Shannon Ackert : SVP, Commercial Operations Jackson Square Aviation. What is an Ideal Aircraft Asset

Transcription

1 Shannon Ackert : SVP, Commercial Operations Jackson Square Aviation What is an Ideal Aircraft Asset

2 What is an Ideal Aircraft Asset Agenda: I. Characteristic of an Ideal Aircraft Asset II. III. Aircraft Residual Value Retention Factors Value Cycles & When to Invest

3 Characteristics of an Ideal Aircraft Asset From an investor perspective, an ideal aircraft is one where: The aircraft has robust market liquidity owing to: competitive market share, large customer & lessor base, and robust geographical spread The aircraft is easily financeable and cost effectively transferred from one operator to another in an active, liquid and global market The value of the aircraft does not decline substantially given a key component of the overall economic return is the residual value.

4 Residual Value Retention Factors Components of overall economic return investor perspective Revenue Lease Rate Residual Sale ROE Net Profit Cost Financing Costs SG & A Aircraft Price Extraordinary Costs Tax The residual value is a key component of an investor s overall economic return. If residual values do not meet projections : the net present value of the transaction can be diminished Financing Debt Free Cash Flow Loan Advance Reinvestment of Cash Flow equity investors can potentially lose a portion of their investment

5 Residual Value Retention Factors Most of the inputs to overall economic return are determinative. However : this does not apply to residual values - future residual values are forecasted and subject to variability, uncertainty & RISK. But we can mitigate this RISK by : forming a policy to analyze those factors that influence an aircraft s residual value over time.

6 Residual Value Retention Factors Aircraft Residual Value Retention Factors Market Factors Economic Factors Aircraft Factors Market Liquidity Inflation Family Production Run / Cycles Storage / Surplus Secondary Market Fuel Prices Interest Rates Technology Specification

7 Residual Value Retention - Market Factors Market Liquidity is composed of an aircraft s: A.) Order Book, and B.) Market Penetration. Market liquidity represents one of the largest influences on value retention. A. Order Book reflects the number of firm orders broken down by : a.) firm backlog, and b.) deliveries. Order book serves to highlight the market share an aircraft has achieved B. Market Penetration consists of the number of customers & lessors, and their associated geographical distribution

8 Residual Value Retention - Market Factors Example : Market Liquidity Firm Orders Deliveries Firm Backlog Customers Lessors 4,891 3,799 1, % 6% 19% 3% 38% Region Africa Asia Pacific Europe Latin America Middle East North America Fleet 153 1,236 1, % Source: Ascend as Jul-2015

9 Residual Value Retention - Market Factors Aircraft with long production runs have greater value retention compared with shorter product life cycles. 727 DC Years 17 Years 21 Years MD-80/ CFMI 737 NG A Years 15 Years 23 Years 21 Years 30 Years

10 Residual Value Retention - Market Factors Aircraft s position in the production cycle influences value retention Early 1 Stable 2 Late 3 #of Aircraft Manufactured EIS Production Run Time Interval

11 Residual Value Retention - Market Factors Key Observations: Early production units can experience value volatility as they tend be heavier, have lower operating weights & incur higher operating costs. However, these units are often the beneficiary of competitive OEM pricing. Stabilized production units tend to have production issues resolved and thus experience stable declines in values Late production units often experience higher declines in values given they are competing against newer technology units offering improvements in operating efficiency. However, these units are often the beneficiary of competitive OEM pricing.

12 Residual Value Retention - Market Factors Aircraft built at the end of production lifecycle depreciate more quickly than earlier vintages, and are often heavily discounted. New value (%) Historical Value Trends Linear Trend line early in production lifecycle end of production lifecycle Aircraft Age

13 Residual Value Retention - Market Factors Other Production Observations: During an aircraft s production run it s important to track conversions rights (e.g. A320 to A321) as this serves as a barometer to future guidance An aircraft s production rate is a leading determinant of capacity growth, with impact on market penetration. Investors tend to have concerns over high production rates, which they view as creating an oversupply leading to volatility in lease rates & values.

14 Residual Value Retention - Market Factors The number of stored aircraft is often used as an indicator of aircraft surpluses; in valuation terms, surpluses push values down. It s important to note whether aircraft are stored for economic obsolescence or owing to the cyclic nature of the business Source: Ascend as Jul-2015

15 Residual Value Retention - Market Factors There are several viable secondary markets that exist for older aircraft, key among them: Lease to second and/or third tier operators Passenger-to-freighter conversion, and Part out for engine and other rotable components

16 Residual Value Retention - Market Factors Secondary market influence on aircraft economic lives Percent in Service Commercial Jet Survivor Curve Normal Fit Robust Secondary Market Lackluster Secondary Market Age

17 Residual Value Retention - Economic Factors The role of inflation should also be considered by aircraft investors. The residual value of an aircraft is a function of real future asset value and the rate of inflation over the given period Effects of Inflation Falling inflation rates depress nominal aircraft residual values. $M % 2% 4% Year

18 Residual Value Retention - Economic Factors Fuel prices are now an added layer of complexity to aircraft residual values. Sustained low fuel prices, all else equal, are likely to support demand for older aircraft at the expense of certain newer types.

19 Residual Value Retention - Aircraft Factors Aircraft are offered with optional features such as engine models, operating weights, avionics, winglets, brakes, & interior layouts. Options with the greatest influences on aircraft values consist of: Engines & Thrust Options, Operating Weights, Winglets, Cabin Layout & Crew Rest Area Aircraft equipped with generic & higher specification features tend to retain their values better & are more marketable relative to those with unique features.

20 Residual Value Retention - Aircraft Factors Fragmentation among multiple engine manufacturers tends to make remarketing more difficult (Example ER)

21 Residual Value Retention - Aircraft Factors Higher operating weights particularly MTOW - enhance an aircraft s utility and marketability (Example A ) Lower MTOW models are generally unpopular, and require costly weight upgrades to convert them to higher standards. Source: Ascend as Jul-2015

22 Residual Value Retention - Aircraft Factors Standard configurations are easier to lease, and have higher resale value. The rule for cabin specification is generic is good, and unique is bad.

23 Residual Value Retention - Aircraft Factors Customers operating a family of aircraft such as the A320 & 737NG incur lower investment in parts, equipment, & training. 737NG Family 100% Engine commonality 100% Flight deck commonality Common ground support equip Common ground handling 98%-100% common airframe spares ER

24 Aircraft Value Cycles & When to Invest Constant age historical half-life CMVs for 5-yr Old & A A320 Global Financial Crisis -13% Normalized Volatility 1 3.9% % 6.7% Aircraft values fluctuate greatly over the cycle Mar-03 Aug-03 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Source: Avitas & ASG 1. Normalized Volatility measure given by standard deviation divided by the mean (given in %)

25 Aircraft Value Cycles & When to Invest Relative half-life CMV performance through the cycle 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1st-05 Theoretical Future Base Value Curve 2nd- 05 1st-06 2nd- 06 1st-07 2nd- 07 Global Financial Crisis The qualities of the aircraft will dictate the size of the market value movement above and below base value 1st-08 2nd- 08 1st-09 2nd- 09 1st-10 2nd- 10 1st-11 2nd- 11 1st-12 2nd- 12 1st Source: Avitas & ASG 2nd- 1st-14 2nd- 1st % 99% 95% 94% 93% 91% 92% 91% 81% 77% 76% 73% 72% 70% 68% 65% 63% 60% 58% 58% 56% % 98% 88% 86% 84% 81% 80% 75% 62% 56% 48% 37% 35% 36% 33% 29% 26% 24% 23% 21% 20%

26 Aircraft Value Cycles & When to Invest When aircraft market values rise above intrinsic base values, it indicates market is reaching cyclical peak MV/BV During upturn good practice to Avoid orders Sell assets where possible Global Financial Crisis During downturn good practice to Order aircraft where possible Buy assets Forecasts shown represent an index of all vintages

27 Aircraft Value Cycles & When to Invest Rule # 1: Most economic events prove to be cyclical Rule # 2 : Some of the greatest opportunities for gain and loss come when other people forget rule number one Thank You