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Airlines costs management

May 2016

Phil Seymour - CEOPaul Lyons - Strategy Director

www.ibagroup.com

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SELECTION

• Target intelligence

• Market entry

• Competitive intelligence

OPPORTUNITY

• Asset DD & values

• Competitor analysis

• Key stakeholder DD

• Benchmarking

THE DEAL

• Negotiation

• Critical factors

• Risk assessment

RUNNING THE ASSET

• Maintenance reserves and DOC analysis

• Costs management

• Technical & regulatory advisory

• Redelivery planning

• Regular reporting around fleets & values

EXIT

• IPO readiness

• DD on prospective buyer

• Sell side advisory

ADDRESSING ISSUES

• Portfolio monitoring & analysis

• Early warning of concerns

• Litigation & dispute support

4.

EXIT

3.

BUILDING VALUE

2.

AQUISITION

1.

IDENTIFICATION

Full service

• Data, asset management, technical advisory

Independent

• No vested interest in a deal progressing or in placating advertisers

• No conflict in treatment of assets under management or for sale

Diversified talent pool

• Imaginative solution finding from a breadth of backgrounds

Exclusive data

• Unique access to critical data and intelligence

Enhancing Decision Making

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The technical costs quadrant (narrow/wide savings)

Maintenance Costs $1/2.5m

• How do you compare?

• OEM Data v Real World

• Environment/Operational Impact

• Reserves v Costs – variances

• MPD v Contractual

Fleet Planning: $2/5m

• Mission/Sector/Payload

• Flexibility/Options

• Buy/Lease

• Crew Commonality

• Maint Support Options

Warranties and Provisions $1/2.5m

• Management of claims

• Lack of airline focus

• Process driven

• Millions available and unclaimed

• AD cost sharing

Transition Management $1.7/3.9m…

• Extend or Return Analysis

• Early Engagement

• Key issues revisited

• Improvement Initiatives

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Show me the money

• Potential savings for a fleet of 76: $317m

• Typical operating profit for a 76 aircraft airline: $175m

• easy to slide into loss

• Cashflow critical, savings can smooth the seasonality curve

0

2

4

6

8

10

12

14

16

Savings per narrow savings per wide

Potential saving per aircraft ($m)

Fleet Planning Warranties and Provisions

Maintenance costs Redeliveries

Fleet size: 76

Redelivery Ratio 10%

Widebody multiplier 2.5

Narrow/Wide redelivery ($m) 1.7 3.9

Potential savings across ($m): Narrow Total ($m) Wide Total ($m)

Fleet Planning 152 380

Warranties and Provisions 76 190

Maintenance costs 76 190

Redeliveries 13 30

sub total 317 790

Engines Rotables Fuselage Landing Gear Interior Avionics

Fleet Planning X X X X

Warranties and Provisions X X X X X

Maintanance costs X X

Redeliveries X X

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In more detail – Fleet planningFleet Planning: $2/5m

• Mission/Sector/Payload

• Does it fly far enough to maximise efficiencies

• How rapidly is traffic changing

• Flexibility/Options

• Agree costs of upgrades even if not chosen

• Buy or Lease? Operational versus financial benefits

• Lease if you can’t drive a big discount

• Carefully review a great deal on a less popular aircraft

• Crew Commonality

• Consider the potential for up/down scaling

• Maintenance Support Options

- Don’t have the OEM as your only source

- Regional Considerations

- In-house v Outsourcing

0

1

2

3

4

5

6

7

8weight

age

maintenance costs

range

fuel burn

lease rate/price

It isn’t just about the lease rate or purchase price

Average

Aircraft 1

Aircraft 2

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In more detail – Maintenance costs

Maintenance Costs $1/2.5m

• How do you compare?

• OEM Data v Real World

• Environment/Operational Impact

• Reserves v Costs –variances

• MPD v Contractual

• In-house/Outsourcing

• Engines/High Cost Rotables

Direct maintenance costs by airline

Source: IATA

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In more detail – Warranties and provisions

Warranties and Provisions $1/2.5m

• Creeping costs, under the radar

• Management of claims

• Lack of airline focus - falling between the cracks

• Process driven

• AD cost sharing

• Maintenance Reserves

• Millions available and unclaimed

Finance

Keep to budget

Get costs fixed

Create supplier competitiveness

“the maintenance guys always bust the budget (spend too much)”

“get the OEM to be aligned with our interests”

Line Maint.

Keep it safe

Get it fixed

Get it out

“maintenance costs are difficult to predict so I always overestimate but am told its too high”

“the OEM cost estimates are not adequate”

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In more detail - Transition Management

Transition Management $1.7/3.9m…

• Extend or Return Analysis

• Early Engagement

• Key issues revisited

• Improvement Initiatives

- 200,000 400,000 600,000

Wings & Empennage

APU

Interior and carpet

Corrosion

Landing gear

Fuselage, windows and doors

Components

General

Engines

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Extend or Return?

Extend

• Good deals to be had, especially on widebodies, given demand and fit out costs.

• Gap between current and next generation kit has narrowed, slowing adoption

• Still a big decision driven by a complex balance of rates, costs, reserves and demand.

Return

• Last minute = bad news and/or big fees

• Two years planning

• How to replace/where’s it going

• What can I avoid paying for

• What do I get next – engines, IFE

• Not a lesson in each side shafting the other

• In fact the opposite is true, doing the right thing = a better deal and more choice.

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Recent examples

Start up airline

• 8 year lease

• Marketing and sales 95% of management time

• Lease docs literally shoved in drawer and ignored

• 6 months out – nowhere near return conditions, gears and engines late to MRO at peak time of year (Winter)

• Big prob for both parties – late delivery penalty, high costs for each side

• Lessor fails to deliver to next lessee on time.

Medium airline

• Great tech team, but focus on up, not back.

• Focus on the day to day difficult to change

• Sufficient volume to really hit core operations.

• We are seeing moves for this size of airline to realise limitations and outsource to specialists

Large airline

• Some might say arrogance

• Assume strong commercial strength will mean lessors will concede

• Probably the worst at collating records, mods and repair files if various tech depts. are spread over a large area.