraft deliveries to increase by 8% in 2017 and thereafter approach a peak in 2018; however, the aircraft manufacturers have generally remained rational despite cyclicality in orders. Airlines continue to adopt leasing as a form of financing, and lease yields may increase as U.S. interest rates move up.

Some recent pricing pressure on widebody aircraft could continue in 2017, though most aircraft lessors are more exposed to liquid narrowbody aircraft. At Sept. 30, 2016, the 10 largest aircraft lessors averaged 14.7% widebody exposure as a percent of fleet net book value.

While large players like GE Capital Aviation Services and AerCap Holdings N.V. continue to be active, Asian institutions are increasingly competitive. Avolon Holdings Limited's (indirectly majority owned by the Chinese conglomerate HNA Group) acquisition of CIT Group Inc.'s commercial air business is expected to close in the first quarter of 2017, which would bring its fleet to 552 owned and managed planes and 316 aircraft on order, ranking third on both bases amongst lessors globally.