Aircraft Leasing in Latin America Phil Seymour, CEO, IBA September 2016 How secure is your aircraft portfolio in the region? Latin America aircraft market size and scale How much movement is there for a portfolio in Latin America? How are airlines rethinking their fleet planning and coping with the recession? phil.seymour@ibagroup.com
Enhancing Decision Making Full service Data, asset management, technical advisory Independent No vested interest in a deal progressing or in placating advertisers No conflict in treatment of assets under management or for sale Diversified talent pool Imaginative solution finding from a breadth of backgrounds Exclusive data Unique access to critical data and intelligence EXIT IPO readiness DD on prospective buyer Sell side advisory ADDRESSING ISSUES SELECTION Portfolio monitoring & analysis Early warning of concerns Litigation & dispute support Target intelligence Market entry Competitive intelligence 4. EXIT 1. IDENTIFICATION 3. BUILDING VALUE 2. AQUISITION OPPORTUNITY Asset DD & values Competitor analysis Key stakeholder DD Benchmarking THE DEAL Negotiation Critical factors Risk assessment RUNNING THE ASSET Maintenance reserves and DOC analysis Costs management Technical & regulatory advisory Redelivery planning Regular reporting around fleets & values
Latin America Market Size and Scale Twin Aisle 120 The growth of airlines, the increase in absolute numbers of aircraft has been made possible with leased aircraft, more so than any other region, on average the leased twin aisle fleet is over 70% (global average is 35-40%) Latin America Twin Aisle Leased Fleet using IBA JetData 100 80 60 40 20 0 A300 A330 A340 A350 747 767 777 787 Leased 4 35 12 2 1 40 16 24 Owned 5 4 2 18 1 16 Total 9 39 12 4 1 58 17 40 Leased %age 44 90 100 50 100 69 94 60
Latin America Market Size and Scale Single Aisle 600 The single aisle market is closer to the norm being an average of just over 50%, however focussing on the 737/A320 sector that is also running at above the global leased fleet average Latin America Single Aisle Leased Fleet - using IBA JetData 500 400 300 200 100 0 A320 146 737 757 CRJ 328Jet E-Jet ERJ-145 Fokker 70/100 MD-80/90 Sukhoi SSJ 100 Leased 394 12 302 7 23 2 135 36 11 17 Owned 174 18 106 2 3 3 86 60 4 31 22 Total 568 30 408 9 26 5 221 96 15 48 22 %age leased 69 40 74 78 88 40 61 38 73 35 0
Latin America Market Size and Scale Commuter Commuter, if adjusted, to weight towards the largest fleet (ATR) it indicates a higher than average leased fleet compared to other regions 160 Latin America Commuter Leased Fleet - using IBA JetData 140 120 100 80 60 40 20 0 ATR42/72 Jetstream 41 DHC8 328 Leased 90 4 4 2 Owned 52 9 8 2 Total 142 13 12 4 %age leased 63 31 33 50 Leased Owned Total %age leased
It is not surprising then that there is particular focus on this region by the lessors Some history Aerolineas Argentinas Varig Lessors felt exposed Huge costs for lessors Local Courts not helpful to lessors Overseas lessors gave up Changes that helped The economies/politics - good long term promising Short term challenges GDP/Air Traffic - Growth/Travel Cape Town Local Courts more helpful New Investor understanding Current difficulties being well managed lessors more willing to work through or work out
Coping with the recession still plenty of upside. Fleet Planning: $2/5m Mission/Sector/Payload Flexibility/Options Buy/Lease Crew Commonality Maint Support Options Maintenance Costs $1/2.5m How do you compare? OEM Data v Real World Environment/Operational Impact Reserves v Costs variances MPD v Contractual Warranties and Provisions $1/2.5m Management of claims Lack of airline focus Process driven Millions available and unclaimed AD cost sharing Transition Management $1.7/3.9m Extend or Return Analysis Early Engagement Key issues revisited Improvement Initiatives
Show me the money Potential savings for a fleet of 76: $317m Typical operating profit for a 76 aircraft airline: $175m easy to slide into loss Engines Rotables Fuselage Landing Gear Interior Avionics Fleet Planning X X X X Warranties and Provisions X X X X X Maintanance costs X X Redeliveries X X Cashflow critical, savings can smooth the seasonality curve Fleet size: 76 Redelivery Ratio 10% Widebody multiplier 2.5 Narrow/Wide redelivery ($m) 1.7 3.9 Potential savings across ($m): Narrow Total ($m) Wide Total ($m) Fleet Planning 152 380 Warranties and Provisions 76 190 Maintenance costs 76 190 Redeliveries 13 30 sub total 317 790 16 14 12 10 8 6 4 2 0 Potential saving per aircraft ($m) Savings per narrow savings per wide Fleet Planning Warranties and Provisions Maintenance costs Redeliveries
In more detail Fleet planning Fleet Planning: $2/5m Mission/Sector/Payload What is the current and future network? Alliances/Regulatory/Distribution Are the sales pitches from OEM independently verifiable? Flexibility/Options Agree costs of upgrades even if not chosen Buy or Lease? Operational versus financial benefits Not an all or nothing decision. Lease equals flexibility? Carefully review a great deal on a less popular aircraft Crew Commonality Consider the potential for up/down scaling Maintenance Support Options - Don t have the OEM as your only source - Regional Considerations : In-house v Outsourcing It isn t just about the lease rate or purchase price lease rate/price fuel burn weight 8 7 6 5 4 3 2 1 0 range age Average Aircraft 1 Aircraft 2 maintenance costs
In more detail Maintenance costs Maintenance Costs $1/2.5m How do you compare? OEM Data v Real World Environment/Operational Impact Reserves v Costs variances MPD v Contractual In-house/Outsourcing Engines/High Cost Rotables Direct maintenance costs by airline Source: IATA
In more detail Maintenance costs Maintenance Costs $1/2.5m How do you compare? OEM Data v Real World Environment/Operational Impact Reserves v Costs variances MPD v Contractual In-house/Outsourcing Engines/High Cost Rotables Optimise, don t cut. At IBA we talk of cost optimisation rather than cost cutting. Cost cutting is easy to do but difficult to reverse. We have seen more thanone airline go to an outsourcing model only to find after two years that it was not a good experience. By that time it had lost an experienced workforce, had sold vital tooling and equipment, lost accreditation and approvals. More importantly it had also lost its reputation for a great on-time fleet network. In theory it has cut millions of dollars of costs. In practice it lost many more millions over time. Source: IATA
In more detail Warranties and provisions Warranties and Provisions $1/2.5m Creeping costs, under the radar Management of claims Lack of airline focus - falling between the cracks Process driven AD cost sharing Maintenance Reserves Millions available and unclaimed Finance Keep to budget Get costs fixed Create supplier competitiveness the maintenance guys always bust the budget (spend too much) get the OEM to be aligned with our interests Line Maint. Keep it safe Get it fixed Get it out maintenance costs are difficult to predict so I always overestimate but am told its too high the OEM cost estimates are not adequate
In more detail Warranties and provisions Boeing Data: Rates are based on percentage of sales 2011 to 2012 included provision for 787 claims Using the following as assumptions: 737NG @ 48mUSD and 777-300ER @ 160mUSD Average provision is circa 240KUSD for each 737NG and 800KUSD for each 777 Are you claiming? Procedures? Training?
In more detail - Transition Management Transition Management $1.7/3.9m Extend or Return Analysis Early Engagement Key issues revisited Improvement Initiatives Engines General Components Fuselage, windows and doors Landing gear Corrosion Interior and carpet APU Wings & Empennage - 200,000 400,000 600,000