Investing in Aviation - Doric · Minimising Risk, Maximising Opportunity Shifting sands. The lessor...
Transcript of Investing in Aviation - Doric · Minimising Risk, Maximising Opportunity Shifting sands. The lessor...
www.iba.aero Minimising Risk, Maximising Opportunity
Investing in Aviation
April 25th 2017
Phil [email protected]
www.iba.aero Minimising Risk, Maximising Opportunity
The Aviation Growth Story
Air travel still doubling every 15 years
IATA still bullish
Developing market growth
Doubling of commercial fleet over 20 years. 40,000 aircraft delivered between 2016 and 2035 – five a day
Capital markets supporting financing demands
Why lease:
Latest tech Fuel efficiency Lower capex Flexibility Access the backlog Avoid residual risk
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General Demand – Traffic
RPK – Up 9.6% for January 2017 v January 2016
Load Factors @ 80.2 % for January 2017 representing slight increase of 1.2% over January 2016
Freight traffic FTK up 6.9% for January 2017 compared to January 2016Source: IATA
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Financing Structures
Source: Boeing
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The Aircraft Operating Lease Sector
The Growth of the Sector.
Why airlines like leases – flexibility
Why investors like leases – typical returns
The changing face of the top 50 lessors
The new money
The variations in leasing entities from the mega lessors who order speculatively, the mid-band and the new entrants
The downside – what can go wrong?
How to mitigate risk
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Why invest
Lots of reasons
Demand increasing
Stable cash flow
Regulation minimises corner-cutting
Capetown
Mobile and liquid (see opposite) assets
Predictable returns
But…be careful with
Credit risk: security, reserves, lease rate
The spec of your assets
Records
Maintenance
Operations
External influences
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Getting In
Getting out
Target ROI
Staying in
The market is strong for investors
but returns are trickier to realise and risks need to be mitigated
Maturity – many more players
Competition – LRFs declining
Over-Supply? - narrow bodies just keep on coming
Volatility – uncertainty/regional pressures
Getting InAsset selection and valuationAsset purchaseFinancing arrangedCredits assessed
Staying InRisk mitigationGetting paidUtilisation and
maintenance
Getting OutRedelivery managementTransition options: sell,
part out, extendRemarketing
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Shifting sands. The lessor market
Mr 10% 10-20 aircraft Mid-life narrowbodies Chasing returns, not scale
The new entrant Insurance, Pension, SWF or PE Asian focus last few years Disruptive in terms of margin, experience and
ambition
The top tier Listed Buying direct from OEMs Need to trade regularly Broad mix of operators and aircraft types
The mid market Consolidate or IPO Can be broad or niche Evolution A look at the ownership – buyers or sellers?
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Getting In
Getting out
Target ROI
Staying in
Getting In
Getting InAsset selection and valuationAsset purchaseFinancing arrangedCredits assessed
Staying InRisk mitigationGetting paidUtilisation and maintenance
Getting OutRedelivery managementTransition options: sell, part out, extend, P2FRemarketing
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Where To Go and Not To Go
The good, the bad the ugly – jurisdictions, regions and countries – how to monitor risk.
The mix of risk and reward
Tier 1, Tier 2 and Tier 3 airlines; Qualitative analysis Quantitative analysis
FAA/EASA Banned lists
Changing circumstances – e.g. Brazil (GOL) Turkey (THY)
Use of registers
Cape Town Treaty
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Appraised vs Trading values
Understandable frustration
Excusable reasons for lack of accuracy Crystal ball – 9/11, GFC Large carrier goes under
Inexcusable reasons for lack of accuracy Leaned on for value X Didn’t ask what it was for
Steps being to improve definitions We cannot put the genie back, but we can make it more clear what you are buying
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A320-200 Maintenance Value - 2016 Constant USD - V2500-A5, 2:1 (W.Europe)
Maintenance Value HL Level
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Historic Performance – How accurate are appraisals – Boeing 737-800
The example used here is a Boeing 737-800 of 2006 YOB
To do this – IBA must look at its 10 year forecasts from 2006
Our 2006 records stated that the aircraft in 2016 would be worth US$ 25.50m with 2.5% annual inflation
IBA’s 2016 records show a MV of US$ 24m
Adapting for actual inflation gives a 10 year forecast of US$ 23.7m – a variation of 1.25%
Similar variations seen for A320 family / other high demand narrow-bodies to +/-4%
All performed according to ISTAT Definitions
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Historic Performance – How accurate are appraisals – Airbus A330-300
The example used here is Airbus A330-300 of 2006 YOB
To do this – IBA must look at its 10 year forecasts from 2006
Our 2006 records stated that the aircraft in 2016 would be worth US$ 44.38m with 2.5% annual inflation
IBA’s 2016 records show MV of US$ 49.68m
Adapting for actual inflation gives a 10 year forecast of US$ 46m
Performed according to ISTAT Definitions
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Trading - “Naked” aircraft versus “encumbered/with lease attached”
An economic analysis reveals the real value….
Then there are further considerations:
Lease income, security deposits. Lessor contributions Other lease terms – extension/purchase option Delivery/Redelivery Conditions Maintenance Reserves and compensation for use Cost of finance
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Getting In
Getting out
Target ROI
Staying in
Staying In
Getting InAsset selection and valuationAsset purchaseFinancing arrangedCredits assessed
Staying InRisk mitigationGetting paidUtilisation and maintenance
Getting OutRedelivery managementTransition options: sell, part out, extend, P2FRemarketing
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Ongoing AM and monitoring…..the WWWWWWH guide
The Asset and its Technical Condition
Who? – IBA tech team – usually one senior surveyor. Lessee tech team – records and physical.
Which? – for portfolios there is sometimes a sampling process – e.g 4 aircraft on lease, choose which one is on maintenance.
Why? Asset value, building rapport, ensuring compliance. Lease v Regulatory can create different approaches – monitor the differences
Where? – ideally at main base where records are held and aircraft inspection ideally during extended downtime or heavy maintenance.
When? – per the lease clause – usually annual rights for lessor
What can change? See next slide
How? – finance and lease management aware - via lessee technical team contacts. Security passes.
Lease
Reserves vs compensation
Ambiguity
AD cost share
Return conditions
Credit
IBA Score
Track record
Deferrals & route changes
Management
team
Asset
Values
Residuals
End of life options
Market shift
Technical
Maintenance costs
Utilisation
Technical Due Diligence
Asset Inspections
Jurisdiction
PESTEL
analysis
Capetown
Courts
Arrests
Transition
Scheduled v unscheduled
Reconfig costs
Reserves or cash
Liquidity of asset
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What can change?
Utilisation
Maintenance Program
Flight Ops
Components
Modifications
Damage
The inspection provides the opportunity to assess thevariables associated with the use of the asset and to assess if there is anything that may impact the valueand future use (remarketability) of the asset:
1. Utilisation: per initial expectation? Any changes?2. Maintenance Program: these can develop from OEM
of from lessee – check variations.3. Flight Operations – any changes to operating weights,
de-rate, performance and procedures?4. Changes to components, including engines. Title?
MRO influence5. Modifications: Configuration, Source documents.6. Damage: Per OEM, who/how performed, per lease,
insurance, repeat inspections.
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Asset Management During the Lease
Use of CMS – Client’s and IBA’s access.
Monitoring and analysing Lessee input – utilisation reports, operator mod. requests,damage rts, certificate and insurance renewals.eporAre the aircraft flying?
Mid–term Aircraft/Records Inspections at appropriate frequencies.
General Monitoring – ADs, Regulatory Changes, etc.
Maintenance Reserves – reserve invoicing and fund balances, workscopes,drawdown approvals.Packaged to build a comprehensive “moving picture”.
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Warning Signs
Late Payment of rentals or reserves
Financial reporting, business plans
Press articles/peer networks, other lessors/financiers concerns
Key staff changes, route cancellations
Supplier payment issues
Economic/regulatory changes
Order deferrals
SO......WATCH FOR THE SIGNSINTEGRATE THE COMMERCIAL AND TECHNICAL ASPECTS
BUILD THAT MOVING PICTURE
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Risk monitoring, easy in hindsight
Look at operator and macro environment as well as the asset itself.
Financial reporting, business plans
Route changes and cancellations
Records & maintenance issues
Political, economic & regulatory changes
Key staff changes
Order deferrals
Staff and suppliers not getting paid
Desktop: Trade, Business, Stats like these to my right
Peer networks
Data: Fleet, Utilisation, Routes and Usage
Spotters
Fleet Info
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Getting In
Getting out
Target ROI
Staying in
Getting Out
Getting InAsset selection and valuationAsset purchaseFinancing arrangedCredits assessed
Staying InRisk mitigationGetting paidUtilisation and maintenance
Getting OutRedelivery managementTransition options: sell, part out, extend, P2FRemarketing
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The Transition Management Minefield
Top 10 contributors to transition challenges
Poor contract drafting around redelivery conditions. Lesser inspection rights and disputes processes
Lack of lessee planning and early engagement with lessor
Inadequate focus on assets during operations
Lessee operational demands consuming redelivery resource
Decentralised, missing or incorrectly completed records
Underestimation of the total workload
Discovery of additional work required during maintenance input
Lack of lessor appetite for returning aircraft
Engines failing borescopes – carry out precautionary borescope much earlier
Underestimating lead times and lessor expectations.
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Pros and Cons of the options if you don’t have a new lessee
Part Out Happening sooner OEM engine programs
Convert Interesting, growing market Amazon driving change
Extend Easiest option Lower rent typical Heavy check triggered
Sell Residual value Naked can be tough
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Demand: where are we? Orders: Airbus A320 & Boeing 737 CFM
Source: IBA. iQ
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NG MAX NEO CEO Oil
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Historic Narrow-body Production Levels
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Delivery Profile
737 CL 737NG CEO NEO
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The Airbus A320 vs Boeing 737 MAX – Latest
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Cumulative NEO/MAX orders – Source: IBA. iQ
MAX NEO
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The Airbus A320 vs Boeing 737 MAX – Latest
Airbus is ahead with the NEO in terms of cumulative orders, regardless of the fact that the NEO was launched 7-8 months earlier.
In terms of firm orders Airbus have circa 5,000 NEO while Boeing have about 3,500 MAX Both the A319NEO and 737 MAX 7 have hardly set the sales stats on fire with sub 100 units each to date The A320NEO and MAX 8 are very closely matched with the NEO slightly ahead. The A321NEO is doing very well while sales of the MAX 9 are a little slow – No figures supplied as it is difficult to
determine which MAX orders are actually confirmed as the Dash 9 Will Boeing do a MAX 10 ? Looking almost inevitable. 66 inch stretch (meaning it will still be slightly smaller than
A321). The 737 MAX 9 is a goer and it has now rolled out of factory Basically – both NEO & MAX very successful when looked at on a programme basis Boeing 737 MAX 8 should enter service with Norwegian / Lion Air circa June this year, WN circa September A321-Neo should enter service later this year too…
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Passenger Aircraft – Lease Rates – Airbus A320-200
Source: IBA. iQ
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A320 Lease Rates - Constant Age
Age - 0 Age - 5 Age - 10 Age - 15 3m Libor
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Passenger Aircraft – Lease Rates – Boeing 737-800
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737-800 Lease Rates - Constant Age
Age - 0 Age - 5 Age - 10 Age - 15 3m Libor Source: IBA Jet DataSource: IBA. iQ
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Passenger Aircraft – Values – Airbus A320-200
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Age - 0 Age - 5 Age - 10 Age - 15 Source: IBA. iQ
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Passenger Aircraft – Values – Boeing 737-800
$10.00
$15.00
$20.00
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737-800 Market Values - Constant Age
Age - 0 Age - 5 Age - 10 Age - 15
Source: IBA Jet Data Source: IBA. iQ
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Trading Volumes – Narrowbodies
Considering new operating leases, secondary sales and sale leasebacks, trading volumes for 2016 appeared to be close to levels encountered for 2015 – although majority of most liquid aircraft are down so far Once again, we expect the top 3 families that trade under those scenarios to remain the same. In terms of % of trades performed this year:
A320 family = 22.9% ≡ 3.7% of the in service fleet
737NG = 14.2% (16.0% in 2015) ≡ 2.7% of the in service fleet
737 classics = 8.8% (8.5% in 2015) ≡ 7.5% of the in service fleetA320 family trading is at same level as for 737classics & 737NG The top 3 specific models are the same as in 2015:
A320-200 = 12.5% of trades
737-800 = 10.9% of trades
A321-200 = 6.3% of trades
Secondary trading 2016 v 2015
Volume CMV
– A320-200 ▼ ▲
– 737-800 ▼ ▲
– A321-200 ▲ ▲
– A319-100 ▲ ▲
– 737-700 ▼ ▲
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Trading Volumes - Widebodies
Widebody trading is down from 2015 – but not far from long-term trend
767s = 4.1% of 2016 trades ≡ 10.2 % of the in service fleet
A330s = 2.6% of 2016 trades ≡ 4.6% of the in service fleet
777s = 2.0% of 2016 trades ≡ 3.2% of the in service fleet
4 engined aircraft overall remain down on previous year
Secondary trading 2016 v 2015
Volume CMV
– 767-300ER ▲ ◄
– A330-200 ▼ ▼
– A330-300 ▼ ▼
– 787-9 ▲ ▲
– 777-300ER ▲ ▼
– 777-200ER ▲ ▼
– A350-900 ▲ ▲
– 737-900ER ▼ ▲
– 787-8 ▼ ▲
– A380-800 ▼ ▲ (new)
– A340-500/600 ▼ ▼
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Wide – Body Market – Take Away Comments
Stronger performers• New generation twins - Boeing 787-8/-9, Airbus A350-900
Strong appetite for sale and leasebacks, good credit lessees, wide operator base, leading edge technology and still in early in the product cycle. Residual value performance is expected to be good.
Average performers – cautious future outlook• Boeing 777-300ER, Airbus A380-800
Aircraft are entering the later stages of their product cycles, high fleet concentration within certain carriers and the secondary market is untested for these models. High transition costs and potentially limited second-hand market compared with fleet size may place pressure on secondary market trading values.
Older twin engine WB - Market softening• Airbus A330-200/-300, Boeing 777-200ER, Boeing 767-300ER
Aircraft are either late in the product cycle (A330s) or out of production (B777 & 767). Whilst there are placement opportunities, the market is in oversupply for these types, storage and availability are high and values and lease rates, particularly of older examples, are under pressure. Part-out is a likely eventuality for mature examples.
Weakest performers – transactions likely to be at distressed levels, limited demand• Airbus A340-300/-500/-600, Boeing 777-200, Boeing 747-400, Boeing 747-8I
Airbus A340s and Boeing 747-400 are all out of production. The later A340 variants achieved poor market uptake, likewise the Boeing 747-8I has struggled in its passenger form with only three carriers and circa 30 aircraft in service. Prospect for future placements is weak with narrow/narrowing operator bases. Secondary market value and lease rate expectations are weak.
Source: IBA. iQ
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Wide – Body Market Source: IBA. iQ
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A330-200 A330-300 A340-300 A340-500 A340-600 A350-900 B747-400 B767-300ER B777-200ER B777-300ER B787-8 B787-9Fleet size Parked Available
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Wide – Body Market – Transactions Source: IBA. iQ
A330-200 A330-300 A340-300 A340-500 A340-600 A350-900 B747-400B767-300ER
B777-200ER
B777-300ER
B787-8 B787-9
Sold with lease 12 5 3 0 0 0 0 2 0 0 1 0
Sold off lease 12 1 17 3 1 0 14 58 11 5 0 0
Sale leaseback 1 14 0 0 0 5 0 0 0 7 13 17
Operating Lease 27 24 4 2 0 11 8 21 9 18 0 17
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Wide – Body Market – Monthly Lease Rentals (idealised market)
Aircraft Year 2017 2012 2007 2002
Low 1,850 1,050 600 -
High 2,250 1,380 850 -
Low 1,100 700 - -
High 1,250 800 - -
Low 630 480 350 245
High 830 665 510 370
Low 680 520 375 250
High 900 720 545 370
Low 1,000 - - -
High 1,300 - - -
Low 920 760 - -
High 1,050 860 - -
Low 1,000 - - -
High 1,200 - - -
Low 1,150 930 750 -
High 1,450 1,145 880 -
Boeing 787-9
Boeing 777-300ER
Airbus A380-800
Boeing 747-8I
Airbus A330-200
Airbus A330-300
Airbus A350-900
Boeing 787-8
Source: IBA. iQ
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NB Market – The Disconnect in Lease Rates
2006 A320-200
Value then $45,600,000
Lease rate then $395,000
LRF 0.87%
2016 / 2017 A320 NEO
Value now $47,950,000
Lease Rate now $350,000
LRF 0.73%
Source: IBA. iQ
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NB Market – The Disconnect in Lease Rates
2006 Boeing 737-800
Value then $46,200,000
Lease rate then $400,000
LRF 0.87%
2017 Boieng 737 MAX 8
Value now $50,500,000
Lease Rate now $360,000
LRF 0.71%
Source: IBA. iQ
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WB Market – The Disconnect in Lease Rates
2006 A330-300
Value then 103,000,000
Lease rate then 830,000
LRF 0.81%
2016 / 2017 Boeing 787-9
Value now 137,000,000
Lease Rate now 960,000
LRF 0.70%
Source: IBA. iQ