Aircraft Asset Management Lessor and Airline view

Transcription

1 Aircraft Asset Management Lessor and Airline view Tianjin, 21 September 2016 Peter Huijbers, Director 2016 Proprietary data PH Aviation Asia Ltd.

2 Topics Keeping aircraft long term vs. selling during the ownership Portfolio / fleet planning Criteria for selling and buying used aircraft Redelivery management & Inspections Page 2

3 Aircraft can be money makers... but there are many different angles related to the choice of business model; Airlines Premium (and typically long haul) airline; (Ultra) Low Cost Carrier; Own aircraft long term or lease shorter term; Lessors Long term investment with higher annual yield but lower exit returns; Short term investment with lower annual yield but higher exit returns. Each require different operating platforms 16,0% 14,0% 12,0% 10,0% 8,0% 6,0% 4,0% 2,0% 0,0% ST XIRR exit LT XIRR exit ST Yield LT Yield Source (LOPA): Seatguru Page 3

4 Airline views Page 4

5 Network development Airline core competencies The right routes and destinations; The right frequencies and capacities to serve such network; Fleet development The right type, amount and phase-in/phase-out of aircraft to serve such existing AND future network; Back-up plan for unforeseen issues (e.g. delayed introduction) Network development and fleet planning run in parallel; Comfort in fleet flexibility either by ownership of (part of) the fleet, or use of operating leases (managing lease start / termination dates and extension options). Page 5

6 Aircraft type Airline fleet planning LCCs: common fleet maximizing benefits of crew, rotation, maintenance, spare parts and reservation system; Network carriers: different short-, medium- and long haul fleet, each with core and non-core aircraft types; Group Carriers: balancing fleet standardisation vs individual requirement addressing network fit, fuel efficiency, improved environmental performance and yield contribution; Acquisition cost (once, upfront) vs operating cost (throughout life) Phase-in/out to suit growth & replacement Work with airline s commercial group for short/mid-term capacity requirements; Work with airline s strategic planning group for long term outlook. Page 6

7 Airline aircraft evaluation An airline focusses both on operational capability as well as on financial/profit contribution; Payload / range; (Dispatch) reliability; Route and airport capability; Cash-Airplane-Related-Operating-Costs (CAROC); Yield management suitability across network; Source: Boeing Page 7

8 Airline fleet financing Airlines have a wide range of choice for financing their fleet; Aside from balance sheet financing, also operating leasing remains a choice for all or part of the fleet In recent years, capital markets have been a strong, growing supplier of funds: Source: Boeing Capital, Feb 2016 Page 8

9 Lessor views Page 9

10 Ingredients to growing operating leasing Money Availability of equity Availability of debt Structuring Tax optimised structuring / FTZ s Availability of double tax treaties Allows for easiness of trading aircraft Expertise Value management Commercial Value management Technical Value management Credit risk Availability of assets Sourcing from, AND into the market Buying from manufacturer aircraft AND engines Page 10

11 Airline Evaluation Lessor core competencies & expertise Risk and credit management; Commercial role for airline relationship management; Portfolio Management The right type, amount and phase-in/phase-out of aircraft to serve portfolio requirements (e.g. of age, concentration, segmentation); Driven by shareholder return requirements as well as market and product life cycle developments; Requires significant technical/asset expertise ideally in-house; Airline evaluation and portfolio management run in parallel; Comfort in portfolio flexibility either by direct orders with manufacturers and purchase & lease back resp. trading with purchasing with or without lease attached Page 11

12 Lessor airline evaluation risk & exposure Competitive Profile, incl. management & market positioning; Operating Performance, incl. financials, fuel and operations; Debt Service Gearing Liquidity Equity Support Monthly rental; Number of months off lease from repossession to placement on lease; Transition Costs; Maintenance reserve liability for aircraft with (or without) reserves; Repossession expense for aircraft; Eurocontrol, airport and mechanic liens Registration and aircraft specification issues Security Deposit; The above seen against a probability of default produces effective exposure Page 12

13 Portfolio Management Page 13

14 Portfolio diversification or not? Option 1 Option 2 Airlines like sisterships Rating agencies like diversity Page 14

15 Lessor aircraft evaluation Remarketing capability Configuration options / standardisation Residual value retention Position in product life cycle Versatility in use (i.p. Freighter conversion) Can I, when I buy, have a good and defined exit scenario? Page 15

16 Buying from manufacturers Typically operating leasing is both by speculative orders when ordering directly from manufacturers, as well as by purchase and lease backs from airlines at delivery: Source: Boeing The significant order backlog of more than eight years will imply long and thus high escalation of future deliveries, affecting final real Purchase prices; the drag from PDP payments and ultimately Lease Rentals Source: Ascend Page 16

17 Managing equity invested in aircraft Page 17

18 About residual values Aircraft are physically mobile assets and can be deployed to other regions and airlines where the value can be maximized, both by Receiving rent; Sale of the aircraft; Aircraft are financially liquid US$ assets and can be traded through their lifetime to investors with different risk and reward appetites; Typically after their 25 year economic life the scrap value is largely determined by the value of the aircraft engines, whose value remains high as long as engines and parts are needed and tradeable; Scrap values are typically at 20 25% of the value when new; Compared to Ship Values, aircraft tend to retain their values longer as well as with less volatility. VLCC or Capesize bulker Source: Ascend Page 18

19 Equity at risk over term of lease Operating lessors have a core competence in being able to manage risk; New lessors may not have as strong a technical expertise as established lessors tend to have; Technical expertise may be significant when negotiating; during and at the end of the lease. Page 19

20 Mitigating asset risk: maintenance collateral Maintenance Reserves, or Supplemental Rent, are payments made by the lessee to the lessor based on the utilisation of the aircraft to provision for the cost of significant aircraft maintenance events. Supplemental Rent is important: Security to protect asset value and maintain lessor exposure; Influences maintenance work-scope; Means to monitor lessee contract compliance; Encourages financial discipline; Supplemental Rent Options: Cash Maintenance Reserves; Letter of Credit (provided by a bank with an agreed rating an location); Lease end adjustments; Half life adjustments. Page 20

21 Managing maintenance collateral Best Practices Clearly define qualifying maintenance; Lessor approval for reimbursable work-scopes; Modular approach to engine reimbursement; Lessor attendance at MRO facilities during maintenance; Good communication to forecast timing of maintenance and reimbursement; Annual review of rates; Aircraft specific accounts and component specific sub-accounts; No co-mingling even across same lessee fleet; Annual review of accounts with reconciliation as needed; End of life assets Retain MR or Supplemental Rent in lieu of Return Conditions; Engine and Component exchanges; Fly to expiration. Page 21

22 Redelivery management & inspections Date: 4 September presentation 2016 title 2016 Proprietary data PH Aviation Asia Ltd. date Page 22

23 Redelivery and inspection process When to start? When issuing / negotiating the LOI, but at Lease documentation latest; What is the challenge? Defining Redelivery Conditions as crystal clear as possible: FAA/EASA compliant Defined Redelivery process Engine substitution rights Bridge maintenance to to OEM standard or next lessee requirements Minimum condition for component conditions LLP Back to Birth Detailed list and format for technical documents Non Incident/Accident statement, PMA and DER repair statements Maintenance Compensation mechanisms Agreeing with the Lessor / Owner inspection rights to verify the above during the term of the lease Page 23

24 Managing Expectations! Inspections are to ensure that what is on paper (the Lease) is what you get (on the apron and in the air): Page 24

25 Redelivery and inspection process Process timeline Typically 12 month before redelivery, the lessor and lessee should meet to discuss the process, timeline and if applicable, MRO location for redelivery; Around 6 months before redelivery, a detailed redelivery activity map should be agreed, in particular on demonstration of record compliance as well as component times; Around 3 months before delivery, a final verification meeting would take place, followed by a lessor representative arriving shortly before redelivery on site; Records Records are extremely important, not only the back to birth traceability in English language, but also the compliance to what was agreed in the Lease (e.g. MPD and FAA/EASA); Sometimes airlines redeliver under their local QA program, yet once the aircraft de-registers, this becomes invalid and is for a lessor & future lessee (and their aviation authority) not acceptable hence require clear agreement. Page 25

26 Redelivery and inspection process What about next lessee involvement? Representative site access during redelivery workscope; Additional maintenance to bridge to lessee program; Option to incorporate next lessee livery; Demonstration flight attendance with cockpit access; Engine and APU borescope observation or performance; Often a reason for dispute, and another item to be clearly defined of what is allowed and who is responsible for which items and which costs. Last but not least if the redelivery is at an external MRO get them involved; ensure who is entitled to give the MRO which instructions; ensure approvals for inspection attendees early! Page 26

27 Thank you for your kind attention 2016 Date: PH Aviation 4 September Asia 2016 Ltd. Whilst best efforts have been 2016 Proprietary data PH Aviation Asia Ltd. Page 27 used to verify correctness of data contained in this presentation, no liability for potential errors is accepted.