Technical Analysis of Maintenance Cash Flows

Transcription

1 Technical Analysis of Maintenance Cash Flows Ishka New Investors Workshop October 18, New York, USA 0

2 TODAY S AGENDA Aircraft maintenance introduction Aircraft maintenance-related lease provisions Lease-related maintenance cash flow forecasting 1

3 Time Remaining (%) INTRODUCTION Introduction: Asset Maintenance Value The market value of an aircraft or engine is primarily determined by its: Overall market supply and demand Age / remaining useful economic life FULL-LIFE 100% Component Maintenance Status Maintenance condition/status The value from maintenance does not decline evenly, but changes over the aircraft s life as the airframe, engines, and major components vacillate between: full-life status (new or freshly overhauled) run-out status (no maintenance life remaining) 50% A320 Maintenance Full-Life Value: ~$15M A330 Maintenance Full-Life Value: ~$30M 0% RUN-OUT Changes in maintenance status have strong impact on the maintenance value of an asset Aircraft Age A factory-new delivered aircraft has the highest possible maintenance status: full-life on all components 2

4 Time Remaining (%) Time Remaining (%) INTRODUCTION How does maintenance value change throughout the life of a leased aircraft? Redelivery #1 Redelivery #2 Delivery Delivered New 100% 50% 100% 25% 75% Depending on the delivery status of the aircraft, maintenance value may increase or decrease over the lease term. Delivered Used 0% 100% 50% % 75% 25% Aircraft lessors protect their investments against deterioration in maintenance value by requiring financial compensation for consumption of maintenance value. 0% Years 3

5 SECTION 1 AIRCRAFT MAINTENANCE INTRODUCTION 4

6 AIRCRAFT MAINTENANCE INTRODUCTION Three primary aircraft maintenance segments Operators approved aircraft maintenance program ensures: Aircraft safety and regulatory airworthiness Asset value retention through minimizing deterioration and restoring components to full-life condition Airframe Engine Major Components OEM Maintenance Planning Document (MPD) prescribes the scheduled maintenance tasks The older the aircraft, the more non-routine maintenance required Aircraft structural & system inspection, repair, and overhaul: Light C-checks: Months Heavy C-checks: 6-12 years Engine performance restoration: Maintenance that achieves a minimum level of the performance threshold and reverts core modules to the highest build specification Engine Life Limited Parts (LLP) replacement: Internal rotating components such as disks, seals, spools, and shafts that have hard-time intervals Landing gear: Intervals of 10 years & 20,000 FC APU: Mean time between removal (MTBR); on-condition Thrust reversers: Mean time between removal (MTBR); on-condition 5

7 AIRCRAFT MAINTENANCE INTRODUCTION Maintenance Intervals: Hard-Time and On-Condition Hard-Time Maintenance Components must be removed from the aircraft and sent to a repair station, upon reaching a defined limit (Airframe, Landing Gears, Engine LLPs): Calendar time; and/or Utilization, in flight hours (FH) or by flight cycles (FC) These time intervals are unrelated to the actual condition or operational performance of the aircraft On-Condition Maintenance Engines and APUs are typically maintained on-condition On-condition components are removed only when monitoring indicates performance is below a threshold, or when an internal component reaches its life limit As an example, in the case of engines, on-condition monitoring includes key performance indicators such as Exhaust Gas Temperatures (EGT), rotor speed, fuel flow, engine vibration and oil characteristics (pressure, temperature and consumption). 6

8 $USD Millions 7 AIRCRAFT MAINTENANCE INTRODUCTION Aircraft Life Cycle Maintenance Costs Engine maintenance accounts for the highest cost and is a key driver in aircraft value Representative Narrowbody Aircraft Life Cycle Maintenance Cost $16 $14 $12 $10 $8 $6 $4 Components: Other Components: Landing Gear Components: APU Engine LLP Engine Performance Restoration Airframe Heavy $2 Airframe Line $ Year Since Delivery 7

9 SECTION 2 AIRCRAFT MAINTENANCE-RELATED LEASE PROVISIONS 8

10 AIRCRAFT MAINTENANCE-RELATED LEASE PROVISIONS How are lessors protected against maintenance value deterioration? LEASE CONTRACTUAL TERMS Maintenance Compliance Requirements Financial Compensation (Major Components) Minimum Return Conditions Maintenance Reserves (MR) End-of-Lease Adjustments (EOL) 9

11 AIRCRAFT MAINTENANCE-RELATED LEASE PROVISIONS Maintenance Reserves: How are rates set? Component Maintenance Reserves Rate Calculation A / V2527-A5 Example Check Cost Airframe Heavy Check AF Rate = AF Check Rate = Check Interval $875, Months + $775, Months = $17,535 / Month Overhaul Cost Engine ENG Rate = ENG OVH Rate = Mean Time between Removal $3,300,000 18,600 FC = $177 / FH Catalog Price Engine LLP LLP Rate = LLP Rate = Cycle Limit $3,321,600 20,000 FC = $166 / FC Overhaul Cost Landing Gear LDG Rate = LDG Check Rate = Overhaul Interval $475, Months = $3,958 / Month APU APU Rate = Overhaul Cost Overhaul Interval APU Check Rate = $242,500 9,500 APU Hour = $26 / APU Hour 10

12 AIRCRAFT MAINTENANCE-RELATED LEASE PROVISIONS Maintenance Reserves: How do they work? 1 1 How much does the lessee pay for reserves? Major components Typical monthly collection Amount = contractual rate X component utilization Lessees 3 Lessors 2 MAINTENANCE-RELATED LEASE CASH FLOW 2 Who is responsible for the actual maintenance? And who pays for it? Airlines are responsible for the maintenance Lessees pay the full cost to the MRO provider Lessees make a claim to the Lessor to receive reimbursement of maintenance reserves Repair Station Maintenance reserve collection compensates for asset value deterioration and reduces the owner s exposure to unfunded maintenance events in case of an airline default 3 How much does the Lessor reimburse to the Lessee? Reimbursement is limited to the total accumulated reserve balance For used aircraft, Lessors also pay contributions to the first maintenance events Reserve surpluses are typically retained by the lessor 11

13 AIRCRAFT MAINTENANCE-RELATED LEASE PROVISIONS End-of-Lease Adjustments: How are they different from the Maintenance Reserves? In lieu of paying monthly maintenance reserves, airlines with stronger credit often pay end-of-lease adjustments. ZERO-TIME PAYMENT Cash Compensation to Full-Life End-of-Lease Adjustments New Aircraft ONE-WAY PAYMENT Cash Compensation to Half-Life Used Aircraft ONE-WAY MIRROR PAYMENT Payment only from the Lessee to Lessor TWO-WAY MIRROR PAYMENT Payment either from: - Lessee to Lessor; or - Lessor to Lessee Rates are similar to MR rates Like MR reserves, the intent is to compensate the aircraft owner for the asset value deterioration However, the payment is made until the lease end In the event of a default, lessors experience economic losses in an amount equal to the value deterioration of the aircraft during the lease term 12

14 AIRCRAFT MAINTENANCE-RELATED LEASE PROVISIONS What are minimum return conditions? Regardless of the maintenance financial compensation structure between the airline and lessor, maintenance components also need to be returned above defined minimum return condition thresholds These minimum return conditions allow the Lessor to place the asset with another airline with a clearance period of months of operations without maintenance needing to be performed Typical Minimum Return Conditions for Major Components (narrowbody aircraft) AIRFRAME Clear from a C check, minimum of 24 Months, 6,000 FH and 4,500 FC remaining ENGINE LLP Minimum of 4,500 FC remaining ENGINE Minimum of 6,000 FH and 4,500 FC remaining LANDING GEAR Minimum of 24 months or 2,000 FC remaining APU No more than 2,500 APUH since the last overhaul 13

15 SECTION 3 LEASE-RELATED MAINTENANCE CASH FLOW FORECASTING 14

16 LEASE-RELATED MAINTENANCE CASH FLOW FORECASTING Inputs, Algorithms, and Outputs MAINTENANCE STATUS ASSET CONDITION & VALUE ADJUSTMENT - Detailed components condition - Detailed component maintenance schedule and costs - Overall asset condition & value adjustments LEASE INFO ALGORITHMS LEASE-RELATED MAINTENANCE CASH INFLOWS - Maintenance reserves collection - End-of-lease collection LEASE-RELATED MAINTENANCE CASH OUTFLOWS - Maintenance reserves reimbursements - Lessor contribution payments - End-of-lease payments MODELLING ASSUMPTIONS ASSET MAINTENANCE EXPOSURE - Detailed exposure by components - Overall asset / portfolio exposure 15

17 LEASE-RELATED MAINTENANCE CASH FLOW FORECASTING Inputs, Algorithms, and Outputs MAINTENANCE STATUS LEASE INFO ALGORITHMS MODELLING ASSUMPTIONS 16

18 Millions Millions LEASE-RELATED MAINTENANCE CASH FLOW FORECASTING For leased assets requiring MR payments, reserve balances typically move inversely to maintenance condition Cash Flows of Leased Narrowbody Aircraft, MR Payer $1.0 $8 $0.8 $0.6 $0.4 $0.2 $0.0 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Oct-21 Apr-22 Oct-22 Apr-23 ($0.2) ($0.4) ($0.6) ($0.8) Maintenance Inflows Maintenance Outflows Cumulative Cash Flow Value Adj. From Half-life $6 $4 $2 $0 ($2) ($4) ($6) ($8) ($1.0) ($10) 17

19 Millions Millions LEASE-RELATED MAINTENANCE CASH FLOW FORECASTING The Maintenance exposure of an Asset owner is typically defined as the variance between the full-life value of the Asset and the cash compensation Cash Flows of Leased Narrowbody Aircraft, MR Payer $1.0 $10 $0.8 $8 $0.6 $6 $0.4 $4 $0.2 $2 $0.0 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Oct-21 Apr-22 Oct-22 Apr-23 ($0.2) $0 ($2) ($0.4) ($0.6) ($0.8) ($1.0) Maintenance Inflows Maintenance Outflows Cumulative Cash Flow Value Adj. From Half-life Maintenance Exposure ($4) ($6) ($8) ($10) 18

20 Millions Millions LEASE-RELATED MAINTENANCE CASH FLOW FORECASTING Maintenance condition is not aligned with cash flow for an aircraft requiring EOL payments and exposure could be high throughout the lease Cash Flows of Leased Narrowbody Aircraft, EOL Payer $1.0 $10 $0.8 $0.6 $5 $0.4 $0.2 $0 $0.0 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 ($0.2) ($5) ($0.4) ($0.6) ($0.8) ($1.0) Maintenance Inflows Maintenance Outflows Cumulative Cash Flow Value Adj. From Half-life Maintenance Exposure ($10) ($15) 19

21 LEASE-RELATED MAINTENANCE CASH FLOW FORECASTING Typical portfolio cash flow profile Aircraft Portfolio 20

22 21 LEASE-RELATED MAINTENANCE CASH FLOW FORECASTING How do you forecast cash flow beyond the contractual lease, throughout the economic life of the asset? Economic Life Assumptions Remarketing Time Future Lease Duration Future Contract Type (MR/EOL) and Rates Cost escalation Typical Minimum Return Conditions Standard Maintenance Intervals 21

23 LEASE-RELATED MAINTENANCE CASH FLOW FORECASTING Maintenance cash flow forecasting models should be flexible to incorporate a number of scenarios for different constituents Generic Base Case Active Management Case Stress Cases Investor Scenarios No default Typical 25-year economic life New/young assets No default Intelligent lease scheduling Active management of maintenance Mid/end-life assets Required by Rating Agencies (ABS transactions) Lease defaults and others stress assumptions Including perspectives with regards to: Aircraft economic lives Upside and downside scenarios across industry cycles Default probabilities Etc. 22

24 Laetitia Achille ALTONAVIATION.COM NEW YORK HONG KONG BEIJING TOKYO 23

25 COMPANY INTRODUCTION Alton Aviation Consultancy is a boutique aviation consulting firm with deep domain expertise across the aviation value chain Aircraft Leasing & Financing Advisory Airlines Aviation & Aerospace Investors Business & General Aviation Aerospace Manufacturers & Supply Chain MRO & Aftermarket Airports Specialty Projects Agile. Global. Objective. 24

26 COMPANY INTRODUCTION Alton provides data-driven guidance and insight required to inform business strategies, allocate capital, prioritize resources, and manage risk Lessors, operators, lenders, and investors rely on Alton s professionals to provide independent, objective advisory support Market research & analysis Commercial due diligence Aircraft Leasing & Financing Advisory Maintenance and lease cash flow forecasting Aircraft appraisals/valuations Aircraft sourcing, remarketing, and technical services Investment strategy related to entry/exit timing 25

27 COMPANY INTRODUCTION Alton supports a global client base from offices in the U.S., China, and Hong Kong New York 380 Lexington Avenue 17 th Floor New York, New York USA New.York@AltonAviation.com Beijing 8 Guanghua Dongli China Overseas Plaza South Tower, Floor 11, Suite A053 Chaoyang, Beijing China Beijing@AltonAviation.com Hong Kong 136 Des Voeux Road Central Suite 903 Central Hong Kong Hong.Kong@AltonAviation.com In China, Alton Aviation Consultancy is known as 德世国际航空咨询 ( 北京 ) 有限公司, or De Shi. 26