ABS Maintenance Forecasting and Stress Testing

Transcription

1 ABS Maintenance Forecasting and Stress Testing Airline Economics Aviation Finance & Leasing School January 24, Dublin, IRELAND 0

2 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. 1

3 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 2

4 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. 3

5 TODAY S AGENDA Aircraft maintenance introduction Aircraft maintenance-related lease provisions ABS maintenance cash flow forecasting ABS stress testing 4

6 SECTION 1 AIRCRAFT MAINTENANCE INTRODUCTION 5

7 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 6

8 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 In-production 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). 7

9 $ millions AIRCRAFT MAINTENANCE INTRODUCTION Aircraft Life Cycle Maintenance Costs Engine maintenance accounts for the highest cost and is a key driver in aircraft value $16 Representative Narrowbody Aircraft Life Cycle Maintenance Cost $14 $12 $10 $8 $6 $4 $2 $ Year Since Delivery Components: Other Components: Landing Gear Components: APU Engine LLP Engine Performance Restoration Airframe Heavy Airframe Line 8

10 SECTION 2 AIRCRAFT MAINTENANCE-RELATED LEASE PROVISIONS 9

11 Time Remaining (%) AIRCRAFT MAINTENANCE-RELATED LEASE PROVISIONS 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 10

12 Time Remaining (%) Time Remaining (%) AIRCRAFT MAINTENANCE-RELATED LEASE PROVISIONS How Does Maintenance Value Change Throughout the Life of a Leased Aircraft? Redelivery #1 Redelivery #2 Delivery 100% 100% 75% Delivered New 50% 0% 100% 25% % 75% Depending on the delivery status of the aircraft, maintenance value may increase or decrease over the lease term. Delivered Used 50% 25% 0% Years 11

13 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) 12

14 AIRCRAFT MAINTENANCE-RELATED LEASE PROVISIONS Maintenance Reserves: How are Rates Set? A / V2527-A5 Example Component Typical Maintenance Reserve Rate Calculation Worked Example Reserve Rate Calculations Airframe Heavy Check Check Cost Check Interval $875, Months + $775, Months = $17,535 / Month Engine Overhaul Cost Mean Time between Removal $3,300,000 18,600 FH = $177 / FH Engine LLP Catalog Price Cycle Limit $3,321,600 20,000 FC = $166 / FC Landing Gear Overhaul Cost Overhaul Interval $475, Months = $3,958 / Month APU Overhaul Cost Overhaul Interval $242,500 9,500 APU Hour = $26 / APU Hour 13

15 AIRCRAFT MAINTENANCE-RELATED LEASE PROVISIONS Maintenance Reserves: How do they work? How much does the lessee pay for reserves? 1 Major components Typical monthly collection Amount = contractual rate X component utilization MAINTENANCE-RELATED LEASE CASH FLOW 2 Who is responsible for the actual maintenance? And who pays for it? Airlines/ Lessees 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 2 Lessee 1 3 Lessor 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 ( top-ups ) to the first maintenance events Reserve surpluses are typically retained by the lessor at the end of lease Repair Station 14

16 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 ( EOL ) adjustments. Rates are similar to MR rates 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 from: - Lessee to Lessor TWO-WAY MIRROR PAYMENT Payment from: - Lessee to Lessor, or - Lessor to Lessee Like MR reserves, the intent is to compensate the aircraft owner for value deterioration from change in maintenance condition However, the payment is not made until the lease end In the event of a default, lessors experience an economic loss equal in amount to the value deterioration of the aircraft during the lease term 15

17 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 16

18 SECTION 3 ABS MAINTENANCE CASH FLOW FORECASTING 17

19 ABS MAINTENANCE CASH FLOW FORECASTING Maintenance Cash Flow Inputs, Model, and Outputs Maintenance Status Lease Terms Modelling Assumptions MCF MODEL ASSET CONDITION & VALUE ADJUSTMENT Component condition Component maintenance schedule and costs Overall aircraft condition & value adjustments LEASE-RELATED MAINTENANCE CASH INFLOWS Maintenance reserve collections End-of-lease collections LEASE-RELATED MAINTENANCE CASH OUTFLOWS Maintenance reserves reimbursements Lessor contribution payments End-of-lease payments ASSET MAINTENANCE EXPOSURE Detailed exposure by component Overall asset / portfolio exposure 18

20 Cash Inflows / Outflows Cumulative Cash Flow, Values Adjustment from Half-Life Millions Millions ABS 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) 19

21 Cash Inflows / Outflows Cumulative Cash Flow, Values Adjustment from Half-Life Millions Millions ABS 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) 20

22 Cash Inflows / Outflows Cumulative Cash Flow, Values Adjustment from Half-Life Millions Millions ABS 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) 21

23 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Oct-21 Apr-22 Oct-22 Apr-23 Oct-23 Apr-24 Oct-24 Apr-25 Oct-25 Apr-26 Oct-26 Apr-27 Oct-27 Apr-28 Oct-28 Apr-29 Oct-29 Apr-30 Oct-30 Apr-31 Oct-31 Apr-32 Oct-32 Apr-33 Cash Inflows / Outflows Cumulative Cash Flow, Values Adjustment from Half-Life Millions Millions ABS MAINTENANCE CASH FLOW FORECASTING For ABS Base Case Scenarios, the Aircraft is Assumed Leased Consecutively Without Default for the Entirety of its Economic Life Cash Flows of Leased Narrowbody Aircraft Over Economic Life $10.0 $40 $8.0 Maintenance Inflows Maintenance Outflows $30 $6.0 $4.0 Cumulative Cash Flow Value Adj. From Half-life $20 $2.0 $10 $0.0 $0 ($2.0) ($10) ($4.0) ($6.0) ($8.0) LEASE 1 END OF LEASE LEASE 2 RESERVE PAYER LEASE 3 RESERVE PAYER ($20) ($30) ($10.0) ($40) 22

24 SECTION 4 ABS STRESS TESTING 23

25 ABS STRESS TESTING Stress Testing for ABS Transaction Allows Rating Agencies to Evaluate the Potential for Impairments to Principal and Interest Payments LOW MED HIGH Variable Affecting Cash Flows Base Case Assumptions Stress Cases Assumptions Maintenance Cash Flow Impact Aircraft Early Retirement In advance of target retirement for heavy maintenance events None Lease Schedule Typical 60-month Lease, 1-month remarketing Various lease terms, remarketing lengths Cost Escalation Assumptions Typically 2-5% blended escalation Various within same range Future % of Maintenance Reserves Fixed % Fixed %, or % of Initial Recession Timing -- Recession start dates/duration Recession Defaults -- Default rates, mode (aircraft/ Lessee), sequence and timing distribution Maintenance Deferrals -- In advance of forecasted defaults (0-12 months) 24

26 Millions MCF Sensitivities: Escalation Cost PORTFOLIO: 15-aircraft NB portfolio $160 $140 $120 $100 $80 $60 $40 $20 $0 Maintenance Cash Flow Forecast Base Deterministic Cumulative Cash Flow 9-Year Old Average 5.5 Year Avg. Lease Time Remaining ($20) ($40) Jan-18 Jan-23 Jan-28 Jan-33 Jan-38 Jan-43 Alton Base Scenario 1 Scenario 2 Scenario 3 Scenario NPV 10% Discount Rate Assumptions NPV ($ million) NPV Variation (from Reference 2.5%) Scenario #1 Base Case, 0% escalation $59.3 (11%) Scenario #2 Base Case, 2.5% escalation $ ALTON BASE -- $ % Scenario #3 Base Case, 5% escalation $ % 25

27 Millions MCF Sensitivities: Default % PORTFOLIO: 15-aircraft NB portfolio $160 $140 $120 $100 $80 $60 $40 $20 $0 Maintenance Cash Flow Forecast Base Deterministic, Stress Probabilistic Cumulative Cash Flow 9-Year Old Average 5.5 Year Avg. Lease Time Remaining STRESS MR Payers: ($20) ($40) Jan-18 Jan-23 Jan-28 Jan-33 Jan-38 Jan-43 Alton Base Scenario 1 Scenario 2 Scenario 3 Scenario NPV 10% Discount Rate Assumptions NPV ($ million) NPV Change From Base ALTON BASE -- $ Scenario #1 Stress Case, 25% Default $35.5 (51%) Scenario #2 Stress Case, 50% Default $19.3 (73%) Scenario #3 Stress Case, 75% Default $4.5 (94%) 26

28 Millions MCF Sensitivities: Future MR Proportion PORTFOLIO: 15-aircraft NB portfolio $160 $140 $120 $100 $80 $60 $40 $20 $0 Maintenance Cash Flow Forecast Base Deterministic, Stress Probabilistic Cumulative Cash Flow 9-Year Old Average 5.5 Year Avg. Lease Time Remaining STRESS Default Rate ($20) ($40) Jan-18 Jan-23 Jan-28 Jan-33 Jan-38 Jan-43 Alton Base Scenario 1 Scenario 2 Scenario 3 Scenario NPV 10% Discount Rate Assumptions NPV ($ million) NPV Change From Base Case ALTON BASE -- $ Scenario #1 Stress Case, 100% MR $17.0 (80%) Scenario #2 Stress Case, 50% MR $7.8 (89%) Scenario #3 Stress Case, 0% MR ($2.0) (103%) 27

29 Laetitia Achille ALTONAVIATION.COM NEW YORK HONG KONG BEIJING TOKYO 28