Aircraft lessors continue to benefit from largely favorable market conditions, including above-average air traffic growth, increasing operating lease penetration, demand for aircraft across the age spectrum and accessible funding markets, according to Fitch Ratings. However, some of these tailwinds are cyclical in nature, and modest challenges are emerging that may pressure margins and growth, limiting upward ratings momentum for the sector.

“We believe near- to medium-term challenges for aircraft lessors may come from rising interest rates, higher fuel costs and increased competition. Aside from these factors, ratings are also constrained due to the monoline nature of the business, its vulnerability to exogenous shocks, potential exposure to residual value risk and its reliance on wholesale funding sources,” Fitch Ratings said.

Air traffic has been strong, as falling travel costs and the introduction of unique, city-pair networks have supported the growth of revenue passenger kilometers (RPKs). RPKs were up 6.9 percent year-to-date through July 2018, down from the 7.7 percent gain seen over the same period in 2017, but up from the 5.5 percent long-term average, according to the International Air Transport Association.

“We believe the current terms of the trade war between U.S. and China are likely to have a limited impact on aircraft lessors, as the currently-proposed Chinese tariffs apply to a small percentage of aircraft lessors' portfolios. We note that higher taxes and tariffs are largely passed on to customers in the form of increased costs. However, broader tariffs that pressure RPKs could cause growth and profitability to decline for aircraft lessors,” Fitch Ratings said.

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