The underlying performance of SMBC Aviation Capital rebounded strongly during the financial year ended March 31, 2022, with an increase in profits before tax and exceptional items of $321m over the previous financial year when the global aviation industry was severely impacted by the Covid pandemic.
This performance was achieved against the backdrop of the continuing recovery in global air travel, particularly in the short haul segment, and the resultant increased demand for aircraft. That demand is mainly concentrated on the young, narrowbody, fuel efficient, short haul aircraft which make up a significant 84% of our portfolio.
Financial performance
SMBC Aviation Capital generated profits before tax and exceptional items of $336m for the financial year ended March 31, 2022, an increase of $321m on the previous financial year.
During the year, we placed 41 aircraft from the Boeing 737 Max and Airbus 320 Neo families. With fewer new aircraft built during the pandemic, there is strong demand, not only for newer aircraft, but also for used aircraft which are coming off their initial leases. In value terms, around 3% of our portfolio rolled off during the year and we were able to place all of those aircraft with customers at increasingly strong rental levels.
There is also a rebound in demand for aircraft from investors and our trading activity made a significant contribution to profits. During the year, we sold 23 aircraft, the majority of which were current technology aircraft, generating a profit of $69m. Investor demand follows that of airline demand, with our young, narrowbody focused fleet perfectly suited to the shape of the recovery that is taking place. Looking forward, we plan to increase our sales targets in response to investor demand.
Operating lease rental revenue was $1.2bn, up 9% year on year from the 2021 level of $1.1bn. This reflects the growth in our portfolio and the impact of the high yielding deals executed during Covid as well as improved cash collection rates.
During the year, we sold 23 aircraft, the majority of which were current technology aircraft, generating a profit of $69m.
Financing
SMBC Aviation Capital raised $1.5 billion in unsecured third party funding during the year. This included a $1bn bond issued at industry leading pricing as we continue to expand on our capital markets activity.
We are also seeing strong interest from the banking market, and we closed a number of funding deals with Japanese and Chinese banks during the year. This adds to the diversity of funding sources we have in place for the business.
Credit impairment charges decreased by $189.3 million to a reversal of $35.4 million for the 12 month period. This was driven by the successful conclusion of a number of airline restructurings, the improvement in cash collection rates, along with the overall recovery in the sector.
Overall asset impairment excluding the impact of the loss of assets in Russia was $69 million, which compares to $176m in the previous year. Cash collection ran at 109%, as airlines continued to repay the rentals that were deferred in the previous financial year at the height of the pandemic.
Russia
Prior to the invasion of Ukraine, SMBC Aviation Capital had 35 aircraft leased to Russian airlines. In the days following invasion we successfully recovered one aircraft resulting in a loss of 34 aircraft.
As a result, we recognised a write off of the full carrying value of $1.6bn in the financial year under review. We have however been able to draw on maintenance reserves and security deposits held of $189m, due to defaults by Russian airlines. We included that as income during the year.
In aggregate, therefore, events in Russia had a $1.45bn impact. Despite the strong underlying performance of the wider business, this gave rise to a Pre-Tax loss of $1.1bn. The first loss in our 20 year history.
We have the benefit of insurance with leading financially sound insurance companies. The cover is on terms typically provided in the insurance market and is in excess of the carrying value of the lost aircraft. We have submitted claims for the aircraft, and we expect those claims to be met. Any such recovery would generate a significant contribution to our financial performance in future years.
Balance sheet
Our balance sheet remains exceptionally strong. At March 31, 2022 SMBC Aviation Capital had $12.3bn in shareholder support. Our fleet is fully unencumbered and we have $4.4bn in liquidity available to the business.
In June and July, Fitch and S&P confirmed our A- rating. This reflected the strong underlying performance of the business, the industry recovery, the strength of our balance sheet, and the continuing support of our shareholders.
Goshawk
The Goshawk transaction will see SMBC Aviation Capital acquire an excellent business with an enterprise value of c.$6.5bn. In funding the transaction, we will receive an equity injection from our shareholders of $1.3bn. We will also draw down c.$1.6bn in debt funding from our shareholders.
While our shareholders have fully underwritten the remaining debt requirement, we fully understand the importance of diversity of funding. Subject to market conditions we plan to fund the remaining c.$3.6bn from the external markets. We are already in advanced discussions with a number of our financing partners in relation to this.
Finally, as I reflect on my first year as Chief Financial Officer of SMBC Aviation Capital - having taken up the role in January 2022, I would like to pay tribute to my predecessor Barry Flannery, and also Eithne Manning, who held the role on an interim basis, both of whom have made an enormous contribution to the continuing success of the business over the past two decades. I would also like to express my gratitude to my team for their outstanding performance and tremendous support since January. I look forward to continuing our work together in what will be a very exciting period in the history of our company.
Aisling Kenny
Chief Financial Officer
30 June 2022
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