Airfinance Journal February/March 2017 February/March 2017
YOUR ESSENTIAL INTELLIGENCE RESOURCE FOR AVIATION FINANCE NORTH AFRICA’S SHIFTING SANDS
North Africa’s shifting sands Will the local carriers overcome the challenges in the region? ISSUE no. 392
DENIS KALSCHEUR INTERVIEW | NEW NAMES IN KOREA | REGIONAL AIRCRAFT SUPPLEMENT The fl exibility to fl y as many cycles as you want, to the destinations you want, as often as you want. LEAP. The architecture of reliability.
cfmaeroengines.com CFM International is a 50/50 joint company between GE and Safran Aircraft Engines
PERFORMANCE | EXECUTION | TECHNOLOGY MORE TO BELIEVE IN
C38142.012_CFM_UTILIZATION_AirFinanceJnlLGS_Sep16_285x210_v1.indd 1 22/09/2016 11:52 Editor’s letter
Quick-learning Korean investors and factors African carriers need to be wary of Jack Dutton outlines plans for the Inaugural Korea Airfinance Conference in March, and compares and contrasts two state-owned African carriers.
he next two months are busy ones for the government owned, but have di erent business TAirfinance Journal team, with our second models. Africa Airfinance Conference in Johannesburg in In its latest financial performance report, February, as well as our Inaugural Korea Airfinance Ethiopian Airlines reported an increase of 12% Conference in Seoul in March. in operating profit, making Br3.53 billion ($156 The Korean event will focus on domestic banks, million) in 2015 compared with Br3.15 billion in 2014. institutional investors, security firms and asset The airline registered a 6% growth in revenue managers to explore new structures and trends in passenger tra c from a 7% capacity increase dealmaking. Being relatively new to the aviation in available seat kilometres. The carrier’s cargo finance market, Korean investors have traditionally business increased its capacity by 25%, which focused on the top-tier credits, but sources say resulted in a 34% growth in tra c. that, as these investors become more educated South African Airways, on the other hand, with the assets, they are likely to start financing refused to post its financial results for the year lower-tier credits. Michael Allen, our Asia-based ending 31 March 2015 until September 2016. The senior reporter, speaks to financiers who work in airline declared a R4.69 billion ($330 million) loss the region on page 16. for that year and has not posted a profit since the The Africa conference will focus on the airlines 2011 financial year, when it made $54.5 million after and lessors which work in the region rather than tax, according to The Airline Analyst. The carrier is the domestic investors. At a glance, the outlook surviving on state-guaranteed loans and last year it for the continent looks fairly positive: Africa’s suspended several senior sta , including its former gross domestic product (GDP) has been growing acting chief executive o cer, Thuli Mpshe, and consistently for the past 20 years, outperforming airline treasurer, Cynthia Stimpel. the global economy, according to the African With Ethiopian Airlines, the local government is at Development Bank Statistics Department. The arm’s length from the airline’s management, leaving department anticipates this continuing, projecting a the executive management to make the majority of GDP growth of 4.5% in 2017. the key decisions in running the airline. However, Yet despite these promising signs, the carriers with South African Airways, its management is ever in Africa have had varying success. Factors such changing and often the major decisions are made as the state of the local economy, the geopolitical by close allies of Jacob Zuma, the South African climate, the role of the government in an airline’s president. In this case, government intervention has strategy and competition from foreign carriers all hindered the progress of a carrier. The fl exibility to fl y as many cycles as you want, to the destinations have potential to turn a carrier that was once a According to Airfinance Journal’s Fleet Tracker, success story into a financial basket case. 671 regional aircraft operate in Africa, making up you want, as often as you want. LEAP. The architecture of reliability. On page 32 in our cover story, we focus on 7% of the global regional fleet. Africa is a continent North Africa, speaking to Royal Air Maroc (RAM) that relies heavily on regional connectivity and cfmaeroengines.com about operating in a region where there is a this number has the potential to increase hugely. lot of competition from the likes of easyJet and But because of poor infrastructure and regulatory CFM International is a 50/50 joint company between GE and Safran Aircraft Engines Ryanair. Because of recent terrorist attacks in constraints, often, to fly from one African country to other countries in the region, there has been a another, passengers need to fly out of Africa and slight decrease in tourist tra c into Morocco from connect to a flight in Europe or the Middle East – Europe. However, because of this, RAM says it which is hardly practical. There is a lot of potential has experienced less competition from low-cost for African carriers to expand intra-regional carriers in the region over the past year. networks through acquiring regional aircraft. Many of the main airlines in Africa are And investors in regional aircraft should look no government owned. This can be polarising: some further. This edition includes Airfinance Journal’s see government ownership as a hindrance, while first regional aircraft supplement, which provides others see it as something that adds stability to an data from Fleet Tracker on the global regional JACK DUTTON airline. Take two very di erent cases in Ethiopian aircraft fleet, as well as info on lease rates on the Editor, Airlines and South African Airlines. Both are 50-seat regional aircraft market. Airfinance Journal PERFORMANCE | EXECUTION | TECHNOLOGY MORE TO BELIEVE IN
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C38142.012_CFM_UTILIZATION_AirFinanceJnlLGS_Sep16_285x210_v1.indd 1 22/09/2016 11:52 Contents
Cover Story Analysis and Interviews Airline interview: Denis Kalscheur interview: North Africa: Headwinds 12 Transformation of Air Baltic 26 A career at the top hold back carriers Jack Dutton speaks to Martin Gauss, the Denis Kalscheur, Aviation Capital Group’s Latvian airline’s chief executive o cer, about former chief executive o cer, left the company North African airlines have faced a the carrier’s plans to streamline its fleet and at the end of 2016. Joe Kavanagh caught the future of the CSeries programme. up with him at the 19th Annual Airfinance number of challenges in recent times, Conference in Dublin to hear about some including a dearth of export credit career highlights, his final months at ACG and financing, geopolitical instability and View From Dublin his new role at Avolon. several terrorist attacks. Jack Dutton 14 investigates. Joe Kavanagh provides a roundup of the Cautious confidence in the biggest stories from the 19th Global Airfinance 28 post-Kingfisher era Conference in Dublin. Michael Allen explores how recent legal and infrastructural developments in the Indian New names and narrowbodies leasing market are helping repair the country’s 22 for Korean investors damaged reputation after the disastrous 16 collapse of Kingfisher Airlines in 2012. In the run-up to the Inaugural Korea Airfinance Conference in Seoul on 23-24 March, Michael Changing composition of Allen examines how Korean investors are financing sources in aviation getting savvier with their investments in 31 aircraft, gaining the courage to branch out into David Yu, Istat certified aviation appraiser, narrowbodies, as well as lesser credit airlines. examines trends in the aviation finance sector driven by the role of insurance companies and commercial banks. Lessor interview: Chorus takes 19 on the regional market Aircraft profile: 777-300ER Chorus’ new leasing subsidiary was established in January with funding from a 34 Canadian insurance company. It plans to The current widebody market is a di cult one carve out a space in the regional leasing and not even Boeing’s most successful twin- market. Joe Kavanagh speaks with its aisle is immune to declining values, according to appraisers. president, Steven Ridolfi, about his plans for the year ahead. Aircraft comparison: Fighting old battles Deal focus: Alaska’s strong 36 profile improves merger The success of the A320neo and 737 Max families will determine the positions of Airbus 21 prospects News and Boeing in the narrowbody market, but the Joe Kavanagh examines the North American relative merits of the manufacturers’ previous- carrier’s financial position after closing its $2.6 generation single-aisle models will be of People News million takeover of Virgin America in December. interest to owners and operators for years to 4 come. Geo Hearn looks at how the A320- Why lessors will continue 200 and 737-800 match up. 24 to consolidate Data The aviation leasing sector will continue to face News Analysis 39 further consolidation following the purchase of 6 CIT Aerospace by Avolon and its Bohai Leasing Pilarski parent group, say lessor sources. 42
Editor Managing director Managing director, The Ariline Analyst Printed in the UK by Buxton Press, Buxton, Jack Dutton Olivier Bonnassies Mike Du Derbyshire. +44(0)20 7779 8734 +44 (0)207 779 8062 +44 (0)20 7779 8058 [email protected] [email protected] mdu @theairlineanalyst.com No part of this magazine can be reproduced without the written permission of the Senior reporter Divisional director Group sub editor Publisher. The Airfinance Journal Ltd. Joe Kavanagh Danny Williams Registered in the United Kingdom 1432333 Peter Styles Wilson +1 212 224 3477 (ISSN 0143-2257). [email protected] Production editor Advertisement manager Tim Huxford (USPS No: 022-554) is a full service business Senior reporter Chris Gardner website and e-news facility with printed Michael Allen +44 (0)20 7779 8231 Subscriptions / Conferences Hotline supplements by Euromoney Institutional +852 2842 6941 [email protected] +44 (0)20 7779 8999 / +1 212 224 3570 Investor PLC . [email protected] [email protected] Head of subscription sales Although Euromoney Institutional Investor Consulting editor Chris Welding Customer Services PLC has made every e ort to ensure the Geo Hearn T: +44 (0) 207 779 8015 +44 (0)20 7779 8610 accuracy of this publication, neither it 8 Bouverie Street, London, EC4Y 8AX +44 (0)20 7779 8853 [email protected] nor any contributor can accept any legal geo [email protected] responsibility for consequences that may Directors: John Botts (Chairman), Andrew arise from errors or omissions or any Senior marketing executive Managing director Rashbass (CEO), Sir Patrick Sergeant, The opinions or advice given. This publication Sam Fairburn Laura Mueller Viscount Rothermere, Colin Jones, is not a substitute for specific professional +44(0) 20 7779 8257 +44 (0)207 779 8278 Paul Zwillenberg, David Pritchard, Andrew advice on deals. ©Euromoney Institutional [email protected] [email protected] Ballingal, Tristan Hillgarth Investor 2013
4 Airfinance Journal February/March 2017 People News
BOC Aviation’s Fabian to lead Elix Aviation rish-based turboprop lessor Elix Aviation company’s next growth phase through their ICapital has appointed Volker Fabian as its new mandates at the company’s board new chief executive o cer, starting 1 March of directors. The current deputy chief 2017. Fabian, who has more than has 20 executive o cer and chief Investment years’ experience in aviation finance and o cer Carousos has been promoted to leasing, replaces Antonis Simigdalas, who the board of directors where he will serve stepped up to the role of chairman. as executive director with responsibility for Fabian joins from BOC Aviation where strategy, risk, and finance. he had been executive vice president of “Volker is a strong leader, and brings a airline leasing and sales for the Europe and wealth of experience from the leasing and Africa region since May 2015. aircraft-finance markets. I look forward to Previously, he served as chief working closely with him as Elix continues commercial o cer of Intrepid Aviation for its journey towards further successes. I am three years. also delighted that Emmanuel Carousos will Elix Aviation Capital also announced that join us on the board of directors where his ex-co founders Antonis Simigdalas and insight and expertise will be of benefit to all Emmanuel Carousos will be supporting the Volker Fabian, CEO, Elix Aviation Capital of us,” says Simigdalas.
employed in senior commercial positions been finalised, though Airfinance Journal Ex-ACG CEO joins at BMW Rolls-Royce, Lufthansa Technik understands that Gao is likely to base as well as being managing director at himself in either China or Hong Kong. Avolon board Nordcapital Aviation. The company’s Dublin o ce, which was His experience covers the full spectrum established in December 2016, will do most volon has appointed ex-Aviation of technical, commercial and capital of the leasing, but CMIG also intends to ACapital Group’s chief executive o cer markets and he has dealt extensively with establish a Hong Kong platform. (CEO) and chairman Denis Kalscheur as the senior management of airlines, lessors, CMIG Aviation Capital is a liated with a non-executive director of its board. banks, aircraft investors and closed-end China Minsheng Investment Group (CMIG), Kalscheur joined the US-based lessor funds globally. a Beijing-based company which owns in January 2013. In December 2015, Huijbers will be based in the CALS Shanghai-based CMIG Leasing in Shanghai. he stepped down from the CEO role headquarters in Shanghai. and assumed the role of vice chairman. Avolon has also appointed two other non-executive directors to its board. The ALAFCO hires first appointment is Joe Nellis, managing CMIG Aviation Capital Aengus Whelan director of the business development makes senior hires team at GE Capital, which oversaw the perating lessor ALAFCO has hired signing and closing of nearly $200 billion MIG Aviation Capital, the Dublin OAengus Whelan as the head of trading, of transactions in a 24 month period as part o ce of Chinese leasing company of beginning in January. of GE’s transition to a more focused, digital C CMIG Leasing, has expanded its platform, Whelan previously served ten years as industrial company. the executive director of aviation finance at sources indicate. The second appointment is Ciarán Standard Chartered Bank in Dublin. Sixiang Gao (Peter Gao), former Bocomm ÓhÓgartaigh, professor of accounting and The Kuwait-based lessor told Airfinance Leasing deputy GM aviation, has been Dean of University College Dublin College Journal in September that it was looking to named as president and chief executive of Business. He has been published in hire more sta in Dublin, after it appointed o cer. international peer-reviewed journals on Jane O’Callaghan as chief commercial Luo Le, former director/senior vice- audit and accounting matters and he also o cer to head the o ce in August. president marketing of Bocomm’s Irish serves on a number of audit committees The lessor is also in the market taking company JY Aviation Leasing, has joined including the Audit Committee of Ireland’s bids on a mixed portfolio of narrowbody as managing director marketing. JY department of finance. aircraft with leases attached, sources Aviation has not yet hired a replacement indicate. for Luo Le, but plans to do so as well as ALAFCO, which recently boosted it make additional hires to expand the team, credit line by $50 million with a local Huijbers joins CALS as CEO sources say. lender, is excepting proposals on an 11-unit Huang Zheng, former managing director portfolio, including five Boeing 737-800s hina International Aviation Leasing and head of aviation at Ping An Leasing, on lease to Turkish Airlines through 2018, CService (CALS) has appointed Peter has been hired as executive vice president and two Boeing 737-900ERs with Ukraine Huijbers as its new chief executive o cer. and chief operating o cer. Joe Tian Ye, International Airlines. Further representatives from CALS Ping An Leasing’s deputy head of aviation, The 737-900ERs, which have leases executive team are chairman Jiedong has been promoted to head of aviation. running through 2021, carry the longest Min, executive o cer Mr. Li and general Yiping Ke, senior trading manager, lease terms in the portfolio, say sources. manager and chief economist Dr. Wang. aviation at Bocomm Leasing, has also The portfolio also includes two Airbus Huijbers was most recently the head of joined the team. Sources could not confirm A320s with VietJet, another A320 with marketing at Hong Kong Aviation Capital. his role at the time of publication. Royal Jordanian and a single A320 with He has over 30 years aviation industry Luo Le will be based in Dublin. The IndiGo. The lessor was not available for experience, and prior to HKAC was positions of the other three have not yet comment at time of publication.
www.airfinancejournal.com 5 People News
Bombardier: Buchholz moves to Clyde & Co SVP strategic initiative role hires aviation ombardier has announced that its chief September 2015 and served as the Bprocurement o cer Nico Buchholz company’s chief procurement o cer, partner will move to the position of senior vice has been instrumental in establishing a president, strategic initiatives with more centralised, focused and e cient aw firm Clyde & Co has hired Robert immediate e ect. procurement organisation,” said Alain LLawson as a partner in its aviation group. Jim Vounassis will assume the chief Bellemare, president and chief executive Lawson joins Clyde & Co from Quadrant procurement o cer responsibilities o cer, Bombardier. Chambers where he has a general in addition to continuing to lead the Before joining the Canadian commercial and common law practice, with company’s operations transformation as manufacturer, Buchholz worked at particular emphasis on aviation law. Bombardier’s chief transformation o cer Lufthansa for 14 years, most recently The firm called the hiring “a rare and procurement o cer. as executive vice president of fleet lateral move from the senior ranks of the “Nico, who joined Bombardier in management. independent bar”. Jazeera Airways K&L Gates hires two partners names new CEO &L Gates has hired two aviation finance businesses across the globe, primarily on Kpartners to work in the firm’s London secured debt and leasing matters. o ce, Airfinance Journal understands. Tony Gri ths, administrative partner of uwaiti airline Jazeera Airways has The new partners, Philip Perrotta and K&L Gates’ London o ce, says: “With air Knamed Rohit Ramachandran as its new Sidanth Rajagopal, will be joining the tra c forecast to grow at 4.5% annually chief executive o cer (CEO). firm from Arnold & Porter Kaye Scholer. over the next 20 years, we expect there Jazeera Airways Group chairman Rajagopal was a partner at the firm to be significant demand for passenger Marwan Boodai stepped up to serve as and Perrotta headed the firm’s aviation — and, indeed, other types of — aircraft the CEO in 2013 when the previous chief finance and leasing practice and served in a wide variety of aviation markets Stefan Pichler resigned in order to head up as managing partner of legacy firm Kaye around the globe and, consequently, the Fiji Airways. Scholer’s London o ce. legal advice and business know-how Ramachandran brings 20 years of They are accompanied in their move surrounding the acquisition and leasing aviation experience to the role, having by a team of associates. Perrotta and of these assets and related matters worked at airlines including KLM, Singapore Rajagopal, as a team, have concluded resulting from that trend. With the arrival Airlines and more recently Air Arabia and hundreds of transactions and projects of this group, we are delighted to add its joint ventures and subsidiaries. involving commercial and business aircraft, the experience and capabilities of one According to Airfinance Journal’s Fleet aero engines, and other aviation assets of the leading aviation finance teams, Tracker, the airline operates a fleet of around the world. They act for aircraft representing the ideal fit for our existing seven Airbus A320s, manufactured in 2015 lenders, lessors, operators, and aviation global practice.” and 2016. In the third quarter of 2016, the latest quarter for which the airline’s financial results are available, the airline generated $62.3 million in total revenue, resulting in $20 million of net income, according to data collected by The Airline Analyst. Earnings before interest, tax, depreciation, amortization and rent (EBITDAR) totalled $37.8 million, with an EBITDAR margin (EBITDAR/total revenue) of 49.3%. Philip Perrotta, partner, K&L Gates Sidanth Rajagopal, partner, K&L Gates
director and chairman of CALC. In a listing on the Stock Exchange of Hong Calc reappoints stock exchange filing, CALC said this Kong in 2014, which made the Group the arrangement will alleviate Chen’s first listed aircraft lessor in Asia.” workload and raise the level of CALC’s Poon is also the founder of Friedmann Poon as CEO corporate governance. Pacific Asset Management (FPAM), which Poon founded CALC in March 2006 is a major shareholder in CALC. ike Poon Ho Man, the founder and and was the former CEO and executive In addition, he founded China Airport Mformer chief executive o cer (CEO) director until his resignation took e ect Synergy Investment in 2014, which and executive director of Hong Kong from 18 June 2015. acquired Toulouse-Blagnac Airport in the lessor China Aircraft Leasing Group “He played an instrumental role in first deal involving a Chinese consortium Holdings (CALC), has been reappointed as developing the Group into the largest purchasing an overseas airport. chief of the lessor. independent aircraft lessor in China and He also initiated Aircraft Recycling The company’s former chairman, Chen one of the leading global players in the International (ARI) in 2014 and its aircraft Shuang, stepped down as CEO on 19 aviation industry,” CALC says. disassembly project in China in 2015. January, but will remain as executive “He was the key driver of the company’s
6 Airfinance Journal February/March 2017 News analysis
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Floreat targets $132m securitisation at aviation loreat Group is embarking on a December. The aircraft is on lease to Virgin We have previously Fsecuritisation programme focused Australia through April 2025. on the aviation sector to provide long A second A330-200, MSN 1310, was funded individual term fixed income investments to their acquired from Avolon. The aircraft is on institutional and high net worth clients. lease to Hawaiian Airlines through May transactions in the aviation The company tapped the commercial 2024. paper market late in December to raise a One A330-300, MSN 1518, was acquired space to satisfy the total of $132 million. from Intrepid in late December. The aircraft demand from our core The eight-year notes were issued by is on lease to Asiana Airlines through April a Luxembourg securitisation vehicle on 2026. clients for long term income 21 December and were listed on the The three aircraft acquisition closed on Euro MTF market of the Luxembourg 30 December. producing transactions Stock Exchange. Part of the notes will be Floreat plans to aquire a fourth aircraft secured by real assets. structured as being Sharia compliant for as Airfinance Journal went to press. The Floreat’s Middle Eastern investors. financing of the A330-200, MSN 904, is Ben Churchill, partner, Floreat Capital The notes, which were issued by Floreat subject to further notes issuance, according Markets. Fixed Income, carried a 7% coupon and to the company’s o ering circular. mature on 23 December 2024. Floreat Aviation is due to decide whether The notes, which are in denomination to issue further notes in the amount of respect of its Floreat Aviation Notes Series of $1,000 each, were sold to non-retail $26.2 million to invest in the net issue B and by the payment of an amount of $9.7 investors. proceeds in the indirect acquisition of the million in cash to the issuer. The series A notes totalled $51 million, 2008-vintage aircraft acquired from TAP “We have previously funded individual while the series B were issued in the Portugal. The aircraft is on lease to TAP transactions in the aviation space to satisfy amount of $81 million. through 1 May 2024. the demand from our core clients for Floreat Fixed Income acted as Doric Asset Finance is acting as asset long term income producing transactions bookrunner. Floreat Capital Markets manager for Guernsey-based Floreat secured by real assets. The issuance of originated and structured the transaction. Aviation. listed notes was a natural next step for our Deutsche Bank acted as paying agent. Floreat Aviation also used the proceeds asset based lending programme, which, to Allen & Overy acted as legal adviser. from the issue of the preference shares date, has only been open to the group’s The multiple waterfall per tranche deal to inject equity into its subsidiaries (other core clients,” said Ben Churchill a partner at use the proceeds to finance two Airbus than MSN 1407) and to repay a $44 million Floreat Capital Markets. A330-200s and one A330-300 recently equity bridge. Floreat is looking to follow this initial acquired by the company. The company repaid the equity bridge issuance with a second issuance this year. One A330-200 unit, MSN 1407, loan by the delivery of preference shares The company plans to issue $1 billion in was purchased from Aircastle in early in an amount of $34.3 million, acting in notes.
engine option models sales and less than 2016: not a year for lessor orders 1% of new engine option orders. Airbus delivered a total of 688 aircraft ircraft leasing companies placed Calc ordered two A320s while Air to customers last year and lessors Aorders for a total of 97 Airbus and Lease placed orders for two A320s, one represented 20% of direct deliveries by Boeing aircraft last year, representing A321 and two A320neos during the year. value. Asia accounted for 31% of deliveries a mere 5% of the manufacturers’ gross Aviation Capital Group was the most ahead of Europe with 19%, Americas with figures. active lessor. It placed follow-on orders 16% and Middle East/Africa with 14%. In 2016, Airbus recorded 949 orders for 35 A320-family aircraft including 30 Lessors represented about 2% of the and 218 cancellations finishing the year A320neos, two A320s and three A321s, as Boeing’s total orders. The lessors placed with 731 net orders. Boeing had 848 well as options for a further 10 A320neo orders for 18 units including Air Lease for orders and 180 cancellations during the aircraft. six 737 Max and Standard Chartered Bank year, meaning 668 net orders. Awas ordered 12 A320s and three for 10 737s. Silk Road Leasing placed an Lessors ordered 79 Airbus aircraft last A321s, while AerCap ordered 10 A320neo order for one 737. Air Lease also ordered year, equivalent to 10.8% of manufacturer’s and BOC Aviation placed follow-on orders one 787 unit during the year. 731 net orders. for five A320s and five A321s. In 2015, Boeing booked narrowbody A total of 33 orders were for the current New lessor Hong Kong International orders from AerCap (101), Air Lease (8), engine option models while another 40 Aviation Leasing extended an order for BOC Aviation (28), Gecas (2) and SMBC orders were for the new engine option five A330-300s in December while Air Aviation Capital (10). models, according to Airbus’ order figures. Lease ordered one A350-900 unit. Boeing delivered a total of 748 aircraft The remaining six orders were for the In the narrowbody market, lessors during 2016 and lessors represented 16% A330 and the A350 models. represented 17.5% of Airbus current of direct deliveries, with 121 units.
8 Airfinance Journal February/March 2017 News analysis
Another real estate firm moves into aircraft leasing Century City Holdings, part of a group of Hong Kong real estate companies, owns a fleet of 15 aircraft managed by a low-key London-based aircraft manager. Kenneth Szeto, executive o cer, tells Michael Allen why the business chose to move into aviation.
he downturn in the Chinese and global aircraft-leasing business. Szeto reports to leasing business. As we gradually gained Treal estate markets has driven two the company’s chairman, Lo Yuk Sui. more experience, we wanted to further Hong Kong companies owned by tycoons Century City Holdings is part of a group expand our portfolio... and seek suitable Li Ka-shing and Cheng Yu-tung to diversify of four other listed companies – Regal opportunities for further expansion,” says into the aircraft leasing business. Hotels International Holdings, Regal Real Szeto. Cheung Kong Holdings recently Estate Investment Trust, Paliburg Holdings “We think narrowbody aircraft markets restructured its aviation businesses, and Cosmopolitan International Holdings – are more lucrative with a wider customer bringing lessor Accipiter and MC Aviation whose primary focus is real estate. base than widebody aircraft. As demand Partners joint venture Vermillion under the “From time to time we look at di erent for air travel will continue to grow, ownership of Cheung Kong Property in a business opportunities as part of our especially in the developing regions, bid to streamline the aviation business and group’s diversification plan and there short-haul and regional routes should give it more access to cash. are people approaching us to present benefit the most in the next five to 10 Goshawk Aviation, Chow Tai Fook’s di erent kinds of business opportunities years. Therefore, we will probably focus Dublin-based lessor, told Airfinance other than hotels or real estate,” Szeto on these narrowbody aircraft that fly Journal in an interview that it had 71 tells Airfinance Journal in an interview at regional routes in our short- to medium- aircraft in its portfolio and has committed Century City’s o ces in Causeway Bay. term expansion strategy.” to acquire 20 more over the next 12 He adds: “When we came across to As of 26 January, the portfolio under the months. review the aircraft leasing industry, we group consists of 15 aircraft: two A320s, However, another Hong Kong tycoon – thought there was a good potential for one 737-800, one 737-300F, six ERJ-135s this time through Century City Holdings – growth in the sector which led us to invest and five ERJ-145s. has been quietly accumulating a portfolio in our first aircraft in 2012. of aircraft. So far, it has stayed out of the “We believed this business would Real estate downturn limelight that has illuminated Cheung Kong generate recurring income for us and Similar to Chow Tai Fook and Cheung and Chow Tai Fook. Several experienced could complement our investment income Kong, Century City’s foray into aircraft industry sources based in Hong Kong base in the long term.” leasing has been partly influenced by were unaware that Century City is involved softness in the real estate market. in aircraft leasing when Airfinance Journal History of Century City “While real estate projects generally contacted them about the company. Szeto declined to provide specific up-to- have a longer investment cycle with a But since 2012, Century City, which is date information on MSNs and lessees, but larger potential upside, aircraft leasing, on chaired by a member of the influential Lo publicly available information is available. the other hand, could still generate good family (see Meet the Los box), has been In July 2012, Century City bought returns over a shorter period of time if accumulating a portfolio of regional jets 84.9% of JAR Aviation Fund for HK$110 well-managed,” says Szeto. and narrowbody aircraft, from its o ce in million ($14.1 million). The fund owned a “Moreover, as the investment amounts Hong Kong. 1998-vintage 737-800 (MSN 27979) on a for aircraft leasing could be much smaller A little-known London-based company, 62-month lease to South Korean carrier as compared to real estate investments, Plane Business Leasing (see What is T’way Air. there are actually more opportunities out Plane Business Leasing? box), is Century At the end of 2012 and in 2013, Century there to choose from and it is easier to City’s aircraft manager, helping it manage City acquired two Airbus A321s (MSNs 1017 find something that suits our investment a portfolio of aircraft on a daily basis and and 781). The aircraft were leased out to appetite. With a shorter investment cycle source and place aircraft from and to the Thai carrier R Airlines and Ukrainian airline in aircraft leasing and a reasonably liquid market. Windrose Aviation, respectively. market, we can also be more flexible in Now, with 15 aircraft under its belt after By 2015, the company further our investment strategy to adapt market a major regional jet portfolio purchase expanded its aircraft leasing business, changes.” in 2015, Century City is eyeing further acquiring a fleet of 12 Embraer aircraft for With increasing competition and overall expansion cautiously, and says it has a $34.5 million. Four of the aircraft were costs going up, the returns in real estate long-term outlook for its aircraft leasing subsequently sold. The following year, it investments are reduced, adds Szeto. ambitions and is “continuously looking for purchased a 737-300SF, which it leased to Overall, though, he remains positive about growth opportunities”. Indonesian cargo carrier Tri-MG Airlines on the Hong Kong and mainland China real Kenneth Szeto, executive o cer, a 62-month finance lease from April 2016. estate markets in the long term. chairman’s o ce, is one of several Century “Our group was being quite cautious in “It’s just harder to find a good City personnel overseeing the company’s the first few years entering into the aircraft opportunity to invest these days,” he says.
www.airfinancejournal.com 9 News analysis
Fleet Although the company’s fleet is now Meet the Los of Shanghai’s upmarket Xintiandi composed of mostly Embraers, Szeto says entertainment district. Century City is not committing itself to Lo Ying-Shek was a Hong Kong property Kai Shui serves as deputy managing Embraer aircraft only. tycoon who cofounded real estate firm director, executive director and member “We have looked at a lot of Airbus Great Eagle Company in 1963 with his of the finance committee of Great Eagle. and Boeing aircraft too, but I think wife, Lo To Lee Kwan, according to Forbes. He is also the founder of Sun Fook Kong probably because they are more popular Besides Yuk Sui, who majority owns Group, which engages in the real estate, among lessors... there is lower return for Century City, Ying-Shek has two other construction and oil and gas industries. investment,” he says. sons, Vincent and Kai Shui. Yuk Sui’s two children, Jimmy Lo Chun However, he adds this is not absolute Vincent is chairman of Hong Kong- To and Lo Po Man, are involved in the and is why Century City needs to evaluate based Shui On Group, whose most family business, holding executive-level deals on a case-by-case basis. Szeto says famous project is the development positions in the group’s companies. his company’s aircraft leasing business has involved investing in midlife aircraft, but it is prepared to add some newer aircraft to its portfolio when the suitable opportunity What is Plane Business Leasing? arises. Plane Business Leasing (PBL) started has since been renamed Plurimi Aircraft Century City’s aircraft are now leased life in 1995/96 as a leasing company Leasing Fund, and is a liated to London- to T’Way Air, Windrose Aviation, R Airlines, attached to Dublin-based airline Aviajet, based Plurimi Capital. Airfinance Journal Aeromexico Connect and South African which was later bought out by London understands that the fund is expected to Airlink, according to the most up-to-date Southend-based Flightline, which ceased close shortly after two aircraft are sold. publicly available data. operations in 2008. Plurimi will resume investment in aircraft “In any case, we try to be very cautious PBL’s first deal was a 737-300 leased but not through a fund structure. when selecting our lessees. Although the into Indonesia. The company, which likes It was Plurimi that initially connected risks associated with our lessees might be to maintain a low-key public profile, has PBL with the Lo family. The two slightly higher, at the same time we were never had a portfolio of more than 30 companies came out to Hong Kong also expecting a higher return from these aircraft and has recently gone through a together to visit Century City. investments and they generally lived up to “very big” period of selling. “Century City loved investment in our expectations so far,” he says. PBL does not hold any equity or aircraft but they didn’t love the fund Szeto adds: “We heard some lessors interest in Century City’s aircraft, but does structure, so they said: ‘How about we were willing to accept a 3% to 4% return with in other aircraft in its portfolio. buy some aircraft and PBL manage brand new aircraft but if this were the case, Plane Business Leasing previously them for us?’” a source close to those we would have other investment options to invested in JAR Aviation Fund, which discussions tells Airfinance Journal. choose from.” Export credit to play limited role in 2017
xport credit funding for the aviation Bank, but hopefully since Trump is all Esector, which is still unavailable for We have all heard of about job creating, if he is seen to be Airbus assets and available on a limited lessors who are picking doing something that is killing jobs, he basis for Boeing products, will not play a could be caught in a catch 22,” Streeter significant role in helping to pay for the up deals that should have says, adding: “The one thing we know industry’s $126 billion financing bill for about Trump is to expect the unexpected, commercial aircraft deliveries this year. gone to the export credit so I don’t think anyone can say with However, Mark Streeter, managing market and that is helping certainty what is going to happen with director of JP Morgan, speaking at how his administration will deal with Ex-Im Airfinance Journal’s Aviation Investors’ Day them out. Bank.” in January, said export credit funding could If there is a “European corollary up and be “up and running” as early as this year. Mark Streeter, managing director of running” then there will be a lot more Though he insists export credit support JP Morgan incentive to have a level playing field in will not pay for a “large piece of the the USA, he adds. aviation funding pie in 2017”. As for Ex-Im, Streeter says it is a matter “Everyone has learned to live without a has been operating with just two board of wait and see whether the agency’s functioning export credit environment,” he members for nearly 19 months, one capability “gets expanded or gets stuck” says, adding: “We have all heard of lessors board member shy of the three needed with the “small” $10 million deals the bank who are picking up deals that should have to approve transactions greater than $10 is authorised to work on. gone to the export credit market and that is million. He adds: “It is not that important now helping them out.” Ex-Im faces opposition from Republicans until we get to the downturn.” While Streeter would not be drawn on that view the agency’s use of government In Europe, regarding Airbus’s when he believes export credit funding funding as corporate welfare, and just how “controversy”, he says: “We will see how it could return to the aviation sector in full the Trump administration will weigh in on all plays out but my sense is at some point force, he indicates the export credit door the matter has yet to be seen. in time we will have a green light again.” is still open under US president Donald “It is interesting as Trump is all about Export credit financing is due to account Trump. creating jobs and the Tea Party is always for 9% of the 2017’s funding bill, according The US Export-Import Bank (Ex-Im) whispering in his ear about killing Ex-Im to Boeing.
10 Airfinance Journal February/March 2017 News analysis
ABS market o to good start
The asset-backed securities (ABS) market continues to attract new issuers as shown by the first two issuances in the second part of January: Dubai Aerospace Enterprise (DAE) and Elix Aviation Capital.
wo leasing companies, although line schedule thereafter. Taddressing di erent parts of the market, The Series-C loans amortise on a 15-year I think 2017 is going tapped the capital markets for a similar straight-line schedule for the first two years amount in February. and a seven-year straight-line schedule to be strong for the ABS DAE packaged loans in a $410 million thereafter. market, especially with bond issuance through its Falcon Kroll Bond Ratings Agency assigned an A Aerospace trust. preliminary rating to the Series-A loans, BBB the deals we are seeing Proceeds from the sale of the transaction to the Series-B loans and BB to the Series-C will be used to purchase a fleet of 21 aircraft, loans. in the pipeline. comprising five Airbus A319s, five A320s, three Boeing 737-700s and eight 737-800s 100% turboprop Steven Chung, partner, Hughes Hubbard on lease to 13 airlines. The initial weighted Irish-based turboprop lessor Elix Aviation and Reed average aircraft age of the portfolio is about Capital also brought to market a $411 million 9.2 years, with a remaining lease term of 4.5 ABS transaction featuring 100% turboprops. Q200s, 11 Q300s and two Q400s. years. The transaction, which features 63 used The asset-backed securities (ABS) are The lessor structured the deal in three turboprop assets, does not include the sale expected to perform well in 2017. tranches: $315 million Series-A loans with of E-note certificates. A total of $4.45 billion-worth of deals a 63.5% loan-to-value (LTV); $65 million Elix Aviation acts as the servicer for the were issued in 2016, according to Airfinance Series-B loans with a 76.6% LTV; and $30 transaction. Phoenix American Financial Journal market research. million Series-C loans with an 82.6% LTV. Services is the managing agent, Wells Fargo Those included first-time issuers including The portfolio’s initial value is $496.1 is the trustee, while Deutsche Bank is the Bocom Leasing ($300 million dual-tranche million, based on the average of the half-life facility provider. transaction) in December. The deal is base values provided by three appraisers as The lessor structured the deal in three backed by 13 aircraft. of June 2016 and adjusted for maintenance tranches: $300 million Series-A loans with Merlin Aviation Holdings closed a $250.8 conditions. The portfolio has an aggregate a 55.5% loan-to-value (LTV); $57 million million ABS in December. The transaction – maintenance-adjusted current market value Series-B loans with a 65.5% LTV; and $54 in which Aviation Capital Group is a servicer of about $488.1 million. As of 31 December, million Series-C loans with a 75.4% LTV. – is backed by eight aircraft and is split the 21 aircraft included in the portfolio The Series-A loans and Series-B loans between three classes of notes. represent about 18.9%, by number of aircraft, amortise on an 11-year straight-line schedule In October, Blackbird Capital 1, the joint of DAE’s owned and committed aircraft. for the first four years and a 13-year straight- venture established by ALC and Napier Park The loans are borrowed by Falcon line schedule thereafter. Global Capital, issued $800 million-worth of Aerospace and Falcon Aerospace USA. The Series-C loans amortise on a five- notes to refinance 16 aircraft. Dubai Aerospace Enterprise will act as year straight-line schedule for the first US lessor AerGen also tapped the ABS the servicer for the transaction. two years and a seven-year straight-line market in June with a $325 million issuance. Phoenix American Financial Services schedule thereafter. The three-class notes issuance was backed is the managing agent, Wells Fargo is the In November 2015, Castlelake Aircraft by 19 in-production narrowbody aircraft. trustee, while Crédit Agricole Corporate and Securitisation Trust 2015-1, which was “I think 2017 is going to be strong for the Investment Bank is the facility provider. backed by 54 aircraft, featured two ATR 42- ABS market, especially with the deals we Goldman Sachs is the structuring agent 500s and three Bombardier Dash 8-100s, or are seeing in the pipeline. If other lessors and left lead, while Goldman Sachs Bank is 2.5% of the collateral. or joint ventures are able to bring in similar they global coordinator. Previously Castlelake Aircraft commitment and focus to Air Lease and Crédit Agricole Corporate and Investment Securitisation Trust 2014-1 transaction closed Blackbird as they did to their deal, I think Bank is the joint lead arranger. in February 2014 and featured 79 aircraft. from a time and cost-e ciency perspective, The Series-A loans and Series-B loans Among those, turboprops accounted for you’ll really see the upside for lessors,” said amortise on a 15-year straight-line schedule 53% of the portfolio with one ATR 42-500, Steven Chung, partner at law firm Hughes for the first two years and a 13-year straight- three ATR 72-500s, seven Dash 8-100s, 18 Hubbard and Reed at the 19th Global Annual Airfinance Conference in Dublin. Air Lease’s head of strategic planning, Source: Dubai Aerospace Enterprise Ryan McKenna, sees ABS transactions trading at better rates than unsecured bonds. He says: “I look at this product and say it can trade better than our unsecured paper at some point. I think there’s a chance with the structured products that we have the opportunity to tap into a market that aviation hasn’t used e ciently.”
www.airfinancejournal.com 11 Airline interview
Transformation of Air Baltic Jack Dutton speaks to Martin Gauss, the Latvian airline’s chief executive o cer, about the carrier’s plans to streamline its fleet and the future of the CSeries programme.
n 2011, Latvian flag carrier Air Baltic was Ion the rocks. The airline was facing a potential closure because of its weakened financial position. In September 2011, the airline announced plans to lay o about half its employees and cancel around 700 flights a month to avoid possible grounding. The mass layo s were later repealed when the airline’s shareholders, the Government of Latvia and Baltijas Aviacijas Sistemas, agreed to invest L100 million ($153 million) in the airline’s share capital. After the shareholders injected their capital into the struggling airline, Martin Gauss, who had previously turned around former BA subsidiary Deutsche BA to make it profitable again, joined Air Baltic in 2011. The company then went through a heavy restructuring after he outlined his ReShape strategy to the airline’s shareholders and the Latvian cabinet. Source: Air Baltic Air Baltic is a di erent airline now compared to what it was six years ago. The carrier has been profitable since 2014 and providing a “standard industry amount “Even if you pay five or 10 million more took delivery of the second Bombardier of the overall loan”, in the region of 85%, for the aircraft you will easily o set this CS300 of its 20-aircraft order at the start of according to Gauss. in the lifetime of the operating cost,” he January. Clyde & Co is representing the airline says, adding: “You take o now with this When the carrier’s first CS300 was on the deal, while Norton Rose Fulbright is aircraft and now we have the second thing delivered in December, it also provided a acting for EDC. coming: the noise levels, which are lower major milestone for Bombardier: it was the Although Gauss will not be drawn on on the CSeries. While you are lighter, you first CS300 to be delivered to a customer, which banks are involved, he confirms the have to pay less money for flying, landing after the programme experienced several airline has appointed one European bank charges, overflying charges.” technical hiccups and delays. Air Baltic will so far for the financing of certain aircraft. The airline operates 13 Boeing 737s, 12 receive six more CS300s this year, eight He says that Air Baltic is looking to put Q400s and two CS300s. All the Q400s are more in 2018 and four more in 2019. all the new Bombardier jets on its balance under operating lease. All the 737s were sheet and is in discussions about financing previously leased but now the carrier has Aircraft of choice options for the other 13 aircraft. Gauss bought nine of them. The new CS300s will Speaking to Airfinance Journal in the airline’s adds it is “too early” to test the sale and replace the carrier’s fleet of 13 737-300 head o ce in Riga, Latvia, Gauss explains leaseback appetite for the aircraft with only and 737-500 Classic aircraft. Four of the why he opted for the CS300 model. one of the type in operation. Classics are leased and nine of them are “You can take a 737-700, A319neo and He says the cost of the aircraft does owned. the CS300 (and later on, the Max and not matter as much because the cost to The airline will have received all of its the Neo). You put all three next to each operate the aircraft is lower. CSeries aircraft by 2019. Between now and other and you take the weight. You take 2021, Gauss plans to sell the 737 Classics the weight of the aircraft and you put the or scrap them, depending on the status engines on, not on the Boeings, [where] it’s of the aircraft after D checks. He says the the LEAP engine or something similar, but aircraft were originally bought “at a good on the others it’s exactly the same engine. Even if you pay five price”. You put that on the aircraft and then you or 10 million more for the Gauss says the airline is now “in a solid take o . You have the same passengers position” because of its €132 million ($142 on board and the same engine. What will C series you will easily million) capital injection last year and being happen? You will burn more fuel on the able to increase some of its route capacity Airbus because it’s heavier.” o set this in the lifetime of over the past year. Air Baltic has secured 12-year financing the operating cost. In 2014, Air Baltic had several other from Export Development Canada (EDC) aircraft types in its fleet, including Fokker for seven of the 20 CS300s it is adding to 50s and 757s. As part of the restructuring its fleet. The deal will also involve lending Martin Gauss, airBaltics chief executive plan, the carrier is looking to operate only from several di erent banks, with EDC o cer two aircraft types – 12 Q400s and 20
12 Airfinance Journal February/March 2017 Airline interview
CS300s – in 2021, at the end of the business “But there is interest and there was plan. Air Baltic plans to keep the 12 Q400s Watch this space – interest all the time,” he says. “People under leases, while the 20 Bombardier 2017 will be a very are always visiting us; at the delivery aircraft will be on the balance sheet. ceremony there were many people there interesting year for the from the industry. Watch this space – 2017 Growth and diversification will be a very interesting year for the 2016 was the first year the airline could CSeries. CSeries.” grow, according to Gauss. He adds that low fuel prices have not had a profound impact Martin Gauss, AirBaltic’s chief executive o cer Regional competition on his business plan, saying that they did Although Gauss keeps an eye on the improve the airline’s results, but that was strength of the dollar and the fuel price, because the business plan assumed that CS300’s small orderbook, saying it will he is not worried about changes having fuel prices would stay higher. have a similar journey to the Embraer 170 too big an e ect on the carrier’s business. Apart from export credit financing, Gauss and 190 programme, which initially started The airline does hedge its fuel, but Gauss says he is also open to looking at other with few orders and is now considered to admits that it cannot hedge to the same ways of financing Air Baltic’s fleet. “That be an operational success. He adds that extent the larger airlines can. was the whole idea because this airline it is unfair to compare a new programme But this has not stopped it outcompeting only had leased aircraft and now we want such as the CSeries to those that are some of the bigger names in the Baltic to strengthen the balance sheet by putting already established. region. the aircraft on. A lot of airlines say ‘no, no “They have a good orderbook for the “Operationally, over the last few years it’s better you lease them’, but as airlines CSeries,” he says. “They have just two of we have shown that we can compete. get bigger, they’ve always had a mixture them in commercial service, so for that, In terms of market share, we’re first – between leased and owned aircraft and we the orderbook is not bad. Of course, number two here is Ryanair, number three want the same, even being a small airline. comparing it to Airbus or Boeing, who have is Wizz Air, number four is Norwegian. We are able to because we’ve got capital thousands of orders, it’s di erent, but the There’s a long break before Lufthansa from the shareholders, which we don’t use media always writes in a negative way comes, meaning we are competing with in operations – we use it for aircraft.” about that aircraft, for the aircraft to be in the top low-cost guys. At 237 aircraft, the CS300 orderbook the sky now and to see who orders it.” “And we’re doing this by keeping is small compared to its more established He adds that it is too early to test the market share above 50% and being the competitors, the 737 Max and the sale and leaseback market appetite for the strongest carrier in the region. We had to A320neo, at 3,336 and 3,385 orders, aircraft, because it has just entered into go through heavy restructuring, and now respectively. But Gauss is unfazed by the service. we’re flying with them head to head.”
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Aviation demand to grow despite protectionism
Joe Kavanagh provides a roundup of the biggest stories from the 19th Global Airfinance Conference in Dublin.
s the industry gathered in January for an enhanced equipment trust certificate Athe 19th Global Airfinance Conference (EETC) to fund the widebody programme. in Dublin, there could hardly have been Helen Kotsovos, director planning of more to talk about. treasury, says Air Canada is also financing President-elect Trump was just days new deliveries through sale and leaseback away from being inaugurated, causing transactions. concern about the likely e ects of rising Tom Weir, American Airlines’ vice- protectionism. Meanwhile, Boeing and president and treasurer, says the term loan Airbus were on course to post a book- B market has become very strong, and the to-bill ratio of below one for the first time airline is also seeing “a lot of strong bids for since 2009, suggesting that the industry is sale and leaseback transactions”. tipping into a down cycle. Borrowing costs Candice Li, vice-president finance and have risen for airlines and lessors alike. fleet management at WestJet, says the However, global demand for air Canadian airline plans to diversify beyond transport will grow in the long term, even unsecured bonds, potentially into products if protectionist policies become the norm, such as Japanese operating leases with according to Iata’s chief economist, call options/Japanese operating leases Brian Pierce. Speaking to a full room of and EETCs. Aeromexico plans to move delegates, Pierce said: “In the long term, more aircraft onto its balance sheet – from we shouldn’t get too pessimistic about The Convention Centre Dublin about 25% now to about 50%, according prospects for growth, or indeed demand to chief financial o cer Ricardo Sanchez for aircraft.” Baker. Chilean low-cost carrier Sky Airline is the Embraer E-Jet family to renew its Avro mulling private placements or commercial Deals RJ85 fleet, according to sources who said loans for its future A320neo deliveries, This year, the conference had a new the regional airline will take 10 used E190s, says chief financial o cer Jose Ignacio feature – the Open Lounge – which as well as three E170s. Dougnac, who adds that lease agreements was a space featuring meeting areas for New operating lessor Avi8 Air has for six Neo deliveries are close to being delegates and non-delegates. The lounge selected an investment bank for its equity finalised. was busy throughout the day, but was raise to secure funding for a portfolio of particularly well attended at about 5pm, new and used assets, valued at more ECA support which may have had something to do with than $1 billion. The company was founded Export credit funding, which is still the open bar. last year by Ray Sisson, the former chief unavailable in a meaningful way for Airbus The number of deals uncovered by executive o cer at Awas, and Ed Wegel, and Boeing aircraft, is unlikely to play a Airfinance Journal’s editorial team showed founder and former president and chief significant role in helping to pay for the the level of business being conducted executive o cer at Eastern Air Lines. industry’s $126 billion financing bill for new there. In October, Sisson said he believed the commercial aircraft deliveries in 2017, say A number of airlines were close leasing market had “finally begun to tip delegates. to mandating banks and lessors for over” into a down cycle, because of low US Ex-Im Bank, which has been unable to incoming aircraft deliveries. Icelandair fuel prices, large orders and low interest authorise deals larger than $10 million since was discovered to be close to appointing rates. late 2015, now has a $4 billion backlog of financiers for six Boeing 737 Max aircraft; There was also talk of a new US airline aircraft deals. Indian low-cost airline SpiceJet has already seeking convertible debt to fund its Mark Streeter, managing director at JP closed lease agreements for five 737-800s operations. The carrier, which will be a Morgan, says that export credit agency in 2017; Wow Air will soon mandate banks “very niche player”, according to a source, funding may be up and running as early for up to four Airbus A321s; Turkish carrier is set to mandate an investment bank soon. as this year. However, he stresses that US Pegasus Airlines, whose cost of financing Meanwhile, several airline executives politics are unpredictable right now. has risen because of the attempted coup spoke about their financing plans for 2017 Streeter adds: “The one thing we know in Turkey last year, has reportedly issued and beyond. about Trump is to expect the unexpected, a request for proposal for the financing Air Canada will fund its upcoming Boeing so I don’t think anyone can say with certainty of a number of incoming Airbus aircraft; 787 deliveries in the commercial banking what is going to happen with how his and South Africa’s Airlink has selected market this year and has no plans to issue administration will deal with Ex-Im Bank.”
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www.airfinancejournal.com 15 Korea investor deals survey
New names and narrowbodies for Korean investors In the run-up to the Inaugural Korea Airfinance Conference in Seoul on 23-24 March, Michael Allen examines how Korean investors are getting savvier with their investments in aircraft, gaining the courage to branch out into narrowbodies, as well as lesser credit airlines.
n [South] Korea, we need aviation “Real estate in the US and UK was the “Ito fly our people in and out of the first pick from 2009 to 2014 for Korean The aviation country – otherwise we have to go through investors seeking an alternative asset transaction is very North Korea,” says one South Korean class. Most Korean investors got exposed aircraft finance practitioner explaining the to the UK, US and even German property standardised and you importance of the aviation industry to his but, from the asset allocation perspective, country. they cannot put all their money in one asset can easily contact the Both aviation and shipping have been class,” explains one source at a Korean pivotal to the peninsula’s history since securities firm active in aircraft financing. right person for feasibility Korea was divided along the 38th parallel “The aviation transaction is very assessment and after World War II and along a military standardised and you can easily contact demarcation line after the Korean War. the right person for feasibility assessment information gathering. Since it became impossible to transport and information gathering. Most reputable goods and people out of the country Korean institutions which have a big Most reputable Korean by land via North Korea, these two presence in the Korean market now have at institutions who have a big transportation industries have been seen least one aircraft in their balance sheet.” as vital to the health of the south. All of the deals done so far involving presence in the Korean But while the South Korean shipping Korean investors have been for the crème- industry – along with real estate – has long de-la-crème credits of the airline industry, market now have at been a key investment target of Korean with a particular focus on Middle Eastern least one aircraft in their institutional investors, investment in aircraft heavyweights such as Emirates and Etihad. is a new area for them. With the shipping Matthew Leigh, a senior associate balance sheet. industry now being far from shipshape and at Norton Rose Fulbright in Singapore, real estate returns lacklustre, aircraft are believes Korean investors are showing a proving more reliable assets for yield- greater receptiveness to financings with hungry investors. operating lessors as the demand for aircraft
16 Airfinance Journal February/March 2017 Korea investor deals survey
deliveries starts to come from the lessors the top 10 lessors,” he says. credit profile alongside a good underlying more than the airlines. Despite this overwhelming preference asset,” says a source with experience of “It is probably reflective of the shift in for top-tier names, preferably government- the Korean market. the market towards the volume of direct owned flag carriers, market sources “However, they are now starting to be lessor orders, but I think that they [Korean believe there is room for deal arrangers willing to look at new names in terms of the investors] are certainly much more aware to introduce lesser credits to the Korean returns. The credit rating remains important now of those opportunities – though I think institutional investor base. – though provided there is the ability to in the same way the investors are looking “There is still the mentality they want demonstrate a good asset and that it’s a well- at the top-tier airlines, the focus will be on to have a full-service carrier with a strong run airline with a history of good lease return Continued on page 18 >>> Korean Investor Deal Survey: Korean deals closed between 1 January 2014 and 31 December 2016
Airline/ Aircraft financed Deal size Financing parties Structure Law firms Lessor
AerCap 787-9 Undisclosed KEB Hana Undisclosed Cli ord Chance, Kim&Chang
AerCap 787-9 Undisclosed KEB Hana, KDB Undisclosed Cli ord Chance, Kim&Chang
All Nippon 777 300ER, KRW The Bank of Tokyo-Mitsubishi UFJ (senior Lease ends 16 Dec 2025 (10 years, 3 months) Lee&Ko, Cli ord Chance Airways delivering 16 Sep 2015 38,862,084, tranche A & B lender); Santander (Mezzanine (ANA) 997 & Equity); JB Fund; Construction Workers Mutual Aid Association
ANA 777-300ER, Undisclosed Banco Santander (arranger), Construction Banco Santander sold down a junior loan on a 2015-vintage PricewaterhouseCoopers closing on 21 September 2016 Workers Mutual Aid Association (investor), JB Boeing 777-300ER aircraft to Construction Workers Mutual (buy-side advisory), Lee & Ko Asset Management acted as asset managers, Aid Association (CWMAA). Santander did not sell 100% of the (legal advisory) Samil junior loan, so both Santander and CWMAA are now new junior lenders.
Air France 777-300ER $34m Public O cials Benefit Association (POBA) and Mezzanine debt. European banks also will invest in equity and Not available Yellow Umbrella Mutual Aid (investors) senior debt financing, while the POBA and the savings fund for small business owners purchase the whole mezzanine tranche. In return, the two Korean funds will receive a fixed annual return at the upper end of the 5% range for seven years to maturity.
Air France 777-300ER $115.7m Dongbu Securities and undisclosed Undisclosed Cli ord Chance, Yulchon as acting legal representative of Dongbu Securities
Asiana A380 Undisclosed Korea Development Bank (lead arranger), The financing was a US dollar denominated commercial loan Norton Rose Fulbright (counsel Airlines KDB Asset Management (arranger for Korean on the senior side and a Korean won denominated junior to KDB), Milbank (counsel to investors on junior side) note issuance. The split between the senior and junior parts Asiana) was roughly 70/30. On the junior side there is one note issuer and one trustee, both of whom are South Korean. The deal represents the first transaction in which Korean investors provided 100% financing for an A380 for a local carrier.
Avianca 8 aircraft (6 A320 family and $379m Burnham Sterling + Of the participating EAIV private placement structure. 12-year final maturity Not available 2 787s) investors, one domiciled in Korea
DHL 2x 777-200LRF. $320m ($160m Helaba, DZ and Nord LB (senior loan), NPS Senior loan, mezzanine and equity. Lease expiring in 2024. Lee&Ko, Vedder Price and Financing closed June 2015. per aircraft) and other Korean institutions (mezzanine), Maples & Calder (legal counsel Mirae Asset Securities HK (equity) to Mirae).
Etihad A380 100% financing; Magi Partners and Youjee Partners (arrangers), Etihad Airways has agreed a finance lease deal for one A380 Allen & Overy (counsel to Airways amount supported by Korean institutional investors. Magi Partners and its Etihad), Stephenson Harwood undisclosed Korean associates Youjee Partners arranged the transaction for (counsel to Korean investors) the Abu Dhabi-based airline. The deal provides 100% financing for the aircraft through a 15 year fixed coupon full payout finance lease. The deal was the first ever Korean backed pre-funded financing for an A380. It is also the first time an A380 financing has been sourced solely with Korean funds with no other commercial debt involved.
Emirates 777-300ER. $144m DVB and MUFG (senior loan), NPS and other Senior loan, mezzanine and equity. Lease expiring in 2024. Bae, Kim & Lee, Cli ord Financing closed March 2015 Korean institutions (mezzanine), Mirae Asset Chance and Maples & Calder Securities HK (equity). (legal counsel to Mirae).
Emirates 777-300ER. $175m MUFG and Société Générale (senior loan), Senior loan, mezzanine and equity. Lease expiring in 2027. Bae, Kim & Lee, Cli ord Financing closed September 2015 NPS (mezzanine), Mirae Asset Securities HK Chance and Maples & Calder (equity). (legal counsel to Mirae)
Emirates 2x 777-300ERs Undisclosed EMP Structured Assets (arranger), Seraph Both aircraft, which delivered at the end of March, are two years Bird & Bird (counsel to EMP Aviation Management (lease manager to old and are on 10 year leases. Air Finance Company (AFC) and Deka Bank), Pillsbury EMP’s equity investors), Dekabank (senior purchased the aircraft initially before ownership transferred to (counsel to Emirates), Allen loan provider), undisclosed Korean investors EMP after the lease novation. Dekabank is providing a senior & Overy (counsel to AFC), (junior loan provider), undisclosed German loan and a group of Korean investors is providing a junior loan Yulchon (counsel to Korean institutional investor (100% equity purchaser) for the two aircraft. A German institutional investor has bought investors). 100% the equity in the widebodies.
Emirates 2x A380s Undisclosed Investec (sole arranger for financing and Sale and leaseback transaction for two new A380-800s.The first Cli ord Chance (counsel to leasing elements), The National Bank of A380, MSN 205, delivered in late January. The second A380 lenders), Bird & Bird (counsel Abu Dhabi and Qatar National Bank (joint delivered in April. Both jets will be on lease for 12 years. to airline) senior underwriters of the senior financing), undisclosed Korean institutional investors (mezzanine financing),
Emirates A380-800 Confidential Stellwagen Finance Company (lenders) The operating lease for the A380 was placed with the Korean Allen & Overy (acting for AFC) Korean institutional investors institutional investor market, by means of a private placement Yulchon (Seoul), Cli ord Magi Partners and Youjee Partners (arrangers) with a group of Korean non-bank financial institutions investing Chance (Singpore), Walkers in a Korean fund structure. (Cayman) acting for the Korean investors) Pillsbury (acting for Emirates)
GECAS Portfolio of 20 aircraft. The $900m Mizuho Securities and Meritz Securities The debt consists of $655m from an asset-backed securities Not available portfolio mainly consists of (arrangers) issuance by Mizuho Securities, and $244.5m in equity from narrowbodies, which are on lease South Korean securities and derivatives firm Meritz. The to a range of low-cost airlines $244.5m contribution from Meritz will consist of a $150m and flag carriers, including some mezzanine tranche and a $94.5m subordinate tranche. Chinese airlines. The average remaining lease length of the aircraft in the portfolio is 7.6 years. Continued on page 18 >>>
www.airfinancejournal.com 17 Korea investor deals survey
Airline/ Aircraft financed Deal size Financing parties Structure Law firms Lessor
KAL A380 Undisclosed KEB Hana Junior term loan Kim&Chang
KAL 3x A330 Undisclosed KEB Hana, KDB Junior term loan Kim&Chang
KAL 2x B777-300ERs Undisclosed KEB Hana Junior term loan Kim&Chang
PAL A321-200 $42m KEB Hana as MLA, KEB Hana and CCB as Secured term loan Cli ord Chance Thailand, Lenders Lee&Ko
Qantas 2x A330-200 $15m and The Local Finance Association (mezzanine The Local Finance Association, which oversees disaster Not available $20m investor), Hana Financial Investment (arranger). insurance and savings money of South Korea’s local governments, opted to invest $15 million on 31 October in mezzanine loans on two A330-200 aircraft that Qantas Airways will lease. Hana Financial Investment, which is in charge of the $20 million fundraising covering the two A330-200s, plans to attract one or two more institutions for mezzanine financing. The mezzanine debt is expected to deliver an annual return of about 6%.
Singapore A330-300 $85 million KTB Investment & Securities and Korea $60 million senior loans with expected returns at 4.05%, $20 Not available Airlines Investment & Securities (established the fund), million mezzanine loans and $5 million subordinated loans. The Wealth Capital Management (seller), BBAM mezzanine and subordinated loans have 6.2% and 9.1% return (asset manager), Eastmerchant (asset manager targets, respectively. & advisor to WealthCap)
Singapore Airbus A330-300, Sep. 2015 KRW Kyobo Securities (organiser); Meritz, JB Fund, Lease end date: August 2023 (8 years). Lessee has option to Yulchon (Korean Law Firm) Airlines 58,077,880,146 Lotte Insurance, Hanwha Insurance, Daewoo finish lease agreement at six and seven years after the start of Securities, Scientists and Engineers Mutual-aid the lease Association, EastMerchant (equity)
Unknown A330-300, delivering in 2009. Undisclosed Nord LB (senior loan), mezzanine (Korean Senior loan, mezzanine and equity. Lease expiring in 2021. Bae, Kim & Lee and Maples & Financing closed March 2014. institutions), Equity (Mirae Asset Securities HK). Calder (legal counsel to Mirae)
Source: Airfinance Journal, January 2017 conditions, then that goes quite a long way Korean investors jurisdiction because Koreans have a long now with the investors.” history with investing in Vietnam, albeit not As with Japan’s Japanese operating for some of the top-tier in aircraft, say sources. lease and call option market, in which deal arrangers are experiencing more demand airlines seem to have GECAS portfolio deal from investors than deal opportunities with Late last year, Mizuho Securities and Meritz top-tier carriers can satisfy, Korean arrangers been tapped out at Securities launched a seven-year, $900 are finding they are needing gradually to this point, so almost by million fund to buy a portfolio of 20 aircraft introduce new names to their investor clients. from US lessor GECAS. The debt consisted “Korean investors for some of the top-tier necessity they are looking of $655 million from an asset-backed airlines seem to have been tapped out at securities issuance by Mizuho Securities, this point, so almost by necessity they are at lesser-known airlines. and $244.5 million in equity from South looking at lesser-known airlines,” says Ji Korean securities and derivatives firm Meritz. Hoon Hong, a partner in White & Case’s Ji Hoon Hong, partner, White & Case The $244.5 million contribution from Meritz South Korea o ce. consisted of a $150 million mezzanine “I think they are looking at deal – just like investors from any other country tranche and a $94.5 million subordinate possibilities involving those airlines that may these days – are hungry for yield. But tranche. not necessarily be flag carriers or household as they get more knowledgeable about Sources tell Airfinance Journal that the names. Depending on how the structure this space, they see the attractiveness of portfolio contained some poor credit airlines, works, I think deals involving below-top-tier narrowbody aircraft in terms of their stable such as EgyptAir, in which Korean investors airlines would be seriously considered by values and secondary market tradability,” would not usually prefer to invest in a single Korean players. Some arrangers are quite says White & Case’s Ji. transaction because of the heightened risk. willing to take a leap forward – maybe a He cautions, however, that this could be However, because of the involvement of giant leap forward – and try to lead some of a “double-edged sword”, as the yield on GECAS – which is the number one lessor in these sophisticated and large transactions narrowbodies would tend to be lower than the world by number of aircraft (according on their own.” that available for widebody transactions. to Airfinance Journal’s The Leasing Top 50 In addition, the deterioration of certain A source from a South Korean securities 2016) – investors are su ciently reassured top-tier airline credits such as Air France firm says: “If we consider the market that the risk could be managed. (because of financial di culties) and Turkish situation separately for widebodies and “A couple of portfolios are coming around Airlines (because of political instability in narrowbodies, we believe the narrowbody the market but have not yet been done. Turkey) means Korean investors may have to market is safer in terms of exit and residual There are better aircraft and airlines in look at other names, says a source in South value risk but there is a tough competition these, but their servicer names are not good Korea. among global lessors. enough from a Korean investor perspective,” “Lease rates for narrowbodies are getting says a source who works with Korean Narrowbodies versus widebodies lower and lower and the rate of return for investors. Korean investors have mostly favoured the equity investment is not very attractive. investment in widebodies over Still, widebodies can provide an attractive Hard to ignore narrowbodies because of the larger, more rate of return, so we need to mix up these More and more international players are expensive aircraft o ering higher returns narrowbodies and widebodies properly and taking notice of the South Korean market as than narrowbodies. However, investment in manage the portfolio risk.” a viable source of financing for aircraft, and widebodies carries a higher residual value One airline that could be a potentially many believe it will remain so for several risk and the aircraft are more di cult to huge target of financing for Korean investors years to come. remarket at the end of their lease term. is Vietnam’s VietJet Air, which is taking One source says: “It’s not going to replace “Korean investors have been attracted delivery of A320-family aircraft to fuel its other sources of financing but if you’re to widebodies because they tend to o er rapid growth. Korean investors might feel looking at what’s out there at the moment, I higher yields and because Korean investors comfortable with Vietnam as an investment don’t think that you can ignore it.”
18 Airfinance Journal February/March 2017 Lessor interview: Chorus Aviation Capital Chorus takes on regional market
Chorus’ new leasing subsidiary was established in January with funding from a Canadian insurance company. It plans to carve out a space in the regional leasing market. Joe Kavanagh speaks with its president, Steven Ridolfi, about his plans for the year ahead.
horus Aviation, the Canadian aviation “Remember that Chorus has a ton of marks an important step for Chorus Cholding company, will become a technical capacity, to modify and transition Aviation’s expansion into aircraft leasing. more familiar name this year. With the airplanes, to provide our customers with The parent company already owns establishment of a new leasing joint more than just the metal but with ancillary Bombardier aircraft, which it leases to Jazz venture, regional operators around the services as well such as technical support, Aviation under the CPA with Air Canada. At world may soon be doing business with the training capacity, spares support and pilot the end of the third quarter 2016, it leased company for the first time. pools. We wanted to keep it in the family. 39 aircraft under the deal. The company already leases aircraft to The [decision to issue a] convertible bond The lessor will initially target aircraft with its airline subsidiary, Jazz Aviation, which was driven by that,” he adds. leases attached. However, it is open to the operates flights on behalf of Air Canada With the capital behind it, and with plans full range of acquisition types. under a capacity purchase agreement to expand rapidly, Chorus Aviation Capital “Immediately in front of us, we are (CPA). But it has planned to expand will most likely be closing its first deals in studying three potential transaction types: its aircraft leasing business with new the very near future. there are some interesting portfolios for customers for some time. The company sale, some airline sale [and] leasebacks told Airfinance Journal in 2015 about its Buying opportunities that we’ve been looking at, and potentially plan to place regional aircraft with airlines The mission statement is clear for Chorus some skyline orders in store. So we are further afield than Canada. Aviation Capital: to stick to its roots with the likely to end up with a mix of these,” he This plan became reality in November purchase of regional aircraft. says. 2016, with the signing of a sale and “We’re staying with regional aircraft, both Asked whether Chorus Aviation Capital leaseback agreement for four Bombardier jets and turboprops,” says Ridolfi. would consider buying Bombardier’s CRJ1000s with Air Nostrum, which became However, the company also plans to CSeries family of aircraft, Ridolfi confirms Chorus Aviation’s first leasing customer buy Embraer and ATR, as well as the that a deal is not o the table. “We could outside of a capacity purchase agreement Bombardier models that it already has have a look at the CSeries if the right with Air Canada. experience of. situation warrants it,” he says. Now, with the foundation of Chorus “Chorus is primarily a Bombardier The initial investment by Fairfax will be Aviation Capital, the company has begun customer, with Q400s, legacy Dash-8s supplemented by debt capital, which will the expansion of its leasing business in and the CRJ family. But we’d certainly boost the company’s buying power. earnest. like to diversify into the Embraer and ATR “The C$200 million [private placement] The new subsidiary will be funded with product families as well. As a global leasing will be leveraged up with debt to a C$200 million ($149.5 million) convertible company, we’ll start to look a lot like the something like C$800 million, and we’ll private placement from Canadian insurance fleet mix of the overall market,” he adds. evaluate which opportunities generate the firm Fairfax Financial. It will also expand its Diversifying with other regional aircraft best combination of returns and strategic purchasing power by leveraging up until it has about C$800 million to chase deals. Steven Ridolfi, who is president of the new company, says that Chorus Remember that Chorus has a tonne of technical has decided to launch a wholly owned subsidiary, rather than a joint venture, in capacity, to modify and transition airplanes, to provide order to retain control. our customers with more than just the metal but with “We did look at joint-venture options and the pros and cons of how they would ancillary services as well such as technical support, work. We ended up with a totally owned training capacity, spares support and pilot pools. We subsidiary because it best fit with our strategic goals: we wanted to maintain wanted to keep it in the family. The [decision to issue control, we wanted to grow organically with full freedom of asset selection, we wanted a] convertible bond was driven by that. to take full advantage of Chorus synergies,” he says. Steven Ridolfi, president, Chorus
www.airfinancejournal.com 19 Lessor interview: Chorus Aviation Capital
fit and go after these. The C$200 million narrowbody space – or even the widebody arrives over the next three months of the Just like most leasing space – there’s 40-plus companies chasing year and, as the opportunities present companies, we’ll try that business. On the regional side, there’s themselves, we’ll structure transactions to Nordic Aviation Capital, which is very large, deploy the full capital,” says Ridolfi. to do a wide range of and then there’s a few smaller ones, some “Just like most leasing companies, we’ll transactions to diversify that have only recently started. We have an try to do a wide range of transactions to ambition to grow very quickly, to stay inside diversify your supply channel. We’ll look at your supply channel. We’ll the regional market place.” all opportunities and selectively choose the Ridolfi notes that some large lessors ones that best fit our criteria,” he adds. look at all opportunities have divested from regional aircraft in and selectively choose recent months. Citing ALC’s sale of 25 Is there space in the regional market? E190 and E175 aircraft to NAC, he says The smaller operator base for regional the ones that best fit our that portfolio sales will represent great aircraft has dissuaded many players from opportunities for Chorus Aviation Capital as getting involved in this space. Some larger criteria. it looks to increase in size. lessors prefer to focus on Airbus and “Many of those 40 narrowbody/mainline Boeing’s most popular single-aisle o erings Steven Ridolfi, president, Chorus leasing companies do have regional instead, leaving regional aircraft leasing to portfolios, but they’re non-core and, in fact, the specialists. some of them are being sold o ,” he says, However, many lessors choose to own “so we see opportunities to pick up some regional aircraft to diversify their portfolio, How will Chorus Aviation Capital try to of those non-core portfolios.” and there are several active lessors which compete with the established players? As he sees it, there is plenty of space for focus on this market segment exclusively. Is there even room in this section of new contenders. There has recently been a flurry of mergers the market for a new contender? Ridolfi “We think Martin Møller [Nordic Aviation in regional leasing, as Nordic Aviation believes so. Capital’s founder and chairman] and Capital (NAC) expanded aggressively last “[Regional aircraft leasing] is a very Nordic have done a tremendous job, but year. Having bought up regional lessors intriguing market that has quite a bit of we believe there’s room for others in this Jetscape and Aldus, NAC seems to be headroom, from our perspective.” market. We have ambitions to be one of the pinning down this market. He adds: “If you think about the leading players before long.”
What is Chorus Aviation?
Chorus Aviation is a Canadian holding company that owns various aviation-related subsidiaries.
Chorus Aviation
Jazz Aviation Voyageur Aviation Chorus Aviation Capital Air Canada Express Voyageur Airways – operates – under a capacity special flying operations for The latest purchase agreement blue chip clients in Canada subsidiary, focused (CPA), the airline operates and Africa with a fleet of 17 on commercial 113 Bombardier aircraft on Bombardier aircraft. aircraft leasing. behalf of Air Canada. Voyageur Aerotech – Jazz – operates North specialises in engineering American charter flights and maintenance. Generates with three Bombardier 25% of Voyageur Aviation’s aircraft. revenues.
Source: Chorus Aviation
20 Airfinance Journal February/March 2017 Deal focus
Alaska’s strong profile improves merger prospects Joe Kavanagh examines the North American carrier’s financial position after closing its $2.6 million takeover of Virgin America in December.
n 14 December, Alaska Airlines closed Oits takeover of Virgin America, in a $2.6 billion transaction that will bring the combined airline’s fleet to 286 aircraft with an average age of 8.1 years. Although the two businesses have not fully merged yet, Alaska Airlines, which will soon be the fifth-largest airline in the United States, is well-placed to take over Virgin America and looks set to enjoy a strong credit profile despite raising leverage in order to fund the deal. Data provided by The Airline Analyst
(TAA) shows that Alaska Airlines is one of Source: Alaska Airlines the strongest-performing airline credits in the world, with strong earnings before interest, tax, depreciation, amortisation and agency a rmed Alaska at BBB- once the discussions with executives from JetBlue rent cost (Ebitdar) margins, healthy fixed takeover was closed in December, after and Hawaiian Airlines. charge cover and high levels of liquidity. having placed it on a watch list because of JetBlue liked the airline enough to pending approval from the US Department make an o er of $54 a share – but was Resilient financial performance of Justice. eventually outbid by Alaska Airlines’ o er The Airline Analyst Financial Ratings Score Alaska funded the deal with cash on of $57 a share. (TAAFRS) ranks Alaska Air Group second hand and about $2 billion of secured debt Data collected by TAA shows that while out of the 150 airlines it covers. financing provided by multiple lenders. Virgin America is less profitable than Narrowly behind Ryanair, the airline is About $1.6 billion of the loans are secured Alaska, it has recently made substantial recognised for its high margins, liquidity against 56 of the company’s Boeing 737 improvements. At 5.3 out of eight, its and low leverage, with an overall score of fleet, including 37 737-900ERs and 19 overall rating score for the last 12-month 7.3 out of a possible eight. 737-800s. period is nowhere near as strong as The airline’s Ebitdar margin for the last In a report issued in December, Alaska’s. However, it represents great 12-month period was 32.8%, which places Fitch notes: “Aircraft tend to be readily progress, up from 5.1 in the preceding it 11th in the world for this metric. The financeable assets, and the reduction in 12-month period and 3.3 in the 12-month top 10 – AirAsia, Jazeera Airways, PSA unencumbered planes reduces one of period before that. Airlines, Hainan Airlines, Allegiant, Volaris, [Alaska’s] easiest and potentially cheapest It has generated healthy Ebitdar margins Spirit, Frontier, IndiGo and SpiceJet – are sources of future financing. Nevertheless, (29.5%) in the last 12-month period, while mostly low-cost carriers. Generating such we believe that [the airline] will still liquidity as a percentage of revenue stands strong margins as a full-service airline is have plenty of capacity to tap the debt at 37.8% – generating the maximum score remarkable. markets in the future if it were in need of eight, according to TAA methodology. The carrier is similarly impressive of capital given the company’s relatively However, its Ebitdar is only twice as high in terms of liquidity, with liquidity as a low leverage, history of free cash flow as its net interest plus rent, generating a percentage of revenue at 55.8% – the generation, and relatively strong credit score of three out of eight. Meanwhile, sixth highest of all airlines covered by profile.” adjusted net debt is 3.5x Ebitdar – TAAFRS. substantially higher than Alaska’s. Meanwhile, its fixed charge cover Virgin America: most improved By one key metric, however, Virgin (calculated by dividing Ebitdar by Although it began operations in 2008, America beats Alaska Airlines: average net interest plus rent) is 20x, which Virgin America did not turn a profit until fleet age. While Alaska’s average fleet age demonstrates how substantially its 2013. is nine years, according to the data, Virgin earnings outweigh its financial obligations. TAA shows that its net income was $10 America’s average age is 6.3 years. In short, the airline’s financial million in 2013, $60 million in 2014 and The improved financial health of Virgin performance sets it up well for the $351 million in 2015 (the last full year for America, as well as that of Alaska, means challenging months ahead, as it integrates which data is available). that the merger has every chance of with Virgin America. The improved financial health of Virgin success. The logistical challenges related The debt that it raised to fund the America is indicated by the interest that to merging two airlines are substantial, but takeover will increase its leverage but its sale generated from other US airlines. the credit profiles of both carriers suggest is unlikely to a ect its ratings in the near Although Alaska Airlines won the deal, that the new entity will be able to benefit future, according to Fitch Ratings. The Virgin America’s leadership also held from strong ratings in the future.
www.airfinancejournal.com 21 North Africa
Headwinds hold back carriers North African airlines have faced a number of challenges in recent times, including a dearth of export credit financing, geopolitical instability and several terrorist attacks. Jack Dutton investigates.
rian Pearce, chief economist of One leasing executive, who works with same pronounced negative e ects as Bthe International Air Transport North African carriers, tells Airfinance some of the other North African countries. Association, told delegates at the fourth Journal: “Tunisair has su ered a lot Royal Air Maroc (RAM), the country’s Iata Airline Cost Conference in Geneva because they had less tourists come into national airline, is viewed by many in the last year that carriers had “never had the country since the attacks. The same industry as being the main African airline it so good” and, after decades of poor thing happened in Turkey with Turkish that connects Africa with Europe, the performance, airlines were finally making Airlines.” Middle East and North America. money. As well as seeing a drop in tourist But that has not stopped the carrier’s The representatives from North African numbers, North African regions that have operating environment from being airlines, who were in the audience during been a ected by terrorism and political challenging. Like many carriers in Africa, the speech, looked at each other in a instability have experienced some RAM has financed a number of its aircraft way that said Pearce’s statements were hesitation from lessors, says the source. with help of export credit agencies (ECAs). far from their realities. Over the past “I think they are more reticent right now. But with the current inactivity of the main few years, the region has witnessed Overall, it’s not stable, but people are ECAs, airlines such as RAM have had to geopolitical instability with the Arab still doing deals. It’s just that when the look at alternative financing options. Spring and several terrorist attacks, often airlines in those regions go to the market Although the airline initially issued in regions where tourism plays a vital role themselves, they often find it harder to a request for proposal to fund three in the local economy. get the financing.” 787-8s by the Export-Import Bank of the “As someone who has been to all If there is a dampening in tourist tra c, United States, the dearth of export credit of these countries, you can see the overcapacity can be a concern. One financing has caused it to look at other diminished air tra c,” says one industry industry source says that EgyptAir has modes of financing. Although this has source, who works with several airlines in got some widebody capacity but “doesn’t been negative for some carriers in the the region. “I was at the pyramids in Cairo really need it” and “there’s a move away region, Yassine Berrada, vice-president a few years ago, and some people came from needing a Boeing 777 and Airbus corporate finance at Royal Air Maroc, up to me saying ‘We miss the Americans, A330 into something that’s not as large says the carrier has not had its financing we miss the Europeans’.” as that” with some of the North African options limited through Ex-Im Bank’s One striking example of an airline that carriers. current inactivity and political instability in has been negatively a ected is Tunisian the Middle East and North Africa (MENA) flag carrier Tunisair. Its tra c su ered Morocco’s safe haven region. During the past six months, RAM after a terrorist mass-shooting against Seen as a more politically stable region has closed three commercial deals for foreign tourists on a resort in Sousse that than some of its neighbours, Morocco three new 787s, with the loans being paid killed 38 people. does not seem to be experiencing the in euros from two Moroccan banks.
The global environment is not helpful for tourism in North Africa. Many Europeans prefer going to Portugal and Spain – they see them as safer.
Yassine Berrada, vice-president corporate finance at Royal Air Maroc
22 Airfinance Journal February/March 2017 North Africa
Unlike many African carriers, RAM has I think the Arab Spring of stability despite the challenges that the not seen a decline in interest from some country faces. of the banks when financing the aircraft. came as such a shock “It does pose a challenge having our “We’ve had o ers on both leases and dominant currency devalued in November. commercial financings,” says Berrada. “We to everyone, it really has But with our airline, we’re not just relying on did not expect to see the interest we saw. changed the culture among local currency – you also rely on currencies We had South African banks, European like the Saudi riyal and Emirati dirham, banks, US banks approach us – frankly, we foreign investors. which also provides a support system.” were quite amazed. I think the appetite was Aly adds that Egypt is “not reliant on due to the strong credit risk of the airline.” Victoria Mackay, founder, VLM Advisory, a just tourism tra c” and it is viewed a The carrier will be taking delivery of MENA political risk consultancy geographically attractive location across more 787s and a 737 Max aircraft from Africa and the Middle East. 2018 to 2020, which it looks likely to take EgyptAir, the country’s flag carrier, on its balance sheet. Berrada adds that the operates a 75-aircraft fleet, including carrier will lease all incoming aircraft this A320s, A330s and A340s, as well as year. 600s, two 737-700Cs, three 767-300s and 737-800s and 777-300ERs, according to “Although we have no big problems, still one Lockheed Hercules L100, according Airfinance Journal’s Fleets. we are working in di cult environments,” to Airfinance Journal’s Fleet Tracker. Tassili The airline is due to issue a request for he says. “Indeed, despite Morocco being Airlines operates a fleet of 15 aircraft, proposal (RFP) in the coming weeks, adds a safe haven within the region, an average indicates Fleet Tracker: four 737-800s, the leasing source. The RFP will be for European or American considers Morocco four Q200s, four Q400s and three Beech 250-seater narrowbody aircraft, according as part of the North Africa-Middle East 1900s. to the source, who adds that the carrier will troubled region. As a consequence, foreign “They use a lot of ECAs,” says the leasing be open to all types of financing to fund the tourist (excluding Moroccans abroad) executive. “But they have a problem with deliveries. arrivals dropped by 4% in 2016 after a drop that because Ex-Im and the European of 5% in 2015.” ECAs are not doing many deals right now. Increase risk monitoring from lessors Berrada adds that the airline has seen If there is any expansion from the airlines, it Mackay has seen an increase in lessors an 11% growth in tra c at fiscal year-end 30 would be by acquiring aircraft from lessors carrying out political risk analysis when October 2016, thanks to the performance or using commercial banks to finance determining which airlines to work with in of its Casablanca hub and new routes from aircraft. Sometimes international banks will the region. this hub. The first two months of 2017 fiscal finance them but it will be more expensive. Phil Seymour, chief executive o cer of year are in the same trend of two-digit In my view, they will have no choice – they aircraft advisory IBA, agrees. “Typically, growth in tra c and he hopes tra c will will have to go to lessors to have 100% a lessor will go and visit an airline and continue growing by a two-digit percentage financing.” the aircraft every two or three years. at the end of next year. We’ve seen that they’re now taking the Although Berrada is optimistic about Egypt’s other opportunities opportunity to get in there more frequently. Morocco, he is less optimistic about North Egypt is also experiencing its own Coupled with that, the local currencies in Africa as a whole. “The global environment problems, at times finding it di cult to the region are probably worth less now, is not helpful for tourism in North Africa attract the foreign investment its tourism and all of the costs are in dollars: fuel, right now. At the moment, many Europeans and airline industry needs. leases and financings are probably based prefer going to Portugal and Spain – they “I think the Arab Spring came as such a on US dollars that are probably going to be see them as safer.” shock to everyone, it really has changed more expensive for them now.” The main part of the carrier’s tra c the culture among foreign investors. When looking at credits in the region, is connecting Africa to Europe and the Political risk is now part of the due lessors often have to look further than the Middle East. Berrada says that this tra c diligence process in a way it hasn’t been profit and loss and the balance sheet of is growing, but he has seen a decline previously and I don’t see that changing the airline. They also look at the airline in competition from foreign carriers into any time soon,” says Victoria Mackay, management teams, the capacity, the Morocco. founder of VLM Advisory, a MENA political codeshares and the alliances – to name a “EasyJet has decreased this year from risk consultancy. few variables. Morocco,” he says. “Like us, they have seen She adds that it takes only one big “It brings up a whole new area in terms that the pure Moroccan-Europe tourism is incident such as the Russian Metrojet of assessing the risk in those areas from a decreasing, so there is less LCC [low-cost passenger aircraft coming down over lessor perspective,” says Seymour. carrier] competition.” the Sinai Peninsula in 2015 to reduce the Mackay adds “It’s very di cult to conduct amount of foreign investment into that due diligence on a company or individual in Algeria’s oil and ECA worries country. that region without assessing their political Unlike Morocco, its neighbour Algeria is In response to these attacks and a context because political change has such mainly an oil-driven economy. The country’s change in the Egyptian tourism landscape, a bearing on the financial fortunes of local two main airlines in Algeria are Air Algerie Cairo-based airline Nile Air has managed entities and individuals.” and Tassili Airlines. to find additional revenue through other Seymour says that if the situation is to The leasing source says: “Now with the avenues by adding new routes to its improve for North African airlines, security oil price going down, it’s less financially network, such as from Sharm El Sheikh to needs to remain a priority for the countries attractive for those airlines, because Air Amman in Jordan. in which they operate. Algerie is owned by the state and Tassili Speaking to Airfinance Journal, the “They’ve got to think, ‘We’ve got to prove Airlines is owned by Sonatrach, an oil carrier’s chief executive o cer, Ahmed Aly, to the industry that we’re a safe place to company.” says: “I think one thing financial institutions be’. There is nothing much they can do Air Algerie has a fleet of 59 aircraft, and leasing companies understand is that about the low oil price, but they can do a comprising 25 737-800s, 12 ATR 72-500s, Egypt’s still a very strategically-important lot about security,” adds Seymour. “That’s eight A330s, five 737-600s, three ATR 72- country and there is an overriding sense within their control.”
www.airfinancejournal.com 23 Consolidation analysis
Why lessors will continue to consolidate The aviation leasing sector will continue to face further consolidation following the purchase of CIT Aerospace by Avolon and its Bohai Leasing parent group, say lessor sources.
ince 2014, the leasing industry has Sevolved through consolidation and the emergence of new platforms. A spate of mergers and acquisitions has allowed cash-rich Asian businesses to enter the sector as the industry is increasingly viewed favourably by yield- hungry long-term investors. The momentum is expected to carry on this year. A leasing source says: “2017 will see more platform acquisitions, given the drive to consolidate and the continued influx of capital to the sector that will quickly determine that a ‘go alone’ strategy is not the right way forward.” More second-tier lessors could fuel their growth by acquiring platforms and/or Robert Martin (left), Managing Director and Chief Executive O cer of BOC Aviation and portfolios to become first-tier lessors. Domhnal Slattery (right), CEO of Avolon, Hong Kong, November 2016 “It is a possibility because generic growth is so hard in today’s market with lease returns being so low. We see the “First, it is the desire of equity to switch of AerCap, said there will be continued likes of AerCap selling o its portfolio to a di erent investment sector and consolidation in the leasing sector as and returning cash to investors via share second, it is because so many of the new there are significant benefits of scale. repurchases vs reinvesting in aircraft,” says entrants are sta ed for good times – they “I would expect to see more of the another source. have no real ability to deal with a single second-tier guys roll over,” he says. “We are still seeing plenty of liquidity and repossession – let alone, say, several – However, another lessor argues that not only in China. Canada has, at present, and lease restructurings simultaneously.” size is not essential. only slightly cracked open its co ers and “I think it’s more important to ensure there’s a lot more there. We have a number More mega-lessors? that the liability side of the balance sheet of sources in the Middle East suggesting In a poll at the 17th Asia Pacific Airfinance is financed e ciently and that doesn’t they are ready to invest. Korea is a quickly conference last November, 85% of the necessarily have to come as a result of developing market also,” he adds. audience expected more operating leasing size,” the lessor says. Another leasing source believes the platforms to be acquired by Chinese He points out the di culties of making catalyst for acquiring other platforms “will be entities in 2017. good returns in today’s market, especially a softening in the market” where the smaller Another 12% opined that this will not be the on sale and leaseback transactions. or boutique lessors start to struggle. case, while the remaining 4% were unsure. “With the OEM’s juggling an order The main reason for this struggle will be In an interview with Airfinance Journal backlog it is impeding their placement two-fold, he says. Aengus Kelly, chief executive o cer (CEO) opportunities for their own orderbooks. Options are few, but doesn’t it point to the fundamental structure of the leasing business changing? You have We are still seeing plenty of liquidity and not only to restructure your balance sheet to China. Canada has, at present, only slightly cracked be a lender via some hybrid leasing structures as well as a traditional lessor,” open its co ers and there’s a lot more there. We have he comments. Airfinance Journal’s 2016 top 50 lessors a number of sources in the Middle East suggesting showed the lessors represented $260 they are ready to invest. Korea is a quickly developing billion-worth of assets, up from $234 market also. billion in 2015.
24 Airfinance Journal February/March 2017 Consolidation analysis
Their revenues and net income are also fleet size – GECAS, AerCap, SMBC Aviation a group of operating lessors, sources up on aggregate. The top 10 lessors had Capital, BBAM and Nordic Aviation Capital indicate. Avolon, Dubai Aerospace $18.6 billion combined revenues this year, (NAC) – contracted by 200 units year-on- Enterprise and Macquarie Group, which up from $15.7 billion last year. Net income year. The race to the top could potentially has teamed up with Ping An, are all has gone up to $4.1 billion from $3.1 billion mean a group of five large lessors by 2020. involved in sales talks regarding the AWAS over the past 12 months. platform, say sources. The top 50 lessors ranking showed Lessor number three However, bids for AWAS were due as a fleet of approximately 8,675 aircraft Avolon’s CEO Domhnal Slattery has said Airfinance Journal went to press. Following under ownership and management. This the purchase of CIT Aerospace is “not the the bids the market should “know more compares with 8,185 units a year ago. summit” of the lessor’s ambition. then” about which firms will emerge as the The top 10 lessors account for 5,200 Bohai Leasing, which is majority owned leading bidders for the platform, says a aircraft or 60% of the top 50 ranking. In last by HNA Group, completed the purchase of source involved in the sale process. year’s ranking they represented almost two Avolon in the first quarter of 2016. Avolon Terra Firma entered into sales talks thirds with 5,330 units. merged with Bohai’s existing leasing entity, last year with Chinese-owned entities Exposure to the widebody market by Hong Kong Aviation Capital. regarding the purchase of AWAS. But talks the top 50 further reduced over the past The completion of the acquisition of CIT with ICBC Financial Leasing and Bohai 12 months to 15% from 15.3% a year ago. Aerospace, which is scheduled for the Leasing broke down due to turmoil in the However the top 50’s narrowbody market first-half of 2017, would propel Avolon to the Chinese market, which resulted in the share is now at 69%, a 0.5 percentage number three spot in the lessor ranking by nation’s stock market coming to a halt point up from the 2015 figures. fleet size behind AerCap and GECAS. twice in one week, triggering a further Aside from NAC, a regional lessor Now all eyes are on the sale of Terra weakening of the yuan. specialist, the top 50’s footprint in the Firma Capital Partners’ AWAS, which So will a sale happen this time around? regional jet and turboprop market over the has been downsizing its fleet size and BOC Aviation’s CEO Robert Martin opines past 12 months has contracted by more personnel during the past couple of years. that a sale is more likely now, but it than 10%, confirming a trend to focus on the The lessor sold a 90-aircraft portfolio “depends on the price and what Guy Hands, mainline sector. to Macquarie AirFinance as well as the founder of Terra Firma, has in his head.” The report shows that 455 regional E-notes of an asset-backed securitisation Avolon’s Slattery believes AWAS will be jets and turboprops were owned and/or (ABS) deal covering 30 aircraft to Kahala sold and the owners will get a “fair price”. managed by the top 10 lessors, down from Aviation in 2015. “If they don’t sell it, I would not like being last year’s 510 total. The remaining 245-aircraft and its a limited partner investor in Guy Hands’ Overall, the largest lessors in terms of platform have attracted the attention of fund. I would be pretty upset,” he adds.
Tamweel Aviation Finance to further expand its platform
ubai-based Novus Aviation Capital and outlook for this product especially structured by Novus o ering the customer Dis looking to further expand the size with the ongoing changes we have been a turn-key solution. of its financing leasing platform, Tamweel witnessing on both the export credit TAF also financed its first A330-300 Aviation Finance (TAF). agencies and regulatory fronts,” he adds. model for Hong Kong Aviation Capital, The company was initially formed in The company was set up to facilitate but in late 2015 it expanded its asset 2013 by Novus in partnership with Airbus the funding of aircraft acquisitions, with investment profile with its first single-aisle and Japanese lender Development Bank a focus on the twin-aisle segment. The transaction. of Japan (DBJ) as a sponsors of the project. Airbus A380 has been the core of the initial TAF agreed a financing deal with Virgin German lender NordLB then joined in investments. America covering three A320s that were October 2014. TAF has grown to a portfolio size of more delivered in the first half of 2016. In an interview with Airfinance Journal, than $1 billion of assets by market value. It also closed financing on two A319s for Novus’s managing director Mounir Kuzbari Its first deals includes the finance leases Avianca. says the financing vehicle intends to further of Emirates A380s with Novus acting as “The mandate has always been to grow this year after a “very successful” overall structuring agent and providing include all types of the Airbus product ramp up. mezzanine and junior tranches through TAF. range including narrowbody aircraft in the “We are working with our partners to The refinancing of two A380s through portfolio with di erent customer profiles in expand the platform over the next few a finance lease for British Airways in Europe, Middle East, Asia, United States months,” he tells Airfinance Journal. November 2014 was innovative as it and Latin America.” The vehicle is an integrated financing provided dual denominated tranches. The In January, TAF provided mezzanine platform that o ers alternative financing deal was structured as a 14-year senior loan loans for the financing of three A321s for solutions to airlines and aircraft leasing and a seven-year junior loan. The senior Singapore-based lessor Avation. Two companies by providing secured junior and loan is 50% euro-denominated and 50% European banks provided the US dollars mezzanine debt loans. US-denominated, with NordLB providing loans on the aircraft that are on lease to “TAF provides financing solutions to the Euro potion and Qatar National VietJet Air. airlines and lessors who are looking for Bank the dollar-denominated loans. The “TAF’s mezzanine facilities are a useful that incremental loan-to-values. We will junior loan is 100% in dollars, with Qatar leverage tool for transactions of this continue growing this part of our business National Bank providing 50% and Tamweel nature,” said Je Chatfield, executive based on the very good market reception providing 50%. The deal was arranged and chairman at Avation
www.airfinancejournal.com 25 Interview A career at the top Denis Kalscheur, Aviation Capital Group’s former chief executive o cer, left the company at the end of 2016. Joe Kavanagh caught up with him at the 19th Annual Airfinance Conference in Dublin to hear about some career highlights, his final months at ACG and his new role at Avolon.
irfinance Journal: One of your first global markets and key international airport Amajor aviation deals took place slots and service protected by bilateral after you were parachuted from the agreements that we had to preserve. If parent company in to US cargo airline we hadn’t been careful in how we dealt Flying Tigers in 1983, to manage a major with the lenders, we could have lost all of debt restructuring. The airline had run that. The real task, stepping in, was to get into serious problems after increased all these people to come to the table. We competition in the freight market and had to come up with a creative solution a dramatic increase in borrowing costs because there was no way to go back and during the recession and credit crunch of renegotiate each deal in the short time we the early 1980s. What was that process had. It was like playing a three-dimensional like? chess game. So what we did, which was very creative, Denis Kalscheur: I started out at the along with the more than 60 lenders holding company, Tiger International, we had, was to create an “override which was Flying Tiger’s NYSE-traded agreement”. We all agreed on a common parent company, and then went to the document that overrode the provisions of airline to do the restructuring. The prime every other document, which took 100% rate had reached 20.5% in the early ’80s of the lenders. That allowed everybody and capital-intensive companies such as to move forward. It got a little tricky at the airlines, which carried heavy financing, end, because we had accumulated cash were hit hard. after having announced the restructuring, I think we went about it the right way. which was a moratorium on repayment until Maybe other companies would have taken we came to an agreement. The lenders more drastic actions, but we successfully wanted a pay down from most of that cash. restructured the airline outside of a Any deal has deal The banks had been most exposed, so bankruptcy. We had a complex set of momentum. You build they were willing to work with us within lenders: we had unsecured and secured limits and we negotiated a new revolving banks, we had institutional investors it and you get things credit with the banks for the liquidity we investing in our equipment trusts and we needed to run the business. This allowed had equity and debt investors through tax to a marshalling point us to take our cash and make a pay down leveraged leases on 747s. where the deal is ready under the new override terms and then The complexity of the restructuring was rely on this new revolving credit facility this: we had lenders in many di erent to happen. If you miss it, for liquidity. So you had to make sure categories, some who were highly secured, everything was in place before parting with who couldn’t care less what happened to it’s like the wave cresting the cash. the airline from a collateral protection point and then you have to Any deal has deal momentum. You build of view. They could sell their assets and it and you get things to a marshalling point our equipment trust would get paid back. wait for the wave to form where the deal is ready to happen. If you But it was the under-secured and totally miss it, it’s like the wave cresting and then unsecured lenders for whom everything again. We were able you have to wait for the wave to form again. depended on a successful restructuring to to bring this disparate We were able to bring this disparate group get their money back. When you’re doing of lenders to that marshalling point on the an overall financial restructuring like that, it group of lenders to that very last business day of 1983. We had to takes 100%. Everybody has to agree. Every marshalling point on the get it done, and we did. There’s nothing equipment trust holder, all the leveraged like a deadline. lease pieces, all the foreign currency debt, very last business day all the banks have to agree and sign o or As chief financial o cer at AirCal, you it doesn’t get done. If you went and fixed of 1983. We had to get it were involved in diversifying the airline’s one to the disadvantage of somebody else, done, and we did. There’s sources of financing. Generally speaking, the other people could take you down. how does the capital structure of airlines So how do you convince everybody to nothing like a deadline. di er now from back then? cooperate? There was a lot that Flying Tigers had Denis Kalscheur, Aviation Capital Group’s There was not a big operating lease option in terms of franchise value, such as its former chief executive o cer at the time. It was at an early enough
26 Airfinance Journal February/March 2017 Interview
market stage where the amount of aircraft Since I was scheduled to retire at the end of 2016, available for operating lease was quite small compared to the total population of it made sense to make the move to a new CEO a bit aircraft that was out there. So you’re talking a small percentage of what it is today, in earlier than planned. It doesn’t matter how good you terms of the operating lease market. are – if the runway is short it’s not a great pitch to say But post-deregulation of the US aviation market there was a lot of airline growth to investors, “Here, buy our stock, but by the way I’m and interest in aircraft as an asset by equity investors who could use the tax benefits not going to be here. of ownership. So a lot of leveraged leases became prevalent because the investors could use the tax benefits and pass some Pacific Life decided it would let a portion of Avolon’s overarching strategy is to of them on to you in terms of lower lease the company go public. That would provide be one of the leading aircraft-leasing rates. The battle at the time for airlines extra capital for growth while keeping enterprises, if not the global number was not only getting the lower rate but at control of the business, which provides one, focused on building a portfolio of the end still to control ownership of the good diversification benefits to Pacific Life. modern, young and fuel-e cient aircraft. asset while keeping the transaction o the Since I was scheduled to retire at the end The CIT acquisition clearly puts Avolon balance sheet. . of 2016, it made sense to make the move in the number three spot and closing Today, the more flexible operating to a new CEO a bit earlier than planned. It in on the couple of larger competitors. leasing option is available which gives doesn’t matter how good you are – if the What has been impressive to me is to see airlines more optionality in dealing with runway is short it’s not a great pitch to say to the thoughtful risk management baked their fleet over time. This is the best of investors, “Here, buy our stock, but by the into all the company’s key processes both worlds between controlling the asset way I’m not going to be here.” and decision-making, which has guided and having fleet flexibility. If you lease a So a logical choice was for Khanh Tran, the company during its rapid growth. new aircraft, you can have it for up to 12 then the president of Pacific Life, to step This does not happen without a skilled years without the headache of ownership in to do the CEO role for ACG and take it management team and the Avolon team, at the end, and with more flexibility in public. We’ve known each other for years which I have known over the years, is the meantime because the lessor owns so it was an easy transition. equally impressive. Before Avolon, that the aircraft and can move it around if [Note: ACG’s partial IPO is ongoing] team built another global top five player in necessary. You have to negotiate your way the leasing industry and their experience out of the cancellation, of course, and that Finally, in January 2017, you accepted across business cycles is evident in how might involve other lease arrangements, a place on the board of directors of they run the business – most particularly but it just gives you a lot more flexibility. Avolon. What made you take the role, in their approach to risk management. and can you share some insight into the Another strategy objective of the You joined ACG from its parent, US leasing company’s strategic goals? company is to achieve investment- insurance company Pacific Life, at the grade [IG] status for its debt. While not end of 2012. How did you find your I wanted to continue to be engaged in the quite rated IG for now, the substantial way to the lessor, and what was the aviation industry without taking on a day- oversubscription of Avolon’s just- company’s thinking behind its planned to-day executive role but in an influential completed $8.5 billion of institutional partial initial public o ering? role with a global company accomplishing funding and the fact that it is operating meaningful things. Serving on the board of with investment-grade metrics today I joined Pacific Life in late 2007 and one of Avolon clearly meets all those goals points toward achieving investment-grade the attractions was that part of the role was for me. status with a bit more seasoning. involvement with ACG. I knew the aircraft- leasing business and had introduced the companies to each other in the mid-1990s. Then the financial crisis hit, right after I joined Pacific Life. My main focus had to be maintaining the financial strength of Pacific Life, which was the parent company, and taking advantage of acquisitions following the onset of the financial crisis. But I always stayed close to ACG. When Steve Hannahs, former CEO, retired, I was asked to step in and run the aircraft leasing business. At the end of 2015, when the Pacific Life board decided to consider a public o ering of ACG, it wasn’t to sell ACG outright – it was to provide ACG with a new source of capital for growth while retaining control of ACG. ACG had become a sizeable piece of the parent company, hitting the mid-teens as a percent of capital – and that’s pretty significant. And looking at the scaling up that was going on in the aircraft-leasing business and the capital that was taking, Source: Avolon
www.airfinancejournal.com 27 India
Cautious confidence in post-Kingfisher era
Michael Allen explores how recent legal and infrastructural developments in the Indian leasing market are helping repair the country’s damaged reputation after the disastrous collapse of Kingfisher Airlines in 2012.
f your flight lands in Delhi, you will by the airline’s failure. DVB confirmed it The Indian aviation “Isee in one corner of the airfield a few had two A320s with Kingfisher. ILFC, which Kingfisher A320s parked on the side just is now owned by AerCap, had at least six industry went through gathering dust – it’s like a little Kingfisher aircraft with the airline. graveyard,” says Sidanth Rajagopal*, a The phrase “Indian airline” therefore has a bit of a rough patch... partner at K&L Gates, who makes frequent an unpleasant ring to it; not just for lessors leaving the aircraft finance trips to India. which dealt directly with Kingfisher, but India su ered a disastrous blow to its also those not exposed to Kingfisher, who and leasing community reputation with the international lessor followed the situation and heard industry community when Kingfisher Airlines folded colleagues’ tales about the di culties with cautious, but the market in 2012 (see box, Kingfisher’s downfall). the jurisdiction. now seems to be booming Few working in the industry at the time But with India’s recent advances in the will be unfamiliar with the horror stories application of the Cape Town Convention and it’s easy to see why. of cannibalised aircraft and protracted (CTC), coupled with voracious demand negotiations to get aircraft out of India, with for aircraft from its fast-growing low-cost Leo Fattorini, head of the Asia-Pacific DVB Bank and ILFC being the hardest hit carriers (see box, SpiceJet’s big order), aviation group, Bird & Bird
*Shortly after this interview, Rajagopal left Kaye Scholer to join K&L Gates as a partner
28 Airfinance Journal February/March 2017 India
those who can forgive India for its past India is a signatory and has ratified the Cape transgressions are reaping the rewards – though full CTC implementation is still Town Convention, but it is still to enact the underlying ongoing and there remains room for improvement. legislation, although it has enacted some subsidiary “The renewed growth is in line with the regulation which requires the Indian Directorate enthusiasm seen in the overall domestic economy and the strong appetite for General of Civil Aviation (DGCA) to deregister an aircraft in the surrounding geographies in Asia. We see more renewed interest for aircraft upon request of an Idera holder. financing aircraft in the region, especially with the right backer and the risk profiles,” Ravi Nath, chairman and managing partner of Rajinder Narain & Co says David Yu, International Bureau of Aviation’s head of Asia. Ravi Nath, chairman and managing partner of Rajinder Narain & Co, says that any spare engines. inevitably translates into more flights and while the market is growing, regulations are Airfinance Journal understands that the the need for more aircraft,” adds Fattorini. not quite keeping pace. idea behind the Idera is that the lessor “India is a signatory and has ratified the holds it, and if the lessor needs to go to DVB and ILFC Cape Town Convention, but it is still to deregister the aircraft and fly it out, it does Airfinance Journal’s Fleet Tracker indicates enact the underlying legislation, although not need to go to the airline. that AWAS, ACG, AerCap, Amentum, BBAM, it has enacted some subsidiary regulation “There is absolute clarity – judicial BOC Aviation, DAE Capital, ILFC, Pembroke which requires the Indian Directorate precedent says that there is no choice but Capital, RBS Aviation Capital and Volito General of Civil Aviation (DGCA) to for the DGCA to deregister the aircraft,” Aviation Services all had exposure to deregister an aircraft upon request of an says a source. Kingfisher. Idera holder,” he says. Leo Fattorini, head of the Asia-Pacific But DVB and ILFC’s exposures were the An Idera is an Irrevocable Deregistration aviation group at Bird & Bird in Singapore, most widely publicised because of their and Export Request Authorisation, a says that he and his colleagues have public battles with the Indian government voluntary measure that provides greater recently advised banks, lessors and airlines to get their aircraft back. security to creditors by preventing a debtor on increasing numbers of deliveries into At the end of 2012, DVB suspended all from flying an aircraft to a jurisdiction where India and he expects this trend to continue. financing to Indian carriers and sued the the Cape Town Convention does not apply. “It’s no secret that the Indian aviation Indian DGCA for its failure to deregister two In October, the Indian government industry went through a bit of a rough patch jets it wanted to repossess from Kingfisher. announced a draft rule that would benefit following the demise of Kingfisher, leaving Bertrand Grabowski, then member of the lessors seeking to repossess aircraft from the aircraft finance and leasing community board at DVB, said at the time that holding India. cautious, but the market now seems to be security over aircraft registered in India did Rule 32A, concerning the export of booming and it’s easy to see why,” he says. not give acceptable protection to owners aircraft, states that if an Idera holder “India has a vast population and, more and mortgagees. applies for export of an aircraft, the central recently, there has been a surge in those ILFC had to repossess six jets on lease government will take action within five with disposable income, which, coupled to Kingfisher. Henri Courpron, then chief of working days to facilitate the export and with the rapid growth of Indian LCCs ILFC, said that his lessor had never faced a physical transfer of the aircraft, along with [low-cost carriers] o ering cheap fares, situation as bad as Kingfisher. Courpron added that complying with Cape Town is critical for the air finance industry, and those who do not comply may struggle to obtain financing for aircraft at all. “Comply or don’t fly,” was his pithy warning to India. DVB Bank declined to be interviewed for this article, saying only: “We don’t really have much new to say on the topic of DVB and India. Our position on India remains as it has been for the last several years since the collapse of Kingfisher. That said, we continue to observe the development of the airline industry in India and monitor the changes to the country’s legal system and may re-enter the market when we again It’s no secret that the Indian aviation industry went feel comfortable.” AerCap, which now owns 100% of ILFC, through a bit of a rough patch following the demise declined to comment. of Kingfisher, leaving the aircraft finance and leasing 5/20 rule – minus the five community cautious, but the market now seems to be Another restriction on some Indian carriers’ growth plans has been the government’s booming and it’s easy to see why. enforcement of the 5/20 rule. In the early 1990s, India privatised some Leo Fattorini, head of the Asia-Pacific aviation group at Bird & Bird of its industries, including aviation, and
www.airfinancejournal.com 29 India
with that came several new entrants. A Cautious confidence making India a completely comfortable new regulation was brought in – the 5/20 With these positive steps towards making jurisdiction for lessors both from a legal rule – which stated that to be able to fly India a more lessor-friendly jurisdiction, it and infrastructure perspective, market internationally as an Indian carrier, an airline seems the main thing that could still hold participants should be optimistic about the must be five years old and have at least 20 the country back is its infrastructure, which future of the country. aircraft in its fleet. Some industry heads view remains crucially underdeveloped. Rajagopal says: “Cautious confidence is it as a protectionist rule for the government- “To allow India’s airlines to expand, there what all lessors should have.” owned flag carrier Air India. is a pressing need to further develop the Newer Indian carriers such as Vistara country’s airport infrastructure and build and AirAsia India are a ected by the rule more airports and runways at a much faster and therefore are restricted to flying only pace than current developments if they are domestic routes. to meet their projected growth plans,” says Kingfisher’s downfall “Some of the more established Indian Jacovides. carriers with more than 20 aircraft and over Kaye Scholer’s Rajagopal says: “The Kingfisher Airlines collapsed in 2012 five years of operation were presumably infrastructure gap is the fact that, of about because of financial di culties. DVB quite happy with the rule as it made it harder 450 airfields in India, only about 70 of them Bank and ILFC (now owned by AerCap) for relative newcomers such as Vistara and are useable. The interconnectivity is really were the main creditors. AirAsia India to operate internationally,” says poor. They have airstrips, but they don’t Kingfisher had its operating license Bird & Bird’s Fattorini. have air tra c control, for example.” revoked by the Indian Directorate General “There’s no reason why the existing But the government is working on of Civil Aviation (DGCA) in October 2012 carriers would want to change the rule that improvements, and the city of Vijayawada after failing to supply the regulators with was e ectively hampering the progress of in the state of Andhra Pradesh is one an acceptable turnaround plan. new carriers,” he adds. example. Its airport serves as a hub for Air DVB Bank sued the DGCA for failing to Airlines including IndiGo, SpiceJet, Jet Costa, but just five years ago it lacked even deregister two Kingfisher A320s. Airways and Air India are exempt from a proper luggage belt, so disembarking Airfinance Journal argued in March the rule, and are able to fly internationally. passengers would simply select their 2013 that the situation was “obviously Foreign carriers such as Singapore Airlines luggage directly from the luggage trolley calamitous for the lessor and banks and Emirates are able to fly routes such as like at the end of a long-distance bus involved, but it has wider implications for Singapore to Delhi in much larger aircraft journey. “Even with that really small airfield the aviation community as a whole”. than the Indian carriers. Because some it’s still a city of about six million people,” An Airfinance Journal editorial at the Indian airlines are impeded by the rule, says Rajagopal. time said: “The Indian government’s foreign carriers reap the benefits. But in January, a new terminal was delay over its return of the jets shows But Airfinance Journal understands that inaugurated and the country’s civil the weakness of rule of law in the the “5” aspect of the rule has now been aviation minister said the runway would be country. Depressingly, it also highlights relaxed, while the “20” remains – for now. extended to accommodate bigger aircraft. some of the limitations of the culture of “The 5/20 issue is going to go away. The “If it’s successful, the Indian aviation compliance that Cape Town supposedly government has already said that that is industry 10 years from now will look helps promote.” almost a non-issue,” says Rajinder Narain & significantly di erent from what it looks Co’s Nath. today,” says Rajagopal. Mario Jacovides, global head of the The Indian government has a so-called structured and asset finance group at Allen Regional Connectivity Scheme in draft & Overy, says that the Indian government’s phase, and the industry hopes this will lead SpiceJet’s big order proposal to relax the 5/20 rule would to more improvements in the country’s enable new airline entrants in the market, aviation infrastructure. SpiceJet has announced a commitment such as Vistara and AirAsia, to compete The scheme, Rajagopal explains, allows for up to 205 aircraft with Boeing. on international routes without having to airlines to approach the DGCA to choose Booked at the end of 2016, the order wait for the current five years of operations. a route from those o ered under the includes 100 new 737 Max 8s, SpiceJet’s While this would be beneficial for them, it scheme – which are all tier 2-tier 3 or current order for 42 Maxs, 13 additional may a ect the market share of incumbent tier 3-tier 4 city routes – whereupon the 737 Maxs, which were previously airlines which are complying with those DGCA can issue that airline an exclusive attributed to an unidentified customer rules. 10-year permit to operate the route, though on Boeing’s orders and deliveries “These rules have been the subject the airline must commit to investing in website, as well as purchase rights for 50 of much debate and discussion and a providing services on that route. additional aircraft. compromise may be needed to move Some of these lower tier cities only have SpiceJet, an all-Boeing jet operator, forward,” he says. runways capable of landing small aircraft, placed its first order with Boeing in 2005 even sometimes only unpressurised aircraft for next-generation (NG) 737s and now such as Dornier 228s. operates 32 737NGs in its fleet. “It will have to be a very, very new Kiran Koteshwar, chief financial o cer The 5/20 issue is concept developing here, which hasn’t of SpiceJet, told Airfinance Journal that been done anywhere else. You will have to the “long-term order” gives the company going to go away. The have proper scheduled airlines with these “strategic direction”. super tiny aircraft,” says Rajagopal. He says: “We have [now] restructured government has already “Yes, there is an infrastructure issue. Yes, completely: We have paid our dues, we said that that is almost a it’s being addressed to a certain extent, have not taken any haircuts, we have but it won’t be addressed fully unless you paid the taxes and everything that is non-issue. have carriers who actually look specifically required. We are now in a growth part at using their aircraft and connecting tier 4 and our load factors have been the Ravi Nath, chairman and managing partner and tier 3 cities to tier 2 cities.” highest in the market.” of Rajinder Narain & Co While there is still work to be done in
30 Airfinance Journal February/March 2017 Financing
Changing composition of financing sources in aviation
Professor David Yu, Istat certified aviation appraiser, examines trends in the aviation finance sector driven by the role of insurance companies and commercial banks.
hroughout the history of aircraft operating leasing industry in the mid-1970s players such as private equity and hedge Tleasing, various financing trends by the pioneering International Lease funds, and tax equity; capital markets have come and gone while the industry Finance Corporation (ILFC) and Guinness (30% of 2016 funding), including asset- has grown significantly to the current $126 Peat Aviation (GPA), aircraft leasing has backed securities (ABSs) and enhanced billion forecasted of new delivery funding continued to grow to where it is 42% of equipment trust certificates (EETCs); requirements for 20171. the world’s fleet2. and aircraft and engine manufacturer There are now more commercial This growth continues to be driven financings (2% of 2016 funding) with a banks than ever before involved in the by the demand for air travel as global total of $122 billion of new aircraft funding equity side of the business, along with economies have grown along with the requirements in 20163. newer capital sources such as insurance number of airlines, as well as revenue companies. These new players are passenger kilometres and available seat Export credit financing additionally more diverse in geographical kilometres. Export credit agencies (ECAs) have been break down by their funding sources a significant source of funding, especially compared with the traditional western Global state of aircraft funding during the financial crisis, but this has players and newer eastern players. Airlines and aircraft have traditionally been been trending lower as capital markets As 2017 further develops, several financed by equity and bank financing financing has increased. The recent low trends can be observed in relation to facilities. These sources have continued exhibited in 2016 has been the uncertainty geographical sources of the funding as to evolve with the support of the aircraft of US Export-Import Bank (US Exim), given well as its characteristics. manufacturers and other innovative its large historical support, especially to structures by the continued increase in aircraft deliveries. Background demand from the users, mainly the airlines. After letting its charter expire in July Sources of capital for aircraft transactions These innovative financing structures 2015, the US Congress reauthorised the have had many forms since the days of include the use of the operating lease by bank in December 2015, but it is still in the original aircraft finance leases back in capital sources such as commercial banks a state of limbo because it is not able 1968 with the start of McDonnell Douglas and leasing companies both captive and to conduct new business given it awaits Finance Corporation (later after the non-captive to banks or manufacturers. Senate confirmation of members to merger renamed as Boeing Capital) and The other sources of funding include: reconstitute a quorum. Only with a quorum leases of DC-8s and DC-9s. Before that, cash or equity (28% of 2016 funding); can new funding decisions be made. the aircraft industry was mainly funded by export credit agencies (7% of 2016 classic equity and bank debt. funding); bank debt (33% of 2016 funding) Graph 4: Percentage of Boeing From that time to the start of the aircraft by commercial banks, institutional Deliveries Funded By US Exim (Source: Boeing Capital Corporation)
China’s history of a formal export Boeing Delivery Funding 2016 credit bank is far shorter that the West’s. The Exim-Import Bank of China (CExim), ● Manufacturing one of the three policy banks under the ● Cash 26% State Council, was founded in 1994 with ● Capital Markets a mission to implement state policies to ● Bank Debt promote the export of Chinese products ● Export Credit and services. Unlike US Exim, CExim 31% funds projects directly instead of through guarantees or insurance, which is akin to what US Exim did in its early years. While direct aggregate funding numbers 34% are not published, the author has seen a significant rise in new financings by CExim especially over the past few years. 9% This increase in funding is in line with the 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F continued increased share of China’s new deliveries in the global aviation market. Source: Boeing Capital Corporation CExim will continue to have a larger impact 1 Boeing Capital Corporation Current Market Finance Outlook 2017. in respect to the global ECAs and the 2 JP Morgan. 3 Boeing Capital Corporation Current Market Finance Outlook 2017.
www.airfinancejournal.com 31 Financing
Airbus Delivery Funding through October 2016 The story of Boullioun is interesting because it was bought from Sumitomo Trust and Banking by Deutsche Bank in 1998 and subsequently sold to WestLB, another German bank, in 2001. WestLB, ● SLB 30% once quite active as an equity investor, also ● Manufacturing 1% had a 35.5% shareholding in Singapore Aircraft Leasing Enterprise (SALE) (now ● Commercial Debt Airline 29% BOC Aviation) until its sale to Bank of China ● Commercial Debt Lessor 3% in 2006, when it decided these were non- core assets and refocused on its traditional ● Capital Market 6% European banking business. WestLB too had issues in its shipping portfolio and has ● Cash Airline 19% further retrenched and this could be said ● Cash Lessor 12% about many of the European banks in the space. The shipping problem story will continue to be an impact, especially for
Source: Airbus European banks. In Russia, VEB, Serbank and VTB banking groups have also been active overall global aircraft financing market. also used their balance sheets to become through their leasing subsidiaries. Lately, This, in addition to the hopeful resolution equity investors. Dean Witter was one of the they have encountered di culties with of the quorum issue at US Exim, will have original founding shareholders of Aviation sanctions and currency issues. global ECAs play a larger role in the overall Capital Group (ACG) in 1986. The merged All of the above has happened as the aircraft finance market. Morgan Stanley Dean Witter combined their East and the Middle East have seen large Since the tail end of the financial aircraft portfolios into the acquired Awas in increases in activity in the sector. Japan recession, capital markets have seen 2000. The end of this era came when John originally had a lot of interest in aircraft a significant rise in the number and Mack took over as chief executive o cer leasing – for example, with Sumitomo Trust magnitude of deals and it has risen to and almost immediately sold Awas to Terra and Banking Company’s acquisition of represent about one-third of all new aircraft Firma once it was determined to be a non- Boullioun in 1994 from the manufacturer’s funding. These are represented by various strategic asset. namesake founder and its subsequent sale securitisation transactions, including ABSs Today in the US, Bank of America Merrill to Deutsche Bank in 1998 as a result of the and EETCs. During this period, the vast Lynch and CIT are still active as bank- financial crisis of Japan Inc. This interest majority of the capital markets deals have owned lessors through their mainly Irish in aviation was resurrected post-2010 and been completed in the West but, in Asia, subsidiaries. CIT will soon be removed from was highlighted by SMBC’s acquisition of the market has only just started. There are this list when the expected closing of the RBS Aviation Capital in 2012, among other more innovative financing structures now sale to HNA Group is completed in the first merger and acquisition transactions by being completed in onshore China and quarter of 2017 because it too has been other local parties. Australia’s Macquarie, Hong Kong. deemed a non-core asset. Commonwealth Bank of Australia and I predict that this trend will continue Wells Fargo too entered the space Investec have all been active principal because more capital markets deals will through a joint venture with Avolon in investors. Middle Eastern banks joined the be completed globally in 2017 but not by 2013. In Europe, DVB, Santander and mix, including the National Bank of Abu much in relative terms to other sources. Standard Chartered, through its acquisition Dhabi. The number of capital markets transactions of Pembroke in 2007, are still active as In China, almost all of the top 15 banks in Asia will increase substantially, along with investors. It is interesting to note that by assets4 are active as investors through the expanding interest by financial players Standard Chartered is now in a joint venture their owned leasing companies, except as described below, but as a percentage of with an undisclosed Chinese investor for a for Postal Savings Bank of China and the overall global market, this will not move separate aircraft leasing investment entity. Agricultural Bank of China, a policy bank. the needle much in 2017. The once active HSH Nordbank, through With the exception of Bank of China its formation of the Amentum platform, has through its acquisition of SALE in 2006, Commercial banks as investors since been sold to its management in an all the other banks’ activities are newly Commercial banks have always played management buy-out. This was because formed financial leasing entities created a significant role in the aviation finance the bank has downsized as a result of the after the 2007 edict by the China Banking market. They have traditionally provided problems with its shipping portfolio. Regulatory Commission allowing the financing facilities, both secured and creation of financial leasing entities owned unsecured term or revolving credit facilities. by banks. Recently there have been more unsecured While financial leasing companies could term loan facilities completed at the lessor Capital markets be formed under the Ministry of Commerce, company level where traditionally the bank-owned financial leasing proved commercial banks have focused on the have seen a significant even more popular as new Administrative senior secured financing of specific aircraft rise in the number and Measures for Financial Leasing Companies assets. In addition, more commercial banks (Order of China Banking Regulatory have again acted as lessors and have also magnitude of deals and Commission No 3) were issued in 2014 become equity players. that lowered the barriers to entry into the One of the sub-trends is in the change it has risen to represent financial leasing industry. These lessors are of overall mix in terms of geography. In the about one-third of all new now some of the top 20 globally, according late 1980s and early 1990s, banks such to Airfinance Journal’s Top Lessors 2016 as Morgan Stanley not only arranged but aircraft funding. by aircraft: BOC Aviation is eighth place
32 Airfinance Journal February/March 2017 Financing
Global Industry Funding Breakdown 2016 2017
● Manufacturer ● Manufacturer ● Cash ● Cash US$122bn ● Capital Markets US$126bn ● Capital Markets ● Bank Debt ● Bank Debt ● Export Credit ● Export Credit
Source: Boeing Capital Corporation
with 267 aircraft; ICBC Leasing 12th with group has continued to expand, including 218 aircraft; and CDB Leasing 17th with 148 There is a new trend acquiring Boullioun in 2005 and embarking aircraft. Meanwhile, Minsheng Financial on a new joint venture with NWS in 2016. Leasing is 46th with 39 aircraft. that is emerging in aircraft Other mid-sized insurance companies in Looking at the top 50 lessors by value leasing of commercial Europe have also started to invest directly 2016, BOC Aviation is in sixth place ($11.4 into aircraft leasing assets. Generally, billion), ICBC Leasing is eighth ($10.2 banks downsizing their these firms have invested in similar profiled billion), CDB Leasing is 13th ($6 billion), investments such as infrastructure or real Bocom Leasing is 19th ($4.2 billion) and investments. assets through ABS, EETC or other public Minsheng Financial Leasing is in 41st place and non-public equity and debt. ($900 million).5 This trend will continue Increased interest in the sector from as the demand for aircraft in the region sub-category of the Basel Committee large insurance companies in China increases. on Banking Supervision, a category that has also emerged. Like its compatriot In addition, there is a new trend that is “generally exhibits higher risks and losses” banks, most of the major insurance firms emerging in aircraft leasing of commercial than other categories of lending. Basel IV in China have created financial leasing banks downsizing their investments. would, therefore, have negative e ects for companies under China’s Ministry of Investec, for example, recently sold its 20% aviation and higher financing costs when it Finance regulations and have primarily share of Goshawk Aviation to Hong Kong is enacted. focused on finance leases, although some based co-shareholders Chow Tai Fook ECAs, on the other hand, have a have started specific aviation divisions Enterprises (CTFE) and NWS Holdings cover e ect on this standardised higher and others have diversified into operating Limited, which now both have 50% risk rating. Areas requiring large capital leases. shareholding. requirements such as aircraft leasing and These new players include Ping An Goshawk is Investec’s third aircraft private equity may propel banks to re- Insurance ($753 billion in assets in 2015 leasing platform, along with Global Aircraft examine and restructure further or leave and ranked number five top global Fund and Aircraft Syndicate Limited. It is these investments. insurance company), China Taiping also interesting to note that Goshawk was In addition, the industry is seeing more Insurance ($63 billion in assets in financial originally set up with backing from Investec, insurance companies come into the space. year 20156) through its joint venture with CTFE and Cheung Kong (CK), but CK Insurance companies with their large Sinopec, and China Life ($378 billion in subsequently sold its stake in the lessor to investment mandates have traditionally assets in 2015 and number 20 top global NWS. CK has since established Accipiter invested in public equities, capital markets insurance company) through its joint and several other joint ventures with global and alternative investments such as hedge venture entity.7 aircraft lessors. funds. Through these asset classes, This is not a surprising trend given Another driver rationale for this trend insurance companies have had exposure that most financial groups and large is the increased implementation higher to the aircraft leasing companies through conglomerates have joined the reserve capital requirements on global one or multiple streams. Some insurance bandwagon in investing directly in aircraft banks by Basel III regulations enacted companies have direct investments in leasing assets. As the industry continues by the global financial crisis and set aircraft leasing assets, which started when to grow in 2017 and beyond, even more for implementation shortly. In addition, ILFC (one of the founding companies in the players from insurance companies and proposed amendments to the final Basel III space) was acquired by AIG Group in 1990. other sectors will be entering the industry. even before its implementation, uno cially Subsequently, AIG sold its ILFC subsidiary These new capital sources will continue Basel IV, has even more stringent after the financial crisis to AerCap and took to change the composition of finance requirements that would standardise risk a large shareholding in the new combined capital globally and increase weight models and do away with internal risk entity in 2014. towards insurance companies and Asian- ratings. Other large notable direct investments based companies along with the continued Aircraft leasing is under the specialised by insurance firms include Pacific Life growth of the global aircraft leasing lending exposures class and object finance Insurance Company in ACG in 1996. The industry.
4 The Largest Banks in China (by Assts as of 30 June 2016) http://www.relbanks.com/asia/china. 5 Airfinance Journal Leasing Top 50 2016 Supplement https://airfinancejournal.com/Magazine/Download/84 6 China Taiping 2015 annual reports. 7 Basel Committee on Banking Supervision. Second consultative document. Standards. Revisions to the Standardised approach for credit risk. March 11, 2016 http://www.bis.org/bcbs/publ/d347.pdf
www.airfinancejournal.com 33 Aircraft profile
Boeing 777-300ER – a hard sell The current widebody market is a di cult one and not even Boeing’s most successful twin-aisle is immune to declining values, according to appraisers.
he 777-300ER is the most successful Tmodel in Boeing’s popular 777 range. The formal go-ahead for the 777 family was announced in October 1990. Original 777- 200 models were available with a choice of powerplant from General Electric (GE), Pratt & Whitney or Rolls-Royce. The stretched 777-300 first flew in 1997 and was sold primarily to Asian airlines, the large majority of which selected Rolls- Royce’s Trent engines. No GE-powered standard 777- 300 aircraft were delivered, but the Source: Boeing manufacturer was awarded sole supplier status on the extended-range 777-300ER version, which was launched in 2002 and ICF believes the initial leases and become available to the entered service in 2003. secondary markets, we expect this trend to 777-300ER market will continue for the next 12 to 18 months. All good things come to an end continue to soften with The demand for this aircraft, reflected in The 777 continues to sell in both passenger the current orderbook, had remained fairly and freighter versions, but orders are further deterioration in stable over the past few years. However, getting scarcer. Boeing’s o cial figures for the lack of recent orders and real demand 2016 show annual net sales of only 17 of values and lease rates in from top-tier operators has started to soften the type. Market conditions and the advent the medium term. the market. Another concern is the Airbus of new competitors are combining to make A350-1000, which is slated to enter service in 2017. With its improved economics, the sales hard to come by. The contract signed Angus Mackay, principal with Iran towards the end of 2016, which A350 may slow future orders for the 777- included an order for 15 777-300ERs, was 300ER, which could have an additional of course welcomed by Boeing, but in the impact on residual values and lease rates. current US political climate Iran Air might -9X will have a range of more than 8,200 When the replacement for the 777 – the not be at the top of everybody’s list of nautical miles (15,185km). The second 777X – starts to deliver in larger numbers, preferred customers. member of the family – the 777-8X – will this will also a ect the future of the current Despite the di cult market background seat 350 passengers and o er a range model, but it is too early to tell when this for new aircraft orders, existing 777-300ERs capability of more than 9,300 nautical will take place and to what extent. CV also are still seen as sound assets by some miles. sees continued pressure on values from investors, as the recent United enhanced Boeing’s launch of the 777X is an attempt some of the aggressive airline campaigns equipment trust certificate (EETC) confirms to recapture its preeminence in the market Boeing is pursuing. CV still feels that this (See United EETC shows 5% di erential on sector but leaves the manufacturer with aircraft will continue to be a desirable 777-300ERs, Airfinance Journal October/ the problem of how to bridge the gap and viable option for many current and November 2016, page 18). until production of the new models gets future operators, but some of the current As part of an attempt to stimulate 777 underway. market trends have increased uncertainty orders, Boeing and GE are phasing in around the future of the aircraft. Longer improvements into current production term, a freighter conversion programme, models aimed at reducing fuel Collateral Verifications (CV) complementing the factory-built 777F, will consumption by 2%. probably be developed. Gueric Dechavanne, vice-president, Future developments commercial aviation services ICF Boeing launched the 777X family at the In the past 12 months, CV has seen the 777- Dubai Airshow in November 2013. The 300ER market soften and lease rates drop Angus Mackay, principal manufacturer is o ering two variants of for the type by about 5%. In our view, this The 777-300ER competes in the 350- to the 777X. The 777-9X provides seating for level of discounting reflects a slightly higher 375-seat, long-haul widebody market more than 400 passengers, depending level of depreciation than normal, which is segment, with a range exceeding 7,800 on an airline’s configuration choices. because of the higher levels of available nautical miles. This segment, previously According to the manufacturer’s data, the aircraft. As more aircraft come o of their dominated by the 747-400, exhibits
34 Airfinance Journal February/March 2017 Aircraft profile
solid demand as operators, particularly Oriel in the buoyant Asia-Pacific region, have increasingly employed large widebody Olga Razzhivina, senior Istat appraiser AIRCRAFT twins, which o er compelling operating The extended-range (ER) version CHARACTERISTICS economics compared to four-engined of the 777-300 has been extremely aircraft such as the 747-400 and A340- successful, having hit the sweet spot of 600. A key factor in the success of the the increasingly cost-conscious airline Seating/range 777-300ER has been the lack of true industry. The aircraft was particularly well Max seating 550 competition after the demise of these four- received by first-tier carriers, because it Typical seating 365 in three-class engined models. o ered trans-pacific with the lower costs of configuration Over the next few years, the 777-300ER a twin-engined aircraft. Since its entry into Max range 7,930nm (14,685km) will be challenged by both larger and service in 2004, the 777-300ER has largely smaller aircraft. At the lower end, the replaced the 747-400 on thinner routes Technical characteristics Airbus A350-1000 will be a competitor and has complemented the A380 on trunk MTOW 351.5 tonnes once scheduled deliveries commence in city-pairs. (775,000lbs) 2017. This aircraft, flying 369 passengers Despite the 777-300ER’s relatively OEW 168 tonnes up to 8,000 nautical miles, has garnered modernity, its successor, the 777X, was (362,000lbs) 211 orders as of December 2016 . Boeing’s launched in November 2013. The new MZFW 238 tonnes 777-8X will also challenge the 777- model will have two variants o ering (529,000lbs) 300ER from the lower end of the payload higher capacity and 10% fuel-burn saving. Fuel capacity 181,200 litres (47,890 spectrum, while the 777X will compete from However, before the planned 2020 entry US gallons) above. Both Boeing products are planned into service of the new models, Boeing Engines GE90-115B for entry into service in 2020 and could be says the current variant will undergo Thrust 115,300lbf (512kN) formidable competitors if they perform as “continuous improvement, o ering a 2% planned. fuel burn reduction and an improved cabin As market interest in the 777-300ER with 14 more seats”. Fuels and times diminishes, Boeing lacks the orders to The facelift for the current generation 777 Block fuel 1,000 15,610kg bridge to the 777X and has announced is timely: it will o er some respite from the nautical miles (nm) progressive production cuts from the last-o -the-line e ect. These improvements Block fuel 2,000nm 29,840kg current 8.3 aircraft a month to 3.5 by 2018. may, however, not be entirely welcomed by Block fuel 4,000nm 60,900kg This translates to about three years of the owners of earlier 777-300ERs. Owners Bock time 1,000nm 152 minutes production based on the firm order backlog. of assets coming o lease in the next two Block time 2,000nm 277 minutes Values and lease rates for the type to three years will be wise to lock in a lease Block time 4,000nm 525 minutes have declined with general widebody extension as soon as possible. With no oversupply and this trend is likely to recovery in the widebody sector expected Fleet data accelerate in the near/medium term with in the short term, downward pressures on Entry into service 2003 the entries into service of the 777X and lease rates and values will only increase. A350-1000. Failing an extension, remarketing a In service 703 Prospects for a freighter conversion 350-seat aircraft could prove challenging, Operators 46 programme seem uncertain in current as has already been shown by the (current and planned) market conditions, and significant smaller 777-200ER. There is no urgency In storage 1 redeployment to second-tier carriers may for possible leasing candidates such On order 124 be challenging. as the US majors and British Airways, Built peak year 88 ICF believes the 777-300ER market will and they will likely cherry-pick the best (2016) continue to soften with further deterioration deals o ering them sister-ship fleets Estimated 66 in values and lease rates in the medium and lessor contributions towards interior production (2017) term. reconfiguration. Average age 5.1 years
Source: Airfinance Journal Fleet Tracker and research VALUES 777-300ER Indicative maintenance reserves Current market value ($m) C-check reserve $125-$130 per flight Build year 2007 2009 2011 2013 2015 2017 hour Higher checks $90-$95/flight hour CV view 75.1 85.2 97.5 111.6 130.4 154.7 reserve ICF view 81.3 93.6 107.8 124.1 142.8 164.3 Engine overhaul $290-$295/engine flight hour Oriel view 63.0 67.5 74.5 85.5 100.5 138.3 Engine LLP $450-$455/engine Values assume standard Istat criteria. cycle Landing gear $160-$165/cycle refurbishment Indicative lease rates ($m) Wheels, brakes $100-$165/cycle Build year 2007 2009 2011 2013 2015 2017 and tyres APU $105-$110/APU hour CV view 0.65 0.75 0.85 0.95 1.05 1.20 Component overhaul $410-$3415/flight hour ICF view 0.75-0.85 0.85-0.95 0.95-1.05 1.05-1.15 1.15-1.25 1.25-1.35 Source: Airfinance Journal research and analysis Oriel view 0.63 0.68 0.73 0.83 0.93 1.10
www.airfinancejournal.com 35 Aircraft comparison Fighting old battles
The success of the A320neo and 737 Max families will determine the positions of Airbus and Boeing in the narrowbody market, but the relative merits of the manufacturers’ previous-generation single-aisle models will be of interest to owners and operators for years to come. Geo Hearn looks at how the A320-200 and 737-800 match up.
t might have been anticipated that by competitor in the Airbus stable. This is a Ithe beginning of 2017 a comparison significant achievement given the aircraft between the Airbus A320 and the Boeing was launched, as part of Boeing’s next- 737-800 would be about two out-of- generation (NG) family, nearly a decade production aircraft, but as the year gets later than its Airbus rival. However, this underway it is clear that the two models does not take into account that the fastest- remain very much part of their respective selling model in the Airbus family is now the manufacturers’ current o erings. Exactly larger A321, which has significantly outsold how long both models will continue to its most direct competitor – the 737-900ER. roll out of the production hangars is not Looking at total sales for the two families completely clear from the manufacturers’ gives Airbus a clear lead. However, there announcements, but it looks certain that is an argument that some sales of the 737 current-generation models will be built Classic generation should be counted in alongside their respective A320neo and any direct comparison. Backlogs of the two 737 Max replacements until at least 2019. current families are broadly similar. Airbus has indicated that A320 production will continue beyond this year, Values and lease rates but has not specified an exact date for Inputs from appraisers (see tables) suggest discontinuing the current engine option that the 737-800 has a slightly higher (Ceo) model. current market value (CMV) than the A320 At a press briefing in early January, for models of the same build year and the Fabrice Brégier, Airbus Commercial Aircraft Boeing aircraft typically attracts higher president and Airbus chief operating lease rates. The di erences are, however, o cer, admitted that there had been largely explained by the di erences in problems with early A320neo production. The timing of an end to 737-800 seating capacity. “The transition between the A320ceo production is even less certain because Angus Mackay, principal, ICF, points out and A320neo is less sharp than what we any hitch in 737 Max flight testing and early the 737-800 has achieved excellent market expected three or four years ago, so we production could delay its phasing out. penetration with a large in-service fleet and will continue to deliver substantial numbers In any case, Boeing is unlikely to be in a a broad operator base. However, he adds of A320ceos beyond 2017,” he says. position to switch from its current model the A320 is a formidable adversary, also The A321ceo is likely to remain in earlier than Airbus. with a large in-service fleet and operator production even longer because it has Thanks in part to its additional seating base. a larger backlog than the baseline A320 capacity, the 737-800 has significantly Mackay points out the latest standard model. outsold the A320, which is its most direct A320ceos can o er an increase in
Leading characteristics of narrowbody competitors
Model Entry into MTOW Engines Maximum Typical Range In service On Customers service (tonnes) pax pax (nm) order
737-800 1998 79 CFM56-7C 189 162 3,115 4,195 696 200
A320 1988 73.5/78 CFM56-5Bor V2500 180 150 3,300 3,945 361 268
A321 1996 89/93.5 CFM56-5Bor V2500 236 185 3,200 1,312 446 110
737-900ER 2001 85.1 CFM56-7C 215 180 3,200 409 102 21
Source: Airfinance Journal Fleet Tracker and research
36 Airfinance Journal February/March 2017 Aircraft comparison Leasing an aircraft doesn’t make it fly. We do.
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049_210x286+3_LeasingBüro_2017_ICv2_RZ01.indd 1 06.02.17 10:54 Aircraft comparison
Current market value ($m) Operating cost Direct cost comparisons between the Boeing and Airbus single-aisle models are Build year 2000 2004 2008 2012 2016 di cult because the two product ranges A320 12.7 17.6 24.0 31.3 43.4 are not aligned in terms of seat count. The 737-800 typically accommodates between 737-800 15.4 19.5 26.0 33.1 46.3 5% and 10% more seats than the A320, which gives the Boeing aircraft an obvious Based on average of inputs from appraisal firms (Collateral Verifications, ICF and Oriel). advantage in seat-mile costs. Airfinance Journal has carried out its own analysis (see table) based on an interpretation of the respective Indicative lease rates ($’000s/month) manufacturers’ claims and published data. This analysis suggests the 737-800 trip Build year 2000 2004 2008 2012 2016 cost on a 500-nautical mile (nm) sector is between 1% and 2% higher than that for A320 155-170 175-220 215-270 250-300 300-380 the A320. This translates to an advantage over the A320 in terms of seat-mile cost of 737-800 165-210 185-250 225-280 265-350 330-400 between 3% and 4%. These figures show a smaller di erence Based on spread of inputs from appraisal firms (Collateral Verifications, ICF and Oriel). in seat-mile costs than in previous Airfinance Journal analyses of these two aircraft, largely because of the reduced fuel burn o ered by equipping range over the 737-800 of about 200 phenomenon, it is likely to have an e ect the A320 with the optional sharklets. nautical miles, albeit with slightly lower into 2017. Industry sources suggest that the fuel capacity. This advantage stems largely Most commentators agree that current burn advantage from the Airbus sharklets from improved specific fuel consumption fuel prices significantly erode the cash is eroded significantly on sectors shorter after the introduction, in December 2012, operating cost advantages of A320neos than the 500nm used in the Airfinance of sharklets (winglets) as an option for and 737 Maxs, which is likely to prop up Journal analysis. The addition of sharklets A320ceo models. demand for current-generation 737 and would normally increase acquisition costs The consensus among appraisers is that A320 models, which, in turn, should bolster and impact on the total direct operating both 737-800 and A320 values will remain values and lease rates. cost of the aircraft. stable in the short term, particularly for The relatively small percentage newer aircraft. Investor view di erences in cash operating costs Olga Razzhivina, senior Istat appraiser, In Airfinance Journal’s 2016 Investors’ Poll, are very sensitive to assumptions and Oriel, says that 737-800 lease rates and the 737-800 was the highest-rated aircraft, are likely to vary depending on an market values have weakened in the past with investors emphasising its suitability for airline’s operation. Maintenance costs 12 months, but this owes much to the the leasing market. The Boeing aircraft was are particularly di cult to estimate for a high rates the Boeing aircraft has been one of the few models to increase its score generalised case study. The di erentials achieving recently. Oriel expects 737-800 from the previous year’s poll. are so small that Airfinance Journal values to remain stable. The A320ceo came only fourth in the believes cash-operating cost is unlikely Gueric Dechavanne, vice-president, poll, behind the Boeing model and the to be a key factor in an airline’s choice Collateral Verifications, says market A320 and A321 Neo models, with its between the two rivals. Fleet commonality, demand for the A320 has remained stable score marginally down from the previous availability and acquisition cost are all in the past six months, especially for newer year. However, the di erences in scores more likely to influence which aircraft is aircraft. He adds that availability remains between the popular single-aisle aircraft selected. low, which has helped stabilise values and are small and the A320 also is very highly Perhaps of more significance to lease rates. He warns that increases in rated by investors. Its lower poll position is investors is the decreased advantage in the production rate by Airbus may have a in part explained by its successor A320neo cash operating costs of both the 737 Max negative impact in the longer term. Delays model having entered service, whereas the 8 and the A320neo over their current- in the delivery of early A320neos have 737-800 replacement – the 737 Max 8 – is generation counterparts, brought about by played a positive role in the values of not scheduled to enter service until the lower fuel prices. A320ceos. While this may be a short-lived third quarter of this year. Everyone’s a winner The market view and Airfinance Journal’s Indicative relative direct cash operating costs for new analysis would suggest that the 737-800 and A320 are di cult to separate in single-aisle aircraft terms of investor appeal. Newer models, in particular, remain in demand and the 737-800 A320 A320neo 737 Max 8 outlook for values of both the Boeing and Airbus aircraft is positive. Relative trip cost 1.5% Base -5.5% -3.4% The testament to this is that even with the successor aircraft either close Relative seat cost -3.4% Base -5.5% -8.0% to entering or already in service, the combined backlog of the two models is in
Assumptions: figures are based on Airfinance Journal’s interpretation of manufacturer claims and published data. Additional excess of 1,000 aircraft. That is certainly a assumptions: 500-nautical mile sector, typical seating layouts. first in commercial aviation.
38 Airfinance Journal February/March 2017 Data
Rating Agency Unsecured Ratings
Airlines
Airline Fitch Moody's S&P Aeroflot B+(stable) - - Air Canada B+(pos) B1(pos) BB-(stable) Air New Zealand - Baa2(stable) - Alaska Air Group BBB-(stable) - BB+(stable) Allegiant Travel Company - Baa3(stable) BB-(stable) American Airlines Group BB-(stable) Baa3(stable) BB-(stable) Avianca Holdings - IFRS B(neg) - B(stable) British Airways BB+(pos) Baa3(stable) BB(pos) Delta Air Lines BBB-(stable) Baa3(stable) BB+(pos) easyJet - Baa1(stable) BBB+(stable) Etihad Airways A(stable) - - GOL CC Caa3(neg) CCC(neg) Hawaiian Airlines B+(stable) B1(stable) BB-(stable) jetBlue BB-(stable) Ba3(stable) BB-(stable) LATAM Airlines Group B+(neg) B1(stable) BB-(neg) Lufthansa Group - Ba1(stable) BBB-(neg) Qantas Airways - Baa3(stable) BBB-(stable) Ryanair BBB+(stable) - BBB+(stable) SAS - B2(stable) B(stable) Southwest Airlines BBB+(stable) Baa1(pos) BBB(stable) Spirit Airlines BB+(stable) - BB-(stable) Turkish Airlines - Ba3(neg) BB-(neg) United Continental Holdings BB(stable) Ba2(stable) BB-(pos) US Airways Group - B1 - Virgin Australia - B2(neg) B+(neg) WestJet - Baa2(stable) BBB-(stable)
Source: Ratings Agencies - 31st January 2017 Lessors
Fitch Moody's S&P AerCap BBB-(stable) Ba1(stable) BBB-(stable) Air Lease Corp BBB(stable) - BBB(stable) Aircastle - Ba1(stable) BB+(stable) Avation PLC B+(stable) - B+(stable) Aviation Capital Group BBB(stable) - A-(stable) AWAS Aviation Capital Limited - Ba3(stable) BB(stable) BOC Aviation A-(stable) - A-(stable) CIT Group Inc BB+(stable) Ba3(stable) BB+(stable) DAE Aviation Holdings - B3(stable) B-(stable) Fly Leasing - B1(pos) BB-(stable) ILFC (Part of AerCap) - Ba1(stable) - SMBC Aviation Capital BBB+(neg) - BBB+(stable)
Source: Ratings Agencies - 31st January 2017 Manufacturers
Fitch Moody's S&P Airbus Group A-(stable) A2(stable) A+(stable) Boeing A(stable) A2(stable) A(stable) Bombardier B(neg) B2(stable) B-(stable) Embraer BBB-(stable) Ba1(neg) BBB(neg) Rolls-Royce A(neg) A3(stable) BBB+(stable) United Technologies A-(stable) A3(stable) A-(stable)
Source: Ratings Agencies - 31st January 2017
www.airfinancejournal.com 39 Data
US Gulf Coast kerosene-type jet fuel (cents per US gallon)
350
300
250
200 149.1 150
100
50
0 Jul-13 Jul-14 Jul-15 Jul-16 Oct-13 Oct-14 Oct-15 Oct-16 Apr-14 Apr-15 Apr-16 Jun-13 Jan-14 Jun-14 Jan-15 Jun-15 Jan-16 Jun-16 Mar-14 Mar-15 Mar-16 Feb-14 Feb-15 Feb-16 Dec-13 Aug-13 Dec-14 Aug-14 Dec-15 Aug-15 Dec-16 Aug-16 Nov-13 Nov-14 Nov-15 Nov-16 May-14 May-15 May-16 Sep-13 Sep-14 Sep-15 Sep-16
Source: US Energy Infromation Administration
Commercial aircraft orders by customer Aircraft list prices -
Customer Country Quantity/Type new models September 2016 to 2 January 2017 Model $ millions Qatar Airways Qatar 30x787-9, 10x777-300ER Airbus (2017 prices) Atlas Air USA 9x767-300F A319neo 99.5 Binter Spain 6xATR72-600 Iran Air Iran 80xBoeing aircraft A320neo 108.4 Iran Air Iran 17xAirbus aircraft A321neo 127
Colorful Guizhou China 2xE190 A330-800neo 254.8 Vietjet Vietnam 2xA321 A330-900neo 290.6 Jetstar Pacific Vietnam 10xA320 A350-800 275.1 Aerolease Aviation USA 10xMRJ90 Hong Kong Airlines Hong Kong 9xA330-300 A350-1000 359.3 Intrepid USA 2x747-8F Boeing (2015) Swiss Switzerland 1x777-300ER 737 Max7 90.2 UPS Airlines USA 14x747-8 737 Max8 110.0 Donghai Airlines China 5x787-9 PNG Air Papua New Guinea 5xATR72-600 737 Max9 116.6 Peach Aviation Japan 10xA320neo, 3xA320 777-8X 371.0
Fiji Airways Fiji 5x737 Max 8 777-9X 400.0 United Republic of Tanzania Tanzania 2xCS300s, 1xQ400 787-10 306.1 Philippine Airlines Phillipines 5xQ400s Bombardier (2016) United Republic of Tanzania Tanzania 1x787-8 BOC Aviation Singapore 5xA320 CS100 76.5 GECAS USA 75x737 Max 8 CS300 85.7
ACG USA 30xA320neo, 2xA320, 3xA321 Embraer (2015) SpiceJet India 100x737 Max 8s E175-E2 48.3 Widerøe Sweden 15xEmbraer E2s E190-E2 55.3 Flynas Saudi Arabia 60xA320neo CityJet Ireland 10xCRJ900 E195-E2 62.4
Based on Airfinance Journal research and manufacturer announcements as of 2nd February
40 Airfinance Journal February/March 2017 Data
Current production aircraft prices and Lease rates ($ millions) values ($ millions)
Model List price Current market value* Model Low High Average Airbus (2017 price) Airbus A319 90.5 35.6 A319 230 310 270 A320 99.0 43.7 A320 285 370 328 A321 116.0 51.6 A320neo 300 400 350 A330-200 233.8 90.4 A321 340 420 380 A330-300 259.0 102.1 A330-200 400 830 615 A350-900 311.2 143.5 A330-300 500 900 700 A380 436.9 220.3 A350-900 900 1,200 1,050 ATR (2015) A380 1,500 2,000 1,750 ATR42-600 21.6 16.1 ATR ATR72-600 25.9 20.4 ATR42-600 110 155 133 Boeing (2015) ATR72-600 150 200 175 737-700 80.6 36.1 Boeing 737-800 96.0 46.8 737-700 240 310 275 737-900ER 101.9 49.0 737-800 295 400 348 747-8 (passenger) 378.5 162.6 737-900ER 320 400 360 777-200LR 313.8 N/A 747-8 (passenger) 1,050 1,440 1,245 777-300ER 339.6 156.9 777-300ER 1,100 1,450 1,275 787-8 224.6 117.3 787-8 850 1,050 950 787-9 264.6 137.1 787-9 950 1,150 1,050 Bombardier (2016 Avitas) Bombardier CRJ700 41.4 23.6 CRJ700 150 228 189 CRJ900 46.5 26.0 CRJ900 180 233 207 CRJ1000 49.5 27.9 CRJ1000 190 255 223 CS100 76.5 32.4 CS100 215 300 258 CS300 85.7 37.2 CS300 255 330 293 Q400 31.9 21.4 Q400 161 200 181 Embraer (2015 Avitas) Embraer E170 41.2 25.8 E170 170 230 200 E175 44.4 28.5 E175 190 245 218 E190 49.1 32.5 E190 230 285 258 E195 52.0 34.5 E195 240 290 265
*Based on Istat appraiser inputs for Air Investor 2017
Commercial aircraft orders by manufacturer
Gross orders 2017 Cancellations 2017 Net orders 2017 Net orders 2016
Airbus 172 0 172 731
Boeing 189 2 187 668
Bombardier 10 0 10 161
Embraer 15 0 15 53
ATR 0 0 0 36
Based on Airfinance Journal research and manufacturer announcements as of 2nd February
www.airfinancejournal.com 41 Pilarski says
The meaning and implications of aviation cycles Despite an “undeserved” reputation as a pessimist, Adam Pilarski, senior vice- president at Avitas, is upbeat about aviation’s the short-term prospects, although a downturn is on the way.
t the recent Dublin Airfinance both oil prices and aircraft purchases Aconference, a speaker addressing the are based on that currency. Yields (ticket question as to where we are in the cycle prices) are getting weaker but still there recited a long list of factors supporting will be demand for added capacity. Despite the positive long-term prospects for the some movement towards consolidation in industry. Most people, though, do not need the leasing industry there appears to be to be reminded of our long-term prospects, more parties planning to enter the field. but they have no doubt that ours is a Low-cost carriers around the world are cyclical business. It is also quite obvious advancing their position in respect to their that we are past the peak and nearing a legacy competitors, except in the USA, periodic slowdown. where government policies seem to favour Over the past few years, we enjoyed a comfortable oligopolistic status quo. continuing growth of world economies, Our author at the 19th Global Annual If my assumptions are correct (and this good performance of airlines and an Airfinance Conference in Dublin last month. is a big “if”, subject to the usual caveats apparent order bubble. All these facts economists are famous for) what does do not contradict the prospects of good it mean with regard to the timing of the fortunes still awaiting us, but highlight Over the past few aviation business cycle? Starting with that changes are coming and those most airlines, I see intensifying competition prepared for them will do better than those years we enjoyed between legacy carriers and low-cost competitors which are not planning for a continuing growth of carriers, including long-haul low-cost downturn. carrier routes, as well as between the To assess where we are related to world economies, good various geographic regions of the world. the cycle, we need to make a distinction Tra c will grow but profitability will be between di erent elements of the aviation performance of airlines weakening as yields continue their decline. industry. Airlines are at a di erent stage and an apparent order For manufacturers, I see an order-to- than manufacturers, which face a di erent delivery ratio of definitely below one for reality than investors or lessors. bubble. All these facts the next few years. This will not prevent To make life even more exciting, each manufacturers from increasing production category can be further subdivided into do not contradict the levels for at least a couple of years segments that have their own mini-cycle. prospects of good because of the existing huge backlog. So, passenger and cargo airlines are not Production increases rumoured now will in the same position, same for legacy and fortunes still awaiting us eventually not materialise though. With low-cost carriers. Manufacturers of jets but highlight that changes intensified competition among lessors, face a di erent environment than those I see increased downward pressure on of turboprops and similarly large versus are coming. yields. Since values lag decline in demand regional jet aircraft producers may be at a I would venture to say we still have steam di erent phase of the aviation cycle. Even Adam Pilarski, senior vice-president, Avitas for values before a periodic adjustment will for the two duopolists, narrowbody lines occur. face di erent realities than their widebody Interestingly, despite my professional brethren. training in the dismal sciences and my So where are we in the timing of undeserved reputation as a pessimist, I am the cycle? First, we need to specify of the world, so we can speculate that fairly upbeat about the short-term prospects assumptions regarding some of the we still have some momentum towards in aviation. A downturn is on the way but I exogenous factors a ecting the various increased worldwide economic growth do not see it just around the corner. segments of aviation. While the US and world tra c. New economic realities Surprisingly, many of my European economy is in the fourth-longest expansion point towards higher inflation rates and colleagues see the realities in much period in its history, a downturn will have to the dollar appears to continue staying at darker colours but many forecasters in happen eventually. The new administration historically strong levels. Airlines just had Asia share my views. All these views has explicit plans to expand spending, the most profitable year in their history can be invalidated by unforeseen new which probably will stimulate the economy but costs are definitely going up, both on developments but right now, this year still for a year or two. the fuel price and labour cost fronts. And looks fine, with a periodic downturn starting There are no obvious signs yet of an the high value of the dollar causes cost to come next year. And the long-term future economic disaster looming in other parts pressures for non-US carriers because of aviation is still good.
42 Airfinance Journal February/March 2017 An Airfinance Journal special supplement Regional Aircraft 2017 Regional aircraft supplement
Contents 44 Regional aircraft news 54 Misubishi profile The manufacturer originally planned to focus on the 70-seat market ATR profile with the MRJ70 but, in response to changed market requirements after the aircraft’s launch and programme delays, emphasis has switched to 46 the larger MRJ90. ATR is the only western commercial aircraft manufacturer that exclusively produces turboprop aircraft and the company’s fortunes have been closely linked to those of turboprops in general. 55 Sukhoi profile Bombardier profile The Russian manufacturer is working on the Sukhoi Superjet 100 as 48 well the Sukhoi Superjet 130, which is due to be introduced in 2020. The Canadian manufacturer’s prospects have improved considerably over the last 12 months. 56 Other regional manufacturers Embraer profile As well as the in-production aircraft types, there is a significant portion 50 of the current regional fleet that is made up of older aircraft models. Embraer kicked o the year strongly with two orders – one for its re- According to Airfinance Journal’s Fleet Tracker, 20% of the total current engined E-2 aircraft and another for its E-Jet family. global regional fleet is made up of out-of-production aircraft. 52 Comac profile 57 Softly, softly The ARJ21 has su ered numerous delays in its development, but finally The 50-seat regional aircraft market continues to experience gained certification from the Civil Aviation Administration of China at challenging conditions, writes Olivier Bonnassies. the end of 2014.
Regional aircraft news TrueNoord Falko buys CityJet firms Bombardier portfolio
invests in alko Regional Aircraft is adding 11 order for 6 FBombardier CRJ900NG aircraft to its portfolio. E190s The aircraft are being acquired from CRJ900s Scandinavian Airline Systems, and are msterdam-based TrueNoord Regional currently on lease to Cimber A/s in ombardier Commercial Aircraft AAircraft Leasing has disclosed its first Denmark. Bhas announced the firm purchase investment, six Embraer E190 aircraft. “We are delighted to have reached agreement with Irish carrier CityJet, The portfolio is made up of aircraft built agreement with SAS on these aircraft which consistent with the conditional agreement in 2013 and 2014 with leases attached. further expands our portfolio of Bombardier announced on 24 January 2017. The investment marks the start of a manufactured aircraft” says Mark Hughes, The firm agreement includes six highly targeted on-going development and executive vice president – corporate Bombardier CRJ900 aircraft and options growth strategy for the TrueNoord fleet finance, Falko Regional Aircraft. for an additional four aircraft. Upon delivery, under lease, following investment from The transaction follows the acquisition of the aircraft will operate under wet-lease in private equity firm Bregal Freshstream in SAS’ subsidiary Cimber A/S by Irish carrier the Scandinavian Airlines (SAS) network. 2016, says the leasing company. Cityjet. As part of the transaction Cityjet On 31 January CityJet completed TrueNoord Regional Aircraft Leasing has won a six-year wet lease contract from the acquisition of Cimber A/S, the relaunched last July after capital injection SAS to operate regional services from Copenhagen-based subsidiary of from a Bregal Freshstream. Copenhagen. Scandinavian Airlines (SAS).
44 Airfinance Journal February/March 2017 Regional aircraft news
ATR misses deliveries target in 2016 urboprop manufacturer ATR delivered In February, Iran’s flag carrier, Iran Air, in November, after the resignation of de Ta total of 80 aircraft in 2016, but missed signed an agreement to purchase up to 40 Castelbajac. its output target of more than 90 units. ATR72-600s. The deal includes firm orders He adds: “As the environment is getting The Toulouse-based company recorded for 20 units, as well as 20 options. The tougher, the economic advantages and the a $1.8 billion turnover, down 10% from its transaction has yet to be finalised. market liquidity of the ATR aircraft versus record turnover in 2015 of $2 billion, when “ATR remained the preferred choice its competitors prove to be the basis of it handed over 88 aircraft to customers. of regional airlines in 2016, despite a our success.” In 2015, ATR indicated that production globally di cult year in the regional aircraft The backlog at the manufacturer is would reach about 100 aircraft annually. market,” says Christian Scherer, who was estimated at 216 units, down from 260 at The then chief executive o cer, Patrick de appointed chief executive o cer of ATR the end of 2015. Castelbajac, also admitted the turboprop manufacturer faced supply-chain “challenges” in ramping up production. ATR orders and deliveries (2011-16) ATR further consolidated its position in 2016 with orders for a total of 36 new 100 180 aircraft, including 34 ATR72-600s and two 90 160
ATR42-600s, guaranteeing about three 80 140 70 years of production. The manufacturer 120 60 sold two ATR42-600s to Aeromar, while its 100 50 largest order was for 12 ATR72-600s for 80
Deliveries 40 Argentina’s Avian Lineas Aéreas. Firm orders 60 It also received renewed confidence 30 40 from nearly 30-year-long customer Binter 20 20 of Spain, as well as additional orders from 10 0 0 Papua New Guinea’s PNG Air (five ATR 72- 2011 2012 2013 2014 2015 2016 600s) and Brazil’s Azul Linhas Aéreas (also Years Number of deliveries Firm orders five ATR 72-600s).
Airfinance Journal understands that says: “I certainly would say that Bombardier MRJ delivery delayed transfer of title was on 19 January and the are looking closely at making a CS500. handover ceremony on 20 January. They see the family concept as a key he Mitsubishi Regional Jets’ (MRJ) first The aircraft, which was purchased with success factor, and we’ve seen that in Tdelivery has been delayed from mid- cash, will enter into service in late April the market having a family is the key to 2018 to mid-2020. after local training. success. I would not be surprised if they Mitsubishi Heavy Industries (MHI) says Eight other aircraft will be delivered tried to stretch the aircraft in the next three in a statement the change is because of over the coming three years as part of the to four years.” revisions of certain systems and electrical carrier’s fleet modernisation process. Lindsay Webster, director, asset configurations on the aircraft to meet the JAC will receive the second aircraft in valuations at Morton Beyer & Agnew, adds: latest requirements for certification. September. It is expected to be funded “Bombardier is pretty adamant that there’s MHI recently established the MRJ partly by the government for operation on not going to be. But I think that if they want business promotion committee, chaired specific island routes. The third aircraft is to be in the industry for long, that’s the next by Shunichi Miyanaga, president and chief due in 2018. option they’ve got to go to.” executive o cer of MHI, to oversee the JAC’s nine new ATRs will start operations However, Rikard de Jounge, vice- continued development and long-term on both main routes and connections to president, asset valuation at Avitas, business performance of the MRJ. and from smaller islands and communities disagrees. “It would be tempting to stretch, “Since the historic MRJ first flight in across the country. but they have enough to do in the sub- November 2015, we have made significant Airfinance Journal reported on 22 March 150 [seat] market. In the bigger market, progress in both engineering and test, and that JAC had retired a Q400 aircraft. Airbus and Boeing would likely stomp you now three aircraft are in flight test in the out,” he says. Olga Razzhivina, director United States,” states MHI. at Oriel, says that Bombardier needs “a Appraisers expect family concept” to be successful but going straight in a new class against Boeing and Bombardier to look Airbus “will be di cult”. JAC becomes She adds: “Looking at the history of at CS500 Bombardier, we know there has been a bid from China to have ownership in the ATR operator ombardier is likely looking at making company. The Canadian government may apan Air Commuter (JAC), a subsidiary Ba larger member of the CSeries look at that again. The influx of money Jof Japan Airlines, the Japanese flag family, according to a panel of appraisers from that side of the Pacific means that carrier, became a new ATR operator on 20 speaking at the 19th Annual Global Bombardier may not have to look over their January with the introduction of an ATR 42- Airfinance Conference in Dublin. shoulder in financial terms when looking to 600 (MSN 1215). Stuart Rubin, principal, ICF International, fund a new programme.”
www.airfinancejournal.com 45 Manufacturer profiles ATR
MANUFACTURER PROFILES ATR
Source: ATR
stablished in November 1981, ATR is a directly with the manufacturer and via sale year, although this has yet to be realised. To Ejoint partnership between Airbus and the and leaseback transactions. meet its production targets, ATR negotiated Italian company Leonardo (formerly known ATR manufactures two sizes of turboprop for additional space in the production as Finmeccanica). Production is based in aircraft, the 70-seat ATR72 and the 50-seat facilities it shares with Airbus and set up a Toulouse alongside Airbus’s commercial ATR42. The aircraft benefit from the inherent dual production line in 2014. aircraft facilities. At the beginning of 2017, advantages of the turboprop design in After this investment, ATR achieved its ATR had about 1,300 employees. terms of fuel e ciency, and relatively low record turnover of $2 billion in 2015. During ATR is the only western commercial emissions and cost e ciencies, particularly that year, the aircraft manufacturer also set aircraft manufacturer that exclusively on shorter sectors. The original ATR42 a new company record for deliveries, with a produces turboprop aircraft and the entered service at the end of 1985. The total of 88 aircraft. company’s fortunes have been closely first commercial operations of the ATR72 However, there is some recent evidence linked to those of turboprops in general. followed in 1989. Both aircraft types that the market has peaked and sales The emergence in the 1990s of regional have been the subject of several major are becoming harder to come by. The jets such as the Embraer ERJ-145 and upgrades and current production aircraft are problem is exacerbated by the increased Bombardier CRJ200 caused a decline in designated as -600 models. participation of lessors, with leasing demand for turboprops, but there has been Many commentators predicted the ATR42 companies accounting for significant a significant revival since the start of this would be phased out because airlines percentages of the manufacturer’s order decade, not least because the economic seemed increasingly to favour the larger backlog. advantages of fuel-e cient turboprops ATR72, but sales of the smaller model have Nonetheless, in January, ATR issued increase as fuel prices rise. continued, albeit in numbers well below briefings saying it had consolidated The resurgence of commercial turboprop those of the larger variant. historical levels of turnover and deliveries, sales has been remarkable for a type There has been much speculation that despite a challenging market environment. of aircraft that many commentators and the company was planning a larger model The briefings noted that, in 2016, the industry insiders thought had been made to take advantage of the return to favour company recorded its second-highest obsolete by the advent of the regional jet. of the turboprop, but the plans have not turnover ($1.8 billion) and its third-highest ATR has been the chief beneficiary of this materialised and the launch of such an yearly total of deliveries (80 aircraft). During resurgence. aircraft looks unlikely in the short-to-medium the year, the company received orders for Perhaps even more striking than the term. 36 aircraft: 34 ATR72-600s and two ATR42- upturn in sales is the improved perception ATR production rates have increased 600s. of turboprops among financiers. There is an to levels that are unprecedented for As of the beginning of 2017, the Franco- unprecedented willingness to provide funds 50- to 70-seat turboprops. The company Italian joint venture had sold more than to customers acquiring aircraft, and leasing has envisaged su cient demand for a 1,500 aircraft, of which about 1,300 have companies have placed significant orders production rate of 100 aircraft deliveries a been delivered.
46 Airfinance Journal February/March 2017 Manufacturer profiles ATR
ATR: Market share of current fleet by region
Europe North America 27% Middle 8% East 1% Asia 31% Africa Central America & 8% Caribbean % Australia 5 & Pacific 10%
South America 10%
12.7% of global regional aircraft fleet
ATR aircraft in the 1,188 current fleet
Source: Airfinance Journal’s Fleet Tracker
www.airfinancejournal.com 47 Manufacturer profiles Bombardier
MANUFACTURER PROFILES Bombardier
Source: Bombardier
ombardier’s prospects have improved 50-seat Dash8-300. A 70-seat variant, the changed last year, with several significant Bconsiderably in the past 12 months. Dash 8-400, followed but is significantly orders coming from leading airlines, At the start of 2016, the company’s new- di erent to the original family members. including Delta and Air Canada. These technology CSeries programme was failing Later models of all variants were rebranded orders brought its backlog above the target to book a significant volume of orders, as Q (for Quiet) Series aircraft. Production of of 300 orders by the time of the aircraft’s more than two years late and $2 billion over the Q200 and Q300 ceased in May 2009. entry into service. budget. The -400 model continues in production, At the 19th Annual Global Airfinance However, thanks to a liquidity boost and under the designation Q400. Conference in Dublin in January, a panel a flurry of orders for CSeries aircraft, 2017 The Canadair Regional Jet (CRJ) was of appraisers said it expected the CSeries has got o to a much brighter start. derived from the Canadair Challenger jet programme to have a strong year in 2017 In June 2016, the company sealed a deal and was well received by the market, with but to continue facing di culties. with Quebec’s provisional government for more than 1,000 of the 50-seat CRJ100/200 Stuart Rubin, principal at ICF International, the investment of $1 billion in the CSeries being delivered. The CRJ’s success was says: “I think 2016 was an excellent year programme, which helped to ease its a major factor in the demise of a number for the programme. The Delta order liquidity problems. Under the agreement, of turboprop manufacturers, which had was key. Still some challenges remain: the government takes a 49.5% stake in the previously dominated the 50-seat market. Boeing and Airbus have deep pockets programme. Production of the CRJ200 was suspended on production levels and I think they are Meanwhile, Bombardier has picked up in 2005. The main competitor to the very well positioned to compete with the large orders from major airlines, boosting CRJ100/200 is the Embraer 145. CRJ CSeries. The A319neo continues to be a the credibility and the prospects of its production is expected to fall in 2017 to problem for the programme, so I think 2017 newest aircraft o ering. about 10 deliveries, most for replacement will be a good year but there will be some Bombardier’s turnaround plan seems to purposes, down from between 35 and 40 challenges ahead.” be taking e ect. The company is on target in 2016. Olga Razzhivina, director at Oriel, says to generate breakeven free cash flow by The CRJ700, CRJ900 and CRJ1000 are the lack of orders for the CSeries may be 2020, while total revenues, driven in part stretched and upgraded versions of the because of market appetite for 108- to 133- by higher CSeries deliveries, are expected original CRJ200. According to Airfinance seat aircraft. to increase by a low-single-digit rate. Journal Fleet Tracker, there are 1,450 “It’s a di cult sector of the market Projected earnings before interest and tax aircraft in operation across the whole to be in. If you look at CSeries’ closest is expected to range between $530 million aircraft family. competitors – 737 Max 7s and A319neos – and $630 million – up from 50% at the the orders are disappointing. But it could be midpoint over 2016’s earnings. Strong year ahead for CSeries? a bellwether for how much demand there is Bombardier’s latest venture is the CSeries for 108- to 133-seater aircraft. It’s hard to tell Aircraft types family, which is aimed at the 100-seat-plus whether the CSeries programme is out of As well as business aircraft, Bombardier market. The two models in the family (the the woods; I think it depends on one more manufactures a range of regional jets and CS100 and the CS300) compete directly major order from the main operators. It is turboprops (excluding the CSeries). These with the smaller members of the Boeing 737 really down to Bombardier to score another include the Dash8, Q Series and CRJ and Airbus A320 families. order, otherwise it might be another niche families. The programme su ered a number of type that has its merits. You want an aircraft The original Dash8 family consisted setbacks and delays and initially failed to type that is really diversified between of the 30-seat Dash8-100/-200 and the attract significant orders. However, that operators.”
48 Airfinance Journal February/March 2017 Manufacturer profiles Bombardier
Bombardier: Market share of current fleet by region
Europe North America 15% Middle 52% East 1% Asia 12% Africa Central America & 8% Caribbean % Australia 2 & Pacific 5%
South America
Undisclosed 3% 2%
35.9% of global regional aircraft fleet
Bombardier aircraft 3,345 in the current fleet
Source: Airfinance Journal’s Fleet Tracker
www.airfinancejournal.com 49 Manufacturer profiles Embraer
MANUFACTURER PROFILES Embraer
Source: Embraer
mbraer kicked o the year strongly representing its highest volume of prices, representing 25% of the worldwide Ewith two announcements – one for its deliveries in the past six years. As of 31 demand for the segment in the period. re-engined E2 aircraft and another for its December, the backlog totalled $19.6 billion. According to the global Embraer Market E-Jet family. Still, even with an uptick in deliveries, Outlook for the 70- to 130-seat capacity Scandinavian regional carrier Wideroe Embraer president and chief executive segment for the next two decades, the placed an order for 15 E190-E2 re-engined o cer, Paulo Cesar de Souza e Silva, entire market will demand 6,350 new jets in aircraft. The agreement includes three firm indicated at the time of the results that this category, which is valued at $300 billion aircraft and purchase rights on a further 12, 2016 was a year of “major challenges in the over the period. with deliveries commencing in 2018. aviation industry due to global economic “We are showing to airlines the benefit Wideroe is switching to Embraer after and political uncertainties”. of moving from red oceans to blue oceans being an all-turboprop operator, with a fleet In response to this scenario, Embraer is – that is, to move away from a crowded entirely comprising Bombardier Dash8s. implementing important actions and making marketplace and seek out opportunities The order coincides with a shift in adjustments to be well positioned in all in markets that are currently underserved, strategy at the Brazilian manufacturer. For business segments it operates, he says. or not served at all, where yields are also some time, Embraer’s focus has been on its The spare parts pool programme stronger, moving from one to two digits,” successful E-Jet family. However, in 2013, continues to grow, he notes. In the fourth says de Souza e Silva. the manufacturer announced the launch quarter, Airlink and the UK’s Eastern Airways Embraer notes in Asia-Pacific about of the E2, which is the second-generation signed contracts for the programme. 30% of narrowbody-exclusive markets are E-Jet. Embraer has logged more than 1,700 served with less than one daily frequency. Airlink, Southern Africa’s largest orders for the E-Jets programme alone. It believes markets such as these would independent regional airline, has selected The manuacturer delivered its 1,300th be better served with 70- to 130-seat the E-Jet for its Avro RJ85 replecement E-Jet in the fourth quarter, to China’s Tianjin jets, based on the average number of programe. The carrier plans to acquire a Airlines. passengers per departure. Also, 37% total of 13 aircraft with second-hand E-Jets Last year, it delivered 90 E175s, eight of intra-regional turboprop capacity is amongst them three E170s and two E190s more than in 2015. E190 deliveries in 2016 o ered on routes longer than 200 nautical will be sourced from ECC Leasing, a wholly totalled 11, three more than 2015, and E195 miles, which are better suited to jet owned Embraer subsidiary. The carrier will deliveries for the year totalled seven, one operations, because of their higher network start receiving the aircraft in the first half of fewer than 2015. productivity, better operating economics this year. However, Embraer did not deliver a and superior passenger appeal, it believes. Airlink already operates a large fleet of single E170 in 2016, whereas it delivered Another opportunity in the region, says ERJ aircraft – last December, it started to two in 2015. Embraer, is the replacement of ageing add 11 further ERJ-140 jets to its fleet. Looking ahead, Embraer is eyeing Iran’s fleets. There are more than 250 jets in the By the end of the fourth quarter of 2017, requirement for aircraft with 130 seats or 50- to 150-seat category that are more than the airline will operate 30 ERJs, comprising fewer after Airbus won orders for 98 aircraft 10 years old, and these are possible targets all three types – ERJ-135, ERJ-140 and the and Boeing secured a deal for 80. for replacement in the near future. ERJ-145. It also sees untapped opportunities in The announcements come after Embraer the Asia-Pacific market. Embraer believes increased its commercial aviation deliveries that airlines in that region will take delivery In the December/January edition of Airfinance Journal there was an by 6.9% to 108 units in 2016. of 1,570 new jets in the 70- to 130-seat incorrect figure in the Investor Poll on the operational success of the It delivered a total of 225 aircraft to segment over the next 20 years. This E175-E2. The incorrect figure was 5.0 when it should have been N/A, as the aircraft in question is not in service yet. the commercial and executive markets, requirement is valued at $75 billion, at list
50 Airfinance Journal February/March 2017 Manufacturer profiles Embraer
Embraer: Market share of current fleet by region
Europe North America 17% Middle 43% East 2% Asia 8% Africa Central America & 6% Caribbean % Australia 5 & Pacific 2%
South America
Undisclosed 5% 12%
30.3% of global regional aircraft fleet
Embraer aircraft in 2,822 the current fleet
Source: Airfinance Journal’s Fleet Tracker
www.airfinancejournal.com 51 Manufacturer profiles Comac
MANUFACTURER PROFILES Comac
Source: Comac
he Commercial Aircraft Corporation certification from the Civil Aviation under 100-seat aircraft in China,” says Tof China (Comac) is a state-owned Administration of China at the end of Professor David Yu. limited liability associated with the Aviation 2014. However, the US Federal Aviation “The continued trend is more upsizing Industry Corporation of China (Avic). Authority, which is shadowing the in the aircraft size especially in crowded Comac is responsible for large passenger certification process, is not expected to trunk routes, so this will likely have a aircraft programmes in China. Its principle certify the aircraft in the short term. minimum impact there. How many regional aircraft is the C919, an A320/737-sized Sichuan-based Chengdu Airlines took aircraft are there in China? Not that many aircraft, but the company also has delivery of the first ARJ21 in November compared to larger-sized aircraft.” responsibility for the ARJ21 regional jet. 2015 on lease from SPDB Financial He adds that one benefit of the aircraft Leasing. is that it could have more impact in ARJ “The 700 baseline variant has already western China, where it can be utilised for The ARJ21 has su ered numerous delays come out and is currently in service, but increasing frequencies on underserviced in its development, but finally gained I don’t think there is much demand for routes or opening up new routes.
Orderbook for ARJ21 Comac: Number of orders by region Airline/Lessor Number ordered
CALC 30
Chengdu Airlines 29 North America Comsys Aviation Leasing 20 Asia 3% 96% Congo Brazzaville 3
Gecas 5 Africa 1% Hebei Airlines 10
ICBC Leasing 40
Henan Airlines 50
Myanmar Airways 2
Shandong Airlines 10 Total number of orders204 Shanghai Airlines 5
Source: Airfinance Journal’s Fleet Tracker
52 Airfinance Journal February/March 2017 Regional survey
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www.airfinancejournal.com 53 Manufacturer profiles Mitsubishi
MANUFACTURER PROFILES Mitsubishi he Mitsubishi Aircraft Corporation is is the US, and this is reflected in the MRJ Global Airfinance Conference Dublin 2017. Towned principally by Mitsubishi Heavy orderbook. This includes a firm order of Embraer has planned a 2020 entry-into- Industries, but has a number of smaller 50 MRJ90 units for Tran States Holdings, service for its E175-E2, and Mitsubishi’s stakeholders, including the Toyota Motor 100 orders from Skywest and 20 units from recent announcement to delay the planned Corporation. The company is developing Eastern Airlines. entry-into-service by two years to mid-2020 the MRJ family of regional jets. All three US operators have conversion would give airlines more time to reach Original plans focused on the 70-seat rights for the 70-seat variant, according new scope agreements, allowing a higher market with the MRJ70 but, in response to Hideyuki Kamiya, head of strategic MTOW. to changed market requirements after the marketing, Mitsubishi Aircraft. “We can’t forecast the timing of scope aircraft’s launch and programme delays, The MRJ also has 10 units on order clauses but, historically, it has expanded. emphasis has switched to the larger MRJ90. from Miami-based lessor Aerolease. In Mitsubishi’s products are good aircraft to On 23 January, the company announced addition, the aircraft has secured three relax the scope clauses,” says Kamiya. a further delay to the MRJ programme, with non-US customers so far, including ANA, The smaller MRJ70 would fit the current the first delivery now scheduled for mid- Air Mandalay and Japan’s flag carrier Japan scope clauses. Kamiya says the model is 2020 rather than mid-2018 as previously Airlines. the same size as the CRJ700 and the E170 planned. In the US market there are two important products. “There are 500 aircraft in this This is not the first time the MRJ has limits that set the size of aircraft for routes category in the US,” he adds. encountered setbacks. In April 2015, applications: the maximum limit of 76 seats The MRJ70 is the smaller next-generation Mitsubishi Aircraft announced a delay in and the 86,000lb maximum take-o weight aircraft available, and Mitsubishi is targeting the first flight from the second to the third (MTOW) limit. CRJ200 and CRJ700 operators in the US quarter of 2015. The 86,000 MTOW limit has created market. problems for the manufacturers because Kamiya says deliveries are expected Aircraft testing new-technology aircraft, equipped with initially to reach one aircraft a month, with Mitsubishi Aircraft has used two aircraft new, e cient high-bypass engines, turn an ultimate goal of 10 aircraft a month. for strength test. One is used for fatigue out heavier than 86,000lb in their 76-seat Lessors represent 10 firm aircraft, or 4% of strength test, while the other has completed variants. firm orders. Rockton announced a letter of the static strength test. The manufacturers of new-technology intent for 10 units at the 2016 Farnborough “The completion of static strength test aircraft gambled on the scope clause Airshow, and Kamiya is confident the confirmed that the MRJ airframe has the MTOW limit being raised by the end of Swedish leasing entity will firm its order. structural strength required for test centre,” the decade. The unchanged MTOW limit As of 31 January 2017, the MRJ has states Mitsubishi Aircraft. favours the two aircraft types that fit under recorded 233 firm orders and 194 options or Four aircraft are in flight test. Three the scope clauses: Bombardier’s CRJ900 purchase rights. “Lessors will endorse the flight test aircraft (one, two and four) have and Embraer’s E175. But it makes life di cult MRJ programme,” he says, adding they will successfully conducted ferry flights and for new products such as the MRJ90 and have the capability to remarket. flight tests are undergoing in the US. The Embraer’s E175-E2, which currently exceed Overall, Kamiya is confident the MRJ fourth aircraft is undergoing flights test in the scope limit. programme will perform well. Japan. The MRJ90 MTOW is 94,000lbs, but “Compared with the E2, we started The new final assembly hangar has been Kamiya says the configuration depends on the design from scratch. The MRJ completed and is ready for production the customer. has an optimised fuselage. The wing “I think they will update and will be able accommodates a high bypass ratio engine. Customers to reduce it if needed,” he tells Airfinance It gives us some advantages over a re- The dominant market for regional aircraft Journal on the sidelines of the 19th Annual engined aircraft,” he says.
Orderbook for MRJ90
● Aerolease 10 Orders from ● Air Mandalay 6 53 Asia 23% ● Eastern Airlines 20 ● Japan Airlines 32 ● Skywest Airlines 100 Orders from North ● Trans States 50 America 77% ● All Nippon Airways 15 190
Source: Airfinance Journal’s Fleet Tracker
54 Airfinance Journal February/March 2017 Manufacturer profiles SCAC
MANUFACTURER PROFILES Sukhoi Civil Aircraft Company
ukhoi Civil Aircraft Company (SCAC) is a 239 firm orders, excluding options, Scivil division of Russia’s Sukhoi Aviation according to Fleet Tracker. Some of the Holding (a UAC company), manufacturing larger orders for the aircraft include an the Sukhoi Superjet 100 aircraft (SSJ100). order of 30 from Aeroflot, made in 2005; There are 85 SSJ100 in the active global an order for 30 made by Mexican carrier regional fleet and a further 164 on order, InterJet in 2011; and, more recently, an according to Airfinance Journal’s Fleet order for 32 aircraft, with options for 28 Tracker. from Russian lessor GTLK. Irish regional The company’s main in-production civil Source: Sukhoi carrier CityJet also placed a firm order programme – the Sukhoi Superjet 100 for 15 SSJ100s with 16 options in October (SSJ100) – was designed in cooperation Holding and Alenia Aermacchi, a division 2015, marking another international order with several foreign partners, but of Italian aerospace conglomerate for the aircraft. production is based in Russia. The aircraft Leonardo (formerly known as The programme su ered a blow in entered service in 2011 after certification Finmeccanica). The current-production May 2012 when a test flight of the SSJ100 from the Russian authorities. Certification models are the 100-seater SSJ100 in Basic crashed into a mountain, killing all 45 by Western authorities followed, although version with a range of 3048 kmand a long people on board. The programme also not without some di culties. The aircraft is range (LR) version of 4578 km range. su ered a set back in January 2017, designed to compete internationally with its The company announced at the 2016 when some operators had to ground Embraer and Bombardier counterparts. Farnborough Airshow that it is developing several of its SSJ100s for safety reasons. The aircraft’s SaM-146 engines are a stretched version to accommodate 120 Cracks were found in the tail section designed and produced by the Franco- passengers.This aircraft may bridge the of one aircraft, forcing the Russian Russian PowerJet joint venture between gap between the Sukhoi Superjet 100 and authorities to order safety inspections of Snecma (Safran) and NPO Saturn. the Irkut MC-21. It will act as a competitor SSJ100. However all the aircraft with the Worldwide marketing is undertaken to the Bombardier CSeries, Airbus A319 technical issue have been repaired by the by SuperJet International, which is a and smaller models of the 737NG. manufacturer the same month and SSJ100 partnership between Sukhoi Aviation Overall, the Sukhoi Superjet 100 has resumed flights.
Sukhoi: Number of orders by region
North America 6 Europe 125
Central America & Caribbean of global 7 Asia 26 1.1 % regional aircraft fleet
Sukhoi Total number of orders164 aircraft in the 107 current fleet
Source: Airfinance Journal’s Fleet Tracker
www.airfinancejournal.com 55 Other regional manufacturers
Other regional manufacturers
s well as the in-production aircraft types, there is a BAE: number of aircraft in current global Asignificant portion of the current regional fleet that is made up of older aircraft models. According to Airfinance Journal’s regional fleet Fleet Tracker, 1,833 out of production aircraft are in the current regional fleet today, making up 20% of the total current global regional fleet. ● North America 98 These include aircraft from British Aerospace, Fokker, Saab, ● Europe 202 Short Brothers and Boeing. Although it stopped being produced in 2002, the BAe 146 remains a particularly popular regional ● Asia 99 aircraft today, with its primary users including Ireland’s CityJet ● South America 77 and Brussels Airlines. There are 246 Bae 146s in the current regional fleet today, ● Africa 75 according to Fleet Tracker. The charts illustrates percentages of ● Australia and Pacific 32 out-of-production aircraft current global regional fleet. ● Central America 30 and Caribbean ● Middle East 32
● Undisclosed 26
Fokker: number of aircraft in current Saab: number of aircraft in current global regional fleet global regional fleet
● North America 16 ● North America 111 ● Europe 108 ● Europe 130 ● Asia 93 ● Asia 29 ● South America 36 ● South America 7 ● Africa 69 ● Africa 0 ● Australia and Pacific 80 ● Australia and Pacific 61
● Central America 25 ● Central America 25 and Caribbean and Caribbean ● Middle East 74 ● Middle East 6
● Undisclosed 0 ● Undisclosed 8
Boeing: number of aircraft in current Shorts: number of aircraft in current global regional fleet global regional fleet
● North America 110 ● North America 92 ● Europe 18 ● Europe 6 ● Asia 7 ● Asia 8 ● South America 0 ● South America 3 ● Africa 0 ● Africa 5 ● Australia and Pacific 20 ● Australia and Pacific 5
● Central America 0 ● Central America 7 and Caribbean and Caribbean ● Middle East 0 ● Middle East 2 ● Undisclosed 0 ● Undisclosed 2
Source: Airfinance Journal’s Fleet Tracker
56 Airfinance Journal February/March 2017 Lease rates
Softly, softly The 50-seat regional aircraft market continues to experience challenging conditions, writes Olivier Bonnassies.
n 2016, appraisers expected the soft Storage of Bombardier aircraft has roles while another 10 are in military use Iconditions in the turboprop market to fallen slightly to 89 units during the past and government institutions. remain as aircraft availability continued 12 months. There are 17 Q400 units in “It is a resilient fleet,” says the lessor to rise. This softening started in 2015, storage, along with 33 Dash8-100s, 15 source. “The [Russian carrier] Polet fleet are according to Collateral Verifications vice- Dash8-200s and 24 Dash8-300/Q300s. the only aircraft available because of the president Gueric Dechavanne. “The Q300 market is an interesting bankruptcy,” he says. One year ago, the number of ATRs in market at the moment because prices Demand is mainly emerging from storage or moving between customers are going down for no apparent reasons,” Europe, with Loganair and Eastern Airways marginally increased to 148 units. At 27 says one leasing source. “It is a versatile adding units. Saab registered two new January 2017, there were 131 ATR aircraft in but also a robust aircraft for operations in customers in 2016: Skywork in Sweden and storage, according to Airfinance Journal’s rough airfields,” he adds. Tus Airways of Cyprus. Fleet Tracker. The source notes a recent increase in US regional carrier PenAir continues to ATR storage has stayed at the same availability after announcements made add Saab 2000s to its fleet and has now level over the past year for 70-seat aircraft, by Air New Zealand to phase out its five units in operations. reflecting challenging market conditions. fleet slowly, while US regional carrier In the meantime, more aircraft could be There were 83 ATR72s – notably 41 Commutair will get some Embraer ERJ- phased out by Swiss carrier Darwin and ATR72-500s and 21 ATR72-600s – in 145s. Sweden’s Braathens Aviation. storage compared with 84 units in Early Q300 models are trading at Lease rates are about $40,000 a month early 2016. A total of 37 ATR72s were about $5 million, while latest models are for a Saab 2000, says the source. advertised for sale or lease by Airfax, as of about $7 million, according to the source. The ATR42 market is holding up 17 January 2017. The leasing market is in the $50,000 to reasonably well. A total of 11 aircraft are On the 50-seat side, the storage $70,000-a-month range. advertised, according to Airfax. situation has decreased. There are 44 In the 50-seat market, the Saab 2000 The lease rate reference for an ATR42 ATR42s in storage compared with 64 in aircraft is still a useful turboprop, despite is between $50,000 and $55,000, says an early 2016. A total of 26 ATR42s were its small fleet in operation. About 45 units airline source, adding or retrieving $10,000 advertised for sale or lease. are still operated in commercial passenger a month depending on the credit.
www.airfinancejournal.com 57 Lease rates
Large turboprops under pressure The high level of navigation systems required in Europe. The high level of storage in the 70-seat Airstairs can costs owners $400,000, market, notably ATR products, is putting storage in the 70-seat including $200,000 for the stairs the market under pressure, despite oil alone, while another $100,000 has to prices remaining at reasonable levels. market, notably ATR be budgeted for the service bulletin. There are 41 ATR72-500s in storage or products, is putting the Installation and fitting make the most of the transiting between customers, and more remaining costs. than half of the fleet is advertised for sale market under pressure, The part-out market is limited because or lease. of high penetration of Rolls-Royce service Lease rates can range between despite oil prices agreements. “There are no buyers for part- $75,000 and $85,000 for older ATR72- remaining at reasonable out scenarios because more than 95% of 500s, according to the airline source. He the fleet is under the Rolls-Royce TotalCare adds that 2002-vintage aircraft are leased levels. scheme,” says a leasing source. at less than $80,000 a month, while a 10- The airframe would sell, in a part-out year model can reach $100,000 a month. scenario, at $225,000 to $250,000, while More challenging lessees will lease in each engine would cost $325,000 to the $120,000-a-month range, according to 50-seat RJs $350,000. another lessor. The 50-seat regional jet market has The source sees lease rates in the US There is definitely some softening in the improved over the past year as a result of between $30,000 and $35,000 a month, market for new Q400s and ATR72-600s the current level of oil prices. There are depending on the credit and on multiple for placements. 134 ERJ-145s in storage, with half of them aircraft deals basis. In 2015, there was a slight decline in o ered for sale or lease. Some transactions have closed in the turboprop values reported. The turboprop Embraer ERJ-145 fleets have traded $45,000 to $50,000-a-month range plus market had been undersupply for a long reasonably well over the past year but this maintenance reserves, says a leasing time and ATR has ramped up production in mainly is a seller’s market. source. recent years to catch up with demand. The reference pricing point is between Lease rates in Europe are about But, in the meantime, the ATR72-600 $1 million and $1.5 million for an ERJ-145, $50,000. A trading source says that lease model has been subject to aggressive but investment could be needed as most rates are between $30,000 and $55,000 bidding from some leasing companies and US-based fleets have no airstairs, because across the board. this has translated into some softening in regional airlines have access to jetways. Good-condition aircraft should sell in the lease rates. Some past trades have recorded as $1.5 million to $1.75 million range, says a “We are not happy where lease rates much as $2 million but the majority of trading source. for the -600 series are,” says one source. deals over the past two years have been The 50-seat CRJ market has been a “At the moment, we will be happy with between $750,000 and $1 million. seller’s market for a long time. According placements at $180,000 a month,” he It is a distressed market because owners, to Fleet Tracker, there are 102 Bombardier adds. which are mainly financial institutions, CRJ200s but only one-third is advertised The lessor representative also notes generally try to sell at a discount rate. for sale or lease. less aggressiveness in the Q400 market to The news that ExpressJet will be Sources say the units sell at a low level, place more aircraft. Still, Q400 lease rates ooading 75 aircraft may add further about $1 million. A typical 15-year-old have softened. pressure on the market, despite some aircraft would be o ered in the market for “The Q400 market is not a selling pockets of demand emerging over the past about $1.5 million. market. In terms of placements, aircraft few years. A run out aircraft would sell below $1 with new interiors can get placed at Mexico’s TAR Aerolineas has been million, says one source. In a part-out $150,000 a month in the second-hand taking former Mesa units while Calafia scenario, engines would sell between market with weak credits. The rate drops Airlines, also in Mexico, has taken some $250,000 and $300,000, he adds. to the $130,000 region for better credit Trans States aircraft. It has now four The top-end of the market commands airlines.” ERJ-145s after recently taking delivery prices in the $1.5 million to $1.7 million But he is optimistic about the Q400 of a 2001-vintage ex-Mesa aircraft from range. market. “Six months ago, we were looking Aerovision Aircraft Services. A trading source says lease rates are hard about where we could place aircraft. Trading company Regional One has typically between $30,000 and $40,000 We are more comfortable to find homes been buying some units lately. for older models while the newest aircraft, now,” he says. In November 2015, US regional carrier especially with more green-time in the New Q400 placements almost reach CommutAir announced it will add 40 ERJ- engines, command higher rates, adds the $200,000 a month, while older models are 145s to its all-turboprop fleet, expanding source. below $110,00 a month. The economics its operations with partner United Airlines Fleet Tracker recorded about 60 of the turboprops over the regional at the New York Newark and Washington transactions in 2016 involving CRJ200s. jets in a high fuel environment are not Dulles bases. Notably some aircraft were placed with questionable but the past year has seen Other US regional airlines, including RusLine and Yamal Airlines in Russia and oil prices at between $28 a barrel and $55 Republic Airways and SkyWest, have been Air Georgian in Georgia. a barrel. This may have prompted some downsizing their 50-seat regional fleets Applications have also developed in the operators not to rush to replace aircraft. in favour of 76-seat regional jets for their African market with CemAir and FlightPro Turboprop values tend to stabilise mainline partners. Zambia adding aircraft last year and in and bounce back “fairly quickly” as soon Fleet concentration has not helped South America with Boliviana and Star Peru. as demand returns, and with oil prices remarketing US fleets outside the US SR Jet in China has taken delivery of four creeping up, market conditions could because they are not EASA-compliant CRJ200s that were previously operated by improve this year. and need investments, especially in the China Yunnan and China Eastern Airlines.
58 Airfinance Journal February/March 2017 AWARDS2017 Global Awards, New York, 16 May, 2017
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