special report: FINANCE & LEASING 2014 february 2014
SPECIAL REPORT FINANCE & LEASING CONTENTS 28 Portfolio players A snapshot of some of the big numbers from the leasing world 31 Friend or foe? Why some airlines are muscling into the leasing market plus a breakdown of the major lessors by fleet value and size 36 Fund for thought We discuss how carriers will pay for their new aircraft in 2014 42 Image reboot How Airbus is working to boost the appeal of the A340 widebody 44 Premium economy Safety is on the up, but the outlook for insurers isn t so rosy Rex Features Lessors ordered over $45 billion worth of airliners last year, and portfolios of the 50 largest players are now approaching $200 billion in combined value, underlining the power of the sector. Perhaps that s why airlines are now looking for a slice of the leasing action. Meanwhile, increasing aircraft deliveries are creating changes in the financing landscape All our special reports are available online at : flightglobal.com/airlines
FINANCE & LEASING SNAPSHOT PORTFOLIO PLAYERS The usual suspects lead the lessor rankings, with GECAS still the dominant player, while the sector s managed fleet has seen a double digit rise in value to over $196 billion. Data from Flightglobal s Ascend Online database Airbus TOP 10 LESSORS BY FLEET VALUE GECAS $33.9bn -0.7% ILFC $25.0bn -4.5% BBAM $10.1bn 17.6% LAUNCH PARTY Air Lease was in the news again in 2013, when Steve Udvar-Hazy (pictured left with Boeing vice chairman Ray Conner) signed up to be a launch customer for the new 787-10. ALC s portfolio has increased by over one-fifth in value, to $6.9 billion SMBC Aviation Capital $9.4bn 59.2% BOC Aviation $8.9bn 22.9% AerCap $8.6bn 11.9% AWAS $7.4bn 20.4% CIT Aerospace $7.3bn 1.4% Air Lease $6.9bn 21.9% Aviation Capital Group $5.9bn 5.8% 1,400 Firm backlog of top 10 lessors (by fleet value) at the end of 2013, led by ILFC with 326 aircraft, followed by Air lease with 318 and GECAS with 251
10.9% Rise in value of the top 50 lessors' fleet portfolios during 2013 2013 LESSOR ORDER SHARE VALUE CIT Aerospace $7.3bn ILFC $6.6bn Boeing $45.4bn Grand total GECAS $3.2bn Others $3.0bn $196bn Total value of top 50 lessors' fleet portfolios at the end of 2013, an increase of 11% S Air Lease $22.6bn NOTE: data for Airbus/Boeing types BOC Aviation $2.6bn AIRBUS/BOEING 2013 LESSOR ORDER SHARE VALUE Boeing $21.0bn Airbus $24.4bn $45.4bn Grand total BIG SPENDERS Mark Lapidus (right), chief executive of Doric Lease, inked a landmark deal with John Leahy of Airbus at the Paris air show for 20 A380s. Associate company Doric ranks 12th in terms of fleet value, with its fleet of 39 aircraft worth $4.6 billion NOTE: Order values based on 2013 list prices
FINANCE & LEASING SURVEY DATA COMPILED BY NIGEL FISHER, STEVE PHIPPS & MIKE REED FLIGHTGLOBAL DATA RESEARCH TEAM TOP 50 LEASING SURVEY We scrutinise the lessors in our annual survey (P27-35) with help from Flightglobal s Ascend Online database, providing a snapshot of the global fleet that they own and manage MAINLINE AIRCRAFT: LEASED FLEET Manufacturer/category Type Value ($m) Fleet Av. value ($m) Airbus narrowbody A318 380 28 13.6 A319 10,029 666 15.1 A320 42,495 1,732 24.5 A321 8,884 328 27.1 AIRBUS NARROWBODY TOTAL 61,788 2,754 22.4 Airbus widebody A300 241 21 11.5 A310 41 10 4.1 A330 24,977 437 57.2 A340 2,015 100 20.1 A380 3,866 23 168.1 AIRBUS WIDEBODY TOTAL 31,139 591 52.7 AIRBUS TOTAL 92,927 3,345 27.8 Boeing narrowbody 717 944 124 7.6 727 6 14 0.5 737 CFM 1,844 613 3.0 737 JT8D 6 41 0.1 737 NG 56,020 2,028 27.6 757 2,594 251 10.3 DC-8 34 21 1.6 DC-9 1 6 0.1 MD-80 184 140 1.3 MD-90 105 21 5.0 BOEING NARROWBODY TOTAL 61,739 3,259 18.9 Boeing widebody 747 4,897 148 33.1 767 4,705 309 15.2 777 27,219 297 91.6 787 1,422 13 109.3 DC-10 4 7 0.6 MD-11 497 35 14.2 BOEING WIDEBODY TOTAL 38,744 809 47.9 BOEING TOTAL 100,482 4,068 24.7 MAINLINE AIRCRAFT GRAND TOTAL 193,409 7,413 26.1 REGIONAL JETS: LEASED FLEET Manufacturer Type Value ($m) Fleet Av. value ($m) Bombardier CRJ 933 283 3.3 CRJ700/900/1000 1,035 80 12.9 BOMBARDIER TOTAL 1,968 363 5.4 Embraer E-170/175 1,399 81 17.3 E-190/195 5,724 232 24.7 ERJ-145 family 1,036 197 5.3 EMBRAER TOTAL 8,159 510 16.0 BAe Systems BAe 146/Avro RJ 199 83 2.4 Fokker Fokker F28/70/100 104 33 3.1 Others 442 38 11.6 REGIONAL JET GRAND TOTAL 10,872 1,027 10.6 NOTES: Embraer data includes Harbin Chinese production; Others includes Antonov An-148; Fairchild/Dornier 328Jet; Sukhoi Superjet 100; Mainline total covers Airbus and Boeing only. * BBAM excludes FLY Leasing, whose portfolio is managed by BBM. SOURCE: Returns to annual leasing survey and Flightglobal s Ascend Online database. Survey data covers all firms with an active operating lease business and a substantial investment in fleet and is not restricted to top 50 aircraft lessors. TURBOPROPS: LEASED FLEET Manufacturer Type Value ($m) Fleet Av. value ($m) ATR ATR 42/72 2,483 242 10.3 BAe Systems ATP, Jetstream 31/41 14 16 0.9 Bombardier Twin Otter/Dash 8 2,053 243 8.5 Embraer EMB-120 5 4 1.2 Fokker 50 74 39 1.9 Saab 340/2000 241 115 2.1 Other types 399 100 4.0 TURBOPOP GRAND TOTAL 5,270 759 6.9 MAINLINE/REGIONAL GRAND TOTAL 209,551 9,199 22.8 NOTES: Other types include Aircraft Industries (Let) 410, Antonov An-12/An-26/An-140, AVIC XAC MA60, Fairchild/Dornier 228/328, Harbin Y-12, Hawker Beechcraft 1900 and Lockheed Hercules NARROWBODY LESSORS BY FLEET VALUE Rank Company Value ($m) Fleet Change 1 GECAS 21,454 1,072-30 2 ILFC 13,681 738-18 3 SMBC Aviation Capital 8,575 321 +103 4 BBAM * 6,642 284-13 5 AerCap 5,957 257 +11 6 Aviation Capital Group 5,720 247-12 7 AWAS 5,402 221 +29 8 BOC Aviation 5,054 173 +7 9 CIT Aerospace 5,050 217 +0 10 Air Lease 3,398 115 +30 MAJOR WIDEBODY LESSORS BY FLEET VALUE Rank Company Value ($m) Fleet Change 1 ILFC 11,270 271-6 2 GECAS 8,485 182-12 3 Doric 4,434 31 +4 4 BOC Aviation 3,588 38 +11 5 BBAM * 3,456 44 +11 6 AerCap 2,581 48 +4 7 Aircastle Advisor 2,529 58-2 8 Air Lease 2,343 32 +4 9 Guggenheim Avn Partners 2,130 37 +4 10 CDB Leasing Company 2,017 28 +5 MAJOR REGIONAL AIRCRAFT LESSORS BY FLEET SIZE Rank Company Value ($m) Fleet Jets Tprops Change 1 GECAS 3,912 438 405 33-8 2 Nordic Aviation Capital 1,787 162 7 155 +162 3 Avmax Aircraft Leasing 406 120 46 74 +21 4 ECC Leasing 423 75 74 1 +21 5 Falko 174 64 63 1-41 6 Air Lease 1,109 47 31 16 +9 7= JetFleet Managment 143 42 8 34 +2 7= Saab Aircraft Leasing 70 42 0 42-17 9 AVIC Int'l Leasing 468 41 12 29 +13 10 ACIA Aero 129 40 3 37 +33
FINANCE & LEASING LESSORS Rex Features REPORT LAURA MUELLER LONDON & SAN FRANCISCO FRIEND OR FOE? The leasing players are facing some homegrown competition from some people they know well their own clients. But just how serious a threat do these entrepreneurial airlines pose to the incumbents? An increasing number of airlines are setting up leasing companies to manage their own fleets and some are positioning themselves to supply the needs of their competitors steps that are under increasing scrutiny by the lessor community. However, airlines acting as operating lessors is nothing new. Many carriers, from time to time, sublease aircraft from their fleets or order books to third parties, particularly in times of excess capacity. This is standard practice among global airlines. In 1985, the now-defunct airline group Ansett Australia took the practice one step further and established the lessor Ansett Worldwide Aviation Services, which was later sold to an affiliate of Morgan Stanley Dean Witter in 2000 for close to $600 million. In 2004, Ansett Worldwide was rebranded as flightglobal.com/ab January-February 2014 Airline Business 31
FINANCE & LEASING LESSORS AWAS. Singapore Airlines completed a similar move in 1994, jointly setting up Singapore Aircraft Leasing Enterprise (SALE) with Boullioun Aviation Services. SALE was later sold to Bank of China in 2006 for $965 million and is now part of BOC Aviation. Cargo carrier Atlas Air followed suit and created Titan Aviation in 2008 as a separate leasing entity to handle third-party leases. The Dublin-based lessor focuses on the acquisition, sale, dry leasing, marketing and servicing of mainly freighter aircraft. Traditionally, lessors paid a different price for airplanes than airlines STEVE RIMMER Chief executive, Guggenheim AirAsia also has formed an internal management firm to handle leases for its various affiliates. Following a $500 million investment from Manila-based San Miguel, Philippine Airlines outlined plans last year to form a leasing firm to manage its long-haul fleet requirements. While these moves have raised a few eyebrows in the leasing community, steps taken by Lion Air and Norwegian to enter the market not just for their own needs but those of their competitors have caused lessors to finally stand up and take notice of this developing business model. FINANCIAL PRIVILEGES No doubt airlines are looking to take advantage of tax and financial privileges afforded to them under a leasing umbrella. Norwegian indicates that its new leasing subsidiary will help limit currency exposure on the carrier s balance sheet. The currency exposure is primarily driven by a mismatch between US dollar-denominated loans and aircraft balance-sheet values denominated in the Norwegian krone, currently managed by extensive hedge arrangements, says the airline. Norwegian will concentrate on new Boeing 737-800 deliveries through its new Irish leasing entity, September Aviation Assets. Its chief executive Bjorn Kjos has confirmed that the entity will assist the carrier s fleet development by selling or leasing surplus aircraft to third parties. The carrier has an order backlog for 62 737-800s to be delivered through to the end of 2018. Ian Reid, formerly an aviation banker and operating lessor and now a senior financial advisor at Philippines Airlines, says carriers may start leasing companies for a number of reasons including tax efficiency or because they have a group of affiliated airlines and want to centralise financing and purchasing. TOP 50 LESSORS BY FLEET VALUE Rank Total fleet value Total Average value Managed only 2013 (2012) Company $m Change fleet $m Change $m Share 1 (1) GECAS 33,851-0.7% 1,692 20.0 2.2% 896 2.6% 2 (2) ILFC 24,951-4.5% 1,009 24.7-2.2% 845 3.4% 3 (3) BBAM 10,142 17.6% 330 30.7 18.3% 7,897 77.9% 4 (8) SMBC Aviation Capital 9,411 59.2% 344 27.4 7.3% 0 0.0% 5 (5) BOC Aviation 8,940 22.9% 221 40.5 10.1% 496 5.5% 6 (4) AerCap 8,621 11.9% 311 27.7 6.8% 1,752 20.3% 7 (7) AWAS 7,379 20.4% 270 27.3 8.8% 99 1.3% 8 (6) CIT Aerospace 7,277 1.4% 272 26.8-0.1% 59 0.8% 9 (9) Air Lease 6,850 21.9% 194 35.3-5.1% 58 0.8% 10 (10) Aviation Capital Group 5,904 5.8% 256 23.1 11.6% 143 2.4% 11 (15) Avolon Aerospace Leasing 4,783 40.1% 113 42.3 10.3% 749 15.7% 12 (11) Doric 4,601 13.7% 39 118.0 2.0% 3,499 76.0% 13 (18) ICBC Leasing 4,573 44.1% 115 39.8 2.7% 118 2.6% 14 (12) CDB Leasing Company 4,503 18.7% 110 40.9-1.8% 0 0.0% 15 (13) Aircastle Advisor 4,008 6.3% 157 25.5 7.0% 30 0.7% 16 (16) Standard Chartered Avn Finance 3,373-0.6% 95 35.5 1.4% 0 0.0% 17 (14) MC Aviation Partners 3,353-5.0% 95 35.3 10.0% 0 0.0% 18 (19) Jackson Square Aviation 3,252 17.7% 79 41.2-3.1% 0 0.0% 19 (17) Macquarie AirFinance 2,988-6.0% 141 21.2-0.7% 263 8.8% 20 (21) DAE Capital 2,702 6.9% 53 51.0 2.9% 0 0.0% 21 (24) ORIX Aviation 2,645 18.5% 132 20.0 7.7% 273 10.3% 22 (22) Hong Kong Avn Capital 2,496 8.5% 79 31.6 0.3% 1,516 60.7% 23 (23) Guggenheim Avn Partners 2,394 5.1% 58 41.3 19.6% 0 0.0% 24 (27) FLY Leasing 2,163 6.9% 105 20.6 12.0% 7,897 365.1% 25 (25) Boeing Capital 1,872-12.3% 220 8.5-5.9% 107 5.7% 26 (26) Amentum Capital 1,857-10.1% 45 41.3-10.1% 1,782 95.9% 27 (29) Nordic Aviation Capital 1,820 23.1% 174 10.5 23.1% 0 0.0% 28 (28) ALAFCO 1,670 6.6% 50 33.4 8.8% 0 0.0% 29 (34) VEB-Leasing JSC 1,583 82.6% 55 28.8 36.1% 0 0.0% 30 (48) BoCom Leasing 1,559 212.5% 43 36.3 9.0% 0 0.0% 31 (30) Changjiang Leasing 1,218 5.4% 55 22.2-4.2% 0 0.0% 32 (41) China Aircraft Leasing 958 57.9% 24 39.9 5.2% 0 0.0% 33 (83) Intrepid Aviation Group 930 583.7% 10 93.0 36.7% 0 0.0% 34 (42) AVIC International Leasing 852 45.3% 50 17.0-4.1% 2 0.2% 35 (32) SkyWorks Leasing 851-11.5% 81 10.5-8.2% 851 100.0% 36 (35) Jetscape 808-5.4% 40 20.2 1.7% 303 37.5% 37 (36) Novus Aviation 803 2.2% 16 50.2 8.6% 469 58.4% 38 (37) Aircraft Leasing & Mgmt 775 5.0% 29 26.7 26.7% 0 0.0% 39 (110) Titan Aviation Leasing 723 1602.0% 7 103.2 386.3% 0 0.0% 40 (65) Jackson Square Avn Ireland 678 146.9% 17 39.9 30.7% 0 0.0% 41 (40) Cargo Aircraft Mgmt 652 1.2% 71 9.2 6.9% 12 1.8% 42 (38) Investec Global Acft Fund 639-5.5% 19 33.6-5.5% 164 25.6% 43 (44) Dragon Aviation Leasing 631 17.6% 20 31.6 0.0% 0 0.0% 44 (31) Lease Corporation Int l 630-35.1% 9 70.0-13.5% 630 100.0% 45 (47) GOAL 626 24.6% 42 14.9-2.1% 0 0.0% 46 (55) Showa Leasing 607 44.3% 27 22.5 22.9% 0 0.0% 47 (53) Apollo Aviation Group 593 39.0% 55 10.8 31.4% 148 24.9% 48 (69) Airbus Asset Mgmt 563 148.3% 34 16.6 16.8% 0 0.0% 49 (60) Vietnam Aircraft Leasing 509 46.9% 15 33.9 7.7% 0 0.0% 50 (39) Penerbangan Malaysia 494-25.8% 32 15.4-14.2% 0 0.0% TOTAL 196,061 10.9% 7,510 26.1 6.5% 31,056 15.8% Notes: Fleet value based on Ascend estimates 2013. FLY Leasing aircraft managed by BBAM, but not included in BBAM figures to avoid double counting. 2012 rankings reworked due to new historical data for two lessors. RBS Aviation Capital acquired by SMBC. DEFINITIONS: Ranking: The survey is based on the Top 50 companies with a substantial operating lease business ranked by the value of their owned and/or managed fleets at the end of December 2013. Change: The change figures are based on fleets/ values supplied by Flightglobal s Ascend Online Fleets and Values databases for December 2013 and 2012. Operating lessors: Lessors are defined as those with an active operating lease business and a substantial investment in fleet. Companies that are solely or predominantly financiers have been excluded. Fleets & values: The survey represents a snapshot of fleets, including stored aircraft, with fair market generic values supplied by Ascend. Note the composition of fleets is constantly changing. 32 Airline Business January-February 2014 flightglobal.com/ab
Norwegian s Irish leasing entity will concentrate on new Boeing 737-800s Also, carriers that are privately held, he says, may want aircraft s ownership structures to differ from the airline s. What has left some lessors in sour moods about airline lessor business models is the fact that airlines such as Lion Air and Norwegian likely received huge discounts on their mega aircraft orders, which will support their leasing operations. I would love for whatever Norwegian and Lion paid for their aircraft to become the most favoured nation pricing that the manufacturers have to provide to leasing companies because that is the important differential here, Steve Rimmer, chief executive of Guggenheim Aviation Partners, said at the Ascend Finance Forum in San Francisco in December 2013. FALSE COMPETITION I think traditionally leasing companies have paid a different price for airplanes than the airlines do, so I think this is creating a false competition. If someone walks through the door saying they are going to be an airline and are going to operate those airplanes, and they don t do that, but they still get the same pricing I think that is an uneven playing field. Another lessor agrees: I cannot see how the manufacturers and lessors will allow airlines to lease out aircraft they pay airline prices for. It is not fair to the leasing community. A major grumble about the business model, according to another lessor, is the fact that manufacturers are selling to both parties, which could stoke a collapse in rental rates and values on aircraft. The manufacturers have realised making money via the operating lessor community is like shooting fish in a barrel sell aircraft to the lessors and sell planes to the airlines at the same time. The car crash takes a few years and comes about in slow motion, he says. High purchase prices, by way of long-term escalation, will force the parties to find homes for their aircraft at any lease rate really and this is not a healthy market. Leasing sources fret that while airlines traditionally have been able to secure aircraft at favourable prices, they typically have been unable to raise capital as cheaply or easily as lessors and this could limit their success as third-party lessors. There are few airlines that are rated investment grade on a standalone basis. Operating lessors would not exist if airlines could access funding easily, says Aengus Kelly, president and chief executive of lessor Aer- Cap. Kelly acknowledges that some airlines have access to cheap funding for aircraft, which they utilise themselves, and those airlines are predominately household names around the world. To build a leasing platform costs a lot of money, and to run a leasing platform is big bucks, adds Kelly. To get out into bank market, on your own credit, is a tough business for an airline. He asks: Is that what airline investors want their airlines to be focused on? Raising $500m San Miguel investment in Philippine Airlines, allowing the carrier to plan a leasing firm Norwegian $50 million every week? Or do they want them transporting passengers? Another lessor questions how airline leasing companies would cope with funding operations during a downturn. Good luck to them on getting cheap funding with such little equity and high leverage in the first place, he says. But what happens when aviation takes a turn for the worse? Will airlines be able to raise financing at sufficiently attractive rates to be a competitive [third party] lessor during a downturn when airlines are handing back aircraft? John Willingham chief executive of Macquarie AirFinance and founding managing director and board member of SALE admits that leasing was a business that, by SIA s standards, required a lot of leverage. Therefore, when the carrier saw a reasonable time to exit the business, it decided to take it and to use the capital realised in the core business. However, to say that airlines cannot access attractive funding is simply not true. Atlas Air recently refinanced a Boeing 777 Freighter aircraft with a loan backed by the US Export-Import Bank for its leasing subsidiary Titan. The $88 million transaction covered a 2009-vintage 777F (MSN 35606) with a 1.839% coupon rate a very favourable rate for airlines and lessors. CAPITAL MARKETS An airline source says the cost of funding largely depends on the credit. Ryanair can fund itself more cheaply than a lot of lessors, and Cathay Pacific recently raised money using floating rate US Ex-Im Bank bonds, at Libor +28 basis points, or pricing lessors would be extremely happy about, he says, adding: True, a lot of airlines don t have cheap access to cheap funds, but some do. Also, more and more global airlines now are able to tap the capital markets, which have traditionally been a US financing tool, in big volumes and at favourable rates. Last year, Air Canada issued the first non- US enhanced equipment trust certificates (EETC) financing since the 2008 financial crisis. The $424 million senior A tranche carries a coupon of 4.125% and a final distribution of May 2025, while the $182 million subordinate B tranche has a 5.375% coupon and a May 2021 distribution. The deal also features a $108 million C tranche, which has a 6.625% coupon and a bullet May 2018 maturity. British Airways also issued its first EETC, a $923 million offering, two months later. BA s class A bonds have an annual coupon, payable quarterly, of 4.625%, while the class B bonds carry an annual coupon, payable quarterly, of 5.625%.
FINANCE & LEASING LESSORS Backed by a strong wave in investor demand for yield in May, Hawaiian Airlines achieved a new milestone in EETC pricing with its $445 million financing. The $328 million, 14-year senior A tranche carries a very attractive 3.9% coupon, while the $116 million,10-year subordinate B tranche has a 4.95% coupon. ATTRACTIVE PRICING In the previous month, US Airways, hardly a desirable credit, issued an $820 million EETC with attractive pricing. The $620 million senior A tranche has a 3.95% interest rate, while the $200 million B tranche carries a 5.375% interest rate. However, it is not just lessors who are critical of airlines moving into leasing. The leap from operating an airline to running a lessor is likened by Avitas senior vicepresident Adam Pilarski to a general doctor branching out into brain surgery. My point is that these are two different jobs, he says. Running an airline is quite different than leasing surplus airplanes. You need systems, infrastructure and know-how to run an efficient leasing company. Becoming an accidental lessor because one bought more planes than one can use does not make good business sense. You do either one or the other, not both at the same time. Willingham agrees that the dynamics of running an airline, and the priorities and focus of running an airline, are very different from leasing, and the business ultimately increases risk. The two businesses are distinct and extremely difficult to mix successfully. Using leasing as a customer helps airlines build fleet flexibility, to optimise the use of scarce capital and reduce their risk in aircraft ownership, he says, adding: For an airline itself to become a leasing company does exactly the opposite. Willingham says SIA s thesis at the time it started SALE was to invest the capital that was over and above what the carrier needed a very unusual position for an airline to be in then, as now. Although SIA knew and understood aircraft and the fast-developing Asian market, the carrier also recognised that it had little experience of originating leasing transactions, he says. It believed therefore that, if it had a capable leasing partner, it could build a successful leasing company. However, over time, Willingham says the airline began to acknowledge that it was increasing the investment risk in its business: It was buying more aircraft, which was not a diversification for the carrier, and it was deepening its involvement in aircraft value risk. Knowing which aircraft will maintain their value and how to manage the risks of owning Few airlines are rated investment grade on a standalone basis. Lessors wouldn t exist if airlines could access funding easily AENGUS KELLY Chief executive, Aercap these aircraft are not practices that come naturally to an airline, says another leasing source. The tax and currency advantages achieved in these leasing models are obvious incentives but airlines need to really know how to manage these aircraft, how to work a downturn, so not to shoot themselves in the foot, he says. John Duffy, president of Transportation Partners (TP), an asset manager for Lion Air Group, believes it is too early to say whether the airline lessor model will take hold. AerCap FLEET FLEXIBILITY Both SALE and AWAS began life with airline affiliations, he says. It certainly has benefits for carriers who place very large orders, because airlines can exploit their inthe-money purchase prices, and also achieve fleet flexibility if they have the contractual rights to pre-place aircraft with third parties. Since TP s formation in 2011, the lessor s primary objective has been to act as an asset management for the Lion Group. However, it also plans on leasing to third parties. Duffy says TP will continue to diversify its funding sources in 2014, in order to conduct more aircraft trading with other lessors and directly from airlines. The lessor hopes to have a portfolio exceeding 50 aircraft by the end of 2014, he says. TP was established under Singapore s Aircraft Leasing Scheme, a programme run by the country s Economic Development Board that provides tax benefits for locally based lessors. The Lion Group has more than $50 billion of aircraft on order. Last year, it ordered 234 Airbus aircraft, following a 2011 order for 230 737s, including 201 updated 737 Max aircraft. It will also receive its initial long-haul jet from Boeing in 2015, the first of five 787s. Frank Pray, chief executive of Intrepid Aviation, who chaired a panel discussion at the Ascend Finance Forum in San Francisco in December, believes that a major hurdle in the airline lessor business model is the airlines themselves. Airlines would not want to lease from other carriers as they would have to divulge financial information and operating information to a competitor, he says. I think there are very few examples in history, and SALE being one of them, where this model has actually worked out, he adds. LUKEWARM RECEPTION AerCap s Kelly agrees. Airline [customers] would ask: Do we really want to get involved in a start-up high growth airline with financing risk? The answer, to date, would be a very lukewarm reception to that. Many would prefer to go through the leasing companies. Philippine Airlines Reid dismisses the possibility of true lessors owned by airlines leasing to third parties. There has never been, and I don t think there ever will be, an airline-controlled leasing company doing substantially third-party business with other unrelated airlines and competing with traditional operating lessors on a long-term sustainable basis, he says. Kelly believes that running a third party leasing company will be a challenge for airlines. Sure, they can lease one or two airplanes, many airlines already do, but would they really be able to go head-to-head and place new airplanes? Also, is that what they really want a CEO of an airline doing? Anything is possible, but as an investor in an airline, what are you paying them to do? It may be that they enter the [third-party leasing] business and, if they do, we wish them the best. I just don t see them becoming a competitive threat. A leasing source says he can hardly blame the airlines for considering the affiliated lessor model. Airline operating margins generally remain lower than those of the bankers and lessors who serve them. And come to think of it, so do their salaries, but they are the ones dealing with crashes and bankruptcies. If aspiring graduates want to earn well, eat well, and dress well, the leasing, finance and legal industries are still the place to be, he says. However, with demand for operating leasing only set to grow, lessors can be sure leasing is not a space that global airlines are willing to abandon, as a lessee or a lessor, anytime soon. Read our analysis of what the acquisition of ILFC means for AerCap: flightglobal.com/ilfc
TOP 50 LESSORS BY FLEET SIZE Rank Total fleet Fleet by type Value 2013 (2012) Company number Change units +/- Wide Narrow RJ/T prop Fleet ($m) Rank Average ($m) 1 (1) GECAS 1,692-2.9% -50 182 1,072 438 33,851 1 20.0 2 (2) ILFC 1,009-2.3% -24 271 738 0 24,951 2 24.7 3 (9) SMBC Aviation Capital 344 48.3% +112 8 321 15 9,411 4 27.4 4 (3) BBAM 330-0.6% -2 44 284 2 10,142 3 30.7 5 (4) AerCap 311 4.7% +14 48 257 6 8,621 6 27.7 6 (6) CIT Aerospace 272 1.5% +4 40 217 15 7,277 8 26.8 7 (7) AWAS 270 10.7% +26 49 221 0 7,379 7 27.3 8 (5) Aviation Capital Group 256-5.2% -14 9 247 0 5,904 10 23.1 9 (10) BOC Aviation 221 11.6% +23 38 173 10 8,940 5 40.5 10 (8) Boeing Capital 220-6.8% -16 18 195 7 1,872 25 8.5 11 (13) Air Lease 194 28.5% +43 32 115 47 6,850 9 35.3 12 (13) Nordic Aviation Capital 174 0.0% +0 0 12 162 1,820 27 10.5 13 (17) Aircastle Advisor 157-0.6% -1 58 94 5 4,008 15 25.5 14 (11) Macquarie AirFinance 141-5.4% -8 12 125 4 2,988 19 21.2 15 (15) ORIX Aviation 132 10.0% +12 18 112 2 2,645 21 20.0 16= (20) Avmax Aircraft Leasing 120 21.2% +21 0 0 120 406 55 3.4 16= (16) ICBC Leasing Co 115 40.2% +33 20 85 10 4,573 13 39.8 18 (14) Avolon Aerospace Leasing 113 27.0% +24 13 94 6 4,783 11 42.3 19 (22) CDB Leasing Company 110 20.9% +19 28 62 20 4,503 14 40.9 20 (24) FLY Leasing 105-4.5% -5 8 97 0 2,163 24 20.6 21= (28) MC Aviation Partners 95-13.6% -15 18 77 0 3,353 17 35.3 21= (29) Standard Chartered Avn Fin 95-2.1% -2 15 80 0 3,373 16 35.5 23 (21) SkyWorks Leasing 81-3.6% -3 15 46 20 851 35 10.5 24= (18) Hong Kong Aviation Capital 79 8.2% +6 18 55 6 2,496 22 31.6 24= (26) Jackson Square Aviation 79 21.5% +14 7 72 0 3,252 18 41.2 26 (23) ECC Leasing 75 38.9% +21 0 0 75 423 54 5.6 27 (27) Falko 72-31.4% -33 0 8 64 231 73 3.2 28= (33) Cargo Aircraft Mgmt 71-5.3% -4 44 27 0 652 41 9.2 28= (25) Guggenheim Avn Partners 58-12.1% -8 37 21 0 2,394 23 41.3 30= (34) AerSale 56 3.7% +2 11 45 0 349 63 6.2 30= (19) Sky Holding 56-15.2% -10 10 46 0 338 64 6.0 32= (40) Apollo Aviation Group 55 5.8% +3 8 44 3 593 47 10.8 32= (48) Changjiang Leasing 55 10.0% +5 0 37 18 1,218 31 22.2 32= (32) VEB-Leasing JSC 55 34.1% +14 21 19 15 1,583 29 28.8 35= (36) DAE Capital 53 3.9% +2 22 31 0 2,702 20 51.0 35= (30) ALAFCO 50-2.0% -1 3 47 0 1,670 28 33.4 35= (38) AVIC Int l Leasing 50 51.5% +17 2 7 41 852 34 17.0 38 (63) GA Telesis 49 2.1% +1 12 26 11 298 66 6.1 39 (31) Amentum Capital 45 0.0% +0 14 26 5 1,857 26 41.3 40 (37) BoCom Leasing 43 186.7% +28 6 35 2 1,559 30 36.3 41= (42) GOAL 42 27.3% +9 1 12 29 626 45 14.9 41= (71) JetFleet Management 42 5.0% +2 0 0 42 143 86 3.4 41= (45) Saab Aircraft Leasing 42-28.8% -17 0 0 42 70 102 1.7 44= (39) ACIA Aero 40 471.4% +33 0 0 40 129 88 3.2 44= (47) Jetscape 40-7.0% -3 0 3 37 808 36 20.2 46= (43) Doric 39 11.4% +4 31 8 0 4,601 12 118.0 46= (44) VTB-Leasing 39 0.0% +0 14 23 2 429 53 11.0 48= (35) Aergo Capital 38-19.1% -9 0 37 1 76 98 2.0 48= (50) Ilyushin Finance 38 5.6% +2 8 18 12 281 69 7.4 50 (57) Jetran International 37 8.8% +3 1 27 9 73 100 2.0 TOTAL 7,955 3.5% +272 1,214 5,398 1,343 190,367 23.9 NOTES: Figures based on fleet data from Ascend s Ascend Online database for December 2013. Total fleet is owned and managed. Standard Chartered Aviation Finance was formerly Pembroke Group FREE SPECIAL REPORTS Flightglobal Insight produces FREE special reports covering various aerospace topics with market analysis, technical information and graphics. Find out more and download our reports at
FINANCE & LEASING FUNDING REPORT OLIVIER BONNASSIES LONDON FUND FOR THOUGHT As production rates continue to rise, airlines are adjusting how they finance their new aircraft deliveries Airliner financing broke the $100 billion mark for the first time ever in 2013, and the level of financing required to cover this year s airliner deliveries is set to be even higher. The commercial jet market required $104 billion worth of financing last year, while manufacturer forecasts estimate that $112 billion in funding will be required during the next 12 months. The increased funding requirement is being supported by higher production rates. Boeing s 737 monthly production rate will reach 42 aircraft this year and the US manufacturer expects a rise to 47 units a month within four years as the re-engined and updated Max version is introduced into service. Airbus increased its A320 monthly production rate to 42 in 2013 1,370 Number of new Western jet deliveries in 2014, according to the Ascend Online database and is exploring a possible rise in this rate to 44. The market will also absorb more widebody aircraft in 2014, but financing is expected to remain smooth with no white elephants in the room, says a financier. Flightglobal s Ascend Online database lists 1,370 new Western jet deliveries in 2014 and 1,380 units in 2015. Of this year s deliveries, Asia-Pacific is expected to represent 42% of the total output with 570 units being delivered to carriers in the region. Financing requirements for commercial jets are set to effectively double over a five-year period to 2015. In 2010, the market required about $62 billion worth of aircraft deliveries to be funded. For 2015, $125 billion is forecast by Boeing Capital (BCC). Over this period, government-backed export credit agencies (ECAs) are forecast to provide the bulk of financing along with the commercial debt market. However, the ECAs have also facilitated the evolution of new capital markets liquidity brought by new banks into the export credit space. This created new structures to address the commercial banks long-term funding cost concerns and opened new opportunities especially with operating lessors. BCC expects the ECAs to contribute to 18% of new
commercial jet aircraft deliveries in 2014, down from 23% in 2013. In 2010, they accounted for 31% of the new deliveries or $19.2 billion. GROWTH OF CAPITAL MARKET Last year brought full implementation of the 2011 Aircraft Sector Understanding agreement, which notably involves an increase in the minimum premiums payable and the requirement for additional risk mitigants for weaker credits borrowers. As expected, ECA-guaranteed financing became more expensive. However, in a low interest rate environment, overall cost remains competitive, especially when considering European ECA and US Ex-Im bond structures. The main emerging source of finance since 2010 has been the capital markets. Back then, capital markets represented $1.5 billion worth of new aircraft deliveries. In 2014, capital markets will absorb 22% of the total deliveries, up from 14% in 2013. This translates into $24.6 billion worth of deliveries for the upcoming year. Last year, non-us carriers raised $9.7 billion in enhanced equipment trust certificates (EETCs), with Air Canada, British Airways and Virgin Australia tapping the market along with Emirates Airline through the Doric issuances. US airlines raised $13 billion in EETCs, says BCC, while the lessor issued more than $6.9 billion in capital market debt financing as of 3 December 2013. Boeing s leasing arm expects further aircraft financing activity to emerge from the private placement market in 2014. We continue to see a rapid change in We continue to see a rapid change in the capital markets KOSTYA ZOLOTUSKY Managing director of capital markets and leasing, BCC the capital markets with the new type of liquidity in the capital markets coming from the private placement market, says Kostya Zolotusky, managing director of capital markets and leasing for BCC. He anticipates that hedge funds, private equity firms and insurance companies will expand their financing roles in 2014. What we are seeing is lots of investors that are active in the EETC space are saying we are not Rex Features
FINANCE & LEASING FUNDING getting enough of this product, we want more, says Zolotusky. He adds: When you have an EETC, the orders are far greater than what is available, and so you have lots of institutional investors fighting for orders for up to $200 million, and they are getting a fraction of that. INSTITUTIONAL INVESTORS APPETITE Those institutional investors are starting to have conversations with financiers about buying pieces of new deals and taking down the old aircraft, he says. The investor would link directly with an airline for one, two or three aircraft and structure the deal in a similar manner as an EETC, he says. Because certain airlines are not able to put together a package of aircraft to finance 18% Boeing Capital expects ECA contribution to decline in 2014, from 23% last year up to $1 billion, or the typical size of a capital market issuance, they may turn to the private investment market, says Zolotusky. Typically, $700 million to $1 billion is a good size in a capital markets issuance, but in the private placement market airlines can do $50 million to $300 million deals on a singleinstitution basis. Zolotusky also expects more activity on the asset-backed securities (ABS) market going forward. One of the concerns of the ABS market is historically, the unpredictability of the tenor. If there is a market dislocation, you could extend the term, he explains. He says BCC is engaged in conversations with potential customers about structuring ABS deals that go to scrap in order to provide a more predictable horizon on the tenor. Cash contribution from airlines and lessors will account for 23% or approximately $26 billion worth of deliveries, says Zolotusky. Bank debt is expected to decline in 2014 in percentage-point terms. The commercial debt providers will account for 25% of this year s funding requirement, a drop of three MORE FUNDING SOURCES ON TAP FOR AIRLINES IN 2014 Global airlines will have more sources of financing available to them, thanks to the expansion of some existing lessors and financiers, and the emergence of others, when they set out to finance their $112 billion worth of expected aircraft deliveries this year. A pullback in the financing markets following the 2008 financial crisis and tighter global financial regulation prompted existing aviation financiers Development Bank of Japan (DBJ) and Novus Aviation Capital to establish Tamweel Aviation Finance (TAF) along with Airbus in September last year. We realised there is growing potential for mezzanine financings in this space, as we expect financings will become more expensive and loan-to-values will decrease as a result of increased regulation, says Masao Masuda, director at DBJ. Airlines and lessors will still need support, even though there could be a tighter pool of investors due to more regulation. We are seeking to help fill any gaps with high-risk, high-return mezzanine capital. In December, TAF and Emirates closed a finance lease transaction covering two Airbus A380s the first deal to be struck by the new fund. While Masuda would not be drawn on the amount of the fund, which will mainly finance widebody Airbus aircraft, market sources indicate that an initial investment of 10 billion ($101 million) is likely. Airbus senior vice-president of structured finance Nigel Taylor says TAF will bring additional liquidity, particularly to long-range aircraft, for its airline customers whose orderbooks continue to grow. Masuda says DBJ had been looking at entering the mezzanine market for some time, but with an experienced partner. We found that in Novus, which has been in the market since 1994 and manages a $2 billion portfolio, he says. Airlines looking for A380 equipment will find relief in Doric Lease, the Dublin-based lessor that was launched on 14 June, days before it signed a memorandum of understanding with Airbus for 20 units at the 2013 Paris air show. Doric Lease says the move to an Airbus A380 operating lessor allows the financier to reap benefits not afforded to it as an asset manager. However, the Offenbach, Germanyheadquartered Doric, which has a portfolio of 38 A380 aircraft valued at $7.8 billion, will independently maintain its asset management role. WIDER BENEFITS In many respects, it is an enhancement of what we have been doing... but this gives us benefits we didn t have access to before, says Paul Kent, chief commercial officer of Doric Lease. There are things I can do in this arrangement that I couldn t do in a sale and leaseback, he adds. There are certain risks I can invite the manufacturer to be part of, for example, that I couldn t achieve in a sale and leaseback agreement where the purchase agreement has been done with the airline before I even get to the table. Doric Lease expects its memorandum of understanding with Airbus to expand the A380 s operator base. Absolutely, this [the MOU] will [broaden the base]. It is a fundamental goal of what we are trying to do to expand the base, says Kent. He dispels a market myth that Doric Lease is involved in a sweetheart deal to front a 20-aircraft order for Emirates: That s absolutely not the purpose behind what we have done. Kent says he has some clear candidates in mind who have expressed interest in the A380 and are not of the existing operating base. Recent consolidation in the operating leasing market will favour airlines looking to expand their leased fleet in 2014. AerCap s purchase of ILFC in December will give the combined lessor greater financing options for purchasing aircraft and supporting future growth plans, says its chief executive Aengus Kelly. We expect the company to have deep access to all funding markets, says Kelly. Greater financial strength is a welcome sign for global airlines looking to increase their sale-and-leaseback financings to boost their internal cash positions. AerCap and ILFC have raised more than $39 billion of financing in the last several years, he says, many times the expected financing need of the combined company over the next few years. Although AerCap has avoided speculative aircraft orders recently, ILFC comes equipped with more than $20 billion in orders, including
percentage points from 2013. In terms of dollar funding, this translates into $28 billion worth of new deliveries, compared with $29.1 billion in 2013, estimates BCC. Back in 2010, commercial banks represented 24%, or $15 billion worth of annual deliveries. The market will absorb more widebody aircraft in 2014 key aircraft such as the Boeing 787 and Airbus A350.The transfer of ILFC s assets to Ireland as part of the purchase will produce a reduction in tax expense, and that should also help boost the combined lessors spending power on airline leasing. ADDITIONAL INVESTMENT Further aiding carriers in search of leasing is a joint venture signed between Aircastle and an affiliate of the Ontario Teachers Pension Plan, the largest single-profession pension plan in Canada. The deal, which was signed the same month of AerCap s purchase of ILFC, brings an additional $500 million to $1 billion of aircraft investments to the leasing market. Aircastle will source and service these investments. Already the joint venture has two Airbus A330 family aircraft that are on lease to Indonesian flag carrier, Garuda Indonesia. The agreement further strengthens Aircastle s capital structure, following the recent strategic investment in the lessor by Japan s Marubeni Corporation, its largest shareholder. Operators of used aircraft will finally have better luck in sourcing financing this year, after that end of the market experienced a dramatic reduction in funding as bank credit committees have preferred newer and lower-risk equipment following the financial crisis. In September, New York-based Fifth Street Finance created First Star Aviation to fill a gap in the funding market for mid-life and older aircraft that are being passed up by existing financiers. With larger banks and financial institutions scaling back on lending activities to older aircraft, we see an opportunity to fill a void in the under-served segments of the markets, says Pradeep Hathiramani, managing director of First Star Aviation. The lessor plans to grow its portfolio during the next few years through a disciplined and value-oriented investment approach. The rate of our growth will depend on market conditions and available transactions, he says. First Star will not target a specific aircraft size or type. Instead, each transaction will be evaluated for its returns on a risk-adjusted basis with appropriate diversification goals for the overall fleet portfolio, says Hathiramani. We think of the sector as an attractive place to deploy patient capital and capitalise on dislocation, he says. The rapid growth of the leasing industry is poised to continue, given the growing preference of leasing versus owning equipment by capitalconstrained carriers. The lessor has already completed the purchase of three Boeing 757 aircraft on lease to United Airlines. The three 1991-build aircraft will be managed by Kahala Aviation Leasing. Fifth Street provided First Star with debt and equity capital to finance the purchases. Airbus COMMERCIAL BANK LENDING Operating lessor Avolon expects commercial bank lending to continue as an important source of delivery financing, but with a more globalised profile. Direct bank lending will stabilise in a relatively narrow range around $30 billion per annum over the next 10 years, while market share will decline slowly from almost 30% to around 20%. Bank lending to lessors has considerable scope to increase within their total volume and bank ownership of leasing platforms will also expand further as an alternative route to growing balance-sheet exposure to the sector, says the lessor. European banks continue to play a vital role, despite having shored up reserves to meet tougher bank regulation capital rules. They have reinvented themselves as mandated lead arrangers in the marketplace and syndicated the debt to other banks. Realignment and balance are the words that best describe 2014 s aircraft financing environment KOSTYA ZOLOTUSKY Managing director of capital markets and leasing, BCC Last year brought the resurgence of secured lending from traditional aviation banks, while some Western banks re-entered the aircraft financing space in the second half of the year in an aggressive way. Liquidity is less of an issue now and they are keen to participate again as active lenders, says a financier. Existing regional banks upped their game last year and expanded their presence beyond local relationship lending. The eastward shift observed over the past few years in aircraft financing also comes as Asian carriers represent the largest proportions of new aircraft deliveries over the next two years. Chinese banks will continue supporting local deliveries in financing aircraft in yuan. The Chinese banks issue is dollar availability, says a financier. However, he forecasts
FINANCE & LEASING FUNDING that in the end they will finance aircraft in yuan with the airlines converting into dollar terms themselves. He also observes that Hong Kong-based banks are more open to cross-border transactions than their mainland counterparts. Avolon expects that more Asian banks will take equity as well as debt positions in commercial aircraft. However, most emerging financial markets will remain insufficiently developed to support the significant expansion of local bank engagement in aircraft financing, which is too often hampered by restrictive regulatory and fiscal constraints on capacity, term and interest rates, argues the lessor. A recent study from Avolon shows that leasing companies represented 35% of annual deliveries financing in 2012 and 2013. In 2014, lessors, including internal and external financing, will contribute to 38% of the market funding requirement. DIVERSE SOURCES Over a medium term, Avolon expects funding through the lessor channel to grow by more than 10% on average per annum. By the middle of the next decade, the share taken by leasing companies will reach 50% of new aircraft deliveries, argues Avolon. This will be achieved through a combination of capital supply and demand factors. Nevertheless, lessors continue to diversify their funding sources. In 2013, two leasing companies tapped the ABS market, while in the second half of the year, there were further unsecured debt issuances in the marketplace a further testament of the strength of capital markets for operating lessors. Matthew Little, vice-president of transportation and infrastructure at Goldman Sachs, thinks the recent unsecured deals by lessors are indicative of a few developments in the capital markets. He says that only a few years ago the spread differential between issuing unsecured, versus on a secured basis, was around 250 basis Issuers that come to market with a debut transaction only benefit over time due to the virtuous interaction with investors MATTHEW LITTLE Vice-president of transportation and infrastructure, Goldman Sachs points, but that yield has compressed to within 100 basis points depending on the issuer. Also, he says, lessors are benefiting from investors that are reaching for yield. Commercial banks $29bn Export credit agencies (regional jets) $3bn Export credit agencies (mainline jets) $24bn Cash $26bn Capital markets $25bn Lessors (self-fund) $10bn INDUSTRY DELIVERY FINANCING SOURCES: 2013-2014 Lessors (self-fund) $5bn SOURCE: Boeing SOURCE: Boeing $104bn 2013 total $112bn 2014 forecast He adds: The depth of access afforded in the unsecured markets is really a manifestation of investors searching for higher yield in an environment where it has been increasingly harder to find that. Issuers that come to market with a debut transaction only benefit over time due to the virtuous interaction with investors, notes Little: As you see more leasing companies access the capital market, it creates this virtuous circle environment where pricing tightens for issuers. FEWER RESTRICTIONS However, Leo Burrell, Credit Agricole-CIB notes that there are positives and negatives in the unsecured versus secured markets, and for this reason not all issuers are racing to do unsecured deals. He says: Part of the problem is that unsecured gives you the flexibility to trade assets Captial markets $15bn Tax equity $3bn Cash $26bn Tax equity $2bn Export credit agencies (mainline jets) $20bn Export credit agencies (regional jets) $2bn Commercial banks $28bn because there are less restrictions on specific assets, but on a negative side you have maturity walls you have to hit... My advice: get a balance of financings. Boeing Capital s Zolotusky says realignment and balance are the words that best describe 2014 s aircraft financing environment. He adds: We anticipate adequate financing at reasonable prices as the industry works to respond to balanced global customer demand and an accelerated replacement cycle resulting from higher fuel prices. We continue to watch how global monetary policies could potentially impact aircraft finance. However, we believe the industry is well positioned for the outcomes of inflation, higher interest rates, or a combination of both. Asset portfolios are excellent inflation hedges, and current all-in aircraft financing costs are at historical lows.
FINANCE & LEASING REMARKETING REPORT MAX KINGSLEY-JONES LONDON IMAGE REBOOT Attempts by Airbus to revive the fortunes of its A340 widebody highlight the pressures manufacturers can face with values of young second-hand aircraft As it battles for market share with Boeing in the new aircraft arena, Airbus is fighting a rearguard action to re-invigorate the market for what was once its flagship product, the A340. The manufacturer has rushed to the defence of the four-engined widebody which has been suffering from a poor image within in the investment community. Airbus and the A340 s engine suppliers Rolls-Royce and CFM International spent a day in London late last year seeking to convince the market that the A340 represents a good investment,as its operating economics are buffeted by high fuel prices and perceived high maintenance costs (of the -500/600 variants). Airbus s top salesman John Leahy was present to open the London event, highlighting how important the manufacturer viewed it. Over 100 delegates took part, including financiers, lessors, appraisers and brokers. Ironically, the Airbus initiative could also assist its rival Boeing, which is remarketing a number of A340s it is taking in trade. Airbus delivered 377 A340s between 1993 and 2012, including 246 CFM56-powered A340-200/300s and 131 R-R Trent 500-powered -500/600s. In all, 358 aircraft remain in existence, according to Flightglobal s Ascend Online database, of which around 300 are in operation. Much of the focus was on the largest model, the A340-600, of which there are 97 in existence and the oldest examples were only A340-500/600 CURRENT/ SHORT-TERM FORECAST Total fleet = 131 Flying 71.8% Flying operator change by 2017 19.8% Retired (2012/13) 0.8% Stored 7.6% SOURCE: Airbus delivered a decade ago. Major operators include Lufthansa (24 aircraft), Iberia (17), Virgin Atlantic (13) and Etihad (11). The fundamental problem Airbus and owners face with the A340-600 is highlighted by its value performance, compared with the 777-300ER. Rob Morris, head of advisory at Flightglobal s consultancy arm Ascend, says that a 10-year-old A340-600 has a current market value of $40.5 million 36% of its $112 million original new value. However, a A340-600 FUEL BURN/COST COMPARISON (HIGH DENSITY) MTOW Pax Fuel used (t) 777-300ER of a similar age is worth $83.5 million 73% of the $114.6 million value when new. On the standard 25-year-to-15% depreciation policy typically used by operating lessors, a 10-year-old aircraft should be at 66% of its original value. This sets the issue completely in context, he says. HIGH COSTS The high operating costs of the four-engined type, configured in a two-class layout with 359 seats, exacerbated by the spike in fuel prices in recent years has impacted the attractiveness of the A340-600 and that of its ultra-long-range sister the -500 to operators and investors. Airbus openly admits that the A340-600 has inferior operating economics to the 777-300ER, to the tune of 12% higher fuel burn per trip on a 4,000nm (7,400km) sector (assuming each is fitted with 475 seats). Boeing believes the deficit to be much greater, claiming that the 777-300ER burns 34% less fuel than the A340-600 on a per-seat basis. To mitigate against the fuel-burn deficit, R-R has developed its EP+ improvement package for Difference (t) Difference (%) Ownership costs ($k) ** Contribution to profit ($k) ** A340-600 368.0t 475 37.2 - - Baseline Baseline 777-400 397.0t 510 88.5 15 +20.9% -200-557 777-300ER* 350.2t 475 65.1 --8-11.1% +850-433 NOTES: Data for 4,000nm (7,400km) sector. Economics data for used aircraft except * 777-300ER (new) ** per month SOURCE: Airbus
partners to boost the A340 s market appeal. Reputations die hard, says one source. Observers point out that R-R s four for the price of two promise is nothing new, but Airbus is adamant that it is serious this time: Rolls is happy that they will be proven, not on their words, but on their actions, says Andreas Hermann, vice-president of freighters and A340 asset management at Airbus. Data released by Airbus shows 120 of the 131 A340-500/600s delivered are currently flying and 10 are in storage, while one has been retired. Of the operational fleet, Airbus expects 26 will change operator by 2017 (see graph). Lufthansa has the largest A340 fleet with 46 in service, including 24-600s (above) A340 ANNUAL DELIVERIES xxxx 35 30 25 20 15 10 5 0 1993 1994 1995 1996 1997 1998 SOURCE: Flightglobal's Ascend Online database 1999 2000 2001 2002 2003 2004 2005 2006 2007 200/300 500/600 Total deliveries = 377 2008 2009 2010 2011 2012 the Trent 500, which it says can save an airline up to $200,000 of fuel per aircraft per year. However, observers believe that the A340-500/600 s appeal can also be hampered by R-R s Total Care engine support programme, which has come in for criticism from lessors and financiers as it has implications for residual values. Airbus and R-R talked up the A340-600 by unveiling plans for a highdensity seating configuration and addressing criticism of high engine maintenance costs. Airbus aims to have a new exit limit of 475 passengers approved by the end of 2014, which will deliver a claimed 7% improvement in cash operating costs. R-R has pledged to adapt its Total Care programme to bring the cost per engine flight hour of four Trent 500s to the same or less than that of two older Trent 800 or General Electric GE90-94Bs engines that power Boeing 777-200ERs. During the presentation, Airbus cited a number of opportunities for the A340, including cost efficient capacity available short-term, replacement of other ageing aircraft and interim lift before the A350 XWB. But the jury is still out as to whether enough has been done to convince everyone that the aircraft is worth a second look. According to industry sources, there has not yet been a sufficient level of detail to enable a full assessment of the efforts by Airbus and its Airbus AVAILABILITY According to Airbus, there are 25 A340s available for sale or lease. Airbus is remarketing 16 of these. Ironically, rival Boeing will be looking to for homes for seven A340-500/600s, through trade-in deals. Ascend Online records 53 A340s currently in storage, including 32-200/300s and 21-500/600s. Several of A340-600 operators are in the process of retiring their aircraft, including Virgin which aims to have phased out its fleet by 2018. China Eastern Airlines is trading its five -600s to Boeing as part of 777 deal. With its proposed 475-seat version of the A340-600, Airbus sees a market to replace high-density Boeing 747-400s operated by charter operators, and also has the 777-300ER in its sights. Airbus claims that when fuel burn, ownership costs and other factors (such as maintenance costs and commonality benefits) are considered, the A340-600 s contribution to profit is $557,000 per month greater than the 747-400, and $433,000 better than the 777-300ER (see table). One thing is what the market could do and another is what it chooses to, says Ascend aviation analyst Maximo Gainza. He adds: The A340-600 may work beautifully in the high-density configuration being certificated this year, but realistically how broad is the appeal? Airline operators are Airbus s main focus as it seeks a home for five A340-600s it is remarketing. However, VIP customers are targeted for four ex-singapore Airlines A340-500s on its books. The type has proved popular with corporate operators, with some 16 aircraft serving in that role. It s image took a bit of a knock recently when president Tim Clark revealed that Emirates was phasing its 10 aircraft and parting out one. When we bought the -500, it was the only aeroplane that could fly nonstop to the west coast of the USA or the east coast of Australia, he said. Unfortunately for Airbus, nobody foresaw fuel doing what it did. Read Ascend s analysis of the market for cargo aircraft at: flightglobal.com/freightermarket
FINANCE & LEASING INSURANCE REPORT PAUL HAYES LONDON PREMIUM ECONOMY Improving safety standards around the world mean that airliner accident rates remain low, but 2013 might have been as good as it gets for aviation insurers Last year was another good period from the point of view of airline safety but, with incurred losses equalling written premium in the year, it was not so good for insurers. Flightglobal estimates that the cost of incurred airline hull and legal liability losses for 2013 was about $1.57 billion. This is some $530 million more than in 2012 and effectively equal to the estimated $1.60 billion of premium written during the year. Despite this, claims costs for 2013 could perhaps be described as average. It is rather that premiums are low, having fallen by almost 25% since the last high in 2010. The level of incurred claims should not have come as a surprise to the market, as it could have been predicted several months AIRLINE HULL AND LIABILITY CLAIMS COST AND PREMIUM $m 5,500 4,500 3,500 2,500 1,500 500 1993 1994 1995 1996 1997 1998 1999 Incurred losses NOTE: Data in then-year $ and excludes hull war and excess third party war losses. SOURCE: Flightglobal 2000 2001 2002 ago at least. However, this has not slowed the continuing collapse in airline insurance rates and premium income, with reductions still being given through to the end of the year. The question now is whether 2013 represents the bottom of the soft market. It is understood that there has been some resistance to further reductions for April renewals (there are few airline renewals during the first quarter) with pre-quotes as before ie, no increase but also no further reduction. But this may just mean that insurers that try to hold the line will end up writing less business. There is a lot of competition out there. With the soft market conditions and new insurance capacity still looking to gain market share, if there are no significant losses 2003 2004 2005 2006 2007 2008 Written premium 2009 2010 2011 2012 2013 we believe that rates and possibly premiums will continue to fall in 2014. Apart from anything else, if there are no significant losses, there s almost an expectation of further reductions from insurance buyers for risks that have gone clean during the year. Nevertheless, we do expect that 2014, even without a significant loss, will mark the end of the current general fall in premiums. But without a reduction in insurance capacity and/or a marked deterioration in the loss experience, there will be nothing to begin driving premiums and rates up again. REDUCED PREMIUMS With reduced premium income from the major airline programmes, established aviation insurers have been managing their books of business to attempt to maintain profitability. Insurers may reduce their line (the percentage of the risk they insure) or decline risks they think are just too cheap but there has also been a gradual reprofiling of the business they write: perhaps less exposure to major airlines but increased exposure to third and fourth tier airlines, products manufacturers and service providers and general aviation. The airline insurance market is traditionally described as cyclical with an eight- or nine-year cycle between premium income troughs. However, recent history has been distorted and totally dominated by the losses incurred as a result of the 9/11 terrorist 44 Airline Business January-February 2014 flightglobal.com/ab
THE EVOLUTION OF INSURANCE DEDUCTIBLES attacks and their impact on airline insurance premiums in the following years. If the incurred losses falling on airline policies for 9/11 are removed and the written premium figures are adjusted to reflect what they might have been if this event had never happened, then the numbers expressed in real terms (1990 $) reveal a different picture. The premium cycle is still there and not surprisingly, follows the loss cycle more or less but the overall long-term trend for both losses and premium is slightly downward. 2013 s position is slightly below the longterm trend for both premium and claims. The slope of the trend lines for both premium and losses is virtually identical, and shows a fall of between 10 and 15% in real terms for both over the last 20 years. Premiums exceed claims in this presentation but only just. In the long term, premium has been exceeding claims by only about 5% or 6%. Considering that, with low interest rates, there is nowadays only limited scope for insurers to generate investment income, a 5% or 6% margin is not enough to meet the running costs of the business, provide a reasonable return on the capital employed and, perhaps, make a small profit. It has been said that, as a rule of thumb, a margin of at least 20% is needed to meet running costs with any profit coming on top. Paul Hayes is director of air safety and insurance at Flightglobal s consultancy and data arm, Ascend Rex Features In airline all-risk hull and legal liability insurance policies it is normal for standard hull deductibles to be used if one of the aircraft insured under the policy is damaged, then the insured (the airline) will be responsible for paying the first part of the loss, the hull deductible. However, it is usual that, if the loss is settled as a total loss or constructive total loss, then the deductible will not apply and insurers will pay the full agreed value. Hull war policies do not have hull deductibles. Hull deductibles can be insured under a separate policy so, for instance, with a widebodied aircraft, a deductible insurance policy might cover a loss from $100,000 up to $1 million, with the hull policy picking up anything over $1 million so the insured would only pay the first $100,000. Not all airlines buy deductible insurance. In the 1960s and into the 1970s the normal flight deductible was 1% which, for a $10 million Boeing 707 or McDonnell Douglas DC-8, would be $100,000. However, the new big-fan engines powering the first widebodied aircraft, which began entering service at that time, had a poor claims experience: with a bad foreign object damage event maybe costing insurers $2 million, or 10% of the value of a $20 million Boeing 747. As a result a new engine ingestion deductible of $600,000 per engine, maximum any two engines (that is, $1.2 million) per event was introduced. Insurers remained concerned by the level of deductibles and in 1982 increased all deductibles to their current level (see table). By the end of the 1990s, with nearly 20 years of inflation having eroded the impact of deductibles, some insurers were again becoming concerned and work was done towards the objective of increasing deductibles substantially the new widebody deductible was to be set at $5 million. However, not all hull insurers supported this STANDARD HULL DEDUCTIBLES move, as they saw it as taking money (premium) out of their market and putting it into the hull deductible market. Then the 9/11 terrorist attacks happened and there were other things to worry about, so changing deductibles was forgotten. For jet types, the deductible groups were and presumably still are based on the engine fan inlet diameter, although it is unclear if the groupings have ever been formally defined in these terms. LARGE FANS This means that certain narrowbodies powered by engines with large fan diameters, such as the Airbus A320ceo and CFM International CFM56-powered Boeing 737 variants, are classed as hybrids. And bizarrely, because the Boeing 757 which has a narrowbody fuselage is powered by big-fan engines (Rolls-Royce RB211 and Pratt & Whitney PW2000), it is classed as a widebody from an insurance deductible perspective. Concorde also had a widebody deductible classification, presumably due to concerns over the potential cost of repairs to its sophisticated afterburning Olympus turbojets. The fact that the fan diameter of the CFM56-5C, which powers certain Airbus A340 widebodies, is 1.84m (72.3in) suggests that any aircraft powered by an engine with a fan diameter of at least this much should also fall into the widebody deductible grouping, regardless of fuselage diameter. Fan diameters for the new generation CFM Leap and P&W PW1000G are sufficiently wide to suggest that the aircraft they power will have a widebody deductible of $1 million (except the Leap 1B-powered 737 Max, which would be classed as a hybrid due its slightly narrower 1.75m fan). However, it is probable that insurers will categorise all these new generation narrowbodies as hybrids. Deductible group Amount Typical types Widebody jets $1,000,000 All widebodies but also Boeing 757 (and Concorde) Hybrid jets $750,000 Airbus A320ceo, Boeing 737-300 to -900, Boeing MD-80 Narrowbody jets $500,000 BAe 146, Boeing 737 (JT8D-powered), Fokker 100, MDC DC-9 Regional jets $250,000 * Bombardier CRJ, Embraer ERJ Turboprops (>50,000kg) $200,000 Lockheed Electra Turboprops (10,000-50,000kg) $100,000 ATR 42, Bombardier Dash 8 Turboprops (5,700-10,000kg) $50,000 BAe Jetstream, Embraer Brasilia Turboprops (<5,700kg) $25,000/1% of value ** De Havilland Twin Otter, Embraer Bandeirante * Value can vary ** Whichever is the greater flightglobal.com/ab January-February 2014 Airline Business 45