Aircraft Finance Guide 2013

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Commercial jet forecast

Boeing on aircraft financing

ELFC’s engine leasing review

Fuel price predictions

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FOREWORD

ln last year’s Aircraft Finance Guide (AFG), I told you that we had “cleared the apex of the financial gale, though we’ve yet to clear all the debris and wreckage”. Sadly, I can say the same a year on, in 2012.

The industry still eagerly watches market fluctuations for signs of stability and growth. The fact that we’re watching so avidly reflects our instability, but we have spotted clear and reassuring signals.

Last year, I noted that aviation leasing was starting to stabilise with CIT coming off Chapter 11 and AerCap’s rising share price. The trend continued this year and the leasing market is now predicted to hold 40 per cent of the market for the next 10 years.

In this year’s AFG, Forecast International’s Raymond Jaworowski tells us: “During the downturn, two years back, lessors very quickly exited the market. Since then, they have come back in force and order activity now is pretty robust.”

Admittedly, lessors are seeing increased business because, with low or no profit, airlines are forced into sale and leasebacks. But, reassuringly, demand for aircraft is not only still there – it’s booming.

This year’s Farnborough Air Show (FAS 12) exceeded expectations. During the five-day show, $72bn worth of orders and deliveries were booked. This was a clear battle cry, telling us the industry is fighting back. Deals at FAS 12 were 53 per cent up on the prior FAS in 2010, and close to 2008’s peak of $88bn.

However, last year I also said: “The used aircraft market is yet to recover fully and bank lending has not returned to pre-crisis levels.” Again, the same is true this year.

In this issue, IBA provides data (see pages 84-98) and analysis (see page 24) on values for both aircraft and engines. Its head of valuations and risk, Stuart Hatcher, takes us through the fall in values and lease rates, but we must remember that such wounds take time to heal.

So far in 2012, thankfully, we’ve heard less about the dreaded funding gap. It appears time has shown us that where there is a will – or rather, where there is demand –

there is a way. Boeing Capital Corp shares this sentiment in its article for the AFG: “Despite recent macro-economic pressures, financing has been available over the last 12 months and challenges have been occasional. Thanks to low interest rates, re-financing costs remain at a historic low.”

While the words ‘funding gap’ have slipped from the top 10 industry phrases, ‘cautious optimism’ is still up there.

I have discussed our reasons to be optimistic, but of course it’s still prudent to be cautious – particularly regarding costs. Airlines will always suffer slim margins and the industry must stay guarded against that.

JBC (page 18) predicts that oil prices, which account for the highest figure on an airline’s list of outgoings, will remain at a high yet manageable $100 to $120 per barrel over the next three to four years.

High operational costs are here to stay, but the industry is responding with numerous and inventive methods, some of which we cover in our articles on lowering foreign exchange costs (page 36), reducing the risk of fraud (page 60) and using IT and social media to boost revenue (page 66), all of which I hope you’ll find interesting reading.

I also hope you like the new look of the AFG, which is in keeping with our sister publication, Airline Fleet Management ( ). We’re always interested to hear your thoughts so please drop by and visit us at our new website, www.afm.aero and keep in touch by social media.

EditorMary-Anne Baldwin

Foreword

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03 Foreword

MARKET OVERVIEW:

10 Future fleets: Commercial jet forecast

A report predicts that nearly 15,000 large commercial aircraft will be built in the next 10 years at a value of more than $2tn. The report’s author and senior analyst at Forecast International, Raymond Jaworowski, speaks to AFG’s Steven Thompson.

14 Cruising at altitude: Aerospace market update

The UK has Europe’s largest aerospace industry by export. Globally, it is ranked second only to the US. Mike Lee, head of market intelligence at ADS, the UK trade organisation for aerospace, defence and security, reports on the state of the country’s aerospace market.

18 Fuelling the industry: Oil price forecasts

Fuel prices are of global concern and affect everything from GDP to the cost of bread. The price of fuel has been of particular interest in the last decade and not least within aviation. Johannes Benigni, MD of JBC Energy, provides his company’s analysis of future oil prices.

FINANCE:

24 Rate of return: Aircraft asset values

Aircraft values and lease rates have continued to fall since 2008. Dr Stuart Hatcher, head of valuations and risk at IBA Group, considers the effect of next generation aircraft and the worrying trend of sliding values for young aircraft.

30 Boeing forecast: Aircraft financing

Boeing Capital Corp discusses aircraft financing in 2012 and beyond and looks at the role OEMs will have.

AFG2013

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Bombardier Interview

Analysis of the engine leasing market

The 787 and route development

European airlines: A look at regionals and LCCs

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FINANCE:

36 Foreign exchange: Counting the cost

The general economic climate is extremely tough and the aviation sector has suffered in particular as a result. As such, it is increasingly important that companies consider the cost of foreign exchange fees. Richard Driver, currency analyst at foreign exchange company, Caxton FX, reports.

LEASING:

40 One to one: Ray Sisson, AWAS CEO

Aircraft Finance Guide talks to Ray Sisson, president and CEO of AWAS, about the resiliency of the aviation industry, the need for next-generation aircraft, financing and the ability to drive continued growth.

44 The CSeries: Stand by for success

Professor Karl Moore of Desautels Faculty of Management, McGill University, Canada, recaps where we are with aircraft development and explains why he thinks Bombardier’s CSeries will prove to be a success.

48 Market review: The engine leasing market

Jon Sharp, president and CEO of Engine Lease Finance Corporation (ELFC), considers the state of the engine leasing market in 2012 and beyond.

54 Repossession: Without nine tenths of the law?

Taking repossession of an aircraft can be a long and painful experience. But with careful planning, swift execution and a dose of luck, it can be achieved quickly and relatively painlessly. Richard Mumford, head of dispute resolution for ASB Law, explains.

AIRLINES:

60 Fighting fraud: Protecting your online bookings

The aviation industry is struggling to remain profitable yet competitive during particularly lean times. With increasingly tight margins, every penny counts. Yet, a significant proportion of airline revenue is lost to fraud. Phil McGriskin, chief product officer at WorldPay, explains how airlines can lower the risk of crime.

66 Technology and travel: How IT can boost airline ancillary revenues?

Following the 2012 Airline IT Trends Survey, Raphael Bejar, CEO of Airsavings, examines the impact IT and social media can have on ancillary revenue, and the need to develop it.

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CONTENTSCONTENTS

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CONTENTS

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AIRLINES:

70 Slotting into place: The effect of bmi’s buyout

How will IAG’s acquisition of bmi affect networks in the UK and further afield? Chris Beanland finds out.

74 Trading places: EU slot reform

James Cole analyses how reforms to European airport slot allocation rules may impact route development.

78 Need for renewal: Latin America’s fleet

Latin America’s agriculture is too dependent on its aging aircraft fleet and faces an inability to locate spares, writes Locatory.com. DATA:

83 Industry dataData including: List and lease rates for engines and aircraft; firm orders; order backlog; aircraft deliveries and traffic growth.

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The Aicraft Finance Guide

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ContributorsSteven Thompson & Chris Beanland.

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The global airline industry is continuing its recovery, according to Forecast International’s Raymond Jaworowski in his paper, The Market for Large Commercial Jet Transports (2012

to 2021).

However, the momentum of this recovery is slowing and air freight is levelling out. Airline finances have been hit by high fuel prices as well as on-going problems with the global economy. But on the positive side, high-yield business travel is on the increase.

Cautious optimismThe report estimates that a total of 14,655 large commercial jets, worth $2.04tn, will be produced during the 10-year period from 2012 through 2021. Production is forecast to increase each year through to 2020, before dropping off slightly in 2021.

Annual production values should rise up until 2020, and will reach a 10-year peak of $237bn, before dropping to $236bn in 2021. Further to this, growth in annual values will slow in around five years before picking

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A report predicts that nearly 15,000 large commercial aircraft will be built in the next 10 years at a value of more than $2tn. The report’s author and senior analyst at Forecast International, Raymond Jaworowski, speaks to AFG’s Steven Thompson.

Future fleets: Commercial jet forecast

MARKET OVERVIEW: Future fleets

up in later years, Jaworowski tells the Airline Finance Guide (AFG).

Despite the recession, there is still a general feeling of ‘cautious optimism’ – a term often used within the industry, but is it really meant?

“Yes,” is Jaworowski’s firm reply. “As things stand now – despite weakness in the economy – the industry is still seeing growth… The airline industry continues to be profitable. Order activity continues to be robust.”

Regional variations in airline revenues differ widely, says Jaworowski. Carriers in Asia-Pacific are outstripping their counterparts in other regions. North American airlines are lagging behind, while the state of play for European airlines is becoming “increasingly dire”, the report says. European carriers face a “difficult business environment” marked by the eurozone crisis and a lack of air travel demand.

“In terms of where the orders are coming from, you have got 30 per cent to Asia-Pacific; 23 per cent to North America; 20 per cent to Europe; 15 per cent to the Middle East; five per cent to Latin America; and the remainder to the rest of the world. Emerging countries will play a big role. Markets in Europe and North America are well saturated. So these emerging markets are where you will see a lot of future orders coming from.

“North American airlines still haven’t joined in [with the uptick in orders]; it is mainly Asian and Middle Eastern airlines. But the North American replacement cycle is coming up very shortly and may even be overdue. It is not a question of if, but when they will join. On the negative side, air traffic is growing but the pace of growth has slowed. It is the same with profits,” he adds.

“Europe in particular is a concern. The economy is of critical importance. If there is a double-dip recession then all bets are off, here [in the US] or in Europe. That will affect business and recreational travel. But if we assume even a sluggish pace of economic improvement, then I think cautious optimism is the best term to use.”

Regarding demand from lessors, which claim their market is growing, the aerospace analyst says: “During the downturn, two years back, lessors very quickly exited the market. Since then, they have come back in force and order activity now is pretty robust.

“Around 40 per cent of [the] worldwide airline fleet is leased. That figure will probably hold up over the time frame [10 years].”

Finance and productionThe obvious question is who will finance these 14,655 jets and is market demand strong enough to support them all? “The phenomenon of an aircraft sales boom combined with an uncertain state of affairs in the airline industry and the general economy has led to concerns about a possible order bubble,” he writes in his report.

“I don’t think we’re there right now,” he tells AFG. “But that could change very quickly. There’s a question of how many orders will hold up. The airline industry is still profitable but there are many individual carriers that aren’t. Many of those have hundreds of orders on the books. Another concern is that if the general economy weakens, then you have to wonder about access to financing.”


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Tied to concerns regarding financing is the rate of production. Some have argued – particularly lessors – that rates are so high, demand will be flooded and values depreciated. But the analyst notes that, having accumulated sizable order backlogs, Airbus and Boeing have plenty of room to adjust build rates.

“Airbus and Boeing have become quite adept at over-booking,” he says. Indeed, he believes that both companies are increasingly relying on over-booking to protect themselves from changes in the market. “I don’t think production rates are too high right now,” he tells AFG. “There’s still some room for growth in build rates as long as it is measured.

“It is a way to keep production stable. It gives them a lot of flexibility in terms of built rates,” he explains. “During the downturn, over-booking was the way they managed it. They are continuing this process, and it will work the same way in good times as it did in bad… When the inevitable cancellations and delays come, they are able to keep production stable.”

Three’s a crowdOne reason Airbus and Boeing are eager to increase production rates is to reduce waiting times for order deliveries. “A lack of early delivery slots could well tempt potential buyers to take a serious look at new aircraft emerging from manufacturers outside of the Airbus/Boeing duopoly,” the report notes.

Such aircraft include Bombardier’s CSeries, COMAC’s C919 and Irkut’s MC-21. Jaworowski believes the CSeries in particular promises “significant improvements in operational efficiencies” and has the potential to be a “formidable competitor”.

“The CSeries has considerable promise,” he says. “They are claiming something like 20 per cent improvement on fuel burn and 15 per cent reduction in operational costs. Those claims are certain to get the attention of potential customers. But I think we will see a ‘wait and see’ policy from some customers.

“Bombardier will never be able to match the sales figures of Airbus and Boeing, but they’ll have confidence that they’ll be able to get a significant slice of the market, provided they come close to their promise on operational efficiency.”He adds that the CSeries product will also have a significant effect on the market. “History will show the influence of the

CSeries. If there was no CSeries, then Airbus would never have gone ahead with the A320neo and Boeing would never have gone ahead with the MAX… It was the threat that pushed Airbus into their re-engining programme.”

The neo’s and the MAX’s entry into service (EIS) will be in October 2015 and 2017 respectively. The A320neo was an immediate sales success, and this, Jaworowski says, was a big factor in Boeing’s decision to launch its own re-engined narrowbody, despite the US company’s “almost visible reluctance to do so”.

In the widebody market, Boeing’s new 787 and 747-8 entered service in 2011. Airbus’ response to the 787 is

the new A350 XWB, which is scheduled for EIS in 2014. The A350 XWB also targets the 777 and Boeing is examining various ways to protect the 777’s market share from that encroachment.

Despite being confident about the CSeries, the duopoly will persist. Boeing is projected to build 7,332 large commercial airliners in the next 10 years, while Airbus is forecast to build 7,004, representing a near 50/50 split. The slight advantage to Boeing is because it is better positioned in the widebody market – a result of the continuing popularity of the 777 series and the recent service entry of the 787, Jaworowski says.

However, the battle for widebody sales will become “more even” once the A350 enters into service and begins to capture a share of the market.

The narrowbody sector is the larger of the two segments of the large jetliner market (in terms of unit production) but it generates less monetary value. Airbus has the edge due to the expected earlier service entry of the A320neo compared to the 737 MAX, says Jaworowski.

Although the figures do not include the CSeries, forecasts call for production of 10,450 light/medium transports, valued at $958bn, and 4,205 heavy transports, valued at $1.08tn. Airbus and Boeing are forecast to produce a combined total of 14,336 large jetliners between 2012 and 2021.

“This represents nearly 98 per cent of total forecast production for the market, and underscores our belief that, despite the appearance of new entrants, the market, during this time, will essentially remain a duopoly.”

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Airbus and Boeing have become quite adept at over-booking.

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A stream of orders worth a total of $72bn were announced during July’s Farnborough International Air Show 2012 (FIA 12), proving that the industry is achieving growth despite the recession. According to a report by ADS,

which was also announced at the show, the UK is not left out of that success.

According to ADS’ Aerospace Survey, UK aerospace revenue totalled £24.2bn ($37.9bn) in 2011, representing

a 4.7 per cent increase over the previous year. In terms of real growth, civil aerospace revenue increased by 5.1 per cent over 2010, but after a difficult year, defence aerospace produced zero growth in the same period.

There was also a real boom in terms of exports with civil aerospace up a commendable 13 per cent over 2010; defence aerospace also saw growth with an increase of five per cent over the previous year.

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The UK has Europe’s largest aerospace industry by export. Globally, it is ranked second only to the US. Mike Lee, head of market intelligence at ADS, the UK trade organisation for aerospace, defence and security, reports on the state of the country’s aerospace market.

Cruising at altitude: Aerospace market update

MARKET OVERVIEW: UK aerospace

Success aheadWhile no one will refute the impact of the global recession, the survey paints an optimistic vision of the future if trends are to continue. Passenger traffic rose six per cent compared with 2010, mirrored by an increase in aircraft deliveries and a record order backlog.

Single-aisle production rates rose to record levels of 73 aircraft per month (rising to 84 per month by 2014), and the report confirms that deliveries of widebody aircraft are also set to significantly increase during 2012. With an increase in air traffic and the civil aircraft fleet expected to double to 40,000 aircraft over the next 20 years, there has been a re-activation of

the lucrative aftermarket, which will benefit the UK’s aerospace MRO sector.

In 2011, the UK trade balance recorded a surplus of £7.2bn ($11.3bn) – a marked contrast to previous years. In terms of percentages, total civil and defence exports within aviation rose by 15.6 per cent over 2010, while imports fell by 27 per cent.

Undoubtedly, a strong performance by the civil sector has helped offset a difficult year for the defence aerospace industry, which has been buffeted by a variety of austerity measures. Many governments have been forced to cut defence expenditure and

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prioritise deficit reduction plans, and this has had an inevitable impact on UK defence.

Drivers and concernsLooking forward at civil aerospace, fuel price volatility and the availability of aircraft financing remain the prime short-term concerns.

Additionally, there is a question of whether Boeing and Airbus will be able to ramp up manufacture both to meet forecasted production rates and satisfy swelling order backlogs, which show particular demand for A320s and 737s, both in the narrowbody market.

However, uncertainty remains in the more traditional defence markets, caused by budget cuts, programme

delays and cancellations. Additional concern has emerged over the last year regarding the prospect of bankruptcy in the US, which could lead to significant additional budget cuts. Indeed, UK and continental European defence budgets are already under considerable pressure.

Major drivers for the immediate future include fixed/rotary wing upgrades and new programmes that have a growing degree of systems complexity. As a consequence, the focus is turning to emerging and growth markets, with the over-riding view that the Middle East, Asia, and South America provide the greatest growth potential.

Last year saw the UK aerospace and defence industry increase its exports by 9.4 per cent over 2010, contributing

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75 per cent of the total £24.2bn ($37.9bn) turnover. This was an excellent achievement, especially considering the increased and ever-strengthening competition, particularly from larger direct foreign investment in nations such as China and India.

Market growthDespite a slowdown overall, the European market achieved a 19 per cent increase year-on-year, making it the strongest region for civil aerospace exports.The rest of the world (which includes Asian and Far East markets) recorded a 24 per cent year-on-year increase.

Exports from the EU’s defence industry were also strong, rising 13 per cent. There was a 2.6 per cent reduction in overall industry orders compared with 2010,

which for 2011 totalled £28.3bn ($44.4bn). While Civil Aerospace orders may have risen by 2.6 per cent last year, this gain was offset by a considerable 12.4 per cent reduction in orders for defence aircraft. Despite this, there were important and welcome rises in research, development and technology, with 11 and 46 per cent year-on-year increases respectively.

Overall, employment levels increased by 4.3 per cent in 2011 over those in 2010, with an unsurprising mix between the more buoyant civil and defence sectors. While it has been a difficult economic year both domestically and internationally, the UK aerospace industry’s gross median weekly wage increased by 2.7 per cent over 2010. This is despite general earnings being flat. The number of students taking specialised aerospace engineering degrees has doubled since 2000, reflected in a compound annual growth rate (CAGR) of 6.9 per cent from 2008 to 2011. This demonstrates how aerospace engineering’s profile has risen, both as an academic subject and as a career.

UK Aerospace International Strategy, (another report produced by ADS along with UKTI) focuses on the potential in international markets and forecasts further growth. May 2012 also saw the publication of another ADS report: International Defence Market Strategy, which identified a shortlist of 23 priority markets on the basis of a rigorous analysis of macro-economic and defence spending trends.

ADS anticipates that the civil aerospace sector will continue a similar upward trend to that experienced in 2011 and that production rates will increase by between 15 to 20 per cent overall. The expectation is for another year of very tough operating conditions in the traditional defence export and domestic market, although there is potential for some stability to return to European defence markets.

The UK’s ability to export its defence products is crucial. The high level of Governmental support and the industry’s keenness to engage with emerging and growth markets should stand the sector in good stead.

Overall, despite increasing competition, there are significant opportunities in the UK supply chain to exploit its capability and grow market share. Importantly for the UK aerospace, the Aerospace Growth Partnership (AGP) – a joint industry and government initiative – has been established. The AGP is a first for the UK and was widely applauded as a successful model at the recent Farnborough Airshow, including by the UK Prime Minister. The purpose of the AGP is to create a strategic 20 year roadmap for the future of the civil aerospace industry that will maintain the UK in its pole position in Europe and second position globally.

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In the run-up to 2008’s record prices of close to $150 per barrel (pb), fuel price forecasts climbed to great heights. In June 2008, Gazprom’s CEO, Alexei Miller, publicly predicted a level of $250 pb within the following 18 months and possible

consequences of even higher levels were also discussed. From today’s perspective, we would judge

that while short-term supply and demand are highly inflexible, long-term trends are more elastic. In other words, every $10 increase over a sustained period will significantly boost supplies and cut demand growth.

The price of ICE Brent oil averaged $90 pb over the last five years, while since late 2004 it averaged $80 pb.

Fuel prices are of global concern and affect everything from GDP to the cost of bread. The price of fuel has been of particular interest in the last decade and not least within aviation. Johannes Benigni, MD of JBC Energy, provides his company’s analysis of future oil prices.

Fuelling the industry: Oil price forecasts

MARKET OVERVIEW: Oil prices

Taking into account the difficult economic environment over the last five years, we see $90 pb as a lower threshold to oil prices, except perhaps for short periods of undershooting. This level is also well supported by marginal production costs.

Looking aheadForecasting prices, one should consider the higher cost of future oil production; OPEC’s growing market power; substantial geopolitical risks; and demand, which is likely to rise. Considering all of this, we

judge the price per barrel will sit at $100, with risk of it rising higher.

However, as recent years have shown that the price path cannot diverge for periods of more than one year, the $150 pb peak reached in 2008 could remain untouched until the middle of the decade, unless supplies in countries such as Iraq and Russia are highly disappointing.

Meanwhile, in the coming few months, prices may fluctuate either way if there are substantial changes to the global economy or UK banking system, or if the eurozone is broken-up. However, our view is that these fears will not materialise or at least will be reasonably managed and the global economy will slowly pick up pace in the remainder of the year, or by 2013 at the latest.

The 2Q price decline of $30 was partly a necessary correction of inflated geo-political risk premiums. It was also somewhat due to an overwhelmingly pessimistic view of the market combined with a frequently skewed weighting of different market elements. These included an overly optimistic view of the shale oil and gas boom over the last two years; an excessive focus on the level of oil stockbuilds in 1H, 2012, compared to the tightening predicted in 2H, 2012; and continued negligence regarding non-OECD demand developments in contrast to overly tracked and reflected US and European data.

Every Wednesday, market participants closely track the Energy Industry Association’s (EIA) Petroleum Status Report. So far this year, demand for gasoline appears to be down 5.1 per cent, while the figure for distillates reads marginally better at -3.5 per cent. This would equal a substantial loss of 590,000 barrels per day (bpd) of demand in the two products. However, the weekly statistics are massively flawed as more accurate data shows a combined decline in gasoline and distillates of just 140,000 bpd.

In Europe the combination of a warm winter and a frozen economy led to an even sharper fall in consumption. Italy – which suffered additionally from a tax increase at the beginning of the year – had the sharpest declines in demand for gasoline and oil, these being 11.8 per cent and 8.9 per cent respectively, each on a year-on-year basis during January to May.

For example, China’s demand for gasoline has an 11.3 per cent growth rate, India’s demand for diesel 9.4 per cent, and Brazil’s requirement for diesel seven per cent, each on a year-to-date basis. Meanwhile, consumption is also increasing in other regions such as Russia and the Middle East.

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Indeed, based on the last seven years, for every barrel of oil lost in demand from the OECD area, two barrels are required from non-OECD markets. After having trailed the OECD by as much as 15 million bpd in 2005, non-OECD countries now account for more than 50 per cent of global oil demand (see Chart 2).

Oil stockbuilds in 1H 2012 (mentioned previously) amounted to 1.1 million bpd on a global implied basis, according to our estimates. This is substantial, though much less significant when seen in the context of stockdraws in the eight previous quarters (see Chart 3).

Furthermore, global oil demand is set to rise by 1.3 million bpd in 2H versus 1H 2012, leading to renewed implied stockdraws over that period. Global implied stockbuilds for 2012 and 2013 should also be viewed in the context of China’s massive Strategic Petroleum Reserve programmes in Asia, which will easily take some 300,000 bpd of crude oil off the market – that is on top of standard demand.

In addition to these factors, we also expect cyclical demand patterns to start their uptick soon.

Based on data from reasonably observable countries, the contraction of global oil demand started in May 2011. If this dip is similar to that experienced in 2008-2009, then we can expect demand to rise soon.

The boom in US shale oil was particularly impressive. Nonetheless, one should not let it breed over-optimism as we do expect a slow down of momentum over the coming years. The market was similarly disappointed over the production of ethanol and other biofuels, as well as the development of oil production in Iraq.

We are firmly convinced that a repeat of the US story outside the US is impossible over the next five years based on a mixture of legal, access, investment and technological conditions. Once we exclude the shale boom, supply developments have rarely been positive over recent years.

Asia: Supply and demandBefore we take a more in-depth view on supply-side support for oil prices, let us have a look at the performance of physical oil markets. Given that the


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1. Total oil products demand growth (Y-o-Y) [million bpd]

2. World oil demand dynamics [million bpd]

Figures from April 2012 - December 2013 are JBC Energy estimates based on the SuDeP model’s growth projections

Source: IEA, JODI, JBC Energy Calculations

Absolute oil demand Cumulutive oil demand growth (2005-2013)

Selected 33 Non-OECD Countries from JODI Submissions:Algeria, Argentina, Azerbaijan, Brazil, Chile, China, Taiwan, Colombia, Croatia, Cyprus, Ecuador, Egypt, Hong Kong, India, Iran, Jamaica, Kuwait, Latvia, Libya, Lithuania, Malaysia, Oman, Peru, Philippines, Qatar, Romania, Saudi Arabia, Slovenia, South Africa, Thailand, Trinidad/Tobago, United Arab Emirates and Venezuela


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decline of oil futures has been sharper than for most other indices, one could expect to see a heavily pressured physical market. On the product side, this is clearly not the case, with the Atlantic Basin (so far) easily soaking up all the product exports stemming from the US. There, refinery runs hit lofty highs of 92 per cent in mid-June. Even European refining margins are at their best levels for four years, as shutdowns in anticipation of poor demand have supported economics.

Meanwhile, the Asian industry is suffering significant requirements for crude imports, which easily digest record production figures from Saudi Arabia and substantial inflows from the Atlantic Basin. A backward-dated Dubai market coupled with a narrowing discount of the Brent benchmark is a clear sign of strength. The only weakness is in the Atlantic Basin light sweet crude market, but this reflects a substantial upgrade of the global refining system and marginal supply streams from North America and Libya, rather than a sign of weakness in the global oil market.

Oiling the wayThe key factors that lead us to believe oil prices will soon remain at triple digits are supply-related and can be split into two main issues. On one hand, marginal production costs and the profitability of liquid production are particular pillars of support.

On the other hand, (and it is partly related) OPEC is acting towards stable and reasonably high oil prices.

Marginal production costs are mostly in line with current oil prices (see chart 4). This is a substantial difference to previous years when oil prices were often higher than strict marginal production costs. However, the concept of marginal production costs should not be overstressed, as it it does not include exploration and production costs, or a reasonable profit margin.

While the curve will change over time, the point of intersection is dependent on respective demand. Most importantly, the marginal production cost curve does not provide information on the profitability of future upstream projects. Given massive decline rates at increasingly mature oil fields around the world, it is crucial that sufficient projects are in the pipeline.

Given the limited access to acreage and high geo-political risk, a price of $100 pb or more should ensure appropriate investment.

Amid surging service sector costs, the latest five-year plan from Petrobras is quite revealing. While increasing planned investments by more than five per cent to $236.5bn – the biggest spending planned for the industry – production targets have been cut by a massive 700,000 bpd for both 2016 and 2020.

3. Implied global stockbuild/draw (2000-2012) [‘000 bpd, million barrels]


More importantly, this is calculated on an oil price of $90-$100 pb, which, from a historical point of view, is extremely high for such purposes. Complex oil extraction at offshore locations such as the Russian Arctic frontier also require high oil price perspectives in order to attract interest. This is also true for the International Oil Companies (IOCs), which already view deepwater projects as their most important assets.

As far as OPEC is concerned, the financial crisis of 2008 and 2009 and the Arab Spring in 2011 have significantly altered the budgetary situation of many OPEC members, likewise oil price, which affects budgets. While it is hard to give exact numbers, it is generally assumed they range from $70 to $115 pb, with Saudi Arabia and Kuwait located towards the lower end and countries such as Libya, Iran or Venezuela closer to the higher mark.

However, the important factor is Saudi Arabia, which is effectively the only country with sizeable spare capacity. According to a poll by Reuters in March, industry experts believe that given the current production level of around 10 million bpd, a price of $76 pb would balance the budgets. However, if one were to use a more realistic annual output figure of 9.4 million bpd, then the breakeven point could be as high as $90 pb. Considering this, it appears unlikely that Saudi

Arabia will allow oil prices to fall below $100 pb for a long period of time.

Meanwhile, the level of spare capacity in the system is a concern. While many OPEC countries could produce much more than they currently do, a combination of political, technical and financial factors hinder them. At the moment, only Saudi Arabia holds significant spare capacity, which is between 2 and 2.5 million bpd. However, Saudi Arabia has never produced more than it has over the last nine months and there is good reason to doubt that the country intends to produce more than the recent 10 million bpd on an annual average basis. At the same time, the cocktail of factors that has resulted in disappointing supply over recent years is unlikely to disappear any time soon.

Once demand picks up and/or further supply disruptions take place, the issue of spare capacity will return. On the other hand, the resulting higher prices could lead to the next round of efficiency improvements across the globe and could incite new upstream investments. Overall, we expect oil prices to stay within a narrow range of $100-$120 pb on an annual average basis over the next three to four years.

All figures and prices were correct at the time of going to print in late August 2012.

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4. Marginal cost of oil production [mbpd, $/bbl]

North Sea WAF Offshore

Oil sands

US Deepwater

US Tight Oil

US Ethanol

BrazilEthanol

BiodieselEurope

Source: JBC Energy

afg


FINANCE: Rate of return

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The UK government has announced that GDP shrank by 0.7 per cent in the 2Q and parts of Europe are under heavy austerity measures.

On the upside, both passenger and freighter traffic continues to rise, with capacity growing at a lower rate. Load factors are strengthening and for the most part sit just below 80 per cent, with only North America exceeding this figure at around 82 per cent. This rise in seat demand is crucial and timely if the values and lease rates of older second-hand aircraft are to stand any chance of recovery.

Sliding valuesIt is no surprise that 2012 continued the dismal trend of falling values and lease rates, which started back in 2008, but worryingly, this trend has spread to some aircraft

traditionally considered beyond reach, namely young A320s and 737-800s.

A sharp intake of breath can be heard when any deal involving a six-year-old aircraft hits the table, but it should not be too surprising given current market pressures. At one end, OEMs devalue current aircraft by releasing new technology and increasing production, while export credit agencies (ECAs) offer poorer credit facilities to buy more new aircraft.

At the other end, the leasing market is saturated with cheap rates as the larger players try to increase market share. However, airlines are demanding shorter lease terms for narrowbody aircraft in anticipation of aircraft with newer technology in 2015.

Aircraft values and lease rates have continued to fall since 2008. Dr Stuart Hatcher, head of valuations and risk at IBA Group, considers the effect of next generation aircraft and the worrying trend of sliding values for young aircraft.

Rate of return: Aircraft asset values


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Traffic figures show some signs of recovery, but there is a long way to go before the secondary market attracts new entrants and commercial banks. The second-hand market contains aircraft that are not yet subject to age restrictions, but consist of current generation technology, which have barely reached its first heavy maintenance event.

While the market for the sale and leaseback of new or nearly new aircraft is in high demand, albeit at lower rates marked by low interest rates, aircraft that are off-lease and older than five years are at distressed levels.

This trend is set to continue as more new narrowbody leases expire after just six years, rather than 10 to 12 years, which was typical just three years ago. This will make it increasingly difficult for many lessors to turn a profit on what was traditionally a long-term investment.

The saving grace for the largest lessors is that they typically buy new aircraft directly from the OEM and are therefore able to take advantage of moderate discounts unavailable to those that purchase exclusively through the sale and leaseback market.

The largest lessors then ‘flip’ these deals to smaller new entrants, which strive to make the connections with good credit lessees, enabling them to capture new sale and leaseback opportunities that will appear to satisfy growing backlogs.

However, if lease terms start to shorten, it will become increasingly difficult for lessors to flip these deals as there would only be a few years left to run.

It is also less straightforward for larger lessors to find operators for new aircraft, so one can expect the number of

speculative purchases to dwindle. Long delivery times for technology that will quickly age will no doubt result in lower values as operators tend to pay less for aircraft with a short economic life.

When analysing the historic movement of lease rates for the A320, there seems to be a growing trend towards lower rental rates. In the graph above, the evolution of lease rentals for a 1998-built A320 clearly illustrates the aviation cycle over the last 14 years. The historical three month LIBOR rate has also been included to illustrate the link between the two. The base lease rate curve illustrates what the underlying lease rate should be for this aircraft vintage, assuming interest rates follow a less volatile long-term downward trend.

When plotting plot the same aircraft type over the same period but keeping the age constant, it’s clear that there is increased rental volatility encountered for older aircraft. Likewise, the underlying rates for the latest-build aircraft remain stable, while the rates for 10-year-old aircraft are separate from the younger models.

The A320 and 737 Despite market and interest rate fluctuations, the mean for new lease rates has remained relatively flat for the past 14 years. This correlates to the almost static mean of the new A320, which has remained close to $40m since the late 1990s.

In addition, it should be noted that this single view of lease rates does not adequately capture the rates encountered for many sale and leaseback agreements, which may be closer to $350,000 per month as a result of higher purchase prices, or those at $250,000, which are floating rates and more firmly linked to the current LIBOR rates.

1. 1998-built A320-200Le

ase

rate

s $ LIB

OR

%

LIBOR

The 737-800 displays a similar trend when lease rates for a 1998-built aircraft are plotted (as shown in Graph 3)

This trend may look similar to the A320 when plotting lease rates for a constant age, but there is a greater level of stability over the last three years, although the basic trend remains as shown in the Graph 4. Also note that, as with the A320, lease rates will vary depending on price and credit risk, and there are swings of around $30,000 above and below the current market rate for new delivery aircraft.

The trends presented in Graphs 5 onward show current generation narrowbody aircraft with achievable lease terms sometimes dependent on when the lessee expects its A320 neo and 737 MAX deliveries. History dictates, however, that some deals that are expected to expire between 2015 and 2017 will be due for an extension of one to two years as the OEMs fail to meet delivery deadlines.

When compared against market value changes over the past few years, the drop in lease rates has been relatively mild. In 2007, the average 1998-built A320 lease rate was

2. A320 lease rates – Constant age

3. 1998-built 737-800

Leas

e ra

tes

$Le

ase

rate

s $

LIBO

R %

LIBO

R %

LIBOR

LIBOR


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aproximately $260,000, whereas the market value was around $26m. By 2012, the rates were down to $150,000, whereas the market value was around $12m maximum. Similarly, with the early-build 737-800s, back in 2007, rates and values were around $280,000 and $28m, yet in 2012, these were $200,000, with offers expected at around $15m depending on specification.

Fortunately, current generation widebodies appear relatively stable. This is partly influenced by the smaller volume of widebody deals, but also because availability for good quality

in-production 777s and A330s remains tight. Operators tend to hold onto these assets for much longer and fewer come from lessors, but tend to be leased through the sale and leaseback market.

There is also a growing appetite among lessors – particularly new entrants and the largest lessors – to take advantage of the longer terms and relatively high lease rates that widebodies may offer. However, the cost of reconfiguration and heavy maintenance will make most think carefully about long-term exposure to such equity-intensive assets.

4. 737-800 lease rates – Constant age

5. 1998-built A330-200

Leas

e ra

tes

$Le

ase

rate

s $

LIBO

R %

LIBO

R %

LIBOR

LIBOR


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Used aircraft valuesAs expected, older aircraft values are more volatile, but it is quite surprising how stable the rates have remained over the past few years. New aircraft lease rates, which are almost exclusively a direct result of sale and leaseback deals, have remained largely static with only minor swings for about six years. Lease terms are often 12 years in length and tie in with the 8C airframe check. There is a high level of commonality among the fleet that will stabilise trading activity. It is important to note that some sale and leaseback activity has been observed at both much higher and much lower rates, depending on the lessees, but this remains a function of the purchase price and interest rates. However, it is becoming less common to find lease terms above $900,000 as LIBOR remains low and new delivery pricing is tightening.

As new aircraft lease rates are so dependent on a mixture of price and interest rate fluctuations, it is reasonable to expect the return of lease rates for new aircraft to be a gradual process as both LIBOR and delivery price forecasts remain steady.

Lease rates for both five- and 10-year-old aircraft will be more closely linked to the secondary trading market and short-term capacity shortfalls. Therefore, the return to stability will be dependant on increased trading prices and a continued rise in passenger demand. Consequently, it may take a longer before rates return for assets of six-years or older. Added pressure will come with many new leases for A320s and 737-800s, which will coincide with deliveries of the Neo and MAX and will counter rising passenger

demand as production rates are set to increase. While both interest rates and second-hand prices remain very low, it is likely that banks will remain unwilling to finance these young and very capable aircraft, therefore prolonging problems.

This dynamic may change should the second-hand market for current generation narrowbody aircraft improve, but it would have to change greatly for aircraft over 10-years-old. When this last occurred in 2006, interest rates were rising and the ordering boom had not started, which meant that demand could be measured more easily.

Despite the entry into service (EIS) of the 787 and expected delivery of the first A350 in the next four years, the current generation fuel-efficient twins seem set to dominate the market. Although banks are now shying away from some A330 deals, the 777-300ER remains the top choice for investors. While airlines want them, investors will remain committed and rates will remain buoyant despite other opposing factors. However, lessors should be careful how they calculate their exposure should the lessee default or the aircraft require a large-scale reconfiguration.

At the other end of the spectrum, the demise of the 747-400 and A340 (all types) looks set to continue as operating costs rise to such a high that it makes no commercial sense to keep large numbers in operation. Both types will continue to operate but at much lower levels and at much lower lease rates. Even if fuel prices dropped significantly, the cost of maintenance and reconfiguration would make them undesirable.

6. A330-200 lease rates – Constant age


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At the year’s midpoint, the view of 2012 global aircraft financing is reasonably good, but there is still considerable uncertainty within the market, particularly concerning changes in export credit and Europe’s

enduring sovereign debt crisis.

Market conditions have held up much as Boeing’s aircraft-financing unit, Boeing Capital Corporation (BCC) predicted in its 2012 look forecast, released last December. Despite recent macro-economic pressures, financing has been available over the last 12 months and challenges have been occasional. Thanks to low interest rates, refinancing costs remain at a historic low.

Contributing factorsLooking toward 2013, however, the horizon becomes somewhat cloudy as implementation of the Basel III accord and new global export-credit requirements (which go into effect next year) create uncertainty.

The new Aircraft Sector Understanding (ASU), signed in early 2011, promises significantly higher borrowing fees, equity requirements and stricter terms for the use of the export credit agencies (ECAs) in aircraft-building nations. It is an effort to make conditions more fair, particularly for airlines that are unable to access export credit support.

Boeing Capital Corp discusses aircraft financing in 2012 and beyond and looks at the role OEMs will have.

Boeing forecast: Aircraft financing

FINANCE: Aircraft financing

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Concurrently, banks are beginning to deal with the implications of the new Basel III regulations, which govern capital requirements, stress testing, market liquidity and risk spawned by the financial downturn and crisis of the late 2000s. Over time, these regulations will make commercial bank debt more expensive and less available for longer tenors.

In addition to these regulatory and export credit changes, the greatest near-term concern is, perhaps, Europe’s economy. Europe’s commercial banks have long been a great source of lending within aviation, though some have already pulled back from aviation finance in response to the continent’s economic challenges. Despite that, European bank lending has

continued to support better credits and many players remain active.

However, if not checked, a major meltdown of Europe’s economy would have a profound impact on the rest of the world, with challenges to aircraft financing being only one of many areas impacted.

With demand comes finance“As we’ve been saying for several years, airlines have done an exceptional job in managing their businesses relative to their historic performance,” said BCC’s Kostya Zolotusky, managing director for capital markets development and leasing. “They have aggressively deleveraged their businesses, which


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has allowed them to deal with the macro-economic environment, and its unpredictability, better than they have in the past. They have reacted proactively to market opportunities and market challenges by adjusting their fleet capacity rapidly. That’s allowed them to stay profitable through some turbulent markets or limit the damage of that economic turbulence.”

BCC’s well-known spokesman for its investor outreach efforts says that with passenger traffic continuing to grow and many of the world’s airlines being profitable, aircraft supply is struggling to keep up with demand.

“With that real demand, financiers clearly recognise aircraft values as being stable, and that’s one of the reasons why, while there’s a lot of change in the aircraft financing markets, capital availability has been stable and adequate. Aircraft finance is not the tail

that’s wagging the dog. Rather, it is responsive to real market demand,” Zolotusky said.

While bullish on aviation’s continuing prospects overall, the airframer is realistic about concerns over where the market is heading. “We recognise the challenges and changes that aircraft financing is undergoing and we believe that, yes, it will limit participation of some funding sources, like commercial bank debt and export credit,” said Zolotusky. “But it will also create opportunities and grow market participation by the capital markets in aircraft finance and the lessor channel.”

Some have questioned whether leasing companies can prosper while banks are under pressure. Zolotusky defends that assertion by pointing to what has happened since late last year. “Lessors have been able to raise an extraordinary amount of capital in the capital markets to fund their current and future deliveries,” Zolotusky said.

He and his Boeing financing colleagues are reporting strong interest from capital market sources in funding not only aircraft lessors but US airline deliveries through enhanced equipment trust certificates (EETCs).

Capital markets“The capital markets are there and clearly demonstrating almost unlimited liquidity for aircraft,” said Tim Myer, BCC’s VP general manager for aircraft financial service and Zolotusky’s boss.

Myers points to recent capital market transactions by US Airways, United Continental, Fed Ex and others. “What drives capital markets for our customers is really pricing on the banking side. If bank pricing continues to be aggressive and is acceptable to the customer, then they won’t go to the capital markets because it’s something new, for which you have to get a deal credit rating for the most part,” Myers said.

“The only reason we haven’t seen a rapid evolution of non-US airlines tapping the capital markets is because they still have relatively easy alternatives available to them in other spaces. When those markets become more expensive or challenged, that’s when you’ll see people starting to work structures to use capital markets.”

In recent months, the industry has also seen a number of deals where the Export-Import (Ex-IM) Bank of the US has stepped in as the guarantor for bonds issued by non-US carriers for their deliveries of US-built aircraft.

“Lion Air went out with an Ex-Im bond deal recently that drew a very attractive rate. In fact, some of the lowest that we’ve seen. That was very positive. Ex-Im is now working on a new product to pre-fund deliveries,

The 787: A financier’s dreamBoeing’s 787 Dreamliner made history by being the first commercial airliner designed with direct involvement by aircraft bankers and investors (some of whom are pictured above). The financiers involved pushed for its standardisation to make it easier for leasing companies and operators to introduce or transition the aircraft to operators. “The plane that you buy is like the ELX model of a car,” said Boeing financing executive, Kostya Zolotusky. “It comes with all the features; there’s no guessing if the airplane you’re getting has what you need for operation, or transition to another operator”. He added that financiers have been especially welcoming of the Dreamliner’s entry into service (EIS). In fact, United Continental’s recent bond offer to fund its 787s delivery this year, as well as new 737-900ERs, resulted in the lowest-ever, all-in pricing for an ‘unwrapped’ aircraft bond sale.


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Origins of A320 oversupply

Aircraft delivery source: Ascend. Lease rate source: IBA, Ascend.

Air

craf

t av

aila

ble

fo

r le

ase

A319 / A320 / A321

737NG

737-800 lease rate premium over A320

737-800 mo

nth

ly lease rate prem

ium

According to Boeing, lease rates and values for the A320 family are suffering. Its financing arm, Boeing Capital Corp, discusses the matter.

Lease rates and values for the A320 are sliding (see chart below). Although those for 737 NGs are holding up well, problems with the A320 could spill into the standard-body marketplace.

Boeing and Airbus are both producing standard-body aircraft at record rates. However, Boeing cautioned that oversupply should not be applied across the industry.

“There is a dynamic that makes us – as well as many in our industry – nervous, and this is why we want to avoid being painted with the same brush,” said Kostya Zolotusky, managing director for capital markets development and leasing at Boeing Capital Corp (BCC) the manufacturer’s product financing and leasing unit.

Over the last 18 months, A320 family lease rates have been distressed and the Airbus twinjets have also seen residual values decline. Meanwhile, its competition – Boeing’s 737 Next Generation family – has seen leases and values hold steady and even command a premium.

“We look at it, not as something that’s wonderful for Boeing competitively, but that it’s only a matter of time before Airbus’ issues will impact values of our airplanes,” Zolotusky said.

Boeing has shared at industry forums its detailed analysis of standard-body production rates since 1998, a period when both manufacturers delivered a similar number of aircraft. However, in the post 9/11 market, Boeing elected to produce fewer aircraft as airlines cancelled or rescheduled orders. Airbus, meanwhile continued production and delivered significantly more A320 capacity into the leasing marketplace.

“That overhang created really depressed rates on those airplanes and we believe its effects are coming back into the market seven to nine years later. Statistically, you have the NG and A320 markets of about the same size and vintage airplanes, but for any given year over the past two years, Airbus has 50 to 70 per cent more units available” Zolotusky said.

“Fortunately, the A320’s dire predicament so far hasn’t hit any of the NG family,” he continued. “If their airplanes get ridiculously cheap, they become competitive with our airplanes or start dragging our airplane pricing down.”

Not all single-aisles are valued the same


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Boeing’s forecast of the aircraft financing market has become a staple for its financiers and investors outreach programme and is relied upon by others in the industry as an important view of market conditions. Since Boeing’s original 2012 forecast was issued late last year, the company has revised its forecast of conditions for commercial bank lending for the duration of this year from one of improvement to one of continued concern. Meanwhile, Boeing sees export

credit agency (ECA) support as a continuing challenge as new global terms and conditions come into play following the introduction of the new Aircraft Sector Understanding (ASU) governing ECAs. The company’s outlook remains encouraging for new sources of delivery capital from regional banks and new players in the debt market. Boeing sees little need to provide its own OEM financing given strong market interest in its current product line.

where it would work very similarly to a typical US EETC capital markets deal, where they prefund the delivery at a specific price. We’re pretty excited about that product and hopefully we should see that close in the fairly near future,” said Myers.

The American manufacturer does not share the concern expressed recently by its European competitor, Boeing, that aircraft manufacturers may have to step up their financing should Europe’s banks or other financial sources become more challenged.

Officials at Airbus’ parent, EADS, have discussed setting up their own bank to conduct product financing and accept deposits from its subsidiaries, while gaining access to Europe’s Central Bank. Boeing has said that it would not explore the option of an in-house bank.

“It’s worth noting that we are faring much better in the current aircraft financing market as we tend to have preferred aircraft,” Zolotusky said. “Not only do we have preferred airplanes but more importantly, we

manage the supply and demand equation much better than our competitor.”

The US aircraft builder has addressed criticism levelled by leasing firms that the commercial aircraft industry is over-producing by pointing to the continued growth of the air travel sector and the geographically balanced nature of its substantial order backlog.

“I won’t speak much on Airbus as I think most people in [the] industry will agree that their backlog and delivery skyline is with a riskier set of customers, which means they’re exposed more than we are to deal or delivery surprises,” Zolotusky said. “But on a macro-systemic level, both of us are benefiting from the rising tide of the industry because when you look at aircraft finance over the last couple decades, or through the downturn, we have done extremely well weathering the storm of the market and over the long-term. We are able to attract very good, stable, long-term funding in our industry even as our industry undergoes macro changes right now.”

Aircraft financing environment


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Airline fuel costs rose 15 per cent over the last year and the Government further impeded the aviation industry by raising its air passenger duty (APD) by eight per cent in April. UK APD is now the highest aviation tax

levied in Europe.

Willie Walsh, CEO of International Airlines Group (IAG), attacked the UK government at the International Air Transport Association (IATA) conference in Beijing, claiming it had damaged the aviation industry and its jobs, citing a lack of capacity, high taxation (according to Walsh, it is the highest in the world) and a stringent visa regime that deters foreign visitors.

These factors have raised the cost of air travel, which has been passed on to the customer – thereby reducing demand for aviation services.

Britain’s largest airport operator, BAA, recently announced that the number of passengers flying between Heathrow and the weaker eurozone nations has fallen significantly.

Traffic to Greece dropped 11.3 per cent compared with May last year; Italian traffic fell 9.2 per cent, Spain 2.5 per cent and Portugal took the largest decline of 11.4 per cent. Fortunately for BAA, the operator was protected from the conditions in the eurozone by

The general economic climate is extremely tough and the aviation sector has suffered in particular as a result. As such, it is increasingly important that companies consider the cost of foreign exchange fees. Richard Driver, currency analyst at foreign exchange company, Caxton FX, reports.

Foreign exchange: Counting the cost

FINANCE: Foreign exchange

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other international traffic, led by the key Heathrow to New York route.

But in further bad news for BAA, it also reported that its cargo transport fell 2.4 per cent to 144,000 metric tonnes of cargo traffic, while cargo traffic at Heathrow fell 3.8 per cent. This is worrying news as air cargo traffic is one of the key indicators of the wider aviation economy.

As a consequence of this constrictive economic climate, IATA almost doubled its forecast for 2012 losses within the European airline industry to $1.1bn, up from its previously forecasted loss of $600m, released in March.

As already indicated, one of the key reasons for reduced demand in the aviation sector is the ongoing debt crisis in the eurozone. In reaction to the European debt crisis, business leaders are urging the Government to build better links to growing economies such as China, India and Brazil.

While there is little aviation businesses can do about the eurozone’s dire economic conditions or business links with emerging economies, there are simple measures they can take in order to reduce their exposure to fluctuations in the currency markets.

Being aware of how currencies are performing can make businesses better prepared and more able to budget. For example, a company will know when it is best to pay a supplier.

Currency conversion A UK-based company that uses suppliers from within the eurozone will inevitably have to convert sterling into the single currency as the eurozone-based company may only accept payment in euros.

Not only is this an administrative burden but banks will charge for the conversion and offer uncompetitive exchange rates – hitting the company’s bottom line.

The prospects for the single currency in 2012 are uncertain. Since June 2011, the euro has lost ground to sterling at a consistent pace (See chart). We believe this will continue for at least the remainder of 2012, with the rate possibly hitting €1.30 by the end of the summer.

The eurozone debt crisis is escalating faster than the EU leadership’s ability to come to a solution. Consequently, investors are flooding out of the euro and returning to safer currencies, such as the US dollar and, in recent times, sterling.

The problems of Greece and SpainAcross the eurozone, unemployment is at record highs, economic growth is being suppressed by austerity measures and bank lending remains restricted.

If we take a closer look, the problems in Greece have weighed heavily on the markets and consequently, the markets are sceptical about the future of Greece and the eurozone as a whole.

While Greece has received international bailouts, one of the conditions is that Greece implements harsh austerity measures, which are crippling its economy. The electorate has spoken up against these measures and the elections in April 2012 proved to be a stalemate with no workable government being formed.

Centre-right party, New Democracy, narrowly swung the vote for Greece’s newly formed coalition and New Democracy’s Antonis Samaras was recently sworn in as prime minister for Greece. The party supports the austerity measures demanded by the international creditors and remaining in the eurozone. While the result showed that the Greeks are keen to remain in the euro, this result will


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not be game-changing; the problems in Greece will not subside and the euro will remain under pressure.

Spain has put further pressure on the euro after it sought a €100bn bailout for its banking system. Although Spain did secure a loan without the same measures imposed on the Greek economy, it is of major concern as Spain is the region’s fourth largest economy. This is expressed through Spain’s soaring government bond yields, which have exceeded seven per cent – the level that triggered the international bailouts of Ireland, Portugal and Greece.

As a result, the pockets of European businesses and consumers are a bit lighter, thereby lowering demand for services. Additionally, the weakening euro has meant holidays and foreign business trips are more expensive.

Sterling, on the other hand, has been granted a second-tier, safe-haven status over the past few months, with investors taking comfort in the Government’s approach to the UK’s deficit and extensive public debt. Credit agencies have also shown confidence in the UK’s approach as they have maintained the UK’s AAA credit rating – essential for any country wanting to borrow money at a cheap rate from the global markets.

Nonetheless, sterling still faces significant risks: Britain is in a recession and growth is being stunted by the Government’s austerity measures, as well as the eurozone debt crisis. This means the Bank of England could introduce another round of quantitative easing in order to boost growth. However, increasing the supply of money could weaken sterling.

All in the timingIn real terms, a company that exports goods to aviation businesses within the eurozone will be forced to sell them at a relatively high price, and considering the weak European economy its business is likely to suffer.

The US dollar is the world’s reserve currency and many costs tend to be paid in this currency, such as monthly rental fees, aircraft leasing, maintenance charges, salaries to expatriate employees, overseas airport charges, fuel at international airports and overseas loan and interest repayments.

We hold an upbeat outlook for the US dollar in 2012 against both the single currency and sterling, which means the rate of the dollar could work against companies, making bills more expensive than before.


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Admittedly, US economic growth has not been hitting highs and the Federal Reserve – America’s central bank – still refuses to completely rule out a third round of quantitative easing. Nonetheless, the US economy looks much better placed to weather the global economic storm.

With better knowledge of the currency markets, businesses are undoubtedly equipped to decide when or how to pay a bill in a foreign denomination. For example, if you know sterling is performing well against the US dollar and you have a bill to settle in dollars, it would be best to pay it straight away. Additionally, if you know whether this trend will hold or decline, you can weigh up whether you should wait for a better rate.

The next thing to look at when reducing your exposure to costs associated with foreign exchange is how to carry out foreign payments.

Businesses tend to go through their banks when it comes to making foreign payments. Unless it is a large multinational, it is likely the bank will charge an unfavourable spread on the exchange rate, as well as charge to facilitate the process.

For example, research carried out by Caxton FX revealed that high-street banks in the UK are charging their business accounts an average flat rate of £21.40 ($33.54) each time a transaction is sent overseas.

If a business makes six transactions with international suppliers a month, it will incur £1,200 ($1,880) per year on foreign transaction fees, as well as an unfavourable exchange rate.

When looking to pay a foreign supplier or purchase foreign currency, companies should research the different banks and foreign exchange suppliers rather than continuing with the usual provider, which may be more costly. There is now a good selection of currency companies able to provide excellent rates, platforms to make cheap foreign payments, as well as exploring hedging options to minimise exposure to currency fluctuations.

Hedging strategies include ‘forward trades’, which enable a company to lockin a good rate when it sees it, but pay for the transaction at a different time. The provider can also watch a rate and contact you when it is a good opportunity to purchase foreign currency.

In terms of saving while overseas, it would be wise to consider a business travel card, which can be credited before travel and used much like a local card. This offers convenience, security and generally a better exchange rate. It is also a great alternative to carrying around cash, they can be used to pay for bills anywhere with the Visa or MasterCard sign and is a great way to budget as the cardholder can only spend what is on the card.

Sterling versus Euro – Two year view

2010 2011 2012


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LEASING: AWAS Q&A

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How do you see the current state of our industry and where do you see it in the next six to 12 months?

A year ago, I am sure that many of us would not have thought that given a dire economic forecast across Europe, and the spectre of further regional – perhaps global – economic contagion, merely a handful of

airlines would have ceased operations and few orders would have been altered. Most airlines have been able to maintain profitability and have in fact added to the manufacturer’s order books for next-generation aircraft.

Many airlines have done a very good job of trimming older capacity and trying to stay at marginal growth

Aircraft Finance Guide talks to Ray Sisson, president and CEO of AWAS, about the resiliency of the aviation industry, the need for next-generation aircraft, financing and the ability to drive continued growth.

One to one: Ray Sisson, AWAS CEO

rates, even while ordering and accepting the new aircraft that is vital for them to achieve operational profitability. Others have turned to strong-performing, mid-life aircraft as an attractive way to make their fleets younger and more capable, at a lower cost.

Our senior team is constantly measuring, benchmarking and re-evaluating financial conditions, risk, and operational performance, and we still see far more areas to invest versus those to stay clear of. We have also seen several successful airlines

begin to place campaigns for significant volumes of new lift, betting on a return to more stable growth in the coming months.

Do you see a rebound of lease rates and do potential production rate increases still concern you? Narrowbodies have been most affected by the current softer market but we have recently seen firming, and most likely a bottoming, of lease rates for both Boeing and Airbus single-aisle aircraft. Widebodies have greater scarcity value and rates have held up pretty well, except for older, out-of-favour variants.

Our industry, like most, does not care for uncertainty. We need to be able to forecast many complex variables to make our business models work. We deal with great assets that perform well for decades, airline businesses that evolve and adapt over time, and global economic trends, both of growth and inevitable shocks from time to time. That is why when the major airframers announced plans to ramp up production some 15 to 20 per cent – which could impact residual values of certain aircraft – many in our industry became concerned. But I think there is now more moderation of those initial ambitious plans, and a tempering given current marketplace conditions.

Do you agree with some views that the neo and MAX are interim aircraft? Did the decision to re-engine the aircraft affect your orders?

I think that both the Airbus A320 neo and Boeing 737MAX will be excellent aircraft, and while we currently have no placed pipeline orders for them, we are planning to own many of them via the OEM’s large orderbooks and airlines’ need and desire for purchase and leaseback financing.

The operating advantages that both these aircraft are designed to deliver are very meaningful and we believe that they will be quite long-lived. While the use of composites will continue to grow, the benefits are slightly less for lighter, single-aisle aircraft, and a next phase of game-changing engine technology, like open rotor, could be quite a while away.

That said, the current generation of A320s with fuel-saving Sharklets and 737NGs will continue to be workhorses for many years to come. I think you can see the airlines’ need and faith in them given the numerous current orders for these types.

LEASING: AWAS Q&A

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We’ve seen a number of aviation leasing start-ups, since then we’ve witnessed consolidation. What is the future for the leasing market? The global constriction of credit we’ve seen recently from the core European banks, which have traditionally been strong lenders, coupled with new restrictions via Basel III and the new ASU, are going to make leasing even more important than it is today.

A decade ago – when leasing was less than 25 per cent compared to approximately 40 per cent of the market today – one might not have thought that entire, new, successful airline business models could, or would, be built around a 100 per cent leased fleet. Leasing is a valuable solution for airlines as a financial tool, as a technology hedge, and also gives them significant flexibility to alter their business model to respond to marketplace changes.

Over the past few years, we’ve seen a number of new lessors and we’ve also recently seen strong

investor interest in the value of strong-performing, established platforms. We see this trend continuing and given the growth, there will be plenty of business for everyone – from the top-tier mega-lessors (the global platforms with 200-plus aircraft, where AWAS currently resides with 240-plus) and newer start-ups looking to capitalise on regional needs or aircraft-type specialisation.

Are airlines placing more demands on lessors and what do lessors need to offer other than simple access to an aircraft?

Airlines want as much flexibility as possible, but they also value expertise and depth of offering. That could mean access to a variety of aircraft types or consultative abilities. It’s of vital importance to have deep domain expertise regionally; to be able to have dedicated staff that understand airlines’ unique needs and competitive environment.

Recently, top-tier credit airlines have had multiple lessors bid on placements and PLBs, [purchase leasebacks] which can affect pricing.

LEASING: AWAS Q&A

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We try to stay a bit away from these scenarios as our platform and people allow us to play in broader markets with a more diverse array of airlines.

What plans do you have for your fleet? Which, and how many, aircraft do you have on order and do you have placements for them? Today, AWAS has over 240 aircraft in our fleet, which is worth over $7bn. We are a little different than most lessors in that we can offer customers new pipeline aircraft; mid-life aircraft; narrowbodies; widebodies; and both passenger and freighter variants.

The broadness of our platform and expertise of our technical team allows us to deliver fleet solutions where, for example, one operator is looking to get into a single type to match the requirements of their new business model.

Our global reach enables us to place the legacy aircraft with a LCC [low-cost carrier] or regional operator for whom the metal is perfect. We can successfully manage

the risk, the transitions, and we get stronger returns in line with our high-yield strategy.

Our pipeline order of new aircraft from both Airbus and Boeing is over 80 additional units and we are placed-out over the next year and beyond. We have been very active in these significant campaigns and we will have several announcements soon on new relationships – and deepening ones – all involving multiple aircraft.

AWAS has also been – and plans to be – very active in the secondary market with purchase and leasebacks, as well as portfolio acquisitions from other lessors. Last year we bought over $1bn in aircraft and we have a prudent growth strategy that we will build upon this year.

By the middle of this decade, our plan is to grow AWAS’ platform to well over 300 modern aircraft worth over $10bn, and we will continue to differentiate ourselves by offering a greater array of solutions to a broader base of airline customers. That will keep us relevant and growing in both challenging markets and hopefully smoother ones ahead.

LEASING: AWAS Q&A

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Professor Karl Moore of Desautels Faculty of Management, McGill University, Canada, recaps where we are with aircraft development and explains why he thinks Bombardier’s CSeries will prove to be a success.

The CSeries: Stand by for success

LEASING: The CSeries

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Seven years ago, Bombardier’s management sought launch customers for their CSeries aircraft, which was to plunge them into competition with Boeing and Airbus – more specifically, their 737-600 and A318 models.

Orders have been less than stellar. At the time of writing, Bombardier had 138 firm orders, 199 options and 15 conditional orders for a total of up to 352 aircraft, perhaps less than one would hope for at this stage in the aircraft’s development. Yet, the numbers are not too bad compared with the A320 (and even the 737NG) in the run up to entry into service (EIS).

But, realising it could do better, Bombardier added considerably to its sales team, welcoming Chet Fuller, (formerly at General Electric) to fill the position of SVP of sales, marketing and asset management. Further additions to the sales force included Andy Solem VP of sales, China, for Bombardier Commercial Aircraft, and Torbjorn (Toby) Karlsson, VP of sales for Bombardier Commercial Aircraft.

The manufacturer also opened regional sales offices in Dubai, Shanghai and Singapore, adding to existing offices in Toronto, Montreal and Munich, allowing it to reach potential customers more effectively.

Production programmesMarket concerns over the CSeries include whether it will be delivered on time, what its competitors, Boeing and Airbus, will do, and how much long-term demand there will be.

First and foremost, Bombardier must hit its target date for first flights. Being on time is crucial to building trust from customers, and thus increasing sales. Yet customers are nervous, remembering all too well the three-year delay of the A380 and two-and-a-half-year delay of Boeing’s 787.

Bombardier’s CEO, Pierre Beaudoin, recently predicted the aircraft will take its maiden voyage by the end of this year but said that if it flew within three to five months of the year’s end, it should be considered on time.

Based on numerous comments made by Bombardier executives, it appears Beaudoin’s window is achievable. If the project were only half-way through with no time to spare, there would be cause for concern, but the CSeries is at the tail-end of what will be a complex, almost eight-year long, project.

The manufacturer has travelled far down its production timeline and although there are likely to be some glitches (as with any such project), it is likely Bombardier will make its window.

Fighting it outCrucial to the success of this aircraft is the competitive response from the world’s two dominant aircraft makers, either of which could squash the CSeries if so desired. Currently, these two firms account for almost 80 per cent of the commercial aircraft market share, with Airbus holding 37.8 per cent and Boeing 39.3 per cent. Bombardier by contrast, though the next biggest competitor in terms of market share, holds only 6.3 per cent. However, for this reason, both Boeing and Airbus will be more focused on the competition posed by each other than by Bombardier’s CSeries.

Airbus’ CEO, Fabrice Brégier, recently commented on the aggressive nature of Boeing’s pricing for its 737 MAX and acknowledged the threat it would pose to the A320 neo. Airbus will be highly aware of any interest given to the MAX, including the recent order from United, (for 150 aircraft, including an order for 100 new 737s) which followed extensive negotiations between the airline and both competitors.

Boeing was forced to respond to Airbus’ new engine option (the neo) by announcing its plans for the 737 MAX. Originally, Boeing hoped to create a completely new aircraft for release in 2019. However, with suppliers demanding a more immediate solution, Boeing chose to re-engineer a

couple of their models. Now, Boeing’s priorities are to ensure the 787 Dreamliner flies perfectly. It must make sure that sales for its 737 MAX continue to grow and take back at least part of the market share lost to Airbus’ A320 neo last year.

Market concerns over the CSeries include whether it will be delivered on time, what its competitors Boeing and Airbus will do, and how much long-term demand there will be.


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Meanwhile, Airbus must focus on issues with the A380’s wing and drive the programme to unquestioned success. The manufacturer’s second priority is to find launch customers for its A350 mid-market aircraft, planned as a response to Boeing’s 787 Dreamliner, which at this point is scheduled to launch in the 1H 2014 – a year later than originally planned. Industry insiders estimate that this market is considerably bigger than that of the CSeries. Airbus’ third priority is to ensure that the revamped A320 neo (helping to replace the A318, A319, A320 and A321 models) continues to sell despite the added competition of the 737 MAX.

A field of its ownOnly time will tell whether these issues will dominate Boeing and Airbus. In terms of competing against Bombardier, both must carefully consider which

size of aircraft to optimise in order to suit the market for smaller jets. The CSeries is specifically designed for the 110 to 149-seat market, but Boeing and Airbus’ comparable aircraft are downsized from their optimal design in terms of fuselage cross-section and weight etc., which means they are not perfect competitors to the CSeries.

When drawing a clean-sheet aircraft, both Boeing and Airbus must ask what seat-size (120, 150, 175) is necessary to successfully meet demand.

According to industry estimates, there is more opportunity in the plus market for 150-seat aircraft. Will Boeing and Airbus re-engineer their existing aircraft to compete against the CSeries, or will they create more competitive, but more costly, clean-sheet aircraft?


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Boeing’s and Airbus’ narrow focus on each other has blinded them to wider competition; in short they suffer from competitive myopia. This is where Bombardier has an advantage. The company has had a family of leaders at its helm, allowing a longer-term vision. This is an important benefit when running a 10-year project to create an aircraft that will be in service for about three decades.

It is a luxury not afforded to Boeing or Airbus. CEOs at both companies are forced to work for a much shorter timeline. Airbus has had six CEOs in the last seven years and Boeing has had five from 1996. Most CEOs have a relatively short tenure, which can lead to an excessive focus on short-term results. In fact, a 2011 study by Booz and Co. found that the average term of a CEO has dropped during the past decade from 8.1 to 6.4 years.

Members of the Beaudoin family have run Bombardier for over 40 years; it has been handed down from father to son with the exception of a few years when Robert Brown and Paul Tellier took the helm. Its current CEO delivers specific support for the CSeries, he has been involved from the start and has shepherded it along its way. It is a particular advantage to have a CEO so committed to a product. Because of his longevity as CEO, Pierre Beaudoin has the luxury of a truly long-term view, which is of immense value to a game-changing new product like the CSeries.

The potential market for the CSeries is huge. Market growth for its segment is pitched at 4.4 per cent annually, creating demand for upwards of 25,000 new aircraft. Bombardier has invested in the future so despite the current unease of the world economy, the CSeries should be a true success.


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We entered the mid-point of the year with a very volatile engine market, caused by a number of factors, which combined, are posing considerable questions for

day-to-day marketeers and senior management strategists throughout the industry.

With oil price variability, the slow-down in Chinaand continued concerns about the eurozone, the global air transport market remains uncertain. IATA’s June update forecasted $3bn (less than half the 2011 results) in global airline profits with losses expected for European airlines. Similarly, Asia’s profits are predicted to halve while only America’s profits should increase.

However, global passenger growth, which was at six per cent for the early part of the year, is above historic trends and the cargo market, particularly around the Middle East, is showing fragile signs of recovery after a very weak last quarter.

With fuel – for now at least – below $100 per barrel (bp), there is potential for the airlines to outperform the IATA forecast, which was based on a $110pb assumption, however oil price volatility continues.

Despite the welcome passenger growth, profitable airlines are currently being very conservative about increasing capacity beyond their committed new deliveries, thus maintaining near record load factors and sustaining profits. This strategy is serving the US airlines particularly well.

With little increase in capacity, the number of parked aircraft at record highs, and low shop visits rates (due to low utilisation), there is weaker demand for spare

engines. This has led to continuing oversupply for the year-to-date and the situation is likely to continue throughout the remainder of 2012 and into 2013.

Meanwhile, aircraft order books are at record levels, with a backlog of over 9,500 units scheduled for delivery at a rate of 1,000 per annum. While lessors complain that production rates are too high, the manufacturers robustly defend themselves – an argument reflecting a natural difference of interest.

The lessors want to ensure supply does not outstrip demand, thus maintaining good lease prices and remarketing potential. At the time of writing, lease rates for both aircraft and engines are at record lows, partly due to oversupply and partly the low cost of funds.

With the cost of funds so low, a plentiful supply of new, fuel efficient aircraft and uncertain oil prices, airlines are finding it makes more sense than ever to retire aircraft early and replace them with more efficient models. There is little demand for older aircraft, thus they are being broken down for parts earlier in their life cycles. Recent announcements from both major manufacturers support this, with the average lifespan dropping from 25-years or more to around 22-years. Certainly the industry has seen several young aircraft (aged less than 10 years) being torn down.

This activity fuels the surplus parts market, which according to some estimates is worth around $3.3bn per annum, with up to 80 per cent coming from torn down aircraft and engines. The question now is whether the market will face oversupply.

If so, it brings major concern to investors in both engines and aircraft. The most valuable part of a torn

Jon Sharp, president and CEO of Engine Lease Finance Corporation (ELFC), considers the state of the engine leasing market in 2012 and beyond.

Market review: The engine leasing market

LEASING: Engines

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LEASING: Engines

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down aircraft is its engines, which the owner will look to liquidate for cash.

However, the demand for MRO services and spare engines is reduced each time an aircraft is taken out of service.

This is not good news for MRO agencies as engine exchanges are becoming even more common. It is no coincidence that three major engine shops have closed in the last 12 months under the dual onslaught of excess supply and the encroachment of OEM maintenance packages on third-party operations. This is not good for the competitive landscape. Nor is it good for engine and aircraft lessors, because an oversupplied market means lower prices for liquidating assets.

Tear-down firms also suffer reduced economics, but at least their business models are designed for fast cash turnover and should be able to cope with supply and demand imbalances and consequent price volatility.

Danger lies in wait for the lessors, however, if what we are seeing is not a short- to medium-term market imbalance but a paradigm shift driving new market economics. For example, if an aircraft asset life should now be viewed as a 20-year proposition rather than a 25-year one, depreciation rates will need to increase by 20 per cent from four to five per cent per annum.

This scenario is bad for aircraft yet to be acquired, but is worse for aircraft that are already owned. If an aircraft has been held for 10 years and has depreciated at four per cent per annum to 60 per cent of its acquisition cost, does this new metric mean that in order to correct its book values, the lessor must accept an impairment charge of a further 10 per cent of the acquisition cost in the current year? In whatever way lessors may deal with this, accelerated depreciation certainly sends lease factors higher.

Engine lessors have a somewhat different take on the same problem as engines do not have the same constraints as aircraft. The economic life of an engine depends on the availability of host aircraft, but as the economic life of an aircraft type reduces, the residual value of the engines become more sensitive to market conditions.

Some commentators believe the A320 neo and the 737 MAX have had an effect on residual values for the A320 classic and 737 NG families, and their respective power plants. A bigger question is for how long will the neo and MAX fly? Are they interim

aircraft awaiting the technology jump, for example into unducted fans.

If that is the case, depreciation policies will have to change as each aircraft is taken out of service, thereby significantly pushing up the cost of leasing.

Perversely, if that is the case, the airline’s preference for leasing is likely to increase. Although the simple economics of the buy and lease argument will move in favour of buying using debt, the last thing an airline wants is climbing residual value risk in an uncertain market place. The strategic management of that risk is the preserve

LEASING: Engines

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of leasing companies, which are better placed to manage their assets over a longer cycle, thus avoiding an uncomfortable liquidation sale in a downturn.

Furthermore, as lessors have placed some 40 per cent of the aircraft order backlog, operating leases will be the only source of new equipment for some airlines. Such a high percentage also underlines the fact that banks increasingly prefer to lend to lessors rather than airlines. This is partially because of asset cycle management and partially because banks view airline operating margins as riskily thin and overly susceptible to oil price volatility.

It is no surprise that the engine leasing market has seen significant change in the last twelve months; the major participants have reacted to the paradigm shifts in our market. There has been consolidation (for example, with Engine Lease Finance’s acquisition of the Macquarie Aviation portfolio of engines) and the introduction of new joint ventures and marketing initiatives, all designed to address the new realities.

Some participants in the engine leasing market specialise in only one or two asset types. Others are sticking to the widespread portfolio

LEASING: Engine leasing

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model. Some operations are designed to be in support of aircraft tear down, burning off the green time from liberated engines through leasing, then breaking them down for parts. Other operations are designed to support MRO activity. As usual, the airline customer is offered a wide choice of short- or long-term leases, whether, inclusive of MRO or not.

CFM International’s (CFM I) recent launch of a ‘lessor-friendly’ MRO package, Portable Maintenance for Lessors (PLM), is a welcome development for engine leasing companies. It allows the lessor to keep reserves (essential security in most cases) and allows both lessors and lessees to enjoy the benefits of an OEM-backed package, which is fully portable from lessee to lessee, operated on an engine-by-engine basis.

At Engine Lease Finance, we strive to be at the forefront of developments and, as such, we became the first engine lessor to sign a memorandum of understanding (MoU) with the manufacturer, as announced at the Farnborough Air Show 2012. When faced with the decision of what asset types to invest in, such factors play a major part in the lessor’s thinking. It is not just about which engine is expected to perform better, which type should have the longer life, or which

will be the most popular, but it is also about the support available.

Any degree of constancy is welcome within the leasing community, which is increasingly experiencing erosion of the old certainties. At the recent UBM Engine Leasing and Trading conference in London, I was asked to make a presentation addressing the topic “Is the Golden Age of Leasing Over?” While I question whether there ever really was a golden age, it is definitely the case that times are harder now.

The airlines manage their yields and load factors much better and push part of the capacity risk to lessors. The introduction of new equipment types, the growth of OEM aftermarket dominance and the booming part-out business all link up to pour stress on the economic models of leasing companies. Residual values and lease rates are under pressure. Lessors are not standing still, but are reacting as one would expect. Business models are being adapted, even reinvented, and the search for innovative structures and finance goes on. The industry is constantly evolving. It may not be the end of leasing’s golden age but we are facing a definite shift. It may simply be that lessors rightly take a greater share of the risk in operating in the commercial aviation market.

LEASING: Engine leasing

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AD page

Aviation has an unusual relationship with litigation. Sometimes, the legal bill for 18 months of gritty combat is outweighed by savings in cash and interest, yet at the end of the process, judgement comes in the

form of paper, not a guarantee of payment or the recovery of assets.

If a lessor ends up in protracted litigation prior to recovering an aircraft, the process of repossession has not gone well. This article explains how a lessor might

minimise the risk of long-term delay before a default has even occurred.

It is vital that lessors carry out due diligence on the lessee. Many failed leases arise from risks that could easily have been foreseen before the lease was signed. A lessor should establish financial and jurisdictional risks in advance and then build them into the lease’s model.

The lender should also see the lessee’s business model, or at least be provided with an explanation of it.

Taking repossession of an aircraft can be a long and painful experience. But with careful planning, swift execution and a dose of luck, it can be achieved quickly and relatively painlessly. Richard Mumford, head of dispute resolution for ASB Law, explains.

Repossession: Without nine tenths of the law

LEASING: Repossession

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Firstly, the lessor should be satisfied that the model is robust and will work. Secondly, this knowledge will enable the lessor and lessee to structure the lease in a way that will work for both parties. It is tempting for lessors to structure a lease that best suits their client. However, it is better to have an honest discussion and to agree mutually beneficial terms at the start – this is the best way to ensure a long and productive relationship with the lessee.

As litigators, we often witness the result of leases that do not work out. Often, the dispute is inevitable and is the result of negligence, poor planning, a flawed business model or an unrealistic bargain.

Too many lessors rush to get their aircraft on lease and do not focus on the key terms of their contract. These terms are not complex or numerous but need to be accurate to ensure lessors can gain easy access to their aircraft under default.

The chief requirement is a clear and unambiguous right to immediately repossess the aircraft upon default. It is common for standard contracts to include provisions that allow time to rectify a default. However, aircraft and engine lessors should avoid such periods of grace unless local law requires it. The success of a repossession is largely reliant on speed and surprise – the lessee must not be given time to move the aircraft or hinder the repossession.

Indeed, another clause should specifically require that a lessee co-operate with repossession. Both parties should also maintain up-to-date aircraft and engine records and the lessor must be able to supply any documents needed to reclaim the aircraft.

Chief among these is a de-registration power of attorney. However, the lessor should be aware of the specific requirements within different regions, both where the aircraft is based, and will fly to, and where proceedings will take place.

For example, Canadian legislation requires a set of signed board minutes before an aircraft can be deregistered and exported. Imagine attempting this in the chaos of insolvency or when the two parties have fallen out and the lessee has wilfully defaulted.

The lender should chose a sensible law and jurisdiction for the contract. This may not be the law of domicile for either the lessor or lessee. The key is to ensure an effective enforcement strategy to ensure the lessee repays debt. Many lessors choose English law for their leases for this very reason. England has a unique place in the jurisdictional world because its judgments are directly enforceable in many countries by reason of its position within the EU, the Commonwealth and various treaties. In addition, the English courts are relatively quick and can generally be relied upon to come to an honest and sensible decision.

However, England is not always the appropriate jurisdiction. Therefore, the lease should allow the lessor complete freedom to choose a jurisdiction, while preventing the lessee from choosing unfavourable jurisdictions (bear in mind many airlines are state-owned and the state may control the courts).

The lessor should also think about the best location for the repossession. This will not always be the aircraft’s base. For example, where an aircraft is flying between


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Africa and the EU and you have a lease under English law, then detaining it in the EU may well be preferable. There are also practical considerations such as risk of corruption, the availability of maintenance, storage and fuel. It should also ensure that any export requirements have either been met or can be bypassed while the aircraft is moved to a safe destination. De-registration is often important but can be a major cause of delay.

Lessors must ensure they build suitable security deposit and maintenance reserve provisions into risky leases. It is always advisable to be driven by one’s own objective decision rather than to be led by market norms. A lessor should ask: “Do the lease terms seem reasonable and sensible? Do they meet my objectives?”

The lessor should consider translating the lease into the lessee’s language as well as the dominant language used in the jurisdiction chosen for court proceedings, as these may be required on repossession and their absence can cause significant delay. However, the translated leases should not be circulated, as documents in more than one language will generally create ambiguity and opportunity for misinterpretation.

It is vital the lessor ensures the right to receive information from the lessee; ideally utilisation, load factors and similar information that will allow early diagnosis of any financial issues and of any problems arising from the lessee’s attitude to maintenance. It is also helpful to receive data on the lessee’s compliance to debt repayment, for example, to cover maintenance, parking or other fees that could lead to the detention of the aircraft.

Operating the leaseGood lease maintenance is about looking ahead and foreseeing potential issues. The sooner a problem is identified, the better the chance of resolving it, or of protecting the lessor against default.

This requires a strong flow of data from the lessee to lessor. However, both parties should also keep a close eye on the data directly available to it, including political and economic information regarding the economy, jurisdictions involved, data provided by the lessee and lease performance.

Early signs of financial trouble may include changes to the flight schedule or utilisation, reduced load factors, or economic or political change. Any aircraft that spends a significant time on the ground will be losing money for the owner or lessee.

The lessor should monitor press and other information such as rumours, competition, fuel prices or other governmental or economic factors. They should also consider seasonal issues such as holiday and religious periods.

A lessor should also talk to the lessee’s management on a regular basis about their financial performance and, ideally, how this compares with the business plan. However, useful information can also be gleaned at an operational level. A lessor should listen carefully to all that the lessee tells it, but it should not take anything at face value. Wherever possible, it should verify every representation independently.

Minor defaults may go unnoticed or unquestioned. In isolation, they could simply be an administrative oversight, causing a day’s delay in payment or a similar minor issue. However, they can also be a pointer to bigger problems ahead, so should never go ignored.


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A lessor should keep track of the location of engines and parts. It should be wary of the installation of third-party engines on its own aircraft and should also consider the risks of terminating contracts while the engine or aircraft is in maintenance as it would be harder to make a clean recovery of the assets, but also because liens may be exercised over the aircraft or engines.

Third-party engine owners can cause difficulties. They may even impound the aircraft itself while it removes the engines or while it awaits payment. Lessors should consider approaching third parties in advance while being beware of any pre-existing relationship it has with the lessee.

When a default occursThe lender should consider its approach to a default and its objectives before one occurs. It should ask: “What might my attitude to a default be? Would I want the aircraft back, or would I prefer to work with the lessee?” Of course, the answer will depend on the circumstances of the default, but one should never send a notice of default as an impulse reaction to a failure to meet obligations.

A missed payment should be investigated immediately, however short the default may be. The lessor should assess the situation and decide whether the priority is to be paid, or to recover the aircraft. It should consider the risks of further exposure and the need to protect its asset.


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Crucial to the question of whether to repossess the aircraft is what the lessor might do with it once it has been reclaimed. Is there a market to re-lease, sell, or tear-down the asset? Have lease rates hardened or softened since the lease was entered into?

What are the wider business implications of repossessing the aircraft? By repossessing an aircraft, a lessor might be turning its back on a potentially long-term customer. If the airline is state-owned or backed by a wealthy investor then it is likely to repay its debt swiftly and return to normal conditions, in which case the lender has lost business. If the airline is part of a group, repossession may lose the lessor business from its affiliate airlines.

The lender should also consider its market reputation. It is generally better to be considered firm but fair but once the lessor repossesses the aircraft, its loses its leverage, in which case it should be prepared for the long-term action which may be required to recover damages.

Timing the notice of defaultToo many lessors serve a notice of default as a reaction to a missed payment. If repossession is the objective, a lessor should not serve the notice of default until it is ready to take possession of the aircraft, as a lot of preparation goes into the process.

The default clause should be unambiguous, giving an immediate right to terminate the lease and repossess the

aircraft. Terminating a lease without the relevant clause can be extremely costly.

A lessor should find out all it can about the aircraft. Including its location, flight schedule and whether it is serviceable or needs maintenance.

The lessor should consider all the practicalities of moving an aircraft. These include the availability and positioning of flight crew; visas; weather; time zones; airport opening times; ferry flight destinations and other flight logistics. Lessors should also carefully consider the exact timing of the repossession and allow for time zones.

All of this needs to be considered before the lessor serves its notice of default, as it will need to move quickly to recover the aircraft before any party become entrenched in legal proceedings.

Once the notice is served, the lessor may consider inviting the lessee to co-operate with the delivery, but should not allow it to use this as an opportunity to delay delivery as that would give the airline and any interested third parties the chance to set legal proceedings.

These considerations do not guarantee success, but they will reduce the risk of things going wrong. Repossession can be a very expensive process – it is important that lessors consider all possible outcomes and plan for these eventualities before it becomes critical.


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AIRLINES: Fighting fraud

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The aviation industry has had a tough decade. Margins have been squeezed by rising fuel costs, additional taxes and environmental restrictions. At its last media day in December 2011, IATA warned that the combination of austerity measures,

dwindling confidence and a downturn in international trade would harm airlines during 2012.

The slowdown, according to IATA, will mean the air freight market remains flat, while growth in the passenger market

will shrink from 6.1 per cent in 2011 to four per cent this year. Carriers therefore need to maximise their revenue opportunities.

Technology (specifically the Internet) has changed how the airline industry offers services to its customers. As early as 1995, carriers were offering passengers the opportunity to search, book and pay for flights online. Services have changed dramatically since 1995 but e-Commerce continues to be a crucial business tool for airlines.

The aviation industry is struggling to remain profitable yet competitive during particularly lean times. With increasingly tight margins, every penny counts. Yet, a significant proportion of airline revenue is lost to fraud. Phil McGriskin, chief product officer at WorldPay, explains how airlines can lower the risk of crime.

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Fighting fraud: Protecting your online bookings

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What the market thinksIn its recent Perfect Passenger Payment report, which surveyed airlines and 4,500 recent flyers, WorldPay found that 71 per cent of passengers in the last 12 months booked their flights online. The industry estimates that 42 per cent of revenues come from online ticket bookings, with the expectation that this will increase by five per cent over the next 12 months.

As e-Commerce evolves, it also impacts on the devices used to go online. WorldPay’s report found that 39 per cent of consumers who have purchased a flight online say they are comfortable buying goods and services using their mobile phone. Over half (58 per cent) of consumers would like to use their mobile or tablet device to pay for airline tickets in the future, and 50 per cent would do so now if the technology allowed it.

The adoption of mobile technology is set to radically change the airline industry and carriers are already gearing up to offer new payment technology. In fact, 84 per cent of operators expect to offer more choice to their customers within the next two to three years.

As these opportunities develop, so does the risk of fraud. Among the airlines surveyed, 1.5 per cent of total online revenues are lost each year beacause of fraud. More worrying is the suggestion that almost a third (29 per cent) say they have seen fraudulent bookings increase in the last 12 months. Only two per cent profess never to have taken a fraudulent booking. As the means of online purchasing expand, so does the risk of fraud and the importance of managing that risk.

Despite recognising this risk, only a small percentage of airlines are educating their customers about the dangers of online fraud. Quite significantly, only 10 per cent obtain some form of credit report on customers before issuing tickets.

Even when fraud is suspected, airlines do not always act on their suspicions. Only two-thirds (65 per cent) conduct internal investigations and only 61 per cent inform the

payment provider. Many suspicious customers are allowed to continue with their booking, with only 61 per cent of airlines blocking them and 43 per cent withholding tickets. Only 35 per cent choose to inform the police.

The global nature of air travel often contributes to the risk of fraud. Often the location of the customer does not match their personal details, or they might be booking the ticket on behalf of another individual. This makes it significantly more challenging for the carrier to flag any suspicious fraudulent characteristics.

Cases of fraud will often be higher in specific regions, although these will change with time. At the moment, a high number of cases originate from the Caribbean, US, Canada and Africa – but airlines cannot afford to ignore these markets.

There are also numerous types of fraud to be cautious of. Most common is ‘friendly fraud’. This is when a consumer makes a legitimate online purchase with their credit card, then issues an illegitimate chargeback, falsely claiming they had not received the goods or service or that someone else booked it illegally. Regardless of what an airline does to verify the transaction, friendly fraud is extremely hard to prevent. Unfortunately for airlines, it is very difficult to prove the customer is lying; banks will support the customer and the liability will be left with airlines.

The second type of fraud originates from organised crime rings. Sophisticated groups of hackers form a team to specifically target an industry. The aviation industry is not alone – organised criminals seek weaknesses in merchants’ payment processes and target those vulnerabilities.

The third type is ‘call centre fraud’. The call centre is a point of weakness sometimes targeted by organised crime gangs. They may attempt to make purchases over the phone, pretend to be call centre staff, or even organise airline staff to process fraudulent transactions. The risk is heightened whenever card numbers are exchanged in a non-secure environment. Airlines are also reliant on bookings from a


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Over half (58 per cent) of consumers would like to use their mobile or tablet device to pay for airline tickets in the future, and 50 per cent would do so now if the technology allowed it.

number of channels including call centres and third parties, so this type of fraud needs to be managed carefully.

Fraud management toolsFrom the research conducted among our airline audience, the most common way for airlines to protect against fraud is to set up a risk management system; 76 per cent of airlines surveyed do this, while 75 per cent of airlines use chargeback protection systems. Use of card security codes and address verification systems are used by 69 per cent and 53 per cent of airlines respectively.

However, risk prevention is not airtight and a significant percentage of revenue is still lost to fraud. A combined approach to fraud management helps an airline to strengthen its defence against fraud, particularly when the characteristics are difficult to spot and many tactics are employed from within many different geographical locations.

Worryingly, only 37 per cent of airlines say they incorporate the newest online security technology. Technology for online purchasing is developing at a rapid pace and consumers increasingly expect to use their mobile devices during the airport-to-flight experience. In the past 12 months, 55 per cent of carriers claim not to have updated their

browser security settings, and two per cent say they have implemented no fraud prevention measures at all.

While the risk of fraud is a challenge and many carriers are not using robust security measures, airlines also have to adopt a balanced approach to the management of fraudulent transactions and not block legitimate transactions.

It is interesting to consider consumers’ attitudes towards security and the privacy of their information versus the speed at which they are able to purchase tickets online. Of those consumers polled, 46 per cent believe security checks may lengthen the booking time and are accepting of that. In fact, 84 per cent of consumers said that website security was either extremely or very important to their online experience.

Overall, 71 per cent of the consumer panel said they would prefer slower, more rigorous checks on their payment information in order to keep their data safe, with just 29 per cent willing to expose themselves to risk for a faster purchasing process.

However, this tolerance is not unlimited and acceptance levels vary by geographic region, how frequently


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Fraudsters will look for any open door in your security.

the customer flies and what device they use for the purchase.

Getting the balanceMore than one in five people found security questions too excessive, and 46 per cent of frequent flyers would be willing to risk the security of their data to improve the speed of the purchasing process. There are interesting geographic differentiators too. In China, 66 per cent would prefer a quicker purchasing process with fewer security questions. UK customers had the lowest percentage of people willing to swap risk for speed, at 19 per cent.

When it comes to purchasing via a mobile device, 38 per cent of customers would be happy to store their payment details with the airline if it made future payments quicker and easier. This slightly more relaxed attitude could reflect the limitations in mobile technology and a degree of frustration. Airlines therefore need to manage the balance between security and speed, and tailor the purchasing process dependent to the customer’s preferences, without heightening the risk of fraud.

Fraud is not unique to airlines, particularly within e-Commerce; airlines are as vulnerable as other vendors. However, airlines’

margins are particularly tight – more so than most – so losing 1.5 per cent of revenue to fraud can have a serious impact. Airlines need to assess the gaps in their security defences both internally and externally as a large number of bookings are still driven by agents and third parties.

Airlines need to focus on a risk management strategy that assesses all of the key criteria combined with an arsenal of fraud detection tools and a stringent review process. They should also consider collaborating in their efforts to combat fraud, particularly in problematic regions. By sharing their experiences and best practice, they will help to identify any weaknesses that might be targeted by criminals.

The good news for airlines is that consumers are, on the whole, willing to accept slower processes if they can be confident that their data is secure; it would therefore be acceptable for airlines to incorporate appropriate layers of security.

With emerging markets offering new and varied customers, airlines must consider the different risks and requirements across the globe. This is a significant task but with the right technology and expertise, airlines can reduce the risk and the cost of fraud.

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The words ‘cautious optimism’ have crept into numerous speeches and news stories during the last year. Google the expression and some 1.3 million hits will pop up. We hear it in economics and predicted growth models, in

quarterly business outlooks, even in weather forecasts.

Cautious optimism is the zeitgeist phrase. It is positive, yet reserved. Upbeat but restrained. But in the world of technological advancements, will reservation and restraint really get you that far? Pioneers such as Apple’s Steve Jobs and Twitter’s Jack Dorsey have led the field with determination and passion; airlines should be no different.

Following the 2012 Airline IT Trends Survey, Raphael Bejar, CEO of Airsavings, examines the impact IT and social media can have on ancillary revenue, and the need to develop it.

Technology and travel: How IT can boost airline ancillary revenues

AIRLINES: IT and social media

IT investment: Helping smartphones (and airlines) get smarter Technology is a vital tool that airlines must understand and develop if they want to maintain their profits. More so than ever, new technology has boosted ancillary revenue, ranging from inflight entertainment (IFE) delivered on smartphones and tablets, to virtual travel concierges and the monetisation of social media. These offerings have

become essential to ancillary revenue and are crucial to offsetting rising fuel costs.

Fee and service-based ancillary revenues have helped airlines to remain in the black throughout tough times. Pioneered by low-cost carriers, unbundled services have helped airlines of all price points to expand their offerings and generate new revenue streams.

Like any product, ancillary offerings have evolved and technology has driven that change. Options such as hotel bookings, car rental and trip insurance are all fairly routine but those are just the beginning. Traditional ancillary revenues have expanded far beyond the booking path and cabin to provide a level of unparalleled and personalised service.

Today, services can include everything from checked baggage to beverages, pillows and headphones, to approaches that link with social media. One of the sustainable alternatives is the provision of free Wi-Fi bundled with offerings such as travel insurance. The expectation is that it will lead to higher revenue and satisfied customers.

The need for innovation and investment is clear, particularly as frequent flyers are also frequent IT users. Smartphone and tablet use is high in the US and adoption rates within the air passenger community have already far surpassed what could be considered ‘critical mass’, reaching 75 per cent for smartphones and more than half for tablets.

In contrast, general US adoption rates stand at approximately 49.7 per cent for smartphones and 19 per cent for tablets. The latter is predicted to rise as high as 40 per cent by 2016 owing to new technology, but even that figure is 10 per cent lower than for air passengers.

Adoption rates continue to surge in Europe too. In France, the rate for smartphones averages about 40 per cent; it is about 50 per cent in the UK and Spain. Travellers dislike being disconnected from their mobile devices, even during the few hours of a short-haul flight. This has driven airlines to remain creative and competitive regarding ancillary revenue.

With all this in mind, cautious optimism cannot be the mantra of the developing airline. Instead, it should push IT forward with ‘unbridled optimism’. The Airline IT Trends Survey revealed that 56 per cent of airlines are prioritising R&D in customer service and the passenger experience. This is good, but not good enough, particularly as an additional survey found that some 70 per cent of airlines believe smartphones will be the second most dominant sales channel behind traditional websites viewed from PCs and laptops.

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Sharpening the picture: A focus on social media Mobile devices, be they smartphones or tablets, are key tools for technology. They will increasingly enable airlines to earn ancillary revenue and will increasingly provide the customer with a personalised service.

While fee and service-based ancillary revenues will remain crucial to airlines’ monetary success, it is essential to embrace new technology in every format. For example, numerous other industries have already proved the revenue benefits of social media. Airlines must not limit themselves to mere branding or only offering ancillaries during the flight or in the booking path. They must be innovative and forward thinking. They should look to social media and find ways to monetise the online dialogue passengers are already having about their services. Indeed, tech-savvy travellers

will expect their service providers to offer and be involved in this interaction.

One example of this in practice is Airsavings’ ‘Let Me Think’ traveller option. The solution successfully merges the interactivity of social media with the growing trend of online booking and ticket price comparison. Let Me Think is embedded within an airline’s website and booking path, and provides an easy way for passengers to input their personal data, and to select and reserve fares.

Travellers can ‘lock in’ a selected fare for a limited time, having up to two days to share their itinerary and travel plans through Facebook with colleagues, friends or family before booking their flight. More than providing an innovative way to create an additional revenue source, Let Me Think also establishes new leads, marketing and


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revenue opportunities from the passenger’s friends and online social circle, while providing a privacy-conscious way to aggregate data on potential passengers.

How Generation IT can generate revenueHighlighting its revenue-generating success, the Centre for Asia-Pacific Aviation (CAPA) has reported that as of 2Q 2011, US airline profits hit $1.9bn, $1.4bn of which came through ancillaries. The bulk of this is likely to have come through baggage fees, but also includes the traditional ‘Big Three’ ancillaries – travel insurance, car hire and hotel booking – plus IFE, duty free and emerging experiential offerings.

Within Europe, budget carrier Ryanair recently announced it had raised €4.3bn in total revenue during the fiscal year ending March 2012 – 21 per cent of which came from ancillary services.

Furthermore, a global study by Amadeus and IdeaWorks estimated that airlines pulled in some $32.5bn in ancillary revenue worldwide during 2011. It also suggested that an increased focus on ancillaries last year could have yielded another $67bn in revenue.

Clearly though, great achievements have already been made. Indeed, 57 per cent of airlines already feel that social media is the greatest tool for marketing and 90 per cent plan to engage passengers via that medium by 2015. This, combined with smartphone penetration rates, strongly suggests that airlines are already fully aware that social media and mobile devices can generate revenue.

Instead of looking at airlines’ quarterly figures, let us look at Facebook’s. As of May 2012, Facebook had 480 million users. Better yet, its mobile penetration rate reached 54 per cent – more than half of its users. Facebook’s adoption rates, along with its $872m revenue (reported in the company’s 1Q 2012 filing), underscore just how important it is for airlines to link with social media’s growing reach. Only through continued IT investment can airlines find creative ways to use Facebook (and other social media) in a way that improves the passenger experience but also aids revenue generation.

It is time to start monetising the social media experience, allowing it to re-invigorate the ancillary revenue profit model. It can serve as a safeguard against the fluctuating price of oil. Although down from recent prices of $100 or more per barrel, prices have again started to rise, surging nearly two per cent in a month.

Social media and the latest technological offerings are not the airline industry’s panacea for poor revenue. Nor can continued investment in technology cure everything. Technology has its limits and cannot be developed without funding, but nor can it be ignored.

Whether through direct fees or its indirect benefits, social media and other technological offerings are advancing the ancillary revenues and their potential. From connectivity to carbon offsets and hotel bookings, to bad weather insurance, ancillaries are growing, either internally or through third-party providers.

From the beginnings of a trip, right through the booking process to the post-trip re-cap, travellers are eager to share their experiences through social media, be it on Facebook, Twitter, Foursquare, or the grandfather of social media, email.

Our customers are already there, let’s join them.

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AIRLINES: Bmi buyout

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Former UK Prime Minister, Margaret Thatcher, was not a big fan of British Airways (BA). She famously pulled a tissue from her handbag and wrapped it round the tailfin of a 747 to show her disgust for the ‘ethnic’ liveries at the airline’s 1997 rebrand.

But there was an airline the Iron Lady was fond of – British Midland, now bmi. Recently, its German owners, Lufthansa, sold the carrier to BA-owner, IAG.

History repeats itself Bmi consisted of three airlines – British Midland International, bmi Regional and bmibaby – only the first of which IAG intends to retain. Bmi Regional has been sold to Sector Aviation, a group of Scottish investors. IAG could not find a buyer for bmibaby and it will be

dissolved after taking its last flight in September. The deal is reminiscent of when BA swallowed British Caledonian (at the time Britain’s second biggest airline) in the 1980s after problems with its strategy led to a financial meltdown.

Bmi’s predicament is a far cry from its heyday when it operated to the US, India and Saudi Arabia and competed with BA on lucrative long-haul routes.

With the purchase of BA’s franchise partner, British Mediterranean, in the 1990s, bmi inherited niche Middle Eastern routes to go with its portfolio of UK and European short-haul ones; its English low-cost operation, bmibaby; and its UK and European

How will IAG’s acquisition of bmi affect networks in the UK and further afield? Chris Beanland finds out.

Slotting into place: The effect of bmi’s buyout

offshoot, bmi Regional. These gave bmi the reach into the Mediterranean, North African and Middle Eastern markets that most regional European carriers could only dream of.

In 2009, Lufthansa paid its chairman, Sir Michael Bishop, a reported €368m for his shares in bmi. It was felt that German management and continuing Star Alliance integration would guarantee the airline’s success. But not all went to plan, despite recent new route launches to Norway and Morocco.

“British Midland was my first employer,” reminisces airline analyst, John Strickland. “In the early 80s they were the new kid on the block in providing meaningful competition at Heathrow and a favourite of Thatcher. They were a friendly local airline, but they lost their way in recent years.”

Dr Rico Merkert, a lecturer in air transport economics and management at Cranfield University, strikes a phlegmatic tone on what happened: “One should ask what went right and wrong for Lufthansa, as they are effectively in control of bmi. I don’t think that they were ever serious about developing some sort of hub at London Heathrow. In terms of its operations, bmi had relatively high unit costs (also as a result of its short sectors), pretty poor load factors (some 61 per cent in 2010), but managed somehow to generate sufficient yields (apart from 2011) to make some profit on these routes.”

The market effectSo what does the demise of bmi mean for the aviation market in the UK and further afield? “BA’s parent, IAG, has made it clear that the real value of bmi’s slots is for use on new long-haul markets,” explains Strickland. “This doesn’t mean that all short-haul routes will disappear, but

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Image courtesy of BAA.


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undoubtedly there will be rationalisation where there is excess and loss making capacity, on some UK domestic routes, for example.

“In the past, British Midland was a key domestic competitor to British Airways at Heathrow, but the landscape has changed over the last 15 years with significant low-cost capacity now available at other London area airports. BA will, however, need to keep adequate capacity on these routes at competitive prices due to their importance for feed to its long-haul network. It will take some time to work through the complexities of slot usage balanced against fleet restructuring, given that most if not all of bmi’s fleet is likely, in the long-term, to be disposed of. The British Midland brand is also likely to disappear by the end of the year,” explains Strickland.

What lies ahead?“Bmi used to be a key competitor in the UK market and specifically at London Heathrow, but its significance has reduced as budget carriers have become major players on domestic routes to London from other London airports,” says Strickland.

According to Merker, the sale of bmi Regional to Sector Aviation excluded rights to Heathrow slots. “So any future bmi flights to and from London to other parts of the UK will have to go through one of the other London airports.”

So what next for Lufthansa in the UK now it is rid of bmi? Will it look for another partner or continue to expand its own operations? Lufthansa is aggressively launching new routes to Britain from Berlin Brandenburg Airport (for example, to Birmingham International Airport). It also thumbed its nose at Heathrow by starting a route from Frankfurt to Gatwick.

Lufthansa’s director of corporate communications for Europe, Aage Duenhaupt, told Routes News: “Lufthansa has a strong position in the UK and is not under pressure to make any decisions for new partners. We have just increased flights to the UK by adding Aberdeen and London Gatwick to the network. Other cities like Edinburgh, Birmingham, Manchester, Newcastle, London City, Heathrow and Inverness are already linked to either Frankfurt, Munich, Düsseldorf, Hamburg, Stuttgart, Cologne Bonn and/or Berlin.”

Meanwhile, Merkert muses: “Regardless of whether IAG or Virgin Atlantic had acquired bmi, the slots at Heathrow will no longer be used for UK domestic flights. Whether that is so bad for the other regions in the UK remains to be seen. Given the capacity constraints at LHR [London Heathrow] and the diminishing chances of getting a third runway, I don’t see why the slots should not be used in the most efficient way. Anyone who wants to fly domestically to anywhere in the UK has at least four other London airports to depart from.”

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AIRLINES: Slot reform

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The European Commission (EC) has put forward proposals to reform the way airport slots are allocated at Europe’s busy airports, as part of the ‘Better Airports Package’, which also deals with ground handling and noise regulations.

Introduced on April 11 by Matthew Baldwin, the EC’s director of aviation and international transport affairs, the package of reforms have been described as a direct response to the predicted airport ‘capacity crunch’. Baldwin contrasted the large-scale development of airport capacity in places such as China and the Middle East with the situation in Europe, where it is expected that 19 airports will be saturated by 2030.

The proposalsThe commission’s proposals on airport slots do not address this fundamental lack of airport capacity, which is

a responsibility for member states, but instead aim to make better use of the capacity that is available. The commission has quantified the proposed changes as being worth €5bn to the European economy, allowing airports to handle 24 million more passengers a year by 2025 and creating 62,000 jobs. The largest proportion of this benefit – over €3bn – is attributed to allowing airlines to buy and sell slots across Europe. This has long occurred at UK airports such as London Heathrow, but does not occur in a transparent way in other EU countries.

Slot trading can encourage airlines to make better use of slots, or sell them to another airline that can operate more profitably. The experience of slot trading at London Heathrow is that it has led to marginally profitable short-haul services being replaced by long-haul services operated by larger aircraft. The number of available seat

James Cole analyses how reforms to European airport slot allocation rules may impact route development.

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Trading places: EU slot reform

kilometres (ASKs) per slot can increase by a factor of 20 or more with trading. Slot trading has also helped low-cost carrier, easyJet, grow at London Gatwick increase from just five departures a day in 2001 to over 150 in 2012.

The commission’s proposals on slot trading enjoy broad support from both airline organisations such as IATA, AEA and ELFAA and ACI Europe, representing the airports. There are concerns in some quarters that attaching an economic value to slots could squeeze regional services out of congested hubs.

The evidence for this is mixed. The number of domestic routes served at Heathrow since 1990 dropped from 16 to six and the share of slots for domestic services halved from 22 per cent to 11 per cent. At London Gatwick, the experience is somewhat different as slot trading has been associated with growth in intra-EU operations, so it is difficult to generalise.

The need for changeAnother important change to the slot regulation from a route development perspective is a broadening of the new entrant category. The current slot regulation seeks to promote competition by allocating 50 per cent of the available slots to new entrants (defined as airlines with fewer than five slots a day at the airport or an airline with less than five per cent of the total slots available) that wish to add competition to an intra-EU route with fewer than three current competitors.

It is broadly acknowledged that these rules, in place since 1993, have not delivered the desired improvements in competition. New entrant airlines are often too small to compete effectively and the rules lead to available slots being spread thinly across a large number of different airlines, rather than allowing stronger competitors to develop. The new rules seek to address this by allowing larger airlines, with up to 10 per cent of the slots at an airport, to qualify as a new entrant in

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order to compete on intra-EU routes and to gain priority for up to four daily frequencies on that route, rather than the current two.

These rule changes will generally improve opportunities for airlines and airports wishing to develop and expand new routes, at least within the EU. However, the proposals do not improve the situation for developing services to other parts of the world. In giving higher priority to the development of European routes, the commission risks inhibiting access to scarce slots for new services to the fast-growing economies of Asia, South America and Africa.

Opposition and developmentThe proposals, which divide the interests of airlines and airports, are those requiring airlines to make greater use of slots in order to maintain their ‘grandfather rights’. Airlines would be required to operate for at least 15 weeks in a summer season and 10 weeks in the winter, compared with the current five weeks, and to operate the slots at least 85 per cent of the time instead of 80 per cent. There is concern that the stricter rules will harm the viability of services to leisure destinations, where demand is highly seasonal, and force airlines to operate more empty flights, representing both financial and environmental costs.

Airlines are also opposed to the idea that airports may levy a slot reservation fee for slots held but not used. This is meant to discourage airlines from requesting more slots than they need, only to hand them back later. IATA sees this as an additional cost to airlines and prefers sanctions targeted at the minority of operators that misuse the system.

ACI Europe, representing the airports, generally favours the proposal and points out that any slot reservation fees would be revenue-neutral to airports, thus resulting in cost savings for those airlines that do not abuse the slot system.

Since the Better Airports Package was put forward by the commission last December, the council of ministers has focused first on the ground handling and noise regulations. Discussion of the slot proposals is expected to commence under the Cypriot presidency in 2H 2012. The European Parliament is expected to debate the full Airports Package in the autumn.

Although the slot proposals are more of a progressive change than a radical reform, they are likely to have a significant impact on how slots are allocated and used in Europe for the next 10 to 20 years. afg

Image courtesy of Beijing Capital International Airport.

AIRLINES: Latin America’s fleet

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Latin America is one of the leading players in the global agricultural market and accounts for approximately 10 per cent of the world’s exported agricultural produce. Furthermore, according to the World Bank, the continent – which is home to

almost 30 per cent of the world’s unused farmable land – is capable of solving global food shortage.

However, significant improvements must be made in order to fulfil the region’s potential. Not only must it tackle the agriculture industry’s poor infrastructure and low profitability, it also has a drastically aging agricultural aircraft fleet.

With the global population estimated to top nine billion by 2050, the demand for food will significantly increase in coming years. According to a UN report, such demand will rise by approximately 50 per cent in less than 18 years. However, the area of farmable land is likely to deplete as the population expands. Due to

improper and inefficient cultivation, and lack of innovations, the quality of the world’s farmable land is worsening each year.

According to Zilvinas Sadauskas, the CEO of Locatory.com, an aircraft and parts supply company, the problem is global and complex. “Although some of the world’s nations are forced to deal with the food shortage problem more than others, the issue is definitely global and thus requires global attention. However, the lack of solidarity is still the reality of our days; therefore most of the policies currently in place are very self-contained. One way or another, one has to play the cards one is dealt. Some of the countries choose to rent farmable areas in other countries with better and richer lands – particularly countries from the Asia or Asia-Pacific region, which are renting farmable areas on every continent, apart for Antarctica. However, having additional land does not solve all problems entirely. It is obvious that any farmable land calls for proper cultivation and, of course, protection.”

Latin America’s agriculture is too dependent on its aging aircraft fleet and faces an inability to locate spares, writes Locatory.com.

Need for renewal:Latin America’s fleet

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Latin America accounts for 42 per cent of the potential global agriculture, according to the Inter-American Institute for Co-operation on Agriculture (IICA). However, in order to implement that potential to the fullest, Latin American farming calls for improvements in its cultivation. One of the ways to improve production (and protect the land at the same time) is to use various crop protection products and technologies.

Light aircraft demandHowever, because of its geographical conditions and poor road systems, many current and potential agricultural areas in Latin America are hardly accessible to specialised vehicles and machineries designed to facilitate the spraying of crops. For that reason, aerial application is not only the most effective, but in some cases the only way to increase the productivity of agricultural lands in the region.

“In Brazil alone, dozens of millions of hectares are being sprayed with the help of specialised aircraft. Apart from the fact that such aircraft are capable of reaching the most remotely situated farmlands, they can cover large portions of land in a relatively short time, without any physical

damage to the crops. Moreover, in some countries like Colombia, aerial spraying not only helps to increase land fertility but also helps to deal with non-agricultural issues. For instance, in the anti-drug war, the technology is widely used to destroy illegal plantations of cocaine,” comments Karla Grauzas, business development manager for Latin America at Locatory.com.

Currently there are approximately 500 various aerial application businesses in the region, which jointly operate one of the largest agricultural aircraft fleets in the world. According to the National Agency of Civil Aviation (NACA), the Latin American giant, Brazil, operates a fleet of approximately 1,500 to 1,600 agricultural aircraft and represents the second largest agricultural fleet in world, giving way only to the US. Argentina also maintains a considerable amount of the industry’s aircraft (about 1,000), while other regional countries have from several to several hundred agricultural aircraft.

However, the quantity of aircraft alone does not ensure effective performance. Many of Latin America’s agricultural aircraft are simply too old to perform effectively.


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“In Argentina, for instance, a large part of the fleet of aerial spraying planes is failing because they were manufactured 30-40 years ago. However, it should be mentioned that ‘old’ is an improper term in aviation. If an aircraft and its components are maintained in strict accordance with the regulations, many of the aging aircraft should perform almost as well as new,” explains Sadauskas.

The need for MRO and suppliesUnfortunately, local agricultural aircraft operators are faced with severe difficulties regarding the repair, maintenance or renewal of their fleets. At a cost of $100,000 to $1,400,000, in most cases they are simply unable to afford new aircraft.

As such, local operators are forced to invest in aircraft repair and overhauls, or depend on US suppliers. But unfortunately the US supply market is heavily penetrated by a substantial number of resellers who do not maintain personal stocks. Instead, they operate as brokers thus stretching out the component procurement process. Moreover, some Latin American destinations have limited or even no direct air connection with the North American suppliers. For example, Surinam Airways, – which is the only carrier in Surinam to operate scheduled flights to the US – flies to Florida (where most of the Latin American market players purchase spare parts) just a couple of times per week.

“While commercial airlines operating much more popular aircraft types may have to wait up to a week until a necessary part is delivered,

receiving agricultural aircraft components takes much longer. In Europe, where spare parts may be delivered within just 24 to 48 hours, a single aircraft-on-ground (AOG) situation may cost up to $50,000 in additional expenses for a commercial airline. In the Latin American case the expenses are naturally significantly higher. But while the commercial aviation sector mostly suffers only financially, the consequences of lengthy deliveries (and thus long aircraft downtimes) in the agricultural aviation segment may be much more dramatic, since two to three days’ delay in the land application process may result in the loss of the entire harvest,” notes Grauzas.

It is almost impossible to find third-party parts suppliers for the agricultural aircraft in Latin America, though there are sure to be plenty of potential suppliers out there. Aviation authorities should join with governments and business representatives to search for ways to improve the internal agricultural aviation aftermarket.

Some of the potential suppliers are running out of business or experiencing financial difficulties, which may lead to them sell some of the aircraft. A portion of those aircraft could be used for part out. In the meantime, a number of agricultural aircraft operators, who may raise the necessary funds for fleet renewals, are also likely to sell some of their older aircraft part-by-part to other market players, including operators and MRO providers.

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Table 1. The number of aerial application-related companies in Argentina, Brazil, Colombia and Uruguay

81

Locating sparesHowever, it is not simple to promote one’s inventory in the region. Should a supplier find a potential buyer for the spare part, local industry players face the issue of poorly developed and clearly protectionist spare parts import policies within the region. For instance, Argentina, (which has the only MRO centre in South America that services the rather popular but old Piper PA-36-300 aircraft) stubbornly maintains very strict regulations on the import of spare parts.

Brazil, which has its own national aircraft manufacturer, Embraer, is among such countries as Russia and China in having the most complicated customs regimes for imported aircraft spares and components in the world. In such countries, imported components are subject to additional taxes and fees. Along with the giant cost of logistics solutions and time-related expenses, the price for imported aircraft parts is approximately 40 per cent higher than in the European market.

“However, considering the aforementioned figures, Argentina and Brazil are large enough markets to develop a self-contained aviation aftermarket themselves. The Brazilian arable area alone has the potential for 10,000 aircraft, meaning that current and potential industry players are sure to have the space for developing internal agricultural aviation aftermarket. But in any case, whether an aircraft owner is willing to sell an aircraft component within his country or outside of it, listing one’s surplus or no-longer needed parts on an accessible marketplace remains an issue,” comments Grauzas.

Not such a long time ago, Latin America had one of the most poorly developed communication networks in the world. However, today the situation has certainly improved. There are over 550 million mobile subscriptions in the region. Moreover, according to comScore, a digital marketing intelligence company, the number of Latin American’s population that are online showed its fastest growth rates in 2011, with the overall annual increase of 16 per cent. The development of mobile networks in the region is being followed by rapidly spreading Internet coverage, which – step-by-step – will reach even the most remote locations in Latin America.

“Under such favourable circumstances, local aviation aftermarket players – particularly in the general aviation sector – are urged to turn themselves towards new, more innovative business solutions, including Internet-based ones. Mere access to mobile Internet connection is more than enough to share information about your components with other industry players in the region,” says Sadauskas.

“Moreover, potential buyers should be able to search for the required components within a certain geographical area, thus ensuring the fastest possible deliveries and the most effective solutions at once. Though being global, Internet-based spare parts procurement projects provide solid regional and even local interaction networks within a certain group of interest, whether it is commercial, general or agricultural aviation. They assist in maintaining prompt communication between the operators, MROs and other aviation market members – whether it is an ad hoc or a regular issue. To sum up, it is safe, it is fast and it is available 24/7.”


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Table 2. Agricultural aircraft fleets in different Latin American countries

afg

1

4

2

3

5 6

9 0

1

3

8

1

8

2

1

4

7

2

3

5 6

8

9 0

1

3

8

Bombardier Interview Analysis of the engine leasing market The 787 and route development European airlines: A look at regionals and LCCs

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AIRCRAFTFINANCE GU

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The annual publication of

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AIRCRAFT FINANCE GUIDE 2013Now in its sixth year, the Aircraft Finance Guide (AFG) is a leading publication covering all areas of finance and leasing within the commercial aviation market. It has an international circulation of 4,000 copies and is written by industry specialists. The guide gives a market overview together with critical information about aircraft values, leasing, finance and popular aircraft families together with market forecasts and trend information.

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INDUSTRY DATA

84 GDP

Traffic growth

Airline results

Aircraft orders

Aircraft deliveries

Airline results

86 Annual GDP growth

Traffic growth

88 Firm orders

90 Firm orders by manufacturer

Firm orders by aircraft type

92 Market values and lease rates

92 Market values and lease rates

(continued)

96 Engine data

98 Order backlog

Industry data

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IBA’s JetData

The last few years have reminded the commercial aviation industry how risk aware we all need to be. With this in mind, IBA is launching JetData – an online database tool that taps into 25 years of research and experience, providing our clients with access to accurate fleet and transactional information for any commercial aircraft with 20 seats or more at any time. IBA has consistently delivered innovative and flexible solutions to match industry needs and JetData is our latest offering aimed at minimising risk and maximising opportunity for our clients in a user-friendly, flexible and cost effective manner. For further information, please contact Owen Geach or Ben Jacques via [email protected]

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INDUSTRY DATA: Overview

84 www.afm.aero

xxx

Airline results

Source: OAG Fleet iNET, April 2012.

Sources: IATA Economics (Thousand million). IBA’s JetData. International Monetary Fund, World Economic Outlook Database. IATA.

Source: IATA Economics (Thousand million).

GDP, traffic growth, airline results, aircraft orders and aircraft deliveries

Note: Western built - Narrowbody, Widebody, Turboprops, Regional excludes Business Jet.

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Net orders

Deliveries

Source: IBA’s JetData.



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Traffic growth

Annual world GDP growth

Source: International Monetary Fund, World Economic Outlook Database.

Source: IATA.


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INDUSTRY DATA: Firm orders

88 www.afm.aero

FIRM ORDERS - Jan to Aug, 2012


Manufacturer Variant Customer Order Date Number of Engines AircraftAirbus A320 BOC Aviation 06/01/2012 2 Unknown

Airbus A350-900 Cathay Pacific 01/02/2012 6 Trent XWB 84

Airbus A318 Private Customer 16/03/2012 1 Unknown

Airbus A330-200 Air Lease Corporation 20/03/2012 1 Unknown

Airbus A330-300 Air Lease Corporation 31/01/2012 1 Unknown

Airbus A320 BOC Aviation 10/05/2012 1 Unknown

Airbus A320 Air Lease Corporation 31/05/2012 16 Unknown

Airbus A320 Air Lease Corporation 31/05/2012 20 Unknown

Airbus A320 Norwegian 08/06/2012 50 Unknown

Airbus A320 Norwegian 08/06/2012 50 PW1100G

Airbus A380 Tansaero Airlines 20/06/2012 4 Unknown

Airbus A330-200 Private Customer 06/07/2012 1 Unknown

Airbus A321 Arkia Israeli Airlines 09/07/2012 4 Unknown

Airbus A319 Drukair 10/07/2012 1 Unknown

Airbus A330-300 CIT 11/07/2012 10 Unknown

Airbus A330-200 Synergy Aerospace 12/07/2012 6 Unknown

Airbus A330-200F Synergy Aerospace 12/07/2012 3 Unknown

Airbus A321 Utair Aviation 12/07/2012 20 Trent 700

Airbus A330-200 Afriqiyah Airways 13/07/2012 3 Unknown

Airbus A319 Air Namibia 24/01/2012 2 Unknown

Airbus A319 Tibet Airlines 31/01/2012 3 Unknown

Airbus A318 Private Customer 11/04/2012 1 Unknown

Airbus A320 AviancaTaca 26/01/2012 20 Unknown



Airbus A330-200F Etihad Airways 26/01/2012 2 Unknown

Airbus A320 Spirit Airlines 27/01/2012 30 Unknown

Airbus A330-300 Garuda Indonesia 11/04/2012 11 Unknown

ATR ATR72-600 Wings Air 16/02/2012 27 PW127M

ATR ATR72-600 GECAS 03/01/2012 2 PW127M

ATR ATR72-600 TransAsia Airways 11/07/2012 8 PW127M

ATR ATR72-600 Lao Airlines 11/07/2012 2 PW127M

ATR ATR72-600 Air Lease Corporation 11/07/2012 2 PW127M

ATR ATR742-600 Nordic Aviation Capital 11/07/2012 1 PW127M

Boeing 737-800 Virgin Australia Airlines 02/01/2012 1 CFM

Boeing 737-800 Jet Airways 03/01/2012 17 CFM

Boeing 787-9 Japan Airlines 09/01/2012 10 GE

Boeing 737-800 Norwegian 24/01/2012 22 CFM

Boeing 737-MAX Norwegian 24/01/2012 100 CFM

Boeing 737-900ER Lion Air 22/02/2012 29 CFM

Boeing 737-MAX Lion Air 22/02/2012 201 CFM

Boeing 767-300ER Air Astana 23/02/2012 4 PW


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Manufacturer Variant Customer Order Date Number of Engines AircraftBoeing 737-800 China Eastern 22/03/2012 45 CFM

Boeing 787-9 Air New Zealand 23/03/2012 2 RR

Boeing 777-300ER TAAG (Angola Airlines) 30/03/2012 3 GE

Boeing 777-300ER Air Canada 30/03/2012 3 GE

Boeing 777-300ER EVA Air 08/05/2012 3 GE

Boeing 777-300ER Pakistan Int’l Airlines 31/05/2012 5 GE

Boeing 777-300ER American Airlines 01/06/2012 1 GE

Boeing 787-8 Lion Air 08/06/2012 5 RR

Boeing 737-900ER Alaska Airlines 15/06/2012 3 CFM

Boeing 767-300F FedEx 29/06/2012 15 GE

Boeing 737-MAX ALC 03/07/2012 75 CFM

Boeing 737-MAX Virgin Australia Airlines 06/07/2012 23 CFM

Boeing 737-800 Unidentified Customer(s) 06/07/2012 3 CFM

Boeing 737-MAX United Air Lines 12/07/2012 100 CFM

Boeing 737-900ER United Air Lines 12/07/2012 50 CFM

Boeing 777-300ER Unidentified Customer(s) 13/07/2012 2 GE

Boeing 777-200LR Ethiopian Airlines 18/07/2012 1 GE

Boeing 777-300ER Korean Air 20/07/2012 2 GE

Boeing 737-900ER EL AL Israel Airlines 30/07/2012 2 CFM

Boeing 777-300ER Unidentified Customer(s) 31/07/2012 2 GE

Boeing 787-8 Air Astana 23/02/2012 3 RR

Boeing 787-8 Transaero Airlines 03/04/2012 4 RR

Bombardier CRJ-1000ER Garuda Indonesia 10/02/2012 6 CF34-8C5A1

Bombardier DHC8-402Q NG Ethiopian Airlines 13/02/2012 5 PW150A

Bombardier DHC8-402Q NG Horizon Air 15/02/2012 2 PW150A

Bombardier CRJ900 RwandAir 19/03/2012 2 CF34-8C5

Bombardier CRJ1000 Nordic Aviation 20/06/2012 12 CF34-8

Bombardier CS100 Unidentified Customer 08/07/2012 5 PW1500G

Bombardier CS300 Unidentified Customer 08/07/2012 10 PW1500G

Bombardier DHC8-400Q NG Chorus Aviation 12/07/2012 6 PW150

Bombardier DHC8-402Q NG Eurolot 09/03/2012 8 PW150A

Bombardier DHC8-400Q NG Westjet 28/06/2012 20 PW150

Bombardier CRJ900 China Express Airlines 07/07/2012 6 CF34-8

COMAC C919 BOC Aviation 14/02/2012 20 LEAP-1C

COMAC C919 ABC Financial leasing 29/06/2012 45 LEAP-X1C

Embraer E195 Azul Linhas Aéreas 14/02/2012 10 CF34-10E

Embraer E190 BA CityFlyer 28/03/2012 1 CF34-10E

Embraer E170 Japan Airlines Group 04/04/2012 1 CF34-8E5

Embraer E190 Hebei Airlines 09/07/2012 5 CF34-10E

Embraer E190 Conviasa 31/07/2012 6 CF34-10E

Sukhoi SSJ100 Blue Panorama 11/06/2012 12 SaM 146

Sukhoi SSJ100 Interjet 21/06/2012 5 SaM 146

FIRM ORDERS - Jan to Aug, 2012



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Firm orders by aircraft type



Firm orders by manufacturer


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For more than 12 years Airline Fleet Management (AFM) has concentrated on the business and financing of airline fleets and operations. It is the only globally distributed publication focussed on, and for aircraft owners, operators and lessors.

Published six times a year, AFM is read by CEOs, CFOs, managing directors, senior directors and managers working in the global commercial aviation sector, including the world’s largest passenger and freight airlines, aircraft and engine OEMs and leasing companies.

AFM is a fully audited BPA Audited magazine, and acknowledged as a highly respected source of information. For anyone involved in the commercial airline business, AFM has all the angles covered. Our exclusive content appeals to senior management at airlines and also reaches a range of industry specialists supporting the manufacture, maintenance, sale, purchase, finance, lease, appraisal and insurance of commercial aircraft.

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MARKET VALUES AND LEASE RATES - Aug 2011


Manufacturer Type Current Market Value Oldest Newest Oldest Newest % AV ChangeAirbus A300-600R $6.33m $15.40m $5.00m $14.00m -15%

Airbus A310-200 $1.85m $2.40m $1.70m $2.40m -4%

Airbus A310-300 $3.90m $8.90m $3.60m $8.50m -6%

Airbus A318-100 $14.00m $24.50m $13.00m $25.00m -3%

Airbus A319-100 $12.50m $34.50m $12.00m $34.40m -2%

Airbus A320-200 $5.50m $40.00m $4.50m $40.50m -8%

Airbus A321-100 $12.00m $19.00m $11.50m $18.50m -3%

Airbus A321-200 $21.00m $49.00m $20.50m $48.50m -2%

Airbus A330-200 $44.00m $86.00m $42.00m $86.50m -2%

Airbus A330-200F $90.00m $96.40m $80.00m $95.00m -6%

Airbus A330-300 $27.00m $97.00m $20.00m $98.00m -12%

Airbus A340-200 $15.00m $20.00m $10.00m $19.00m -19%

Airbus A340-300 $18.00m $70.00m $10.00m $65.00m -26%

Airbus A340-500 $55.00m $97.00m $50.00m $90.00m -8%

Airbus A340-600 $58.00m $104.00m $50.00m $95.00m -11%

Airbus A380-800 $145.00m $195.00m $140.00m $205.00m 1%

Boeing B717-200 $7.75m $11.50m $7.00m $11.00m -7%

Boeing B737-300 $2.00m $6.80m $1.80m $6.00m -11%

Boeing B737-400 $4.00m $8.00m $3.00m $7.50m -16%

Boeing B737-500 $2.50m $6.00m $2.00m $5.00m -18%

Boeing B737-600 $11.00m $20.00m $10.00m $18.00m -10%

Boeing B737-700 $16.20m $35.75m $14.00m $36.00m -6%

Boeing B737-800 $20.00m $44.50m $19.00m $44.50m -3%

Boeing B737-900 $19.80m $24.00m $18.00m $24.00m -5%

Boeing B737-900ER $33.50m $47.40m $33.50m $48.00m 1%

Boeing B747-400 $18.00m $59.50m $12.00m $50.00m -25%

Boeing B747-8F - $185.00m - $185.00m -

Boeing B757-200 $6.00m $22.50m $6.00m $22.00m -1%

Boeing B767-200ER $4.00m $14.50m $3.00m $17.00m -4%

Boeing B767-300ER $11.00m $61.50m $10.00m $61.50m -5%

Boeing B767-300F $30.00m $73.52m $28.00m $70.00m -6%

Boeing B777-200 $24.00m $57.00m $22.00m $53.00m -8%

Boeing B777-200ER $47.70m $118.00m $45.00m $118.00m -3%

Boeing B777-200LR $91.00m $136.50m $87.20m $142.40m 0%

Boeing B777F $140.00m $160.00m $138.00m $163.00m 0%

Boeing B777-300 $47.75m $78.00m $45.40m $76.00m -4%

Boeing B777-300ER $96.50m $155.00m $93.00m $158.00m -1%

Boeing B787-8 $105.00m $110.00m $105.00m $111.00m 0%

Boeing McDonnell Douglas MD-11 $10.00m $17.00m $10.00m $17.00m 0%



Boeing McDonnell Douglas MD-83 $1.30m $3.25m $1.00m $3.25m -12%



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Manufacturer Type Dry Lease Rate Oldest Newest Oldest Newest % AV ChangeAirbus A300-600R $0.105m $0.200m $0.090m $0.180m -12%

Airbus A310-200 $0.070m $0.100m $0.070m $0.100m 0%

Airbus A310-300 $0.090m $0.140m $0.090m $0.140m 0%

Airbus A318-100 $0.130m $0.200m $0.120m $0.220m 1%

Airbus A319-100 $0.130m $0.320m $0.120m $0.260m -13%

Airbus A320-200 $0.065m $0.350m $0.065m $0.300m -7%

Airbus A321-100 $0.120m $0.220m $0.090m $0.200m -17%

Airbus A321-200 $0.200m $0.380m $0.170m $0.365m -9%

Airbus A330-200 $0.420m $0.850m $0.400m $0.830m -4%

Airbus A330-200F $0.750m $0.800m $0.750m $0.800m 0%

Airbus A330-300 $0.280m $0.900m $0.240m $0.880m -8%

Airbus A340-200 $0.300m $0.350m $0.150m $0.325m -29%

Airbus A340-300 $0.230m $0.600m $0.180m $0.590m -12%

Airbus A340-500 $0.490m $0.850m $0.470m $0.830m -3%

Airbus A340-600 $0.530m $0.920m $0.500m $0.900m -4%

Airbus A380-800 $1.450m $1.850m $1.450m $1.850m 0%

Boeing B717-200 $0.100m $0.150m $0.080m $0.140m -13%

Boeing B737-300 $0.040m $0.110m $0.040m $0.105m -2%

Boeing B737-400 $0.075m $0.120m $0.070m $0.115m -5%

Boeing B737-500 $0.050m $0.090m $0.050m $0.085m -3%

Boeing B737-600 $0.135m $0.200m $0.100m $0.180m -18%

Boeing B737-700 $0.160m $0.320m $0.120m $0.310m -6%

Boeing B737-800 $0.220m $0.360m $0.190m $0.350m -6%

Boeing B737-900 $0.170m $0.230m $0.140m $0.220m -11%

Boeing B737-900ER $0.320m $0.400m $0.290m $0.390m -6%

Boeing B747-400 $0.300m $0.670m $0.200m $0.550m -26%

Boeing B747-8F $1.400m $1.550m $1.400m $1.550m -

Boeing B757-200 $0.100m $0.230m $0.100m $0.230m 0%

Boeing B767-200ER $0.120m $0.280m $0.110m $0.280m -4%

Boeing B767-300ER $0.180m $0.500m $0.170m $0.460m -7%

Boeing B767-300F $0.340m $0.580m $0.300m $0.580m -6%

Boeing B777-200 $0.350m $0.450m $0.300m $0.440m -8%

Boeing B777-200ER $0.500m $0.990m $0.450m $0.950m -7%

Boeing B777-200LR $0.800m $1.200m $0.800m $1.200m 0%

Boeing B777F $1.200m $1.400m $1.200m $1.400m 0%

Boeing B777-300 $0.450m $0.700m $0.440m $0.700m -1%

Boeing B777-300ER $0.850m $1.400m $0.850m $1.400m 0%

Boeing B787-8 $0.950m $1.100m $0.950m $1.100m 0%







Source: IBA’s JetData. JetData.


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94 www.afm.aero


Source: IBA.

Manufacturer Type Current Market Value Oldest Newest Oldest Newest % AV ChangeBoeing McDonnell Douglas MD-88 $1.90m $3.20m $1.50m $3.20m -11%


Bombardier (Canadair) CRJ-100/200 $1.80m $7.20m $1.80m $6.50m -5%

Bombardier (Canadair) CRJ-700/705 $11.00m $21.50m $10.50m $22.50m 0%

Bombardier (Canadair) CRJ-900 $13.90m $25.00m $13.00m $25.00m -3%

Bombardier (Canadair) CRJ-1000 $24.00m $26.00m $23.30m $27.20m 1%

Bombardier Q200 $4.00m $8.00m $4.00m $8.00m 0%



Embraer ERJ-135ER $3.40m $5.80m $3.00m $5.50m -8%


Embraer E170 LR $14.40m $25.20m $14.40m $26.25m 2%

Embraer E175 LR $17.70m $27.20m $17.50m $28.70m 2%

Embraer E190 LR $20.00m $30.20m $20.70m $32.60m 6%

Embraer E195 LR $22.90m $31.70m $24.27m $34.95m 8%

Fokker Fokker 70 $2.40m $3.00m $2.20m $3.00m -4%


Sukhoi SSJ 100-95B - - $22.12m $23.93m -

Sukhoi SSJ 100-95LR - - $22.60m $24.45m -

ATR ATR 42-500 $4.30m $14.30m $4.30m $14.30m 0%

ATR ATR 72-500 $6.75m $18.10m $6.75m $18.10m 0%

ATR ATR 42-600 - $14.95m - $14.95m -

ATR ATR 72-600 - $19.20m - $19.20m -


xxx

Current market value by type


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Source: IBA.

Manufacturer Type Dry Lease Rate Oldest Newest Oldest Newest % AV Change



Bombardier (Canadair) CRJ-100/200 $0.035m $0.080m $0.035m $0.080m 0%

Bombardier (Canadair) CRJ-700/705 $0.110m $0.245m $0.105m $0.235m -4%

Bombardier (Canadair) CRJ-900 $0.140m $0.255m $0.135m $0.250m -3%

Bombardier (Canadair) CRJ-1000 $0.220m $0.255m $0.220m $0.260m 1%

Bombardier Q200 $0.050m $0.080m $0.040m $0.080m -10%





Embraer E170 LR $0.145m $0.230m $0.140m $0.240m 0%

Embraer E175 LR $0.160m $0.240m $0.160m $0.250m 2%

Embraer E190 LR $0.200m $0.270m $0.195m $0.280m 1%

Embraer E195 LR $0.210m $0.290m $0.210m $0.300m 2%



Sukhoi SSJ 100-95B - - $0.177m $0.225m -

Sukhoi SSJ 100-95LR - - $0.182m $0.230m -

ATR ATR 42-500 $0.065m $0.135m $0.065m $0.135m 0%

ATR ATR 72-500 $0.085m $0.180m $0.085m $0.180m 0%

ATR ATR 42-600 - $0.145m - $0.145m -

ATR ATR 72-600 - $0.190m - $0.190m -



Current market value by dry lease rate


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INDUSTRY DATA: Engine data

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Engine data – August 2011 versus August 2012

Type Engine August 2011 August 2012 % Change August 2011 August 2012 % Change Half-Life CMV Half-Life CMV Lease Rates Lease Rates

B737-300 CFM56-3B1 $1.00m $0.80m -20% $0.025m $0.023m -8%

B737-400 CFM56-3B2 $1.40m $1.20m -14% $0.028m $0.026m -7%

B737-500 CFM56-3C1 $1.80m $1.80m 0% $0.035m $0.037m 6%

A321-200 CFM56-5B3/P $6.40m $6.40m 0% $0.078m $0.075m -4%

A319-100 CFM56-5B5/P $4.30m $4.40m 2% $0.054m $0.052m -4%

A340-300 CFM56-5C4/P $4.80m $4.20m -13% $0.055m $0.048m -13%

B737-600 CFM56-7B22 $4.80m $4.90m 2% $0.058m $0.052m -10%

B737-700 CFM56-7B24 $5.60m $5.70m 2% $0.068m $0.060m -12%

B737-800 CFM56-7B26 $6.30m $6.50m 3% $0.075m $0.075m 0%

B737-900ER CFM56-7B27 $6.60m $6.75m 2% $0.079m $0.075m -5%

CRJ-200 CF34-3B1 $1.30m $1.30m 0% $0.020m $0.020m 0%

CRJ-700 CF34-8C5 $2.90m $3.12m 8% $0.045m $0.045m 0%

E170/175 CF34-8E5 $2.90m $3.20m 10% $0.045m $0.045m 0%

E190/195 CF34-10E6 $4.60m $4.80m 4% $0.065m $0.065m 0%

A300-600R CF6-80C2A5 $3.40m $3.20m -6% $0.050m $0.042m -16%

B767-300ER CF6-80C2B6F $5.10m $5.20m 2% $0.065m $0.055m -15%

MD-11 CF6-80C2D1F $3.80m $3.80m 0% $0.055m $0.045m -18%

A330-200 CF6-80E1A3 $9.80m $9.85m 1% $0.115m $0.120m 4%

B777-300ER GE90-115B $19.70m $21.80m 11% $0.210m $0.240m 14%

A320-200 V2527-A5 $5.60m $5.50m -2% $0.065m $0.063m -3%

MD-82 JT8D-217C $0.60m $0.60m 0% $0.020m $0.020m 0%

B747-400 PW4056 $4.10m $4.10m 0% $0.060m $0.055m -8%

A310-300 PW4152 $3.40m $3.40m 0% $0.055m $0.048m -13%

B757-200 RB211-535E4 $3.80m $3.80m 0% $0.050m $0.050m 0%

Fokker 100 RB183 Tay 650-15 $1.40m $1.40m 0% $0.024m $0.025m 4%

A340-600 Trent 556-61 $8.90m $8.60m -3% $0.110m $0.110m 0%

A330-300 Trent 772B-60 $8.40m $8.90m 6% $0.120m $0.120m 0%

B777-200ER Trent 895 $14.44m $14.20m -2% $0.170m $0.170m 0%

A380-800 Trent 970 $13.60m $13.90m 2% $0.170m $0.170m 0%

ERJ-145 ER AE3007-A1 $1.50m $1.40m -7% $0.025m $0.025m 0%

B717-200 BR715A $2.50m $2.50m 0% $0.042m $0.042m 0%


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INDUSTRY DATA: Engine data

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Engine versus half life percentage change

Engine versus lease rate percentage change




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INDUSTRY DATA: Order backlog

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Source: IBA.

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Order backlog

Order backlog

Model Backlog Model Backlog

737-700 297737-800 1449737-900ER 371737-MAX 649747-8 30747-8F 51767-300ER 17767-300F 54777-200ER 10777-200LR 4777-300ER 269777F 66787-8 505787-9 339SSJ 100 236A318 3A319-100 139A319neo 35A320-200 1374A320neo 1378A321-200 305A321neo 170A330-200 93

A330-200F 42A330-300 177A350 XWB 2A350-1000XWB 88A350-800XWB 118A350-900XWB 350A380-800 242CRJ-900 20CRJ-1000 44DHC8-400 74CS100 40CS300 55CRJ-700 6E190 89E195 30E170 2E175 39ATR72-600 178ATR42-500 0ATR42-600 15ATR72-200 2ATR72-500 19


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Aircraft Finance Guide 2013

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