Airfinance Journal March/April 2018 March/April 2018 YOUR ESSENTIAL INTELLIGENCE RESOURCE FOR AVIATION FINANCE JACKSON SQUARE AVIATION CEO INTERVIEW SLB terms ‘are being eroded’ Jackson Square’s Toby Bright on airline pricing power, widebody transitions and OEM orders ISSUE no. 398 INVESTOR’SACCIPITER ON VIEW COMPETITION | JOL/JOLCO | SURVEY CIT TAKEOVER 2018 REGIONAL | INTREPID'S AIRCRAFT PLANNED SUPPLEMENT IPO LESS FUEL. F LY WE MAKE IT At 4000nm the A321LR has the biggest range of any new single aisle aircraft in the world. Not only is it capable of opening the door to the long-haul market, it can do so with an incredible 30% reduction in operating costs. But it’s not just designed to impress CFOs with unbeatable fuel ef ciency. It is available with our state-of-the-art Airspace cabins to give passengers unparalleled comfort too. Long-haul. We make it y. airbus.com Editor’s letter Adjusting for interest rate rises With interest rate rises on the way, lessors need to examine their rental contracts, writes Jack Dutton. n 27 February, the new chair of the Federal One of the biggest questions is how rate OReserve, Jerome Powell, gave his first speech rises will impact the new capital that has flowed in the post. Unlike many of President Trump’s into this sector over the past few years. Some LESS FUEL. choices for cabinet secretaries, Powell is not a of the industry’s sale-and-leaseback money controversial one. He is expected to follow Janet may not survive. New entrants will have capital Yellen’s footsteps and adopt a cautious interest expenditure targets and if better returns rate policy – the former Fed chief even describes materialise in other markets, they may deploy Powell as “part of the consensus”. their capital elsewhere. Even so, interest rates will probably rise several Financiers I speak to disagree slightly on the times over the next two years. Policymakers’ subject. Some believe most of the new money median forecast is for three quarter-point interest will leave aircraft finance, while others caution rate rises this year and two more in 2019. that the exodus will be smaller than expected. Although 2018 has not yet seen its first rise, If the new money is from economic investors many lessors are already realising the impacts hunting for value, they would likely leave the of higher rates in their aircraft rental contracts. sector if interest rates go up significantly. Steven Udvar-Házy, executive chairman of Air However, some financiers tell me that many Lease (ALC), said on a recent fourth-quarter of the new investors are deepening their earnings call that he sees increased costs across understanding of the sector, and are in it for the all forms of financing for airlines. long haul. “Whether it’s EETC [enhanced equipment trust That said, there is still a huge supply-demand certificates] or whatever financing structure, those imbalance in the sale-and-leaseback market and costs are going to go up,” he said. “Most of our interest rate rises may necessitate a correction customers are non-investment-grade credits, in lease rates. But that may be cancelled out and so we believe their interest rate cost will by higher returns attracting more players to the probably go up at a faster clip than ours will as an market. investment-grade company.” There are many factors that could impact John Plueger, ALC’s chief executive officer interest rates. One prominent example is and president, said on the same call: “We are President Trump’s recent tax reforms. US-based F LY delivering airplanes that have interest rate lessors and airlines have been vocal about how adjusters, so we’re seeing the impact of a rising Trump’s tax cuts have helped their businesses. WE MAKE IT rate environment show up today. We’re looking ALC enjoyed a $354 million benefit from the at higher interest rates, but fortunately we have December 2017 US tax reform legislation, At 4000nm the A321LR has the biggest the adjusters in our lease contracts for forward increasing the Los Angeles-based lessor’s net deliveries, which increase our lease rates as profit to $756 million for 2017. Spirit Airlines range of any new single aisle aircraft interest rates rise.” expects a $200 million income tax expense Understanding the impact of rising interest on reduction in the fourth quarter of 2017. Southwest in the world. Not only is it capable the aviation industry is not straightforward. Rate Airlines said the reforms will lead to further of opening the door to the long-haul increases are likely to result in more interest rate investment in the airline. adjusters, which alter lease rentals according These reforms could also impact the financing market, it can do so with an incredible to changes in interest. Once common in leases, strategies of US carriers. From 2018, up to 30% especially before the financial crash of 2008 when of a company’s Ebitda (earnings before interest, 30% reduction in operating costs. rates were more volatile, such adjusters all but taxes, depreciation and amortisation) can be But it’s not just designed to impress disappeared after interest flat-lined at a record deducted as interest expenses. There is no low. However, if leasing companies continue to cap on interest expense deductions for lease CFOs with unbeatable fuel ef ciency. provide fixed-rate leases rather than ones with rentals, so this makes leasing more attractive adjusters, airlines will likely find these attractive than financing for US airlines. However, there is It is available with our state-of-the-art compared with bank financing. also another US tax law change that provides Airspace cabins to give passengers Will increases in interest rates impact aircraft for up to 100% bonus depreciation, which values? Many financiers think rises could bring encourages investment and makes purchasing unparalleled comfort too. values down. Higher interest rates are likely to aircraft attractive to airlines. US carriers will lead to higher discount factors on aircraft, and need to weigh both of these tax law changes to Long-haul. We make it y. discounting cash flows by a higher amount can determine whether to lease or finance. decrease the value of an aircraft. Although Trump’s tax cuts, along with $1.5 Higher rates will disadvantage most businesses trillion in infrastructure spending, are expected to in this segment except banks and noteholders. boost the US economy in the short term, they will JACK DUTTON However, debt margins are low for airlines right also escalate the budget deficit. Such policies will Editor, now and many of them should be able to absorb make matters more complicated for Powell and Airfinance Journal the impact of a few slight rate rises. the Fed when reviewing interest rates. [email protected] airbus.com www.airfinancejournal.com 3 Contents Cover story News analysis Sale-and-leaseback terms ‘are being How will AFIC impact Deal focus: Comsys arranges A380 eroded’ 12 the market? 13 refinancing for Veling’s ‘east meets Toby Bright, chief executive officer of Jack Dutton explores the west’ deal Jackson Square Aviation, waxes lyrical implications of the new insurance With large order backlogs, carriers such as Emirates are with Jack Dutton about how airline-pricing product and whether it is likely constantly looking for new and innovative ways to finance power is changing and a potential order to have a material impact on the aircraft. Michael Allen examines a recent deal the airline from the San Francisco-based lessor. market. closed with Veling and Chinese lessor Comsys. Features 16 PAL taps local and Chinese lessors opt for Jolcos 14 international financing 28 Philippine Airlines’ senior management tells Airfinance Journal’s annual Jol and Jolco survey Michael Allen its financing plans for the 15 found that the Boeing 787-9 was popular among aircraft the carrier will take delivery of this financiers. Chinese lessors are warming to the year. Jolco because they can obtain a high percentage of financing and banks are often willing to lend Investor’s view higher loan-to-values on these transactions. 19 Michael Allen and Mike Duff report. Keith Allman, vice-president, senior Aircraft profile: A320 People news securitised asset analyst at investment 31 5 company Loomis, Sayles & Company, speaks to Jack Dutton about why equity investors Aircraft comparison News analysis often know more about the price of assets 33 and why the configuration of an aircraft could 737 Max, 737-900ER, A321neo and A321 Boost for A380 but for how make or break an investment. Data 8 long? 35 Appraiser interviews: Airbus The Airbus superjumbo managed to secure Pilarski its first order since 2015 from Emirates in 22backing will boost CSeries 38 February, but will it be enough to ensure the Olivier Bonnassies speaks to seven long-term future of the programme? appraisal firms about their outlook for 39 Regional aircraft 2018 aviation finance this year. Labour issues ‘will not impact’ Regional aircraft news 10 Ryanair’s business model View from Singapore: Bees on 40 The Irish low-cost carrier has had a lot to 24 Honey ATR profile answer to since it cancelled thousands of Michael Allen, who attended the Singapore 41 flights in September. Analysts tell Jack Dutton air show in February, asks the market about Bombardier profile about the effect of ongoing labour issues on the country’s status as a leasing centre and 43 the airline’s business plan.. the latest developments with HNA Group. 45 Embraer profile Bocomm Leasing places ex-Air Sponsored editorial: Getting Mitsubishi profile 11 Berlin aircraft 26 the right Spec 47 Li Ling, the Chinese company’s managing Christian Kabbas, a senior at Fairfield Manufacturers continue to director, aviation, tells Michael Allen about its University in Fairfield, Connecticut, looks at 48 open new markets exposure to HNA-linked carriers and the influx how ATA Spec 2500 will change the transfer Regional OEMs are finding new operators of leasing newcomers entering the market.