Aircraft Backed Debt Securities are debt securities which are backed by an aircraft or by any aircraft related assets. Traditionally, such securities were mainly financed by the banking sector, using a combination of loans and mortgages on aircrafts. Since industry deregulation, it is increasingly common to find hedge funds and private equity groups showing an interest in the aviation sector.

The aviation sector has undergone a sea-change since the introduction of aircraft backed debt securities. In the 1970's a handful of large carriers monopolized the business of flying business travelers and wealthy individuals who used to travel on vacation with their families. Globally the load factor was neat 50% meaning that only half the seats were occupied.

During the 1980's airlines adopted a system of yield management to maximize revenue on a particular flight and try to cut the cost. Passengers were being charged different amounts for similar services. For example a business passenger always paid more, and a last minute booking was always more expensive than one booked in advance.

By the 1990's, the largest U.S. airlines had developed the hub-and-spoke network system which allowed them to provide more services through their extensive route structures. By digressing from traditional sources of finance and applying new structures of financing they migrated to a higher reliance on asset value and structure for the repayment of debt.

The first pooled aircraft backed debt securities transaction was done in 1992, whereas the earliest EETC (Enhanced Equipment Trust Certificates) transactions were done in 1994. Aircraft backed debt securities peaked in 2000 with a total of $15.1 billion from 30 transactions. In 2001, issuance in the sector appeared headed towards record levels until the terrorist attacks of 9/11 halted issuance of pooled aircraft lease aircraft backed debt securities. Issuance across the aircraft-backed market dropped dramatically in 2002, with only eight deals pricing for a total of just $4.3 billion.

Investors in the aircraft ABS sector have to be diligent about the work to become comfortable with the risks inherent in this asset class.