Scope warns that aircraft prices have risen steadily since the financial crisis and some may have reached inflated levels. While Scope expects favourable industry conditions to continue in 2018, interest rates represent a primary short-term source of risk. High liquidity in the market and low interest rates have pushed investors towards alternative asset classes such as aviation.

Airlines have not deleveraged or actively cut costs during the benign times. Instead, they have increased spending, particularly on new aircraft. Record industry profits are mostly due to external factors, particularly low oil prices and interest rates, according to Scope.

'Some aircraft transactions completed in the market in 2017 have traded at prices that cannot be explained only by increased future cash flows,' writes Helene Spro in ‘Aviation Finance Outlook 2018: Tomorrow’s Problems are Created Today’. 'Elevated prices are the result of higher valuations discounting increased future cash flows (due to technological developments and low oil prices) and lower discount rates.'

The credit risk of transactions is increasing because there is less room for price corrections. Sector yields are decreasing, tenors are being extended, and loan-to-value ratios are rising as investors compete for deals. 'A present value analysis of aircraft prices is vital for investors to ensure a proper risk/return balance,' writes Spro.

On the upside, Scope does not see overcapacity in the aviation sector and strong demand is supporting value increases. Revenue passenger kilometres (RPKs) are rising at a higher rate than available seat kilometres (ASKs) and load factors are at record levels. In addition, the two main aircraft makers – Airbus and Boeing – have limited production capacity and they are also likely to act if they see signs of oversupply, according to Scope.

Still, overcapacity is evident in some regions. In the Middle East, carriers have the highest order backlogs – placed when annual growth was in double digits. This year, however, load factors, revenue and profits have been second-to-worst globally.

In contrast, US fleets are among the oldest, with the fewest new orders. These carriers could step in as the new operators for aircraft that the intended buyers cannot afford to take delivery of, according to Scope.

Looking ahead, Scope warns that high future ASK growth coupled with a decline in RPKs in some regions is a warning sign of potential future overcapacity.

'Investors need to prepare for potential changes in order to prevent their investments from suffering from aircraft price corrections,' Spro says.