Aviation Strategy Issue No: 120 October 2007 Atlantic battle plans he Euro-majors are starting to make some big moves in antici- CONTENTS Tpation of next year's US-EU open skies regime. Air France has announced a comprehensive joint venture with Analysis Delta. Mirroring the long-established KLM/Northwest agreement, the two airlines will implement full revenue and cost sharing on all their services between their respective hubs (CDG, Orly and Lyons; Air France’s advance 1 Atlanta, JFK, Cincinnati and Salt Lake City), as well as the planned, from April next year, Heathrow operations. The aircraft leasing business: This is only the first phase. All the main SkyTeam members have applied for extended anti-trust immunity, the main effect being that • GECAS the AF/DL operation would combine with the KL/NW joint venture, • ILFC generating an estimated €20-30m net benefit for the Air France • Boeing Capital Corporation Group. • AerCap The assault on Fortress Heathrow has been launched with the • CIT transfer of three daily LHR slot pairs from Air France to Delta, • Babcock & Brown enabling the US carrier to fly double dailies to/from JFK plus a daily • Aviation Capital Group to Atlanta. Air France itself will operate from LHR to Los Angeles (and • RBS Aviation Capital from there connect to Tahiti, which is legally part of France). AF/KL • Pegasus Aviation has another 22 daily slots at LHR, though not all are suitable for transfer from short to long haul operations. Plus all of the other major How the passenger will benefit from all this consolidation is rather players and new entrants 2-13 unclear - unlike the KL/NW agreement which rationalised numerous thin O&D city-pairs by hubbing passengers over Amsterdam and Briefing Detroit, the AF/DL alliance focuses on cooperation on thick hub-to- hub routes, though it also should intensify competition on the very Lufthansa: Ready for lucrative LHR-JFK market. major acquisition? 14-23 For BA this incursion means that it has become more important to get its business-orientated Atlantic subsidiary successfully off the Databases 24-27 ground. Project Lauren, as it is known, is scheduled to start up with 757s in the summer of 2008. Incidentally, just how seriously the net- Airline traffic and financials work carriers are taking the new wave of business-class carriers may be indicated by Delta starting a JFK to Orly service in direct compe- Aircraft available tition against L'Avion, while American has started Stansted to counter the impact of Maxjet and EOS. Regional trends For Lufthansa, Air France's moves make it more likely though not inevitable that it will make an offer for bmi when the present sell Orders option on bmi's part turns into a buy option on Lufthansa's part next year (see Briefing, page 14). With a consolidation trend apparently in motion, Iberia, for not particularly logical reasons, has probably PUBLISHER become a more attractive target for BA or Lufthansa or Air France or indeed Grupo Marsans (the owner of Spanish long-haul charter Air Comet and Aerolineas Argentinas, which has just signed an MoU for Aviation Economics 61 Airbuses including four A380s). James House, 1st Floor Observing all this is Michael O'Leary who is apparently deter- mined to create a long-haul low cost carrier, separate from Ryanair, 22/24 Corsham Street and dubbed Ego Air. Intensely commercial as always, he states that London N1 6DR the right time to start up is in a recession when he can pick up equip- Tel: +44 (0) 20 7490 5215 ment cheaply as opposed to today's very strong aircraft market. Fax: +44 (0) 20 7490 5218 e-mail: [email protected] www.aviationeconomics.com Aviation Strategy Analysis Is the leasing market peaking? ith lease rates still climbing, a continuing amount of leasing assets and companies that Wshortage in second-hand aircraft and are changing hands, which always tends to very few spare production slots available at happen at the very top of the market. It is a Aviation Strategy Boeing and Airbus until after 2010, the leasing long list. Recently there have been floats for is published 10 times a year industry is enjoying its best times since 1996- AerCap, Aircastle and GECAS's Genesis, by Aviation Economics 1999. But is the cyclical upturn that started in while the Bank of China bought SALE, Terra 2004 at the very top of its peak, or will the bull- Firma acquired AWAS and Pegasus, a Editor: ish market continue for another few years? Macquarie-led consortium bought GATX's Keith McMullan [email protected] Most of the industry holds strong views that portfolio, and Standard Chartered is buying good times are here to stay for a while longer, Pembroke. Contributing Editor: with the peak not being reached until 2009 or Of course there has always been a steady Heini Nuutinen 2010 and a downturn only in 2012-2013. change of ownership in the aircraft leasing Some are even speaking of a "super-cycle" in industry, but it is the growing interest of private Contributing Editor: Nick Moreno the industry. The rationale goes that this leas- equity funds in today's market that some see ing upturn is different to others, since this time as a crucial warning sign that the market is at Sub-editor: it is not dependent on US and European air- or even past its peak. The activity of UK buy- Julian Longin lines but rather on long-term, rising demand out specialist Terra Firma is particularly attract- [email protected] from China, India and other emerging Asian ing criticism, with one analyst regarding its Subscriptions: markets. Combine this with other factors such acquisition of AWAS as having "curious tim- [email protected] as consolidation in the US industry and ing", while others believe that the company impending modernisation of the ageing fleet paid too much for AWAS, having chased the Tel: +44 (0)20 7490 5215 there, along with signs that many airlines have deal after reportedly losing out on earlier decided to permanently put a larger proportion attempts to acquire debis and Boullioun. Copyright: Aviation Economics of their fleet on leases in order to increase flex- The "bulls" say this criticism is unfair, given All rights reserved ibility, and the consensus view is that there is that there is more than just one large private no market bubble waiting to burst. equity company looking to buy leasing assets Aviation Economics The circumstantial evidence that the peak at the moment, with banks that were reluctant Registered No: 2967706 has not yet been reached is substantial. Many to own aviation assets in the years after (England) airlines are signing longer leases (up to 10 September 11 also now looking to buy lessors, Registered Office: years in some cases) and the strong narrow- while there is continuing interest from some James House, 1st Floor body market has been joined by a strengthen- lessors to merge with competitors. Indeed 22/24 Corsham St ing widebody market as airlines try to plug the Babcock & Brown, Macquarie Bank, Allco London N1 6DR gap before the A380 is eventually delivered. Finance, the UK's Standard Chartered Bank, VAT No: 701780947 The operating lessors' share of the world fleet Mitsubishi Corp. and Dubai Aerospace ISSN 1463-9254 has risen from an estimated 19% to 31% over Enterprise are all reported to have bid unsuc- The opinions expressed in this publica- the last decade (according to research from cessfully for Pegasus or SALE, and may be on tion do not necessarily reflect the opin- ions of the editors, publisher or contribu- Aircastle), with some lessors claiming this will the look-out for other potential acquisitions. tors. Every effort is made to ensure that the information contained in this publica- continue to rise, reaching 50% in the next And they are being joined from growing tion is accurate, but no legal reponsibility decade. interest out of China in the aircraft asset man- is accepted for any errors or omissions. Having said all that, there is a small (but agement sector, fuelled by the booming avia- The contents of this publication, either in whole or in part, may not be copied, growing?) view that 2007 and 2008 will be the tion industry there and by government stored or reproduced in any format, print- peak of the cycle, with the market likely to soft- "encouragement" to buy foreign assets. The ed or electronic, without the written con- sent of the publisher. en in 2009 or even before then. One analyst Bank of China is believed to be looking for fur- (who, unsurprisingly, prefers not to be named) ther leasing acquisitions, while Beijing-based says there is a lot of "froth" in the leasing mar- China Minsheng Bank (the largest privately- ket, and that direct evidence for this is the owned bank in China) is talking with potential October 2007 2 Aviation Strategy Analysis partners, both foreign and domestic, in order Oaktree, Singapore Airlines and WestLB), to set up a leasing entity, and at least four prior to a downturn? If the latter occurs, then other Chinese banks are looking to set up Terra Firma will have to wait until the next leasing ventures. peak before it can sell at a profit - which it may Yet, unlike most banks and leasing compa- well be prepared to do, but which surely is not nies, private equity companies tend to have what Guy Hands (the CEO of Terra Firma and relatively short-term investment horizons, and a legendary UK financier who founded the it's likely that Terra Firma will be looking to sell company after leaving Nomura in 2002) is its assets and make a large profit in around banking on? two to four years from now - which some say Interestingly, the two powerhouses of the will be right in the middle of the leasing down industry - GECAS and ILFC - appear to be cycle.