High-Yield Opportunities in Global Airline Debt

“Assets that are comparable on a global scale but with significantly different risk profiles across the United States, Europe, and emerging markets: the airline sector is particularly well-suited for high-yield investors with a flexible geographic mandate, capable of identifying and capitalizing on relative value opportunities wherever they arise.”

Jeremy Landau – Portfolio Manager & Senior Analyst at IVO Capital Partners

Synthesis

• The airline industry is particularly well-suited to global credit investing: its key assets (aircraft, routes, and loyalty programs) and business models are largely comparable across regions, which allows for a meaningful relative-value analysis.
• The sector consists of three structurally distinct credit markets (the United States, Europe, and emerging markets), each characterized by its own risk factors, legal frameworks, and collection dynamics.
• The same rating may conceal significantly different levels of risk depending on the jurisdiction, capital structure, and sovereign exposure.
• By definition, regional mandates miss out on cyclical rotations and cross-border valuation anomalies. A comprehensive and flexible investment mandate allows us to capture mispricings and investment opportunities across cycles, asset classes, and geographic regions—where the best risk-adjusted opportunities are constantly shifting.

Introduction

Airlines have long tested the patience of investors in both debt and equity markets. High fixed costs, cyclical demand, volatile fuel prices, and constant capital reinvestment needs make air transport one of the most structurally demanding sectors. Yet it is precisely this complexity that makes it fertile ground for high-yield credit investors. In the United States, Europe, and emerging markets, airline debt offers an attractive and diverse pool of opportunities, with risk profiles, capital structures, and performance drivers that vary significantly by region.

This combination of comparable assets and regional differences makes the aviation industry particularly well-suited for cross-border relative-value analysis. A Boeing 787 or an Airbus A350 generates fundamentally identical revenues, whether operated by a U.S., European, or Latin American airline. Aircraft, airport slots, and frequent-flyer programs are globally comparable assets with observable economic value, while airlines’ business models exhibit largely similar operational characteristics across regions. Consequently, differences in credit spreads are more often driven by jurisdiction, capital structure, sovereign risk, or technical market factors than by fundamentally different business models, creating a particularly attractive pool of opportunities for active global credit investors. A global high-yield strategy, with unrestricted geographic flexibility, is therefore ideally positioned to identify and capitalize on the sector’s most attractive opportunities, wherever they arise.

Airlines: A High-Yield Credit Opportunity

Airlines are structurally predisposed to high-yield credit profiles. They are extremely capital-intensive: a single wide-body aircraft costs between $200 million and $400 million, which requires ongoing debt financing and maintains high debt leverage throughout business cycles. Fixed costs, particularly payroll, limit flexibility during downturns, while revenues remain highly cyclical, driven by macroeconomic conditions, consumer demand, and fuel prices—factors that airlines can only partially control through their hedging strategies.

The combination of high operational leverage and volatile revenues results in strong cash flow generation at the peak of the cycle but a rapid deterioration during downturns—a characteristic typical of high-yield credit. At the same time, aircraft and related assets offer tangible collateral value, although recovery rates vary significantly depending on the jurisdiction, seniority within the capital structure, and insolvency regimes.

The post-COVID recovery has reinforced this dispersion rather than eliminating it. Global passenger air traffic surpassed its pre-pandemic peaks in 2024 and continues to grow. The International Air Transport Association (IATA) forecasts a sector-wide net profit of $23 billion for 2026, supported by resilient demand, particularly on transatlantic and intra-Asian routes. Capacity rationalization, government support, and strengthening demand have improved credit metrics, but the gap between the strongest and weakest issuers remains wide. An airline rated BB in the United States may have a fundamentally different risk profile than a BB-rated airline in an emerging market, despite having identical ratings. This is what makes airline credit particularly attractive to investors capable of analyzing capital structures, jurisdictions, and collateral, rather than relying solely on ratings.

Three Distinct Credit Categories

United States: Market Maturity, Driven by Rating Shifts

The high-yield market for U.S. airlines is the most developed and liquid in the world. The post-pandemic credit story can be summed up as a rapid shift in ratings: Delta regained investment-grade status from the three major agencies in 2024. United Airlines, rated BB+/Ba1 as of early 2026 with a positive outlook, is now just one notch away from investment grade following a series of upgrades driven by record revenues, steady deleveraging, and leverage reduced to nearly 2.8x EBITDAR. American Airlines, rated B+/B1, has higher leverage of approximately 5.0x and a tighter liquidity cushion, reflecting a more challenging execution.

A key structural feature of the U.S. aviation credit market is the securitization of aircraft and frequent-flyer programs. The three major network carriers have raised secured debt backed by their aircraft (EETC) and their loyalty programs—recurring, contractually protected revenue streams that typically trade at significantly tighter spreads than the same issuer’s unsecured bonds. For an experienced global high-yield investor familiar with the sector, the ability to navigate this complex capital structure—particularly under stress scenarios—is a significant source of returns that is inaccessible to generalist or passive credit investors.

With U.S. high-yield spreads near their cycle lows, the most attractive opportunities in the U.S. airline sector are no longer simply directional bets. They are idiosyncratic: trades involving rising stars, capital structure misalignments, and specific issuers whose improving fundamentals have not yet been priced in.

Source: Announcements by rating agencies, company disclosures, end of 2025.

Europe: Structural Divergence and the Complexity of Low-Cost Carriers

The European airline sector is structurally divided between legacy network carriers (Lufthansa Group, Air France-KLM, IAG) and a dynamic group of low-cost carriers (LCCs) including Ryanair, easyJet, and Wizz Air. These two segments present radically different risk and return profiles for a high-yield investor.

Among the legacy carriers, the Lufthansa Group (BBB-/Baa3) exemplifies the complexity of the European full-service airline industry. Rated Baa3 by Moody’s, Lufthansa generated revenue of approximately 39 billion euros in 2025, with EBITDAR of approximately 4.3 billion euros. Its credit profile is supported by strong liquidity (€8.1 billion in cash and a fully available €2.5 billion sustainability-linked revolving credit facility), but is weighed down by investment commitments in the fleet and transformation costs related to its €1.5 billion efficiency program. Above all, Lufthansa’s increase in its stake in ITA Airways (formerly Alitalia) from 41% to 90%, announced in May 2026 and expected to be finalized in Q1 2027 subject to regulatory approval, as well as its Europe-wide consolidation strategy, illustrate the group’s long-term network ambitions, while introducing event risk and additional balance sheet pressure. IAG (BBB/Baa2), by contrast, has established itself as Europe’s most profitable legacy airline group, with record results driven by transatlantic premium demand and effective portfolio management of its various brands (British Airways, Iberia, and Vueling).

It is in the low-cost segment that European airline debt offers the most attractive opportunities for high-yield investors. Wizz Air, rated BB+/Ba1, with a heavily indebted IFRS 16 balance sheet dominated by fleet leases, represents a credit profile that is structurally different from its historical peers: stronger growth, lower unit costs, higher operating leverage, and a capital structure almost entirely financed through leases. The company repaid its €500 million bond in January 2026. easyJet (BBB+), by contrast, remains one of the benchmark issuers in the European low-cost airline sector, combining a structure of low unit costs, a solid balance sheet (negative net debt), and strong free cash flow generation.

The most emblematic case is airBaltic, Latvia’s national airline. The combination of its fleet being grounded due to issues with Pratt & Whitney GTF engines, heavy lease debt, and negative free cash flow has exposed the carrier to a realistic risk of debt restructuring. With the decision on government support on hold due to the ongoing election cycle, the €380 million senior secured bonds are now firmly in distressed territory, trading at around 40 cents on the euro—levels that still present an unfavorably asymmetric risk-return profile. The carrier entered 2026 with only ~10% of its fuel consumption hedged, leaving it fully exposed to the price surge triggered by renewed tensions in the Middle East.

airBaltic is a prime example of why differentiation within the European airline credit market is essential: there is a wide gap between the sector’s strongest and weakest issuers, and it is the ability to differentiate that drives performance in this segment.

Emerging Markets: Premium Returns, Sovereign Discount, and Structural Complexity

Emerging-market airline credit offers the widest spreads in the global airline credit market, as well as the most diverse risk landscape. The universe ranges from recently restructured Latin American carriers (LATAM Airlines, Aeroméxico, Avianca, and Azul) to fast-growing Asian carriers operating in markets with structural undercapacity, as well as quasi-sovereign entities in the Gulf region that periodically slip into high-yield territory during periods of macroeconomic stress.

In Latin America, LATAM Airlines and Azul are the most transparent high-yield credit investments. LATAM emerged from its Chapter 11 restructuring at the end of 2022 with a significantly strengthened balance sheet and has since reestablished its position as the leading regional network carrier. Its dollar-denominated senior secured bonds (with coupons in the upper 7% range) still offer a substantial premium over equivalent U.S. or European credits—a premium that more than offsets the sovereign risk of Brazil and Chile, given LATAM’s strong liquidity and post-restructuring leverage profile, which are now largely comparable to those of its U.S. peers. Azul, the Brazilian low-cost carrier, represents the riskier alternative: the carrier underwent its own debt restructuring in 2024–2025 and remains exposed to BRL/USD exchange rate fluctuations on its aircraft leases and fuel costs, with leverage that is more sensitive to local macroeconomic conditions than that of its regional peers.

Across the emerging market aviation credit sector, spreads often incorporate a sovereign and geopolitical premium that exceeds what would be justified by probability-weighted default and recovery scenarios alone. Investors who can distinguish macroeconomic noise from underlying credit quality (and size their positions accordingly) can capture a yield premium that is unavailable in the tighter U.S. or European markets.

Approximate spreads, presented for illustrative purposes. Source: IVO Capital Partners analysis, Bloomberg, data from rating agencies, June 2026 .

The Benefits of a Comprehensive Mandate

One of the defining characteristics of the aviation credit market is that credit cycles rarely evolve in sync across regions. The United States recovered earlier and more strongly from the COVID-19 pandemic, Europe followed later, and emerging markets followed more bumpy trajectories, often marked by restructurings. These asynchronous cycles create recurring opportunities for geographic rotation, available only to investors not constrained by regional mandates. A global approach allows portfolio managers to allocate capital to regions offering the most attractive risk-adjusted returns, while avoiding markets where risks are not adequately compensated.

Beyond cyclical volatility, valuation anomalies in the aviation credit market are often structural. Differences in legal frameworks, investor bases, accounting standards, and sovereign exposure can create persistent valuation gaps between issuers with largely similar operational fundamentals. Aviation is one of the sectors that lends itself most naturally to cross-border relative-value analysis, as many of its underlying assets are comparable on a global scale. A wide-body aircraft essentially has the same collateral value, whether it is owned by a U.S., European, or Latin American carrier. Yet, the credit spreads associated with these assets can differ significantly depending on the jurisdiction and market structure. For investors with a global perspective, these differences create sustainable opportunities for relative value.

A global mandate also addresses a fundamental limitation of regional investing: the inability to keep pace with the evolving landscape of opportunities. Capital can thus be allocated to rising U.S. stars during rating migration phases, to European issuers when complexity generates excessive spread premiums, or to emerging-market carriers when sovereign concerns overshadow solid credit fundamentals following a restructuring. This flexibility is difficult for regionally focused strategies to replicate and can be a significant source of outperformance over the entire cycle.

Conclusion

Successful investing in the airline sector requires in-depth industry expertise, rigorous analysis of capital structures, and the ability to distinguish sovereign and macroeconomic noise from underlying credit fundamentals. It also requires the conviction to invest when complexity creates price dislocations. Above all, it requires a global perspective. At any point in the cycle, the most attractive aviation credit opportunity may be found in the United States, Europe, or among an emerging-market issuer outside the scope of regionally constrained investment mandates.

IVO Capital Partners’ Global High Yield strategy is well positioned to capitalize on this wealth of opportunities, thanks to a combination of extensive in-house credit expertise, in-depth knowledge of the airline sector, solid expertise across all capital structures, and a discipline focused on high-conviction investments. Its flexible mandate allows the management team to allocate across the entire spectrum of aviation credit, from U.S. “rising stars” to emerging high-yield issuers offering attractive risk-return profiles, without the constraints imposed by geography or credit rating categories.

In a sector characterized by asynchronous cycles, persistent structural valuation anomalies, and a wide dispersion of risks and returns, the ability to invest globally is more than just a source of flexibility—it is a structural investment advantage.

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