Aircraft Finance Guide 2013

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ELFCs engine leasing review
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FOREWORD
l
n last years Aircraft Finance Guide (AFG), I told you
that we had cleared the apex of the nancial gale,
though weve yet to clear all the debris and wreckage.
Sadly, I can say the same a year on, in 2012.

The industry still eagerly watches market uctuations for
signs of stability and growth. The fact that were watching
so avidly reects our instability, but we have spotted clear
and reassuring signals.
Last year, I noted that aviation leasing was starting to
stabilise with CIT coming off Chapter 11 and AerCaps rising
share price. The trend continued this year and the leasing
market is now predicted to hold 40 per cent of the market
for the next 10 years.
In this years AFG, Forecast Internationals Raymond
Jaworowski tells us: During the downturn, two years back,
lessors very quickly exited the market. Since then, they have
come back in force and order activity now is pretty robust.
Admittedly, lessors are seeing increased business because,
with low or no prot, airlines are forced into sale and
leasebacks. But, reassuringly, demand for aircraft is not only
still there its booming.
This years Farnborough Air Show (FAS 12) exceeded
expectations. During the ve-day show, $72bn worth of
orders and deliveries were booked. This was a clear battle
cry, telling us the industry is ghting back. Deals at FAS 12
were 53 per cent up on the prior FAS in 2010, and close to
2008s peak of $88bn.
However, last year I also said: The used aircraft market is yet
to recover fully and bank lending has not returned to pre-crisis
levels. Again, the same is true this year.
In this issue, IBA provides data (see pages 84-98) and
analysis (see page 24) on values for both aircraft and
engines. Its head of valuations and risk, Stuart Hatcher, takes
us through the fall in values and lease rates, but we must
remember that such wounds take time to heal.
So far in 2012, thankfully, weve heard less about the
dreaded funding gap. It appears time has shown us that
where there is a will or rather, where there is demand
there is a way. Boeing Capital Corp shares this sentiment in
its article for the AFG: Despite recent macro-economic
pressures, nancing has been available over the last
12 months and challenges have been occasional. Thanks to
low interest rates, re-nancing costs remain at a historic low.
While the words funding gap have slipped from the top 10
industry phrases, cautious optimism is still up there.
I have discussed our reasons to be optimistic, but of course
its still prudent to be cautious particularly regarding costs.
Airlines will always suffer slim margins and the industry
must stay guarded against that.
JBC (page 18) predicts that oil prices, which account for the
highest gure on an airlines list of outgoings, will remain at
a high yet manageable $100 to $120 per barrel over the
next three to four years.
High operational costs are here to stay, but the industry is
responding with numerous and inventive methods, some of
which we cover in our articles on lowering foreign exchange
costs (page 36), reducing the risk of fraud (page 60) and
using IT and social media to boost revenue (page 66), all of
which I hope youll nd interesting reading.
I also hope you like the new look of the AFG, which is in
keeping with our sister publication, Airline Fleet
Management ( ). Were always interested to hear your
thoughts so please drop by and visit us at our new website,
www.afm.aero and keep in touch by social media.
Editor
Mary-Anne Baldwin
Foreword
AlPCPAlT llNANCL CUlDL 20!3 www.afm.aero 5
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Foreword
MARKET OVERVIEW:
10
Future eets:
A report predicts that nearly 15,000 large commercial
aircraft will be built in the next 10 years at a value of
more than $2tn. The reports author and senior analyst at
Forecast International, Raymond Jaworowski, speaks to
AFGs Steven Thompson.
14
Cruising at altitude:
Aerospace market update
The UK has Europes largest aerospace industry by export.
Globally, it is ranked second only to the US. Mike Lee, head
of market intelligence at ADS, the UK trade organisation for
aerospace, defence and security, reports on the state of the
countrys aerospace market.
18
Fuelling the industry:
Oil price forecasts
Fuel prices are of global concern and affect everything
from GDP to the cost of bread. The price of fuel has been
of particular interest in the last decade and not least within
aviation. Johannes Benigni, MD of JBC Energy, provides his
companys analysis of future oil prices.
FINANCE:
24
Rate of return:
Aircraft asset values
Aircraft values and lease rates have continued to fall since
2008. Dr Stuart Hatcher, head of valuations and risk at IBA
Group, considers the effect of next generation aircraft and
the worrying trend of sliding values for young aircraft.
30
Boeing forecast:
Aircraft nancing
Boeing Capital Corp discusses aircraft nancing in 2012 and
beyond and looks at the role OEMs will have.
AFG
2013
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Bombardier Interview
Analysis of the engine leasing market
The 787 and route development
European airlines: A look at regionals and LCCs
AIRCRAFT
FINANCE G
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Publishedby The annual publicationof
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Sponsoredby
In this issue
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FINANCE:
36
Foreign exchange:
Counting the cost
The general economic climate is extremely tough and the
aviation sector has suffered in particular as a result. As such,
it is increasingly important that companies consider the cost
of foreign exchange fees. Richard Driver, currency analyst at
foreign exchange company, Caxton FX, reports.
LEASING:
40
One to one:
Ray Sisson, AWAS CEO
Aircraft Finance Guide talks to Ray Sisson, president and
CEO of AWAS, about the resiliency of the aviation industry,
the need for next-generation aircraft, nancing and the
ability to drive continued growth.
44
The CSeries:
Stand by for success
Professor Karl Moore of Desautels Faculty of Management,
McGill University, Canada, recaps where we are with aircraft
development and explains why he thinks Bombardiers
CSeries will prove to be a success.
48
Market review:
The engine leasing market
Jon Sharp, president and CEO of Engine Lease Finance
Corporation (ELFC), considers the state of the engine leasing
market in 2012 and beyond.
54
Repossession:
Without nine tenths of the law?
Taking repossession of an aircraft can be a long and painful
experience. But with careful planning, swift execution and
a dose of luck, it can be achieved quickly and relatively
painlessly. Richard Mumford, head of dispute resolution for
ASB Law, explains.
AIRLINES:
60
Fighting fraud: Protecting
your online bookings
The aviation industry is struggling to remain protable yet
competitive during particularly lean times. With increasingly
tight margins, every penny counts. Yet, a signicant
proportion of airline revenue is lost to fraud. Phil McGriskin,
chief product ofcer at WorldPay, explains how airlines can
lower the risk of crime.
66
Technology and travel: How
IT can boost airline ancillary
revenues?
Following the 2012 Airline IT Trends Survey, Raphael Bejar,
CEO of Airsavings, examines the impact IT and social media
can have on ancillary revenue, and the need to develop it.
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44
54
60
CONTENTS CONTENTS
CONTENTS
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AIRLINES:

70
Slotting into place:
The effect of bmis buyout
How will IAGs acquisition of bmi affect networks in the UK
and further aeld? Chris Beanland nds out.
74
Trading places:
EU slot reform
James Cole analyses how reforms to European airport slot
allocation rules may impact route development.
78
Need for renewal:
Latin Americas eet
Latin Americas agriculture is too dependent on its aging
aircraft eet and faces an inability to locate spares, writes
Locatory.com.

DATA:
83
Industry data
Data including: List and lease rates for engines
and aircraft; rm orders; order backlog; aircraft
deliveries and trafc growth.
70
CONTENTS
78
The Aicraft Finance Guide
Website: www.afm.aero
Editor
Mary-Anne Baldwin
Mary-Anne@afm.aero
+44 (0)208 831 7511
Contributors
Steven Thompson &
Chris Beanland.
Advertising Manager
Ellis Owen
Ellis@afm.aero
+44 (0)208 831 7519
Editorial Director
Joe Bates
joe@aviationmedia.aero
Design
Andrew Montgomery
andy@afm.aero
Sponsored by: IBA Group
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T
he global airline industry is continuing its
recovery, according to Forecast Internationals
Raymond Jaworowski in his paper, The Market
for Large Commercial Jet Transports (2012
to 2021).
However, the momentum of this recovery is slowing and air
freight is levelling out. Airline nances have been hit by high
fuel prices as well as on-going problems with the global
economy. But on the positive side, high-yield business travel
is on the increase.
Cautious optimism
The report estimates that a total of 14,655 large commercial
jets, worth $2.04tn, will be produced during the 10-year
period from 2012 through 2021. Production is forecast to
increase each year through to 2020, before dropping off
slightly in 2021.
Annual production values should rise up until 2020,
and will reach a 10-year peak of $237bn, before dropping
to $236bn in 2021. Further to this, growth in annual
values will slow in around ve years before picking
10 AlPCPAlT llNANCL CUlDL 20!3 www.afm.aero
A report predicts that nearly 15,000 large commercial aircraft will be built in the next
10 years at a value of more than $2tn. The reports author and senior analyst at Forecast
International, Raymond Jaworowski, speaks to AFGs Steven Thompson.
Future eets:
MARKET OVERVIEW: Future eets
up in later years, Jaworowski tells the Airline Finance
Guide (AFG).
Despite the recession, there is still a general feeling of
cautious optimism a term often used within the industry,
but is it really meant?
Yes, is Jaworowskis rm reply. As things stand now
despite weakness in the economy the industry is still
seeing growth The airline industry continues to be
protable. Order activity continues to be robust.
Regional variations in airline revenues differ widely,
says Jaworowski. Carriers in Asia-Pacic are outstripping
their counterparts in other regions. North American
airlines are lagging behind, while the state of play for
European airlines is becoming increasingly dire, the
report says. European carriers face a difcult business
environment marked by the eurozone crisis and a lack
of air travel demand.
In terms of where the orders are coming from,
you have got 30 per cent to Asia-Pacic; 23 per cent
to North America; 20 per cent to Europe; 15 per cent
to the Middle East; ve per cent to Latin America; and
the remainder to the rest of the world. Emerging
countries will play a big role. Markets in Europe and
North America are well saturated. So these emerging
markets are where you will see a lot of future orders
coming from.
North American airlines still havent joined in [with
the uptick in orders]; it is mainly Asian and Middle Eastern
airlines. But the North American replacement cycle is coming
up very shortly and may even be overdue. It is not a
question of if, but when they will join. On the negative side,
air trafc is growing but the pace of growth has slowed. It is
the same with prots, he adds.
Europe in particular is a concern. The economy is of critical
importance. If there is a double-dip recession then all bets
are off, here [in the US] or in Europe. That will affect
business and recreational travel. But if we assume even a
sluggish pace of economic improvement, then I think
cautious optimism is the best term to use.
Regarding demand from lessors, which claim their market is
growing, the aerospace analyst says: During the downturn,
two years back, lessors very quickly exited the market. Since
then, they have come back in force and order activity now is
pretty robust.
Around 40 per cent of [the] worldwide airline eet is
leased. That gure will probably hold up over the time frame
[10 years].
Finance and production
The obvious question is who will nance these 14,655 jets
and is market demand strong enough to support them all?
The phenomenon of an aircraft sales boom combined with
an uncertain state of affairs in the airline industry and the
general economy has led to concerns about a possible order
bubble, he writes in his report.
I dont think were there right now, he tells AFG. But that
could change very quickly. Theres a question of how many
orders will hold up. The airline industry is still protable but
there are many individual carriers that arent. Many of those
have hundreds of orders on the books. Another concern is
that if the general economy weakens, then you have to
wonder about access to nancing.
Tied to concerns regarding nancing is the rate of
production. Some have argued particularly lessors that
rates are so high, demand will be ooded and values
depreciated. But the analyst notes that, having accumulated
sizable order backlogs, Airbus and Boeing have plenty of
room to adjust build rates.
Airbus and Boeing have become quite adept at
over-booking, he says. Indeed, he believes that both
companies are increasingly relying on over-booking to
protect themselves from changes in the market. I dont
think production rates are too high right now, he tells AFG.
Theres still some room for growth in build rates as long as
it is measured.
It is a way to keep production stable. It gives them a lot of
exibility in terms of built rates, he explains. During the
downturn, over-booking was the way they managed it. They
are continuing this process, and it will work the same way in
good times as it did in bad When the inevitable
cancellations and delays come, they are able to keep
production stable.
Threes a crowd
One reason Airbus and Boeing are eager to increase
production rates is to reduce waiting times for order
deliveries. A lack of early delivery slots could well tempt
potential buyers to take a serious look at new aircraft
emerging from manufacturers outside of the Airbus/Boeing
duopoly, the report notes.
Such aircraft include Bombardiers CSeries, COMACs C919 and
Irkuts MC-21. Jaworowski believes the CSeries in particular
promises signicant improvements in operational efciencies
and has the potential to be a formidable competitor.
The CSeries has considerable promise, he says. They
are claiming something like 20 per cent improvement on
fuel burn and 15 per cent reduction in operational costs.
Those claims are certain to get the attention of potential
customers. But I think we will see a wait and see policy
from some customers.
Bombardier will never be able to match the sales gures of
Airbus and Boeing, but theyll have condence that theyll be
able to get a signicant slice of the market, provided they
come close to their promise on operational efciency.
He adds that the CSeries product will also have a signicant
effect on the market. History will show the inuence of the
CSeries. If there was no CSeries, then Airbus would never
have gone ahead with the A320neo and Boeing would never
have gone ahead with the MAX It was the threat that
pushed Airbus into their re-engining programme.
The neos and the MAXs entry into service (EIS) will be in
October 2015 and 2017 respectively. The A320neo was an
immediate sales success, and this, Jaworowski says, was a big
factor in Boeings decision to launch its own re-engined
narrowbody, despite the US companys almost visible
reluctance to do so.
In the widebody market, Boeings new 787 and 747-8
entered service in 2011. Airbus response to the 787 is
the new A350 XWB, which is scheduled for EIS in 2014.
The A350 XWB also targets the 777 and Boeing is
examining various ways to protect the 777s market share
from that encroachment.
Despite being condent about the CSeries, the duopoly will
persist. Boeing is projected to build 7,332 large commercial
airliners in the next 10 years, while Airbus is forecast to build
7,004, representing a near 50/50 split. The slight advantage to
Boeing is because it is better positioned in the widebody
market a result of the continuing popularity of the 777 series
and the recent service entry of the 787, Jaworowski says.
However, the battle for widebody sales will become more
even once the A350 enters into service and begins to
capture a share of the market.
The narrowbody sector is the larger of the two segments of
the large jetliner market (in terms of unit production) but it
generates less monetary value. Airbus has the edge due to
the expected earlier service entry of the A320neo compared
to the 737 MAX, says Jaworowski.
Although the gures do not include the CSeries, forecasts
call for production of 10,450 light/medium transports,
valued at $958bn, and 4,205 heavy transports, valued at
$1.08tn. Airbus and Boeing are forecast to produce a
combined total of 14,336 large jetliners between 2012
and 2021.
This represents nearly 98 per cent of total forecast
production for the market, and underscores our belief that,
despite the appearance of new entrants, the market, during
this time, will essentially remain a duopoly.
Airbus and Boeing have
become quite adept
at over-booking.
afg
A
stream of orders worth a total of $72bn
were announced during Julys Farnborough
International Air Show 2012 (FIA 12), proving
that the industry is achieving growth despite
the recession. According to a report by ADS,
which was also announced at the show, the UK is not left
out of that success.
According to ADS Aerospace Survey, UK aerospace
revenue totalled 24.2bn ($37.9bn) in 2011, representing
a 4.7 per cent increase over the previous year. In
terms of real growth, civil aerospace revenue increased
by 5.1 per cent over 2010, but after a difficult year,
defence aerospace produced zero growth in the
same period.
There was also a real boom in terms of exports with civil
aerospace up a commendable 13 per cent over 2010;
defence aerospace also saw growth with an increase of
five per cent over the previous year.
The UK has Europes largest aerospace industry by export. Globally, it is ranked second
only to the US. Mike Lee, head of market intelligence at ADS, the UK trade organisation for
aerospace, defence and security, reports on the state of the countrys aerospace market.
Cruising at altitude:
Aerospace market update
MARKET OVERVIEW: UK aerospace
Success ahead
While no one will refute the impact of the global
recession, the survey paints an optimistic vision of the
future if trends are to continue. Passenger traffic rose six
per cent compared with 2010, mirrored by an increase in
aircraft deliveries and a record order backlog.
Single-aisle production rates rose to record levels of
73 aircraft per month (rising to 84 per month by 2014),
and the report confirms that deliveries of widebody
aircraft are also set to significantly increase during
2012. With an increase in air traffic and the civil
aircraft fleet expected to double to 40,000 aircraft
over the next 20 years, there has been a re-activation of
the lucrative aftermarket, which will benefit the UKs
aerospace MRO sector.
In 2011, the UK trade balance recorded a surplus of
7.2bn ($11.3bn) a marked contrast to previous years.
In terms of percentages, total civil and defence exports
within aviation rose by 15.6 per cent over 2010, while
imports fell by 27 per cent.
Undoubtedly, a strong performance by the civil sector
has helped offset a difficult year for the defence
aerospace industry, which has been buffeted by a
variety of austerity measures. Many governments
have been forced to cut defence expenditure and
prioritise deficit reduction plans, and this has had an
inevitable impact on UK defence.
Drivers and concerns
Looking forward at civil aerospace, fuel price volatility
and the availability of aircraft financing remain the prime
short-term concerns.
Additionally, there is a question of whether Boeing and
Airbus will be able to ramp up manufacture both to
meet forecasted production rates and satisfy swelling
order backlogs, which show particular demand for A320s
and 737s, both in the narrowbody market.
However, uncertainty remains in the more traditional
defence markets, caused by budget cuts, programme
delays and cancellations. Additional concern has
emerged over the last year regarding the prospect of
bankruptcy in the US, which could lead to significant
additional budget cuts. Indeed, UK and continental
European defence budgets are already under
considerable pressure.
Major drivers for the immediate future include fixed/
rotary wing upgrades and new programmes that have a
growing degree of systems complexity. As a consequence,
the focus is turning to emerging and growth markets,
with the over-riding view that the Middle East, Asia, and
South America provide the greatest growth potential.
Last year saw the UK aerospace and defence industry
increase its exports by 9.4 per cent over 2010, contributing
75 per cent of the total 24.2bn ($37.9bn) turnover. This
was an excellent achievement, especially considering the
increased and ever-strengthening competition, particularly
from larger direct foreign investment in nations such
as China and India.
Market growth
Despite a slowdown overall, the European market
achieved a 19 per cent increase year-on-year, making it
the strongest region for civil aerospace exports.
The rest of the world (which includes Asian and Far East
markets) recorded a 24 per cent year-on-year increase.
Exports from the EUs defence industry were also
strong, rising 13 per cent. There was a 2.6 per cent
reduction in overall industry orders compared with 2010,
which for 2011 totalled 28.3bn ($44.4bn). While Civil
Aerospace orders may have risen by 2.6 per cent last year,
this gain was offset by a considerable 12.4 per cent
reduction in orders for defence aircraft. Despite this, there
were important and welcome rises in research,
development and technology, with 11 and 46 per cent
year-on-year increases respectively.
Overall, employment levels increased by 4.3 per cent in
2011 over those in 2010, with an unsurprising mix
between the more buoyant civil and defence sectors.
While it has been a difficult economic year both
domestically and internationally, the UK aerospace
industrys gross median weekly wage increased by
2.7 per cent over 2010. This is despite general earnings
being flat. The number of students taking specialised
aerospace engineering degrees has doubled since 2000,
reflected in a compound annual growth rate (CAGR) of
6.9 per cent from 2008 to 2011. This demonstrates how
aerospace engineerings profile has risen, both as an
academic subject and as a career.
UK Aerospace International Strategy, (another report
produced by ADS along with UKTI) focuses on the
potential in international markets and forecasts further
growth. May 2012 also saw the publication of another
ADS report: International Defence Market Strategy, which
identified a shortlist of 23 priority markets on the basis of
a rigorous analysis of macro-economic and defence
spending trends.
ADS anticipates that the civil aerospace sector will
continue a similar upward trend to that experienced
in 2011 and that production rates will increase by
between 15 to 20 per cent overall. The expectation is
for another year of very tough operating conditions in
the traditional defence export and domestic market,
although there is potential for some stability to return to
European defence markets.
The UKs ability to export its defence products is crucial.
The high level of Governmental support and the industrys
keenness to engage with emerging and growth markets
should stand the sector in good stead.
Overall, despite increasing competition, there are
significant opportunities in the UK supply chain to exploit
its capability and grow market share. Importantly for the
UK aerospace, the Aerospace Growth Partnership (AGP)
a joint industry and government initiative has been
established. The AGP is a first for the UK and was
widely applauded as a successful model at the recent
Farnborough Airshow, including by the UK Prime Minister.
The purpose of the AGP is to create a strategic 20 year
roadmap for the future of the civil aerospace industry that
will maintain the UK in its pole position in Europe and
second position globally.
afg
I
n the run-up to 2008s record prices of close to
$150 per barrel (pb), fuel price forecasts climbed
to great heights. In June 2008, Gazproms CEO,
Alexei Miller, publicly predicted a level of $250
pb within the following 18 months and possible
consequences of even higher levels were also
discussed. From todays perspective, we would judge
that while short-term supply and demand are highly
inflexible, long-term trends are more elastic. In other
words, every $10 increase over a sustained period will
significantly boost supplies and cut demand growth.
The price of ICE Brent oil averaged $90 pb over the last
five years, while since late 2004 it averaged $80 pb.
Fuel prices are of global concern and affect everything from GDP to the cost of bread. The
price of fuel has been of particular interest in the last decade and not least within aviation.
Johannes Benigni, MD of JBC Energy, provides his companys analysis of future oil prices.
Fuelling the industry:
Oil price forecasts
MARKET OVERVIEW: Oil prices
Taking into account the difficult economic environment
over the last five years, we see $90 pb as a lower
threshold to oil prices, except perhaps for short periods
of undershooting. This level is also well supported by
marginal production costs.
Looking ahead
Forecasting prices, one should consider the higher
cost of future oil production; OPECs growing market
power; substantial geopolitical risks; and demand,
which is likely to rise. Considering all of this, we
judge the price per barrel will sit at $100, with risk of
it rising higher.
However, as recent years have shown that the price
path cannot diverge for periods of more than one year,
the $150 pb peak reached in 2008 could remain
untouched until the middle of the decade, unless
supplies in countries such as Iraq and Russia are
highly disappointing.
Meanwhile, in the coming few months, prices may
fluctuate either way if there are substantial changes
to the global economy or UK banking system, or if
the eurozone is broken-up. However, our view is that
these fears will not materialise or at least will be
reasonably managed and the global economy will
slowly pick up pace in the remainder of the year, or by
2013 at the latest.
The 2Q price decline of $30 was partly a necessary
correction of inflated geo-political risk premiums. It
was also somewhat due to an overwhelmingly
pessimistic view of the market combined with a
frequently skewed weighting of different market
elements. These included an overly optimistic view of
the shale oil and gas boom over the last two years; an
excessive focus on the level of oil stockbuilds in 1H,
2012, compared to the tightening predicted in 2H,
2012; and continued negligence regarding non-OECD
demand developments in contrast to overly tracked
and reflected US and European data.
Every Wednesday, market participants closely track the
Energy Industry Associations (EIA) Petroleum Status
Report. So far this year, demand for gasoline appears
to be down 5.1 per cent, while the figure for distillates
reads marginally better at -3.5 per cent. This would
equal a substantial loss of 590,000 barrels per day
(bpd) of demand in the two products. However, the
weekly statistics are massively flawed as more
accurate data shows a combined decline in gasoline
and distillates of just 140,000 bpd.
In Europe the combination of a warm winter and a
frozen economy led to an even sharper fall in
consumption. Italy which suffered additionally from a
tax increase at the beginning of the year had the
sharpest declines in demand for gasoline and oil, these
being 11.8 per cent and 8.9 per cent respectively, each
on a year-on-year basis during January to May.
For example, Chinas demand for gasoline has
an 11.3 per cent growth rate, Indias demand for
diesel 9.4 per cent, and Brazils requirement for
diesel seven per cent, each on a year-to-date
basis. Meanwhile, consumption is also increasing
in other regions such as Russia and the
Middle East.
Indeed, based on the last seven years, for every
barrel of oil lost in demand from the OECD area,
two barrels are required from non-OECD markets.
After having trailed the OECD by as much as
15 million bpd in 2005, non-OECD countries now
account for more than 50 per cent of global oil
demand (see Chart 2).
Oil stockbuilds in 1H 2012 (mentioned previously)
amounted to 1.1 million bpd on a global implied basis,
according to our estimates. This is substantial, though
much less significant when seen in the context of
stockdraws in the eight previous quarters (see Chart 3).
Furthermore, global oil demand is set to rise by 1.3
million bpd in 2H versus 1H 2012, leading to renewed
implied stockdraws over that period. Global implied
stockbuilds for 2012 and 2013 should also be viewed
in the context of Chinas massive Strategic Petroleum
Reserve programmes in Asia, which will easily take
some 300,000 bpd of crude oil off the market that is
on top of standard demand.
In addition to these factors, we also expect
cyclical demand patterns to start their uptick soon.
Based on data from reasonably observable countries,
the contraction of global oil demand started in
May 2011. If this dip is similar to that experienced
in 2008-2009, then we can expect demand to
rise soon.
The boom in US shale oil was particularly
impressive. Nonetheless, one should not let it breed
over-optimism as we do expect a slow down of
momentum over the coming years. The market was
similarly disappointed over the production of ethanol
and other biofuels, as well as the development of oil
production in Iraq.
We are firmly convinced that a repeat of the US story
outside the US is impossible over the next five years
based on a mixture of legal, access, investment and
technological conditions. Once we exclude the shale
boom, supply developments have rarely been positive
over recent years.
Asia: Supply and demand
Before we take a more in-depth view on supply-side
support for oil prices, let us have a look at the
performance of physical oil markets. Given that the
1. Total oil products demand growth (Y-o-Y) [million bpd]
2. World oil demand dynamics [million bpd]
Figures from April 2012 - December 2013
are JBC Energy estimates based on the
SuDeP models growth projections
Source: IEA, JODI, JBC Energy Calculations
Absolute oil demand Cumulutive oil demand growth (2005-2013)
Selected 33 Non-OECD Countries from JODI Submissions:
Algeria, Argentina, Azerbaijan, Brazil, Chile, China, Taiwan, Colombia, Croatia, Cyprus, Ecuador, Egypt, Hong Kong,
India, Iran, Jamaica, Kuwait, Latvia, Libya, Lithuania, Malaysia, Oman, Peru, Philippines, Qatar, Romania, Saudi Arabia,
Slovenia, South Africa, Thailand, Trinidad/Tobago, United Arab Emirates and Venezuela
decline of oil futures has been sharper than for most
other indices, one could expect to see a heavily
pressured physical market. On the product side, this is
clearly not the case, with the Atlantic Basin (so far)
easily soaking up all the product exports stemming
from the US. There, refinery runs hit lofty highs of
92 per cent in mid-June. Even European refining
margins are at their best levels for four years, as
shutdowns in anticipation of poor demand have
supported economics.
Meanwhile, the Asian industry is suffering significant
requirements for crude imports, which easily digest
record production figures from Saudi Arabia and
substantial inflows from the Atlantic Basin. A
backward-dated Dubai market coupled with a
narrowing discount of the Brent benchmark is a clear
sign of strength. The only weakness is in the Atlantic
Basin light sweet crude market, but this reflects a
substantial upgrade of the global refining system
and marginal supply streams from North America
and Libya, rather than a sign of weakness in the
global oil market.
Oiling the way
The key factors that lead us to believe oil prices
will soon remain at triple digits are supply-related
and can be split into two main issues. On one hand,
marginal production costs and the profitability of
liquid production are particular pillars of support.
On the other hand, (and it is partly related) OPEC is
acting towards stable and reasonably high oil prices.
Marginal production costs are mostly in line with
current oil prices (see chart 4). This is a substantial
difference to previous years when oil prices were often
higher than strict marginal production costs. However,
the concept of marginal production costs should not be
overstressed, as it it does not include exploration and
production costs, or a reasonable profit margin.
While the curve will change over time, the point of
intersection is dependent on respective demand.
Most importantly, the marginal production cost
curve does not provide information on the
profitability of future upstream projects. Given
massive decline rates at increasingly mature oil
fields around the world, it is crucial that sufficient
projects are in the pipeline.
Given the limited access to acreage and high
geo-political risk, a price of $100 pb or more should
ensure appropriate investment.
Amid surging service sector costs, the latest five-year
plan from Petrobras is quite revealing. While increasing
planned investments by more than five per cent to
$236.5bn the biggest spending planned for the
industry production targets have been cut by a
massive 700,000 bpd for both 2016 and 2020.
3. Implied global stockbuild/draw (2000-2012) [000 bpd, million barrels]
More importantly, this is calculated on an oil price
of $90-$100 pb, which, from a historical point of
view, is extremely high for such purposes. Complex
oil extraction at offshore locations such as the
Russian Arctic frontier also require high oil price
perspectives in order to attract interest. This is also
true for the International Oil Companies (IOCs), which
already view deepwater projects as their most
important assets.
As far as OPEC is concerned, the financial crisis of
2008 and 2009 and the Arab Spring in 2011 have
significantly altered the budgetary situation of many
OPEC members, likewise oil price, which affects
budgets. While it is hard to give exact numbers, it is
generally assumed they range from $70 to $115 pb,
with Saudi Arabia and Kuwait located towards the
lower end and countries such as Libya, Iran or
Venezuela closer to the higher mark.
However, the important factor is Saudi Arabia,
which is effectively the only country with sizeable
spare capacity. According to a poll by Reuters in
March, industry experts believe that given the
current production level of around 10 million bpd,
a price of $76 pb would balance the budgets.
However, if one were to use a more realistic
annual output figure of 9.4 million bpd, then the
breakeven point could be as high as $90 pb.
Considering this, it appears unlikely that Saudi
Arabia will allow oil prices to fall below $100 pb for a
long period of time.
Meanwhile, the level of spare capacity in the system
is a concern. While many OPEC countries could
produce much more than they currently do, a
combination of political, technical and financial
factors hinder them. At the moment, only Saudi Arabia
holds significant spare capacity, which is between
2 and 2.5 million bpd. However, Saudi Arabia has
never produced more than it has over the last nine
months and there is good reason to doubt that the
country intends to produce more than the recent
10 million bpd on an annual average basis. At the same
time, the cocktail of factors that has resulted in
disappointing supply over recent years is unlikely to
disappear any time soon.
Once demand picks up and/or further supply
disruptions take place, the issue of spare capacity
will return. On the other hand, the resulting higher
prices could lead to the next round of efficiency
improvements across the globe and could incite
new upstream investments. Overall, we expect oil
prices to stay within a narrow range of $100-$120 pb
on an annual average basis over the next three to
four years.
All figures and prices were correct at the time of going
to print in late August 2012.
4. Marginal cost of oil production [mbpd, $/bbl]
North Sea WAF Offshore
Oil sands
US Deepwater
US Tight Oil
US Ethanol
Brazil
Ethanol
Biodiesel
Europe
Source: JBC Energy
afg
FINANCE: Rate of return
T
he UK government has announced that GDP shrank by
0.7 per cent in the 2Q and parts of Europe are under
heavy austerity measures.
On the upside, both passenger and freighter trafc continues
to rise, with capacity growing at a lower rate. Load factors
are strengthening and for the most part sit just below 80 per
cent, with only North America exceeding this gure at
around 82 per cent. This rise in seat demand is crucial and
timely if the values and lease rates of older second-hand
aircraft are to stand any chance of recovery.
Sliding values
It is no surprise that 2012 continued the dismal trend of
falling values and lease rates, which started back in 2008,
but worryingly, this trend has spread to some aircraft
traditionally considered beyond reach, namely young A320s
and 737-800s.
A sharp intake of breath can be heard when any deal
involving a six-year-old aircraft hits the table, but it should
not be too surprising given current market pressures. At one
end, OEMs devalue current aircraft by releasing new
technology and increasing production, while export credit
agencies (ECAs) offer poorer credit facilities to buy more
new aircraft.
At the other end, the leasing market is saturated with
cheap rates as the larger players try to increase market
share. However, airlines are demanding shorter lease
terms for narrowbody aircraft in anticipation of aircraft with
newer technology in 2015.
Aircraft values and lease rates have continued to fall since 2008. Dr Stuart Hatcher, head
of valuations and risk at IBA Group, considers the effect of next generation aircraft and the
worrying trend of sliding values for young aircraft.
Rate of return:
Aircraft asset values
Trafc gures show some signs of recovery, but there is a long
way to go before the secondary market attracts new entrants
and commercial banks. The second-hand market contains
aircraft that are not yet subject to age restrictions, but consist
of current generation technology, which have barely reached
its rst heavy maintenance event.
While the market for the sale and leaseback of new or nearly
new aircraft is in high demand, albeit at lower rates marked
by low interest rates, aircraft that are off-lease and older than
ve years are at distressed levels.
This trend is set to continue as more new narrowbody leases
expire after just six years, rather than 10 to 12 years, which
was typical just three years ago. This will make it increasingly
difcult for many lessors to turn a prot on what was
traditionally a long-term investment.
The saving grace for the largest lessors is that they typically buy
new aircraft directly from the OEM and are therefore able to take
advantage of moderate discounts unavailable to those that
purchase exclusively through the sale and leaseback market.
The largest lessors then ip these deals to smaller new
entrants, which strive to make the connections with good credit
lessees, enabling them to capture new sale and leaseback
opportunities that will appear to satisfy growing backlogs.
However, if lease terms start to shorten, it will become
increasingly difcult for lessors to ip these deals as there
would only be a few years left to run.
It is also less straightforward for larger lessors to nd
operators for new aircraft, so one can expect the number of
speculative purchases to dwindle. Long delivery times for
technology that will quickly age will no doubt result in lower
values as operators tend to pay less for aircraft with a short
economic life.
When analysing the historic movement of lease rates for the
A320, there seems to be a growing trend towards lower
rental rates. In the graph above, the evolution of lease rentals
for a 1998-built A320 clearly illustrates the aviation cycle over
the last 14 years. The historical three month LIBOR rate has
also been included to illustrate the link between the two. The
base lease rate curve illustrates what the underlying lease
rate should be for this aircraft vintage, assuming interest rates
follow a less volatile long-term downward trend.
When plotting plot the same aircraft type over the same
period but keeping the age constant, its clear that there is
increased rental volatility encountered for older aircraft.
Likewise, the underlying rates for the latest-build aircraft
remain stable, while the rates for 10-year-old aircraft are
separate from the younger models.
The A320 and 737
Despite market and interest rate uctuations, the mean for new
lease rates has remained relatively at for the past 14 years.
This correlates to the almost static mean of the new A320,
which has remained close to $40m since the late 1990s.
In addition, it should be noted that this single view of lease
rates does not adequately capture the rates encountered for
many sale and leaseback agreements, which may be closer to
$350,000 per month as a result of higher purchase prices, or
those at $250,000, which are oating rates and more rmly
linked to the current LIBOR rates.
1. 1998-built A320-200
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The 737-800 displays a similar trend when lease rates for a
1998-built aircraft are plotted (as shown in Graph 3)
This trend may look similar to the A320 when plotting
lease rates for a constant age, but there is a greater
level of stability over the last three years, although the
basic trend remains as shown in the Graph 4. Also note
that, as with the A320, lease rates will vary depending
on price and credit risk, and there are swings of around
$30,000 above and below the current market rate for
new delivery aircraft.
The trends presented in Graphs 5 onward show current
generation narrowbody aircraft with achievable lease terms
sometimes dependent on when the lessee expects its A320
neo and 737 MAX deliveries. History dictates, however, that
some deals that are expected to expire between 2015 and
2017 will be due for an extension of one to two years as the
OEMs fail to meet delivery deadlines.
When compared against market value changes over the
past few years, the drop in lease rates has been relatively
mild. In 2007, the average 1998-built A320 lease rate was
2. A320 lease rates Constant age
3. 1998-built 737-800
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LIBOR
aproximately $260,000, whereas the market value was
around $26m. By 2012, the rates were down to $150,000,
whereas the market value was around $12m maximum.
Similarly, with the early-build 737-800s, back in 2007, rates
and values were around $280,000 and $28m, yet in 2012,
these were $200,000, with offers expected at around $15m
depending on specication.
Fortunately, current generation widebodies appear relatively
stable. This is partly inuenced by the smaller volume of
widebody deals, but also because availability for good quality
in-production 777s and A330s remains tight. Operators tend
to hold onto these assets for much longer and fewer come
from lessors, but tend to be leased through the sale and
leaseback market.
There is also a growing appetite among lessors particularly
new entrants and the largest lessors to take advantage of
the longer terms and relatively high lease rates that
widebodies may offer. However, the cost of reconguration
and heavy maintenance will make most think carefully about
long-term exposure to such equity-intensive assets.
4. 737-800 lease rates Constant age
5. 1998-built A330-200
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LIBOR
Used aircraft values
As expected, older aircraft values are more volatile, but it is
quite surprising how stable the rates have remained over
the past few years. New aircraft lease rates, which are
almost exclusively a direct result of sale and leaseback
deals, have remained largely static with only minor swings
for about six years. Lease terms are often 12 years in length
and tie in with the 8C airframe check. There is a high level
of commonality among the eet that will stabilise trading
activity. It is important to note that some sale and
leaseback activity has been observed at both much higher
and much lower rates, depending on the lessees, but this
remains a function of the purchase price and interest rates.
However, it is becoming less common to nd lease terms
above $900,000 as LIBOR remains low and new delivery
pricing is tightening.
As new aircraft lease rates are so dependent on a
mixture of price and interest rate uctuations, it is
reasonable to expect the return of lease rates for new
aircraft to be a gradual process as both LIBOR and delivery
price forecasts remain steady.
Lease rates for both ve- and 10-year-old aircraft will be
more closely linked to the secondary trading market and
short-term capacity shortfalls. Therefore, the return to
stability will be dependant on increased trading prices and
a continued rise in passenger demand. Consequently, it
may take a longer before rates return for assets of six-years
or older. Added pressure will come with many new leases
for A320s and 737-800s, which will coincide with deliveries
of the Neo and MAX and will counter rising passenger
demand as production rates are set to increase. While both
interest rates and second-hand prices remain very low,
it is likely that banks will remain unwilling to nance
these young and very capable aircraft, therefore
prolonging problems.
This dynamic may change should the second-hand market
for current generation narrowbody aircraft improve, but it
would have to change greatly for aircraft over 10-years-old.
When this last occurred in 2006, interest rates were rising
and the ordering boom had not started, which meant that
demand could be measured more easily.
Despite the entry into service (EIS) of the 787 and expected
delivery of the rst A350 in the next four years, the current
generation fuel-efcient twins seem set to dominate the
market. Although banks are now shying away from some
A330 deals, the 777-300ER remains the top choice for
investors. While airlines want them, investors will remain
committed and rates will remain buoyant despite other
opposing factors. However, lessors should be careful how
they calculate their exposure should the lessee default or
the aircraft require a large-scale reconguration.
At the other end of the spectrum, the demise of the
747-400 and A340 (all types) looks set to continue as
operating costs rise to such a high that it makes no
commercial sense to keep large numbers in operation. Both
types will continue to operate but at much lower levels and
at much lower lease rates. Even if fuel prices dropped
signicantly, the cost of maintenance and reconguration
would make them undesirable.
6. A330-200 lease rates Constant age
afg
A
t the years midpoint, the view of 2012
global aircraft financing is reasonably good,
but there is still considerable uncertainty
within the market, particularly concerning
changes in export credit and Europes
enduring sovereign debt crisis.
Market conditions have held up much as Boeings
aircraft-financing unit, Boeing Capital Corporation
(BCC) predicted in its 2012 look forecast, released
last December. Despite recent macro-economic
pressures, financing has been available over the last
12 months and challenges have been occasional. Thanks
to low interest rates, refinancing costs remain at a
historic low.
Contributing factors
Looking toward 2013, however, the horizon
becomes somewhat cloudy as implementation of
the Basel III accord and new global export-credit
requirements (which go into effect next year)
create uncertainty.
The new Aircraft Sector Understanding (ASU),
signed in early 2011, promises significantly higher
borrowing fees, equity requirements and stricter terms
for the use of the export credit agencies (ECAs) in
aircraft-building nations. It is an effort to make
conditions more fair, particularly for airlines
that are unable to access export credit support.
Boeing Capital Corp discusses aircraft nancing in 2012 and beyond and
looks at the role OEMs will have.
Boeing forecast:
Aircraft nancing
FINANCE: Aircraft nancing
Concurrently, banks are beginning to deal with the
implications of the new Basel III regulations, which
govern capital requirements, stress testing, market
liquidity and risk spawned by the financial downturn
and crisis of the late 2000s. Over time, these regulations
will make commercial bank debt more expensive and
less available for longer tenors.
In addition to these regulatory and export credit
changes, the greatest near-term concern is, perhaps,
Europes economy. Europes commercial banks have
long been a great source of lending within aviation,
though some have already pulled back from aviation
finance in response to the continents economic
challenges. Despite that, European bank lending has
continued to support better credits and many players
remain active.
However, if not checked, a major meltdown of Europes
economy would have a profound impact on the rest of
the world, with challenges to aircraft financing being
only one of many areas impacted.
With demand comes finance
As weve been saying for several years, airlines
have done an exceptional job in managing their
businesses relative to their historic performance,
said BCCs Kostya Zolotusky, managing director for
capital markets development and leasing. They
have aggressively deleveraged their businesses, which
has allowed them to deal with the macro-economic
environment, and its unpredictability, better than they
have in the past. They have reacted proactively to
market opportunities and market challenges by
adjusting their fleet capacity rapidly. Thats allowed
them to stay profitable through some turbulent
markets or limit the damage of that economic
turbulence.
BCCs well-known spokesman for its investor
outreach efforts says that with passenger traffic
continuing to grow and many of the worlds airlines
being profitable, aircraft supply is struggling to keep
up with demand.
With that real demand, financiers clearly recognise
aircraft values as being stable, and thats one of the
reasons why, while theres a lot of change in the
aircraft financing markets, capital availability has been
stable and adequate. Aircraft finance is not the tail
thats wagging the dog. Rather, it is responsive to real
market demand, Zolotusky said.
While bullish on aviations continuing prospects overall, the
airframer is realistic about concerns over where the market
is heading. We recognise the challenges and changes that
aircraft nancing is undergoing and we believe that, yes, it
will limit participation of some funding sources, like
commercial bank debt and export credit, said Zolotusky.
But it will also create opportunities and grow market
participation by the capital markets in aircraft nance and
the lessor channel.
Some have questioned whether leasing companies can
prosper while banks are under pressure. Zolotusky
defends that assertion by pointing to what has
happened since late last year. Lessors have been able
to raise an extraordinary amount of capital in the capital
markets to fund their current and future deliveries,
Zolotusky said.
He and his Boeing financing colleagues are reporting
strong interest from capital market sources in funding
not only aircraft lessors but US airline deliveries through
enhanced equipment trust certificates (EETCs).
Capital markets
The capital markets are there and clearly
demonstrating almost unlimited liquidity for aircraft,
said Tim Myer, BCCs VP general manager for aircraft
financial service and Zolotuskys boss.
Myers points to recent capital market transactions by US
Airways, United Continental, Fed Ex and others. What
drives capital markets for our customers is really pricing
on the banking side. If bank pricing continues to be
aggressive and is acceptable to the customer, then they
wont go to the capital markets because its something
new, for which you have to get a deal credit rating for
the most part, Myers said.
The only reason we havent seen a rapid evolution of
non-US airlines tapping the capital markets is because
they still have relatively easy alternatives available to
them in other spaces. When those markets become more
expensive or challenged, thats when youll see people
starting to work structures to use capital markets.
In recent months, the industry has also seen a number of
deals where the Export-Import (Ex-IM) Bank of the US
has stepped in as the guarantor for bonds issued by
non-US carriers for their deliveries of US-built aircraft.
Lion Air went out with an Ex-Im bond deal recently
that drew a very attractive rate. In fact, some of the
lowest that weve seen. That was very positive. Ex-Im is
now working on a new product to pre-fund deliveries,
The 787:
A nanciers dream
Boeings 787 Dreamliner made history by being the rst
commercial airliner designed with direct involvement by
aircraft bankers and investors (some of whom are pictured
above). The nanciers involved pushed for its standardisation
to make it easier for leasing companies and operators to
introduce or transition the aircraft to operators. The plane
that you buy is like the ELX model of a car, said Boeing
nancing executive, Kostya Zolotusky.
It comes with all the features; theres no guessing if the
airplane youre getting has what you need for operation, or
transition to another operator. He added that nanciers
have been especially welcoming of the Dreamliners entry into
service (EIS). In fact, United Continentals recent bond offer to
fund its 787s delivery this year, as well as new 737-900ERs,
resulted in the lowest-ever, all-in pricing for an unwrapped
aircraft bond sale.
Origins of A320 oversupply
Aircraft delivery source: Ascend. Lease rate source: IBA, Ascend.
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A319 / A320 / A321
737NG
737-800 lease rate premium over A320

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According to Boeing, lease rates
and values for the A320 family
are suffering. Its nancing arm,
Boeing Capital Corp, discusses
the matter.
Lease rates and values for the A320 are sliding (see
chart below). Although those for 737 NGs are holding
up well, problems with the A320 could spill into the
standard-body marketplace.
Boeing and Airbus are both producing standard-body
aircraft at record rates. However, Boeing cautioned that
oversupply should not be applied across the industry.
There is a dynamic that makes us as well as
many in our industry nervous, and this is why we
want to avoid being painted with the same brush,
said Kostya Zolotusky, managing director for capital
markets development and leasing at Boeing Capital
Corp (BCC) the manufacturers product financing and
leasing unit.
Over the last 18 months, A320 family lease rates
have been distressed and the Airbus twinjets have
also seen residual values decline. Meanwhile, its
competition Boeings 737 Next Generation family
has seen leases and values hold steady and even
command a premium.
We look at it, not as something thats wonderful for
Boeing competitively, but that its only a matter of
time before Airbus issues will impact values of our
airplanes, Zolotusky said.
Boeing has shared at industry forums its detailed
analysis of standard-body production rates since
1998, a period when both manufacturers delivered
a similar number of aircraft. However, in the post
9/11 market, Boeing elected to produce fewer
aircraft as airlines cancelled or rescheduled orders.
Airbus, meanwhile continued production and
delivered significantly more A320 capacity into the
leasing marketplace.
That overhang created really depressed rates on
those airplanes and we believe its effects are coming
back into the market seven to nine years later.
Statistically, you have the NG and A320 markets
of about the same size and vintage airplanes, but
for any given year over the past two years, Airbus
has 50 to 70 per cent more units available
Zolotusky said.
Fortunately, the A320s dire predicament so far
hasnt hit any of the NG family, he continued. If
their airplanes get ridiculously cheap, they become
competitive with our airplanes or start dragging our
airplane pricing down.
Not all single-aisles are valued the same
Boeings forecast of the aircraft financing market has
become a staple for its financiers and investors
outreach programme and is relied upon by others in
the industry as an important view of market conditions.
Since Boeings original 2012 forecast was issued late
last year, the company has revised its forecast of
conditions for commercial bank lending for the
duration of this year from one of improvement to one
of continued concern. Meanwhile, Boeing sees export
credit agency (ECA) support as a continuing challenge
as new global terms and conditions come into play
following the introduction of the new Aircraft Sector
Understanding (ASU) governing ECAs. The companys
outlook remains encouraging for new sources of
delivery capital from regional banks and new players in
the debt market. Boeing sees little need to provide its
own OEM financing given strong market interest in its
current product line.
where it would work very similarly to a typical US EETC
capital markets deal, where they prefund the delivery at
a specific price. Were pretty excited about that product
and hopefully we should see that close in the fairly near
future, said Myers.
The American manufacturer does not share the concern
expressed recently by its European competitor, Boeing,
that aircraft manufacturers may have to step up their
financing should Europes banks or other financial
sources become more challenged.
Officials at Airbus parent, EADS, have discussed setting
up their own bank to conduct product financing and
accept deposits from its subsidiaries, while gaining
access to Europes Central Bank. Boeing has said that it
would not explore the option of an in-house bank.
Its worth noting that we are faring much better in the
current aircraft financing market as we tend to have
preferred aircraft, Zolotusky said. Not only do we
have preferred airplanes but more importantly, we
manage the supply and demand equation much better
than our competitor.
The US aircraft builder has addressed criticism levelled
by leasing firms that the commercial aircraft industry is
over-producing by pointing to the continued growth of
the air travel sector and the geographically balanced
nature of its substantial order backlog.
I wont speak much on Airbus as I think most people in
[the] industry will agree that their backlog and delivery
skyline is with a riskier set of customers, which means
theyre exposed more than we are to deal or delivery
surprises, Zolotusky said. But on a macro-systemic
level, both of us are benefiting from the rising tide of
the industry because when you look at aircraft finance
over the last couple decades, or through the downturn,
we have done extremely well weathering the storm of
the market and over the long-term. We are able to
attract very good, stable, long-term funding in our
industry even as our industry undergoes macro changes
right now.
Aircraft nancing environment
afg
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www.intaerospace.com
Contacts
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sales@intaerospace.ie
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Power by the hour
agreements
ConsIgnment
agreements
AIRCRAFT
FINANCE
G
U
I
D
E
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to the 2014 issue?
For more information contact
Sales: Ellis Owen
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A
irline fuel costs rose 15 per cent over the last
year and the Government further impeded
the aviation industry by raising its air
passenger duty (APD) by eight per cent in
April. UK APD is now the highest aviation tax
levied in Europe.
Willie Walsh, CEO of International Airlines Group (IAG),
attacked the UK government at the International Air
Transport Association (IATA) conference in Beijing,
claiming it had damaged the aviation industry and its
jobs, citing a lack of capacity, high taxation (according to
Walsh, it is the highest in the world) and a stringent visa
regime that deters foreign visitors.
These factors have raised the cost of air travel, which
has been passed on to the customer thereby reducing
demand for aviation services.
Britains largest airport operator, BAA, recently
announced that the number of passengers flying
between Heathrow and the weaker eurozone nations
has fallen significantly.
Traffic to Greece dropped 11.3 per cent compared
with May last year; Italian traffic fell 9.2 per cent, Spain
2.5 per cent and Portugal took the largest decline of
11.4 per cent. Fortunately for BAA, the operator was
protected from the conditions in the eurozone by
The general economic climate is extremely tough and the aviation sector has suffered
in particular as a result. As such, it is increasingly important that companies consider
the cost of foreign exchange fees. Richard Driver, currency analyst at foreign exchange
company, Caxton FX, reports.
Foreign exchange:
Counting the cost
FINANCE: Foreign exchange
other international traffic, led by the key Heathrow to
New York route.
But in further bad news for BAA, it also reported that its
cargo transport fell 2.4 per cent to 144,000 metric tonnes
of cargo trafc, while cargo trafc at Heathrow fell
3.8 per cent. This is worrying news as air cargo trafc is
one of the key indicators of the wider aviation economy.
As a consequence of this constrictive economic climate,
IATA almost doubled its forecast for 2012 losses within
the European airline industry to $1.1bn, up from its
previously forecasted loss of $600m, released in March.
As already indicated, one of the key reasons for reduced
demand in the aviation sector is the ongoing debt crisis
in the eurozone. In reaction to the European debt crisis,
business leaders are urging the Government to build
better links to growing economies such as China, India
and Brazil.
While there is little aviation businesses can do about the
eurozones dire economic conditions or business links
with emerging economies, there are simple measures
they can take in order to reduce their exposure to
fluctuations in the currency markets.
Being aware of how currencies are performing can
make businesses better prepared and more able to
budget. For example, a company will know when it is
best to pay a supplier.
Currency conversion
A UK-based company that uses suppliers from within the
eurozone will inevitably have to convert sterling into the
single currency as the eurozone-based company may only
accept payment in euros.
Not only is this an administrative burden but banks will
charge for the conversion and offer uncompetitive
exchange rates hitting the companys bottom line.
The prospects for the single currency in 2012 are
uncertain. Since June 2011, the euro has lost ground to
sterling at a consistent pace (See chart). We believe this
will continue for at least the remainder of 2012, with the
rate possibly hitting 1.30 by the end of the summer.
The eurozone debt crisis is escalating faster than the EU
leaderships ability to come to a solution. Consequently,
investors are flooding out of the euro and returning to
safer currencies, such as the US dollar and, in recent
times, sterling.
The problems of Greece and Spain
Across the eurozone, unemployment is at record highs,
economic growth is being suppressed by austerity
measures and bank lending remains restricted.
If we take a closer look, the problems in Greece have
weighed heavily on the markets and consequently, the
markets are sceptical about the future of Greece and the
eurozone as a whole.
While Greece has received international bailouts, one of
the conditions is that Greece implements harsh austerity
measures, which are crippling its economy. The electorate
has spoken up against these measures and the elections
in April 2012 proved to be a stalemate with no workable
government being formed.
Centre-right party, New Democracy, narrowly swung the
vote for Greeces newly formed coalition and New
Democracys Antonis Samaras was recently sworn in as
prime minister for Greece. The party supports the austerity
measures demanded by the international creditors and
remaining in the eurozone. While the result showed that
the Greeks are keen to remain in the euro, this result will
not be game-changing; the problems in Greece will not
subside and the euro will remain under pressure.
Spain has put further pressure on the euro after it sought
a 100bn bailout for its banking system. Although Spain
did secure a loan without the same measures imposed on
the Greek economy, it is of major concern as Spain is the
regions fourth largest economy. This is expressed through
Spains soaring government bond yields, which have
exceeded seven per cent the level that triggered the
international bailouts of Ireland, Portugal and Greece.
As a result, the pockets of European businesses and
consumers are a bit lighter, thereby lowering demand for
services. Additionally, the weakening euro has meant
holidays and foreign business trips are more expensive.
Sterling, on the other hand, has been granted a second-
tier, safe-haven status over the past few months, with
investors taking comfort in the Governments approach to
the UKs deficit and extensive public debt. Credit agencies
have also shown confidence in the UKs approach as they
have maintained the UKs AAA credit rating essential
for any country wanting to borrow money at a cheap rate
from the global markets.
Nonetheless, sterling still faces significant risks: Britain is
in a recession and growth is being stunted by the
Governments austerity measures, as well as the eurozone
debt crisis. This means the Bank of England could
introduce another round of quantitative easing in order to
boost growth. However, increasing the supply of money
could weaken sterling.
All in the timing
In real terms, a company that exports goods to aviation
businesses within the eurozone will be forced to sell them
at a relatively high price, and considering the weak
European economy its business is likely to suffer.
The US dollar is the worlds reserve currency and many
costs tend to be paid in this currency, such as monthly
rental fees, aircraft leasing, maintenance charges,
salaries to expatriate employees, overseas airport charges,
fuel at international airports and overseas loan and
interest repayments.
We hold an upbeat outlook for the US dollar in 2012
against both the single currency and sterling, which
means the rate of the dollar could work against
companies, making bills more expensive than before.
Admittedly, US economic growth has not been hitting
highs and the Federal Reserve Americas central bank
still refuses to completely rule out a third round of
quantitative easing. Nonetheless, the US economy
looks much better placed to weather the global
economic storm.
With better knowledge of the currency markets,
businesses are undoubtedly equipped to decide when or
how to pay a bill in a foreign denomination. For example,
if you know sterling is performing well against the US
dollar and you have a bill to settle in dollars, it would be
best to pay it straight away. Additionally, if you know
whether this trend will hold or decline, you can weigh up
whether you should wait for a better rate.
The next thing to look at when reducing your exposure to
costs associated with foreign exchange is how to carry
out foreign payments.
Businesses tend to go through their banks when it comes
to making foreign payments. Unless it is a large
multinational, it is likely the bank will charge an
unfavourable spread on the exchange rate, as well as
charge to facilitate the process.
For example, research carried out by Caxton FX revealed
that high-street banks in the UK are charging their
business accounts an average flat rate of 21.40 ($33.54)
each time a transaction is sent overseas.
If a business makes six transactions with international
suppliers a month, it will incur 1,200 ($1,880) per year
on foreign transaction fees, as well as an unfavourable
exchange rate.
When looking to pay a foreign supplier or purchase
foreign currency, companies should research the
different banks and foreign exchange suppliers rather
than continuing with the usual provider, which may
be more costly. There is now a good selection of
currency companies able to provide excellent rates,
platforms to make cheap foreign payments, as well as
exploring hedging options to minimise exposure to
currency fluctuations.
Hedging strategies include forward trades, which enable
a company to lockin a good rate when it sees it, but pay
for the transaction at a different time. The provider can
also watch a rate and contact you when it is a good
opportunity to purchase foreign currency.
In terms of saving while overseas, it would be
wise to consider a business travel card, which can be
credited before travel and used much like a local card.
This offers convenience, security and generally a better
exchange rate. It is also a great alternative to carrying
around cash, they can be used to pay for bills anywhere
with the Visa or MasterCard sign and is a great way
to budget as the cardholder can only spend what is on
the card.
Sterling versus Euro Two year view
2010 2011 2012
afg
LEASING: AWAS Q&A
How do you see the current state of our
industry and where do you see it in the
next six to 12 months?
A year ago, I am sure that many of us would not have
thought that given a dire economic forecast across
Europe, and the spectre of further regional perhaps
global economic contagion, merely a handful of
airlines would have ceased operations and few
orders would have been altered. Most airlines
have been able to maintain profitability and have
in fact added to the manufacturers order books for
next-generation aircraft.
Many airlines have done a very good job of trimming
older capacity and trying to stay at marginal growth
Aircraft Finance Guide talks to Ray Sisson, president and CEO of AWAS, about the
resiliency of the aviation industry, the need for next-generation aircraft, nancing and
the ability to drive continued growth.
One to one:
Ray Sisson, AWAS CEO
rates, even while ordering and accepting the
new aircraft that is vital for them to achieve
operational profitability. Others have turned to
strong-performing, mid-life aircraft as an
attractive way to make their fleets younger and
more capable, at a lower cost.
Our senior team is constantly measuring,
benchmarking and re-evaluating financial conditions,
risk, and operational performance, and we still see
far more areas to invest versus those to stay clear
of. We have also seen several successful airlines
begin to place campaigns for significant volumes of new
lift, betting on a return to more stable growth in the
coming months.
Do you see a rebound of lease rates and
do potential production rate increases
still concern you?

Narrowbodies have been most affected by the current
softer market but we have recently seen firming, and
most likely a bottoming, of lease rates for both Boeing
and Airbus single-aisle aircraft. Widebodies have greater
scarcity value and rates have held up pretty well, except
for older, out-of-favour variants.
Our industry, like most, does not care for uncertainty.
We need to be able to forecast many complex
variables to make our business models work. We
deal with great assets that perform well for decades,
airline businesses that evolve and adapt over time,
and global economic trends, both of growth and
inevitable shocks from time to time. That is why
when the major airframers announced plans to
ramp up production some 15 to 20 per cent
which could impact residual values of certain
aircraft many in our industry became concerned.
But I think there is now more moderation of those
initial ambitious plans, and a tempering given
current marketplace conditions.
Do you agree with some views that the
neo and MAX are interim aircraft? Did
the decision to re-engine the aircraft
affect your orders?
I think that both the Airbus A320 neo and Boeing
737MAX will be excellent aircraft, and while we
currently have no placed pipeline orders for
them, we are planning to own many of them via
the OEMs large orderbooks and airlines need and
desire for purchase and leaseback financing.
The operating advantages that both these aircraft
are designed to deliver are very meaningful and we
believe that they will be quite long-lived. While
the use of composites will continue to grow, the
benefits are slightly less for lighter, single-aisle
aircraft, and a next phase of game-changing
engine technology, like open rotor, could be quite a
while away.
That said, the current generation of A320s with
fuel-saving Sharklets and 737NGs will continue
to be workhorses for many years to come. I think
you can see the airlines need and faith in
them given the numerous current orders for
these types.
LEASING: AWAS Q&A
Weve seen a number of aviation
leasing start-ups, since then weve
witnessed consolidation. What is the
future for the leasing market?

The global constriction of credit weve seen
recently from the core European banks, which
have traditionally been strong lenders, coupled
with new restrictions via Basel III and the new
ASU, are going to make leasing even more
important than it is today.
A decade ago when leasing was less than
25 per cent compared to approximately 40 per cent
of the market today one might not have thought
that entire, new, successful airline business models
could, or would, be built around a 100 per cent
leased fleet. Leasing is a valuable solution for
airlines as a financial tool, as a technology hedge,
and also gives them significant flexibility to
alter their business model to respond to
marketplace changes.
Over the past few years, weve seen a number
of new lessors and weve also recently seen strong
investor interest in the value of strong-performing,
established platforms. We see this trend continuing and
given the growth, there will be plenty of business for
everyone from the top-tier mega-lessors (the global
platforms with 200-plus aircraft, where AWAS currently
resides with 240-plus) and newer start-ups looking to
capitalise on regional needs or aircraft-type specialisation.
Are airlines placing more demands
on lessors and what do lessors need
to offer other than simple access
to an aircraft?
Airlines want as much flexibility as possible,
but they also value expertise and depth of offering.
That could mean access to a variety of aircraft
types or consultative abilities. Its of vital
importance to have deep domain expertise
regionally; to be able to have dedicated staff
that understand airlines unique needs and
competitive environment.
Recently, top-tier credit airlines have had multiple
lessors bid on placements and PLBs, [purchase
leasebacks] which can affect pricing.
LEASING: AWAS Q&A
We try to stay a bit away from these scenarios
as our platform and people allow us to play
in broader markets with a more diverse array
of airlines.
What plans do you have for your fleet?
Which, and how many, aircraft do you
have on order and do you have
placements for them?

Today, AWAS has over 240 aircraft in our fleet, which is
worth over $7bn. We are a little different than most
lessors in that we can offer customers new pipeline
aircraft; mid-life aircraft; narrowbodies; widebodies; and
both passenger and freighter variants.
The broadness of our platform and expertise of our
technical team allows us to deliver fleet solutions
where, for example, one operator is looking to get into
a single type to match the requirements of their new
business model.
Our global reach enables us to place the legacy aircraft
with a LCC [low-cost carrier] or regional operator for
whom the metal is perfect. We can successfully manage
the risk, the transitions, and we get stronger returns in
line with our high-yield strategy.
Our pipeline order of new aircraft from both Airbus and
Boeing is over 80 additional units and we are placed-out
over the next year and beyond. We have been very active
in these signicant campaigns and we will have several
announcements soon on new relationships and
deepening ones all involving multiple aircraft.
AWAS has also been and plans to be very active
in the secondary market with purchase and leasebacks,
as well as portfolio acquisitions from other lessors.
Last year we bought over $1bn in aircraft and we
have a prudent growth strategy that we will build
upon this year.
By the middle of this decade, our plan is to grow
AWAS platform to well over 300 modern aircraft
worth over $10bn, and we will continue to
differentiate ourselves by offering a greater array
of solutions to a broader base of airline customers.
That will keep us relevant and growing in both
challenging markets and hopefully smoother
ones ahead.
LEASING: AWAS Q&A
afg
Professor Karl Moore of Desautels Faculty of Management, McGill University,
Canada, recaps where we are with aircraft development and explains why he thinks
Bombardiers CSeries will prove to be a success.
The CSeries:
Stand by for success
LEASING: The CSeries
S
even years ago, Bombardiers management
sought launch customers for their CSeries
aircraft, which was to plunge them into
competition with Boeing and Airbus more
specifically, their 737-600 and A318 models.
Orders have been less than stellar. At the time of writing,
Bombardier had 138 firm orders, 199 options and 15
conditional orders for a total of up to 352 aircraft,
perhaps less than one would hope for at this stage in the
aircrafts development. Yet, the numbers are not too bad
compared with the A320 (and even the 737NG) in the run
up to entry into service (EIS).
But, realising it could do better, Bombardier added
considerably to its sales team, welcoming Chet Fuller,
(formerly at General Electric) to ll the position of SVP of
sales, marketing and asset management. Further additions
to the sales force included Andy Solem VP of sales, China,
for Bombardier Commercial Aircraft, and Torbjorn (Toby)
Karlsson, VP of sales for Bombardier Commercial Aircraft.
The manufacturer also opened regional sales offices in
Dubai, Shanghai and Singapore, adding to existing offices
in Toronto, Montreal and Munich, allowing it to reach
potential customers more effectively.
Production programmes
Market concerns over the CSeries include whether it will
be delivered on time, what its competitors, Boeing and
Airbus, will do, and how much long-term demand there
will be.
First and foremost, Bombardier must hit its target date
for first flights. Being on time is crucial to building trust
from customers, and thus increasing sales. Yet customers
are nervous, remembering all too well the three-year
delay of the A380 and two-and-a-half-year delay of
Boeings 787.
Bombardiers CEO, Pierre Beaudoin, recently predicted
the aircraft will take its maiden voyage by the end of this
year but said that if it flew within three to five months of
the years end, it should be considered on time.
Based on numerous comments made by Bombardier
executives, it appears Beaudoins window is achievable. If
the project were only half-way through with no time to
spare, there would be cause for concern, but the CSeries
is at the tail-end of what will be a complex, almost
eight-year long, project.
The manufacturer has travelled far down its production
timeline and although there are likely to be some glitches
(as with any such project), it is likely Bombardier will
make its window.
Fighting it out
Crucial to the success of this aircraft is the competitive
response from the worlds two dominant aircraft makers,
either of which could squash the CSeries if so desired.
Currently, these two firms account for almost 80 per cent
of the commercial aircraft market share, with Airbus
holding 37.8 per cent and Boeing 39.3 per cent.
Bombardier by contrast, though the next biggest
competitor in terms of market share, holds only
6.3 per cent. However, for this reason, both Boeing
and Airbus will be more focused on the competition
posed by each other than by Bombardiers CSeries.
Airbus CEO, Fabrice Brgier, recently commented on
the aggressive nature of Boeings pricing for its
737 MAX and acknowledged the threat it would pose
to the A320 neo. Airbus will be highly aware of any
interest given to the MAX, including the recent order
from United, (for 150 aircraft, including an order for
100 new 737s) which followed extensive negotiations
between the airline and both competitors.
Boeing was forced to respond to Airbus new engine option
(the neo) by announcing its plans for the 737 MAX. Originally,
Boeing hoped to create a completely new aircraft for release
in 2019. However, with suppliers demanding a more
immediate solution, Boeing chose to re-engineer a

couple of their models. Now, Boeings priorities are to ensure
the 787 Dreamliner ies perfectly. It must make sure that sales
for its 737 MAX continue to grow and take back at least part
of the market share lost to Airbus A320 neo last year.
Market concerns over the CSeries include
whether it will be delivered on time, what its
competitors Boeing and Airbus will do, and how
much long-term demand there will be.
Meanwhile, Airbus must focus on issues with the
A380s wing and drive the programme to unquestioned
success. The manufacturers second priority is to find
launch customers for its A350 mid-market aircraft,
planned as a response to Boeings 787 Dreamliner,
which at this point is scheduled to launch in the
1H 2014 a year later than originally planned. Industry
insiders estimate that this market is considerably
bigger than that of the CSeries. Airbus third priority
is to ensure that the revamped A320 neo (helping to
replace the A318, A319, A320 and A321 models)
continues to sell despite the added competition
of the 737 MAX.
A eld of its own
Only time will tell whether these issues will dominate
Boeing and Airbus. In terms of competing against
Bombardier, both must carefully consider which
size of aircraft to optimise in order to suit the market for
smaller jets. The CSeries is specifically designed for the
110 to 149-seat market, but Boeing and Airbus
comparable aircraft are downsized from their optimal
design in terms of fuselage cross-section and weight etc.,
which means they are not perfect competitors to the
CSeries.
When drawing a clean-sheet aircraft, both Boeing
and Airbus must ask what seat-size (120, 150, 175) is
necessary to successfully meet demand.
According to industry estimates, there is more
opportunity in the plus market for 150-seat aircraft.
Will Boeing and Airbus re-engineer their existing
aircraft to compete against the CSeries, or will
they create more competitive, but more costly,
clean-sheet aircraft?
Boeings and Airbus narrow focus on each other has
blinded them to wider competition; in short they suffer
from competitive myopia. This is where Bombardier
has an advantage. The company has had a family of
leaders at its helm, allowing a longer-term vision.
This is an important benefit when running a 10-year
project to create an aircraft that will be in service for
about three decades.
It is a luxury not afforded to Boeing or Airbus. CEOs
at both companies are forced to work for a much
shorter timeline. Airbus has had six CEOs in the last
seven years and Boeing has had five from 1996. Most
CEOs have a relatively short tenure, which can lead to
an excessive focus on short-term results. In fact, a 2011
study by Booz and Co. found that the average term
of a CEO has dropped during the past decade from
8.1 to 6.4 years.
Members of the Beaudoin family have run Bombardier
for over 40 years; it has been handed down from father
to son with the exception of a few years when Robert
Brown and Paul Tellier took the helm. Its current CEO
delivers specific support for the CSeries, he has been
involved from the start and has shepherded it along
its way. It is a particular advantage to have a CEO
so committed to a product. Because of his longevity
as CEO, Pierre Beaudoin has the luxury of a truly
long-term view, which is of immense value to a
game-changing new product like the CSeries.
The potential market for the CSeries is huge. Market
growth for its segment is pitched at 4.4 per cent
annually, creating demand for upwards of 25,000 new
aircraft. Bombardier has invested in the future so
despite the current unease of the world economy, the
CSeries should be a true success.
afg
W
e entered the mid-point of the year
with a very volatile engine market,
caused by a number of factors,
which combined, are posing
considerable questions for
day-to-day marketeers and senior management
strategists throughout the industry.
With oil price variability, the slow-down in China
and continued concerns about the eurozone, the
global air transport market remains uncertain.
IATAs June update forecasted $3bn (less than half the
2011 results) in global airline profits with losses
expected for European airlines. Similarly, Asias profits
are predicted to halve while only Americas profits
should increase.
However, global passenger growth, which was at six
per cent for the early part of the year, is above historic
trends and the cargo market, particularly around the
Middle East, is showing fragile signs of recovery after a
very weak last quarter.
With fuel for now at least below $100 per barrel
(bp), there is potential for the airlines to outperform
the IATA forecast, which was based on a $110pb
assumption, however oil price volatility continues.
Despite the welcome passenger growth, profitable
airlines are currently being very conservative about
increasing capacity beyond their committed new
deliveries, thus maintaining near record load factors
and sustaining profits. This strategy is serving the US
airlines particularly well.
With little increase in capacity, the number of parked
aircraft at record highs, and low shop visits rates (due
to low utilisation), there is weaker demand for spare
engines. This has led to continuing oversupply for the
year-to-date and the situation is likely to continue
throughout the remainder of 2012 and into 2013.
Meanwhile, aircraft order books are at record levels,
with a backlog of over 9,500 units scheduled for
delivery at a rate of 1,000 per annum. While lessors
complain that production rates are too high, the
manufacturers robustly defend themselves an
argument reflecting a natural difference of interest.
The lessors want to ensure supply does not outstrip
demand, thus maintaining good lease prices and
remarketing potential. At the time of writing, lease rates
for both aircraft and engines are at record lows, partly
due to oversupply and partly the low cost of funds.
With the cost of funds so low, a plentiful supply of
new, fuel efficient aircraft and uncertain oil prices,
airlines are finding it makes more sense than ever to
retire aircraft early and replace them with more
efficient models. There is little demand for older
aircraft, thus they are being broken down for parts
earlier in their life cycles. Recent announcements from
both major manufacturers support this, with the
average lifespan dropping from 25-years or more to
around 22-years. Certainly the industry has seen
several young aircraft (aged less than 10 years) being
torn down.
This activity fuels the surplus parts market, which
according to some estimates is worth around
$3.3bn per annum, with up to 80 per cent coming
from torn down aircraft and engines. The question now
is whether the market will face oversupply.
If so, it brings major concern to investors in both
engines and aircraft. The most valuable part of a torn
Jon Sharp, president and CEO of Engine Lease Finance Corporation (ELFC), considers the
state of the engine leasing market in 2012 and beyond.
Market review:
The engine
leasing market
LEASING: Engines
LEASING: Engines
down aircraft is its engines, which the owner will look
to liquidate for cash.
However, the demand for MRO services and spare
engines is reduced each time an aircraft is taken out
of service.
This is not good news for MRO agencies as engine
exchanges are becoming even more common. It is
no coincidence that three major engine shops have
closed in the last 12 months under the dual onslaught
of excess supply and the encroachment of OEM
maintenance packages on third-party operations. This
is not good for the competitive landscape. Nor is it
good for engine and aircraft lessors, because an
oversupplied market means lower prices for
liquidating assets.
Tear-down firms also suffer reduced economics,
but at least their business models are designed for
fast cash turnover and should be able to cope with
supply and demand imbalances and consequent
price volatility.
Danger lies in wait for the lessors, however, if what
we are seeing is not a short- to medium-term
market imbalance but a paradigm shift driving new
market economics. For example, if an aircraft asset life
should now be viewed as a 20-year proposition rather
than a 25-year one, depreciation rates will need to
increase by 20 per cent from four to five per cent
per annum.
This scenario is bad for aircraft yet to be acquired, but
is worse for aircraft that are already owned. If an
aircraft has been held for 10 years and has depreciated
at four per cent per annum to 60 per cent of its
acquisition cost, does this new metric mean that in
order to correct its book values, the lessor must accept
an impairment charge of a further 10 per cent of the
acquisition cost in the current year? In whatever way
lessors may deal with this, accelerated depreciation
certainly sends lease factors higher.
Engine lessors have a somewhat different take on
the same problem as engines do not have the same
constraints as aircraft. The economic life of an
engine depends on the availability of host aircraft, but
as the economic life of an aircraft type reduces, the
residual value of the engines become more sensitive to
market conditions.
Some commentators believe the A320 neo and the
737 MAX have had an effect on residual values for
the A320 classic and 737 NG families, and their
respective power plants. A bigger question is for
how long will the neo and MAX fly? Are they interim
aircraft awaiting the technology jump, for example into
unducted fans.
If that is the case, depreciation policies will have to
change as each aircraft is taken out of service, thereby
significantly pushing up the cost of leasing.
Perversely, if that is the case, the airlines preference
for leasing is likely to increase. Although the simple
economics of the buy and lease argument will move
in favour of buying using debt, the last thing an airline
wants is climbing residual value risk in an uncertain market
place. The strategic management of that risk is the preserve
LEASING: Engines
of leasing companies, which are better placed to manage
their assets over a longer cycle, thus avoiding an
uncomfortable liquidation sale in a downturn.
Furthermore, as lessors have placed some 40 per cent
of the aircraft order backlog, operating leases will be
the only source of new equipment for some airlines.
Such a high percentage also underlines the fact that
banks increasingly prefer to lend to lessors rather
than airlines. This is partially because of asset cycle
management and partially because banks view airline
operating margins as riskily thin and overly susceptible
to oil price volatility.
It is no surprise that the engine leasing market
has seen significant change in the last twelve
months; the major participants have reacted to the
paradigm shifts in our market. There has been
consolidation (for example, with Engine Lease
Finances acquisition of the Macquarie Aviation
portfolio of engines) and the introduction of new joint
ventures and marketing initiatives, all designed to
address the new realities.
Some participants in the engine leasing market
specialise in only one or two asset types.
Others are sticking to the widespread portfolio
LEASING: Engine leasing
model. Some operations are designed to be in
support of aircraft tear down, burning off the
green time from liberated engines through leasing,
then breaking them down for parts. Other operations
are designed to support MRO activity. As usual,
the airline customer is offered a wide choice
of short- or long-term leases, whether, inclusive of
MRO or not.
CFM Internationals (CFM I) recent launch of a
lessor-friendly MRO package, Portable Maintenance
for Lessors (PLM), is a welcome development for
engine leasing companies. It allows the lessor to
keep reserves (essential security in most cases)
and allows both lessors and lessees to enjoy the
benefits of an OEM-backed package, which is fully
portable from lessee to lessee, operated on an
engine-by-engine basis.
At Engine Lease Finance, we strive to be at the
forefront of developments and, as such, we became
the first engine lessor to sign a memorandum
of understanding (MoU) with the manufacturer,
as announced at the Farnborough Air Show 2012.
When faced with the decision of what asset types
to invest in, such factors play a major part in
the lessors thinking. It is not just about which
engine is expected to perform better, which
type should have the longer life, or which
will be the most popular, but it is also about the
support available.
Any degree of constancy is welcome within the leasing
community, which is increasingly experiencing erosion
of the old certainties. At the recent UBM Engine
Leasing and Trading conference in London, I was asked
to make a presentation addressing the topic Is the
Golden Age of Leasing Over? While I question
whether there ever really was a golden age, it is
definitely the case that times are harder now.
The airlines manage their yields and load factors much
better and push part of the capacity risk to lessors. The
introduction of new equipment types, the growth of
OEM aftermarket dominance and the booming part-out
business all link up to pour stress on the economic
models of leasing companies. Residual values and lease
rates are under pressure.

Lessors are not standing still, but are reacting
as one would expect. Business models are being
adapted, even reinvented, and the search for
innovative structures and finance goes on. The
industry is constantly evolving. It may not be
the end of leasings golden age but we are facing a
definite shift. It may simply be that lessors rightly
take a greater share of the risk in operating
in the commercial aviation market.
LEASING: Engine leasing
afg
AD page
A
viation has an unusual relationship with
litigation. Sometimes, the legal bill for
18 months of gritty combat is outweighed
by savings in cash and interest, yet at the
end of the process, judgement comes in the
form of paper, not a guarantee of payment or the recovery
of assets.
If a lessor ends up in protracted litigation prior to
recovering an aircraft, the process of repossession has not
gone well. This article explains how a lessor might
minimise the risk of long-term delay before a default has
even occurred.
It is vital that lessors carry out due diligence on the
lessee. Many failed leases arise from risks that could
easily have been foreseen before the lease was signed. A
lessor should establish financial and jurisdictional risks in
advance and then build them into the leases model.
The lender should also see the lessees business
model, or at least be provided with an explanation of it.
Taking repossession of an aircraft can be a long and painful experience. But with careful
planning, swift execution and a dose of luck, it can be achieved quickly and relatively
painlessly. Richard Mumford, head of dispute resolution for ASB Law, explains.
Repossession:
Without nine tenths
of the law
LEASING: Repossession

Firstly, the lessor should be satisfied that the model is
robust and will work. Secondly, this knowledge will
enable the lessor and lessee to structure the lease in a
way that will work for both parties. It is tempting for
lessors to structure a lease that best suits their client.
However, it is better to have an honest discussion and
to agree mutually beneficial terms at the start this is
the best way to ensure a long and productive
relationship with the lessee.
As litigators, we often witness the result of leases that do
not work out. Often, the dispute is inevitable and is the
result of negligence, poor planning, a flawed business
model or an unrealistic bargain.
Too many lessors rush to get their aircraft on lease and
do not focus on the key terms of their contract. These
terms are not complex or numerous but need to be
accurate to ensure lessors can gain easy access to their
aircraft under default.
The chief requirement is a clear and unambiguous
right to immediately repossess the aircraft upon
default. It is common for standard contracts to include
provisions that allow time to rectify a default. However,
aircraft and engine lessors should avoid such periods of
grace unless local law requires it. The success of a
repossession is largely reliant on speed and surprise
the lessee must not be given time to move the aircraft or
hinder the repossession.
Indeed, another clause should specifically require that a
lessee co-operate with repossession. Both parties should
also maintain up-to-date aircraft and engine records and
the lessor must be able to supply any documents needed
to reclaim the aircraft.
Chief among these is a de-registration power of attorney.
However, the lessor should be aware of the specific
requirements within different regions, both where the
aircraft is based, and will fly to, and where proceedings
will take place.
For example, Canadian legislation requires a set of signed
board minutes before an aircraft can be deregistered and
exported. Imagine attempting this in the chaos of
insolvency or when the two parties have fallen out and
the lessee has wilfully defaulted.
The lender should chose a sensible law and jurisdiction
for the contract. This may not be the law of domicile for
either the lessor or lessee. The key is to ensure an
effective enforcement strategy to ensure the lessee
repays debt. Many lessors choose English law for their
leases for this very reason. England has a unique place in
the jurisdictional world because its judgments are directly
enforceable in many countries by reason of its position
within the EU, the Commonwealth and various treaties. In
addition, the English courts are relatively quick and can
generally be relied upon to come to an honest and
sensible decision.
However, England is not always the appropriate
jurisdiction. Therefore, the lease should allow the lessor
complete freedom to choose a jurisdiction, while
preventing the lessee from choosing unfavourable
jurisdictions (bear in mind many airlines are state-owned
and the state may control the courts).
The lessor should also think about the best location for
the repossession. This will not always be the aircrafts
base. For example, where an aircraft is flying between
Africa and the EU and you have a lease under English
law, then detaining it in the EU may well be preferable.
There are also practical considerations such as risk
of corruption, the availability of maintenance, storage and
fuel. It should also ensure that any export requirements
have either been met or can be bypassed while the
aircraft is moved to a safe destination. De-registration is
often important but can be a major cause of delay.
Lessors must ensure they build suitable security deposit
and maintenance reserve provisions into risky leases. It is
always advisable to be driven by ones own objective
decision rather than to be led by market norms. A lessor
should ask: Do the lease terms seem reasonable and
sensible? Do they meet my objectives?
The lessor should consider translating the lease into the
lessees language as well as the dominant language used
in the jurisdiction chosen for court proceedings, as these
may be required on repossession and their absence can
cause significant delay. However, the translated leases
should not be circulated, as documents in more than one
language will generally create ambiguity and opportunity
for misinterpretation.
It is vital the lessor ensures the right to receive information
from the lessee; ideally utilisation, load factors and similar
information that will allow early diagnosis of any nancial
issues and of any problems arising from the lessees
attitude to maintenance. It is also helpful to receive data
on the lessees compliance to debt repayment, for example,
to cover maintenance, parking or other fees that could lead
to the detention of the aircraft.
Operating the lease
Good lease maintenance is about looking ahead and
foreseeing potential issues. The sooner a problem is
identified, the better the chance of resolving it, or of
protecting the lessor against default.
This requires a strong flow of data from the lessee to
lessor. However, both parties should also keep a close eye
on the data directly available to it, including political and
economic information regarding the economy,
jurisdictions involved, data provided by the lessee and
lease performance.
Early signs of financial trouble may include changes to
the flight schedule or utilisation, reduced load factors, or
economic or political change. Any aircraft that spends a
significant time on the ground will be losing money for
the owner or lessee.
The lessor should monitor press and other information such
as rumours, competition, fuel prices or other governmental
or economic factors. They should also consider seasonal
issues such as holiday and religious periods.
A lessor should also talk to the lessees management
on a regular basis about their financial performance and,
ideally, how this compares with the business plan.
However, useful information can also be gleaned at an
operational level. A lessor should listen carefully to all
that the lessee tells it, but it should not take anything at
face value. Wherever possible, it should verify every
representation independently.
Minor defaults may go unnoticed or unquestioned.
In isolation, they could simply be an administrative
oversight, causing a days delay in payment or a
similar minor issue. However, they can also be a
pointer to bigger problems ahead, so should never
go ignored.
A lessor should keep track of the location of engines
and parts. It should be wary of the installation of
third-party engines on its own aircraft and should
also consider the risks of terminating contracts while
the engine or aircraft is in maintenance as it would
be harder to make a clean recovery of the assets, but
also because liens may be exercised over the aircraft
or engines.
Third-party engine owners can cause difficulties.
They may even impound the aircraft itself while it
removes the engines or while it awaits payment.
Lessors should consider approaching third parties in
advance while being beware of any pre-existing
relationship it has with the lessee.
When a default occurs
The lender should consider its approach to a default and
its objectives before one occurs. It should ask: What
might my attitude to a default be? Would I want the
aircraft back, or would I prefer to work with the lessee?
Of course, the answer will depend on the circumstances of
the default, but one should never send a notice of default
as an impulse reaction to a failure to meet obligations.
A missed payment should be investigated immediately,
however short the default may be. The lessor should
assess the situation and decide whether the priority
is to be paid, or to recover the aircraft. It should
consider the risks of further exposure and the need to
protect its asset.
Crucial to the question of whether to repossess the
aircraft is what the lessor might do with it once it has
been reclaimed. Is there a market to re-lease, sell, or
tear-down the asset? Have lease rates hardened or
softened since the lease was entered into?
What are the wider business implications of repossessing
the aircraft? By repossessing an aircraft, a lessor might be
turning its back on a potentially long-term customer. If
the airline is state-owned or backed by a wealthy investor
then it is likely to repay its debt swiftly and return to
normal conditions, in which case the lender has lost
business. If the airline is part of a group, repossession
may lose the lessor business from its affiliate airlines.
The lender should also consider its market reputation. It is
generally better to be considered firm but fair but once
the lessor repossesses the aircraft, its loses its leverage, in
which case it should be prepared for the long-term action
which may be required to recover damages.
Timing the notice of default
Too many lessors serve a notice of default as a reaction to
a missed payment. If repossession is the objective, a
lessor should not serve the notice of default until it is
ready to take possession of the aircraft, as a lot of
preparation goes into the process.
The default clause should be unambiguous, giving an
immediate right to terminate the lease and repossess the
aircraft. Terminating a lease without the relevant clause
can be extremely costly.
A lessor should find out all it can about the aircraft.
Including its location, flight schedule and whether it is
serviceable or needs maintenance.
The lessor should consider all the practicalities of moving
an aircraft. These include the availability and positioning
of flight crew; visas; weather; time zones; airport opening
times; ferry flight destinations and other flight logistics.
Lessors should also carefully consider the exact timing of
the repossession and allow for time zones.
All of this needs to be considered before the lessor serves
its notice of default, as it will need to move quickly to
recover the aircraft before any party become entrenched
in legal proceedings.
Once the notice is served, the lessor may consider inviting
the lessee to co-operate with the delivery, but should not
allow it to use this as an opportunity to delay delivery as
that would give the airline and any interested third
parties the chance to set legal proceedings.
These considerations do not guarantee success, but they
will reduce the risk of things going wrong. Repossession
can be a very expensive process it is important that
lessors consider all possible outcomes and plan for these
eventualities before it becomes critical.
afg
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AIRLINES: Fighting fraud
60
T
he aviation industry has had a tough decade.
Margins have been squeezed by rising fuel costs,
additional taxes and environmental restrictions. At
its last media day in December 2011, IATA warned
that the combination of austerity measures,
dwindling condence and a downturn in international trade
would harm airlines during 2012.
The slowdown, according to IATA, will mean the air freight
market remains at, while growth in the passenger market
will shrink from 6.1 per cent in 2011 to four per cent
this year. Carriers therefore need to maximise their
revenue opportunities.
Technology (specically the Internet) has changed how the
airline industry offers services to its customers. As early as
1995, carriers were offering passengers the opportunity to
search, book and pay for ights online. Services have
changed dramatically since 1995 but e-Commerce continues
to be a crucial business tool for airlines.
The aviation industry is struggling to remain protable yet competitive during particularly
lean times. With increasingly tight margins, every penny counts. Yet, a signicant proportion
of airline revenue is lost to fraud. Phil McGriskin, chief product ofcer at WorldPay, explains
how airlines can lower the risk of crime.
Fighting fraud:
Protecting your
online bookings
61
What the market thinks
In its recent Perfect Passenger Payment report, which
surveyed airlines and 4,500 recent yers, WorldPay found
that 71 per cent of passengers in the last 12 months booked
their ights online. The industry estimates that 42 per cent
of revenues come from online ticket bookings, with the
expectation that this will increase by ve per cent over the
next 12 months.
As e-Commerce evolves, it also impacts on the devices used
to go online. WorldPays report found that 39 per cent of
consumers who have purchased a ight online say they are
comfortable buying goods and services using their mobile
phone. Over half (58 per cent) of consumers would like to
use their mobile or tablet device to pay for airline tickets in
the future, and 50 per cent would do so now if the
technology allowed it.
The adoption of mobile technology is set to radically
change the airline industry and carriers are already
gearing up to offer new payment technology. In fact,
84 per cent of operators expect to offer more choice to their
customers within the next two to three years.
As these opportunities develop, so does the risk of fraud.
Among the airlines surveyed, 1.5 per cent of total online
revenues are lost each year beacause of fraud. More
worrying is the suggestion that almost a third (29 per cent)
say they have seen fraudulent bookings increase in the last
12 months. Only two per cent profess never to have taken a
fraudulent booking. As the means of online purchasing
expand, so does the risk of fraud and the importance of
managing that risk.
Despite recognising this risk, only a small percentage
of airlines are educating their customers about the
dangers of online fraud. Quite signicantly, only 10 per cent
obtain some form of credit report on customers before
issuing tickets.
Even when fraud is suspected, airlines do not always act on
their suspicions. Only two-thirds (65 per cent) conduct
internal investigations and only 61 per cent inform the
payment provider. Many suspicious customers are allowed
to continue with their booking, with only 61 per cent of
airlines blocking them and 43 per cent withholding tickets.
Only 35 per cent choose to inform the police.
The global nature of air travel often contributes to the
risk of fraud. Often the location of the customer does not
match their personal details, or they might be booking the
ticket on behalf of another individual. This makes it
signicantly more challenging for the carrier to ag any
suspicious fraudulent characteristics.
Cases of fraud will often be higher in specic regions,
although these will change with time. At the moment, a
high number of cases originate from the Caribbean, US,
Canada and Africa but airlines cannot afford to ignore
these markets.
There are also numerous types of fraud to be cautious
of. Most common is friendly fraud. This is when a consumer
makes a legitimate online purchase with their credit card,
then issues an illegitimate chargeback, falsely claiming they
had not received the goods or service or that someone else
booked it illegally. Regardless of what an airline does to
verify the transaction, friendly fraud is extremely hard to
prevent. Unfortunately for airlines, it is very difcult to prove
the customer is lying; banks will support the customer and
the liability will be left with airlines.
The second type of fraud originates from organised
crime rings. Sophisticated groups of hackers form a
team to specically target an industry. The aviation
industry is not alone organised criminals seek
weaknesses in merchants payment processes and target
those vulnerabilities.
The third type is call centre fraud. The call centre is a point
of weakness sometimes targeted by organised crime gangs.
They may attempt to make purchases over the phone,
pretend to be call centre staff, or even organise airline staff
to process fraudulent transactions. The risk is heightened
whenever card numbers are exchanged in a non-secure
environment. Airlines are also reliant on bookings from a
Over half (58 per cent) of consumers
would like to use their mobile or tablet
device to pay for airline tickets in the future,
and 50 per cent would do so now if the
technology allowed it.

number of channels including call centres and third parties,
so this type of fraud needs to be managed carefully.
Fraud management tools
From the research conducted among our airline audience, the
most common way for airlines to protect against fraud is to
set up a risk management system; 76 per cent of airlines
surveyed do this, while 75 per cent of airlines use chargeback
protection systems. Use of card security codes and address
verication systems are used by 69 per cent and 53 per cent
of airlines respectively.
However, risk prevention is not airtight and a signicant
percentage of revenue is still lost to fraud. A combined
approach to fraud management helps an airline to
strengthen its defence against fraud, particularly when the
characteristics are difcult to spot and many tactics are
employed from within many different geographical locations.
Worryingly, only 37 per cent of airlines say they incorporate
the newest online security technology. Technology for online
purchasing is developing at a rapid pace and consumers
increasingly expect to use their mobile devices during
the airport-to-ight experience. In the past 12 months,
55 per cent of carriers claim not to have updated their
browser security settings, and two per cent say they have
implemented no fraud prevention measures at all.
While the risk of fraud is a challenge and many carriers are not
using robust security measures, airlines also have to adopt a
balanced approach to the management of fraudulent
transactions and not block legitimate transactions.
It is interesting to consider consumers attitudes towards
security and the privacy of their information versus the
speed at which they are able to purchase tickets online.
Of those consumers polled, 46 per cent believe security
checks may lengthen the booking time and are accepting of
that. In fact, 84 per cent of consumers said that website
security was either extremely or very important to their
online experience.
Overall, 71 per cent of the consumer panel said they would
prefer slower, more rigorous checks on their payment
information in order to keep their data safe, with just
29 per cent willing to expose themselves to risk for a faster
purchasing process.
However, this tolerance is not unlimited and acceptance
levels vary by geographic region, how frequently
Fraudsters will look for any open door in your security.
the customer flies and what device they use for
the purchase.
Getting the balance
More than one in ve people found security questions too
excessive, and 46 per cent of frequent yers would be
willing to risk the security of their data to improve the speed
of the purchasing process. There are interesting geographic
differentiators too. In China, 66 per cent would prefer a
quicker purchasing process with fewer security questions.
UK customers had the lowest percentage of people willing
to swap risk for speed, at 19 per cent.
When it comes to purchasing via a mobile device,
38 per cent of customers would be happy to store their
payment details with the airline if it made future payments
quicker and easier. This slightly more relaxed attitude could
reect the limitations in mobile technology and a degree of
frustration. Airlines therefore need to manage the balance
between security and speed, and tailor the purchasing
process dependent to the customers preferences, without
heightening the risk of fraud.
Fraud is not unique to airlines, particularly within e-Commerce;
airlines are as vulnerable as other vendors. However, airlines
margins are particularly tight more so than most so losing
1.5 per cent of revenue to fraud can have a serious impact.
Airlines need to assess the gaps in their security defences both
internally and externally as a large number of bookings are still
driven by agents and third parties.
Airlines need to focus on a risk management strategy that
assesses all of the key criteria combined with an arsenal of
fraud detection tools and a stringent review process. They
should also consider collaborating in their efforts to combat
fraud, particularly in problematic regions. By sharing their
experiences and best practice, they will help to identify any
weaknesses that might be targeted by criminals.
The good news for airlines is that consumers are, on the
whole, willing to accept slower processes if they can be
condent that their data is secure; it would therefore be
acceptable for airlines to incorporate appropriate layers
of security.
With emerging markets offering new and varied customers,
airlines must consider the different risks and requirements
across the globe. This is a signicant task but with the right
technology and expertise, airlines can reduce the risk and
the cost of fraud.
63
afg
T
he words cautious optimism have crept into
numerous speeches and news stories during
the last year. Google the expression and some
1.3 million hits will pop up. We hear it in
economics and predicted growth models, in
quarterly business outlooks, even in weather forecasts.
Cautious optimism is the zeitgeist phrase. It is positive,
yet reserved. Upbeat but restrained. But in the world of
technological advancements, will reservation and restraint
really get you that far? Pioneers such as Apples Steve
Jobs and Twitters Jack Dorsey have led the eld with
determination and passion; airlines should be no different.
Following the 2012 Airline IT Trends Survey, Raphael Bejar, CEO of Airsavings, examines the
impact IT and social media can have on ancillary revenue, and the need to develop it.
Technology and travel:
How IT can boost airline
ancillary revenues
AIRLINES: IT and social media
IT investment: Helping smartphones
(and airlines) get smarter
Technology is a vital tool that airlines must
understand and develop if they want to maintain their
profits. More so than ever, new technology has
boosted ancillary revenue, ranging from inflight
entertainment (IFE) delivered on smartphones and
tablets, to virtual travel concierges and the
monetisation of social media. These offerings have
become essential to ancillary revenue and are crucial
to offsetting rising fuel costs.
Fee and service-based ancillary revenues have helped
airlines to remain in the black throughout tough times.
Pioneered by low-cost carriers, unbundled services
have helped airlines of all price points to expand their
offerings and generate new revenue streams.
Like any product, ancillary offerings have evolved and
technology has driven that change. Options such as
hotel bookings, car rental and trip insurance are all
fairly routine but those are just the beginning.
Traditional ancillary revenues have expanded far beyond
the booking path and cabin to provide a level of
unparalleled and personalised service.
Today, services can include everything from checked
baggage to beverages, pillows and headphones, to
approaches that link with social media. One of the
sustainable alternatives is the provision of free Wi-Fi
bundled with offerings such as travel insurance. The
expectation is that it will lead to higher revenue and
satisfied customers.
The need for innovation and investment is clear,
particularly as frequent flyers are also frequent IT users.
Smartphone and tablet use is high in the US and
adoption rates within the air passenger community have
already far surpassed what could be considered critical
mass, reaching 75 per cent for smartphones and more
than half for tablets.
In contrast, general US adoption rates stand at approximately
49.7 per cent for smartphones and 19 per cent for tablets.
The latter is predicted to rise as high as 40 per cent by
2016 owing to new technology, but even that gure is
10 per cent lower than for air passengers.
Adoption rates continue to surge in Europe too. In
France, the rate for smartphones averages about 40 per
cent; it is about 50 per cent in the UK and Spain.
Travellers dislike being disconnected from their mobile
devices, even during the few hours of a short-haul
flight. This has driven airlines to remain creative and
competitive regarding ancillary revenue.
With all this in mind, cautious optimism cannot be
the mantra of the developing airline. Instead, it
should push IT forward with unbridled optimism.
The Airline IT Trends Survey revealed that 56 per cent
of airlines are prioritising R&D in customer service and
the passenger experience. This is good, but not good
enough, particularly as an additional survey found
that some 70 per cent of airlines believe smartphones
will be the second most dominant sales channel
behind traditional websites viewed from PCs
and laptops.
67
Sharpening the picture: A focus on social media
Mobile devices, be they smartphones or tablets, are key
tools for technology. They will increasingly enable
airlines to earn ancillary revenue and will increasingly
provide the customer with a personalised service.
While fee and service-based ancillary revenues will
remain crucial to airlines monetary success, it is
essential to embrace new technology in every format.
For example, numerous other industries have already
proved the revenue benefits of social media. Airlines
must not limit themselves to mere branding or only
offering ancillaries during the flight or in the booking
path. They must be innovative and forward thinking.
They should look to social media and find ways to
monetise the online dialogue passengers are already
having about their services. Indeed, tech-savvy travellers
will expect their service providers to offer and be
involved in this interaction.
One example of this in practice is Airsavings Let Me
Think traveller option. The solution successfully merges
the interactivity of social media with the growing trend of
online booking and ticket price comparison. Let Me Think
is embedded within an airlines website and booking
path, and provides an easy way for passengers to input
their personal data, and to select and reserve fares.
Travellers can lock in a selected fare for a limited time,
having up to two days to share their itinerary and travel
plans through Facebook with colleagues, friends or family
before booking their flight. More than providing an
innovative way to create an additional revenue source,
Let Me Think also establishes new leads, marketing and
revenue opportunities from the passengers friends and
online social circle, while providing a privacy-conscious
way to aggregate data on potential passengers.
How Generation IT can generate revenue
Highlighting its revenue-generating success, the Centre for
Asia-Pacic Aviation (CAPA) has reported that as of 2Q 2011,
US airline prots hit $1.9bn, $1.4bn of which came through
ancillaries. The bulk of this is likely to have come through
baggage fees, but also includes the traditional Big Three
ancillaries travel insurance, car hire and hotel booking
plus IFE, duty free and emerging experiential offerings.
Within Europe, budget carrier Ryanair recently
announced it had raised 4.3bn in total revenue during
the fiscal year ending March 2012 21 per cent of
which came from ancillary services.
Furthermore, a global study by Amadeus and IdeaWorks
estimated that airlines pulled in some $32.5bn in
ancillary revenue worldwide during 2011. It also
suggested that an increased focus on ancillaries last
year could have yielded another $67bn in revenue.
Clearly though, great achievements have already been
made. Indeed, 57 per cent of airlines already feel that
social media is the greatest tool for marketing and
90 per cent plan to engage passengers via that medium
by 2015. This, combined with smartphone penetration
rates, strongly suggests that airlines are already fully
aware that social media and mobile devices can
generate revenue.
Instead of looking at airlines quarterly figures, let us
look at Facebooks. As of May 2012, Facebook had
480 million users. Better yet, its mobile penetration rate
reached 54 per cent more than half of its users.
Facebooks adoption rates, along with its $872m
revenue (reported in the companys 1Q 2012 filing),
underscore just how important it is for airlines to link
with social medias growing reach. Only through
continued IT investment can airlines find creative ways
to use Facebook (and other social media) in a way that
improves the passenger experience but also aids
revenue generation.
It is time to start monetising the social media
experience, allowing it to re-invigorate the ancillary
revenue profit model. It can serve as a safeguard
against the fluctuating price of oil. Although down from
recent prices of $100 or more per barrel, prices have
again started to rise, surging nearly two per cent
in a month.
Social media and the latest technological offerings
are not the airline industrys panacea for poor
revenue. Nor can continued investment in
technology cure everything. Technology has its limits
and cannot be developed without funding, but nor
can it be ignored.
Whether through direct fees or its indirect benefits,
social media and other technological offerings
are advancing the ancillary revenues and their
potential. From connectivity to carbon offsets
and hotel bookings, to bad weather insurance,
ancillaries are growing, either internally or through
third-party providers.
From the beginnings of a trip, right through the booking
process to the post-trip re-cap, travellers are eager to
share their experiences through social media, be it on
Facebook, Twitter, Foursquare, or the grandfather of
social media, email.
Our customers are already there, lets join them.
69
afg
AIRLINES: Bmi buyout
F
ormer UK Prime Minister, Margaret Thatcher, was
not a big fan of British Airways (BA). She famously
pulled a tissue from her handbag and wrapped it
round the tailn of a 747 to show her disgust for
the ethnic liveries at the airlines 1997 rebrand.
But there was an airline the Iron Lady was fond of British
Midland, now bmi. Recently, its German owners, Lufthansa,
sold the carrier to BA-owner, IAG.
History repeats itself
Bmi consisted of three airlines British Midland
International, bmi Regional and bmibaby only the
rst of which IAG intends to retain. Bmi Regional has
been sold to Sector Aviation, a group of Scottish investors.
IAG could not nd a buyer for bmibaby and it will be
dissolved after taking its last ight in September. The
deal is reminiscent of when BA swallowed British
Caledonian (at the time Britains second biggest airline)
in the 1980s after problems with its strategy led to a
nancial meltdown.
Bmis predicament is a far cry from its heyday when it
operated to the US, India and Saudi Arabia and competed
with BA on lucrative long-haul routes.
With the purchase of BAs franchise partner, British
Mediterranean, in the 1990s, bmi inherited niche
Middle Eastern routes to go with its portfolio of UK
and European short-haul ones; its English low-cost
operation, bmibaby; and its UK and European
How will IAGs acquisition of bmi affect networks in the UK and further aeld?
Chris Beanland nds out.
Slotting into place:
The effect of
bmis buyout
offshoot, bmi Regional. These gave bmi the reach into
the Mediterranean, North African and Middle Eastern
markets that most regional European carriers could
only dream of.
In 2009, Lufthansa paid its chairman, Sir Michael Bishop, a
reported 368m for his shares in bmi. It was felt that
German management and continuing Star Alliance
integration would guarantee the airlines success. But not
all went to plan, despite recent new route launches to
Norway and Morocco.
British Midland was my rst employer, reminisces
airline analyst, John Strickland. In the early 80s they
were the new kid on the block in providing meaningful
competition at Heathrow and a favourite of Thatcher.
They were a friendly local airline, but they lost their way in
recent years.
Dr Rico Merkert, a lecturer in air transport economics and
management at Craneld University, strikes a phlegmatic
tone on what happened: One should ask what went right
and wrong for Lufthansa, as they are effectively in control
of bmi. I dont think that they were ever serious about
developing some sort of hub at London Heathrow. In terms
of its operations, bmi had relatively high unit costs (also as
a result of its short sectors), pretty poor load factors (some
61 per cent in 2010), but managed somehow to generate
sufcient yields (apart from 2011) to make some prot on
these routes.
The market effect
So what does the demise of bmi mean for the aviation
market in the UK and further aeld? BAs parent, IAG, has
made it clear that the real value of bmis slots is for use on
new long-haul markets, explains Strickland. This doesnt
mean that all short-haul routes will disappear, but
71
Image courtesy of BAA.
72
undoubtedly there will be rationalisation where there is
excess and loss making capacity, on some UK domestic
routes, for example.
In the past, British Midland was a key domestic
competitor to British Airways at Heathrow, but the
landscape has changed over the last 15 years with
signicant low-cost capacity now available at other
London area airports. BA will, however, need to keep
adequate capacity on these routes at competitive prices
due to their importance for feed to its long-haul network. It
will take some time to work through the complexities of
slot usage balanced against eet restructuring, given that
most if not all of bmis eet is likely, in the long-term, to be
disposed of. The British Midland brand is also likely to
disappear by the end of the year, explains Strickland.
What lies ahead?
Bmi used to be a key competitor in the UK market and
specically at London Heathrow, but its signicance has
reduced as budget carriers have become major players on
domestic routes to London from other London airports,
says Strickland.
According to Merker, the sale of bmi Regional to
Sector Aviation excluded rights to Heathrow slots. So
any future bmi ights to and from London to other parts
of the UK will have to go through one of the other
London airports.
So what next for Lufthansa in the UK now it is rid of bmi?
Will it look for another partner or continue to expand its
own operations? Lufthansa is aggressively launching new
routes to Britain from Berlin Brandenburg Airport (for
example, to Birmingham International Airport). It also
thumbed its nose at Heathrow by starting a route from
Frankfurt to Gatwick.
Lufthansas director of corporate communications for
Europe, Aage Duenhaupt, told Routes News: Lufthansa
has a strong position in the UK and is not under pressure to
make any decisions for new partners. We have just
increased ights to the UK by adding Aberdeen and London
Gatwick to the network. Other cities like Edinburgh,
Birmingham, Manchester, Newcastle, London City,
Heathrow and Inverness are already linked to either
Frankfurt, Munich, Dsseldorf, Hamburg, Stuttgart, Cologne
Bonn and/or Berlin.
Meanwhile, Merkert muses: Regardless of whether IAG or
Virgin Atlantic had acquired bmi, the slots at Heathrow will
no longer be used for UK domestic ights. Whether that is
so bad for the other regions in the UK remains to be seen.
Given the capacity constraints at LHR [London Heathrow]
and the diminishing chances of getting a third runway,
I dont see why the slots should not be used in the most
efcient way. Anyone who wants to y domestically to
anywhere in the UK has at least four other London airports
to depart from.
afg
AIRLINES: Slot reform
74
T
he European Commission (EC) has put forward
proposals to reform the way airport slots are
allocated at Europes busy airports, as part of
the Better Airports Package, which also deals
with ground handling and noise regulations.
Introduced on April 11 by Matthew Baldwin, the ECs
director of aviation and international transport affairs,
the package of reforms have been described as a direct
response to the predicted airport capacity crunch.
Baldwin contrasted the large-scale development of
airport capacity in places such as China and the Middle
East with the situation in Europe, where it is expected
that 19 airports will be saturated by 2030.
The proposals
The commissions proposals on airport slots do not
address this fundamental lack of airport capacity, which is
a responsibility for member states, but instead aim to
make better use of the capacity that is available. The
commission has quantified the proposed changes as being
worth 5bn to the European economy, allowing airports
to handle 24 million more passengers a year by 2025
and creating 62,000 jobs. The largest proportion of this
benefit over 3bn is attributed to allowing airlines
to buy and sell slots across Europe. This has long
occurred at UK airports such as London Heathrow, but
does not occur in a transparent way in other
EU countries.
Slot trading can encourage airlines to make better use of
slots, or sell them to another airline that can operate
more profitably. The experience of slot trading at London
Heathrow is that it has led to marginally profitable
short-haul services being replaced by long-haul services
operated by larger aircraft. The number of available seat
James Cole analyses how reforms to European airport slot allocation rules may
impact route development.
Trading places:
EU slot reform
kilometres (ASKs) per slot can increase by a factor of
20 or more with trading. Slot trading has also helped
low-cost carrier, easyJet, grow at London Gatwick
increase from just five departures a day in 2001 to
over 150 in 2012.
The commissions proposals on slot trading enjoy broad
support from both airline organisations such as IATA, AEA
and ELFAA and ACI Europe, representing the airports.
There are concerns in some quarters that attaching an
economic value to slots could squeeze regional services
out of congested hubs.
The evidence for this is mixed. The number of domestic
routes served at Heathrow since 1990 dropped from 16
to six and the share of slots for domestic services halved
from 22 per cent to 11 per cent. At London Gatwick, the
experience is somewhat different as slot trading has been
associated with growth in intra-EU operations, so it is
difficult to generalise.
The need for change
Another important change to the slot regulation from a
route development perspective is a broadening of the
new entrant category. The current slot regulation seeks to
promote competition by allocating 50 per cent of the
available slots to new entrants (defined as airlines with
fewer than five slots a day at the airport or an airline
with less than five per cent of the total slots available)
that wish to add competition to an intra-EU route with
fewer than three current competitors.
It is broadly acknowledged that these rules, in place
since 1993, have not delivered the desired improvements
in competition. New entrant airlines are often too small
to compete effectively and the rules lead to available
slots being spread thinly across a large number of
different airlines, rather than allowing stronger
competitors to develop. The new rules seek to address
this by allowing larger airlines, with up to 10 per cent of
the slots at an airport, to qualify as a new entrant in
75
order to compete on intra-EU routes and to gain priority
for up to four daily frequencies on that route, rather than
the current two.
These rule changes will generally improve opportunities
for airlines and airports wishing to develop and expand
new routes, at least within the EU. However, the
proposals do not improve the situation for developing
services to other parts of the world. In giving higher
priority to the development of European routes, the
commission risks inhibiting access to scarce slots for
new services to the fast-growing economies of Asia,
South America and Africa.
Opposition and development
The proposals, which divide the interests of airlines and
airports, are those requiring airlines to make greater use
of slots in order to maintain their grandfather rights.
Airlines would be required to operate for at least
15 weeks in a summer season and 10 weeks in the winter,
compared with the current five weeks, and to operate
the slots at least 85 per cent of the time instead of
80 per cent. There is concern that the stricter rules will
harm the viability of services to leisure destinations,
where demand is highly seasonal, and force airlines to
operate more empty flights, representing both financial
and environmental costs.
Airlines are also opposed to the idea that airports
may levy a slot reservation fee for slots held but not
used. This is meant to discourage airlines from
requesting more slots than they need, only to hand
them back later. IATA sees this as an additional cost
to airlines and prefers sanctions targeted at the
minority of operators that misuse the system.
ACI Europe, representing the airports, generally favours
the proposal and points out that any slot reservation
fees would be revenue-neutral to airports, thus resulting
in cost savings for those airlines that do not abuse the
slot system.
Since the Better Airports Package was put forward
by the commission last December, the council of
ministers has focused first on the ground handling
and noise regulations. Discussion of the slot
proposals is expected to commence under the Cypriot
presidency in 2H 2012. The European Parliament is
expected to debate the full Airports Package in
the autumn.
Although the slot proposals are more of a progressive
change than a radical reform, they are likely to have
a significant impact on how slots are allocated and
used in Europe for the next 10 to 20 years. afg
Image courtesy of Beijing Capital International Airport.
AIRLINES: Latin Americas eet
L
atin America is one of the leading players in
the global agricultural market and accounts for
approximately 10 per cent of the worlds exported
agricultural produce. Furthermore, according to
the World Bank, the continent which is home to
almost 30 per cent of the worlds unused farmable land
is capable of solving global food shortage.
However, significant improvements must be made in order
to fulfil the regions potential. Not only must it tackle the
agriculture industrys poor infrastructure and low
profitability, it also has a drastically aging agricultural
aircraft fleet.
With the global population estimated to top nine
billion by 2050, the demand for food will significantly
increase in coming years. According to a UN report,
such demand will rise by approximately 50 per cent in
less than 18 years. However, the area of farmable land is
likely to deplete as the population expands. Due to
improper and inefficient cultivation, and lack of
innovations, the quality of the worlds farmable land is
worsening each year.
According to Zilvinas Sadauskas, the CEO of Locatory.com,
an aircraft and parts supply company, the problem is global
and complex. Although some of the worlds nations are
forced to deal with the food shortage problem more than
others, the issue is denitely global and thus requires
global attention. However, the lack of solidarity is still the
reality of our days; therefore most of the policies currently
in place are very self-contained. One way or another, one
has to play the cards one is dealt. Some of the countries
choose to rent farmable areas in other countries with
better and richer lands particularly countries from the
Asia or Asia-Pacic region, which are renting farmable
areas on every continent, apart for Antarctica. However,
having additional land does not solve all problems entirely.
It is obvious that any farmable land calls for proper
cultivation and, of course, protection.
Latin Americas agriculture is too dependent on its aging aircraft eet and faces an inability
to locate spares, writes Locatory.com.
Need for renewal:
Latin Americas eet
79
Latin America accounts for 42 per cent of the potential
global agriculture, according to the Inter-American
Institute for Co-operation on Agriculture (IICA). However, in
order to implement that potential to the fullest, Latin
American farming calls for improvements in its cultivation.
One of the ways to improve production (and protect the
land at the same time) is to use various crop protection
products and technologies.
Light aircraft demand
However, because of its geographical conditions and poor
road systems, many current and potential agricultural areas
in Latin America are hardly accessible to specialised vehicles
and machineries designed to facilitate the spraying of crops.
For that reason, aerial application is not only the most
effective, but in some cases the only way to increase the
productivity of agricultural lands in the region.
In Brazil alone, dozens of millions of hectares are being
sprayed with the help of specialised aircraft. Apart from the
fact that such aircraft are capable of reaching the most
remotely situated farmlands, they can cover large portions
of land in a relatively short time, without any physical
damage to the crops. Moreover, in some countries like
Colombia, aerial spraying not only helps to increase land
fertility but also helps to deal with non-agricultural issues.
For instance, in the anti-drug war, the technology is widely
used to destroy illegal plantations of cocaine, comments
Karla Grauzas, business development manager for Latin
America at Locatory.com.
Currently there are approximately 500 various aerial
application businesses in the region, which jointly operate
one of the largest agricultural aircraft eets in the world.
According to the National Agency of Civil Aviation (NACA),
the Latin American giant, Brazil, operates a eet of
approximately 1,500 to 1,600 agricultural aircraft and
represents the second largest agricultural eet in world,
giving way only to the US. Argentina also maintains a
considerable amount of the industrys aircraft (about 1,000),
while other regional countries have from several to several
hundred agricultural aircraft.
However, the quantity of aircraft alone does not ensure
effective performance. Many of Latin Americas agricultural
aircraft are simply too old to perform effectively.
80
In Argentina, for instance, a large part of the fleet of
aerial spraying planes is failing because they were
manufactured 30-40 years ago. However, it should be
mentioned that old is an improper term in aviation. If
an aircraft and its components are maintained in strict
accordance with the regulations, many of the aging
aircraft should perform almost as well as new,
explains Sadauskas.
The need for MRO and supplies
Unfortunately, local agricultural aircraft operators are
faced with severe difficulties regarding the repair,
maintenance or renewal of their fleets. At a cost of
$100,000 to $1,400,000, in most cases they are simply
unable to afford new aircraft.
As such, local operators are forced to invest in aircraft
repair and overhauls, or depend on US suppliers. But
unfortunately the US supply market is heavily penetrated
by a substantial number of resellers who do not
maintain personal stocks. Instead, they operate as
brokers thus stretching out the component procurement
process. Moreover, some Latin American destinations
have limited or even no direct air connection with the
North American suppliers. For example, Surinam Airways,
which is the only carrier in Surinam to operate
scheduled flights to the US flies to Florida (where
most of the Latin American market players purchase
spare parts) just a couple of times per week.
While commercial airlines operating much
more popular aircraft types may have to wait up
to a week until a necessary part is delivered,
receiving agricultural aircraft components takes
much longer. In Europe, where spare parts may be
delivered within just 24 to 48 hours, a single aircraft-
on-ground (AOG) situation may cost up to $50,000 in
additional expenses for a commercial airline. In the
Latin American case the expenses are naturally
significantly higher.

But while the commercial aviation sector mostly
suffers only financially, the consequences of lengthy
deliveries (and thus long aircraft downtimes) in the
agricultural aviation segment may be much more
dramatic, since two to three days delay in the land
application process may result in the loss of the entire
harvest, notes Grauzas.
It is almost impossible to find third-party parts
suppliers for the agricultural aircraft in Latin America,
though there are sure to be plenty of potential
suppliers out there. Aviation authorities should join
with governments and business representatives to
search for ways to improve the internal agricultural
aviation aftermarket.
Some of the potential suppliers are running out of
business or experiencing financial difficulties, which
may lead to them sell some of the aircraft. A portion
of those aircraft could be used for part out. In the
meantime, a number of agricultural aircraft operators,
who may raise the necessary funds for fleet renewals,
are also likely to sell some of their older aircraft
part-by-part to other market players, including
operators and MRO providers.
Table 1. The number of aerial application-related companies in Argentina, Brazil, Colombia and Uruguay
81
Locating spares
However, it is not simple to promote ones inventory in
the region. Should a supplier find a potential buyer for
the spare part, local industry players face the issue of
poorly developed and clearly protectionist spare parts
import policies within the region. For instance, Argentina,
(which has the only MRO centre in South America that
services the rather popular but old Piper PA-36-300
aircraft) stubbornly maintains very strict regulations on
the import of spare parts.
Brazil, which has its own national aircraft manufacturer,
Embraer, is among such countries as Russia and China in
having the most complicated customs regimes for
imported aircraft spares and components in the world. In
such countries, imported components are subject to
additional taxes and fees. Along with the giant cost of
logistics solutions and time-related expenses, the price
for imported aircraft parts is approximately 40 per cent
higher than in the European market.
However, considering the aforementioned figures,
Argentina and Brazil are large enough markets to
develop a self-contained aviation aftermarket
themselves. The Brazilian arable area alone has the
potential for 10,000 aircraft, meaning that current
and potential industry players are sure to have the
space for developing internal agricultural aviation
aftermarket. But in any case, whether an aircraft
owner is willing to sell an aircraft component within
his country or outside of it, listing ones surplus or
no-longer needed parts on an accessible marketplace
remains an issue, comments Grauzas.
Not such a long time ago, Latin America had one of the
most poorly developed communication networks in the
world. However, today the situation has certainly
improved. There are over 550 million mobile subscriptions
in the region. Moreover, according to comScore, a digital
marketing intelligence company, the number of Latin
Americans population that are online showed its fastest
growth rates in 2011, with the overall annual increase of
16 per cent. The development of mobile networks in the
region is being followed by rapidly spreading Internet
coverage, which step-by-step will reach even the
most remote locations in Latin America.
Under such favourable circumstances, local aviation
aftermarket players particularly in the general aviation
sector are urged to turn themselves towards new, more
innovative business solutions, including Internet-based
ones. Mere access to mobile Internet connection is more
than enough to share information about your components
with other industry players in the region, says Sadauskas.
Moreover, potential buyers should be able to search for
the required components within a certain geographical
area, thus ensuring the fastest possible deliveries and the
most effective solutions at once. Though being global,
Internet-based spare parts procurement projects provide
solid regional and even local interaction networks within
a certain group of interest, whether it is commercial,
general or agricultural aviation. They assist in
maintaining prompt communication between the
operators, MROs and other aviation market members
whether it is an ad hoc or a regular issue. To sum up, it
is safe, it is fast and it is available 24/7.
Table 2. Agricultural aircraft eets in different Latin American countries
afg
1

4
2

3

5

6

9

0
1

3

8
1
8
2
1
4
7
2
3
5
6
8
9
0
1
3
8
Bombardier Interview
Analysis of the engine leasing market
The 787 and route development
European airlines: A look at regionals and LCCs
w w w . a f m . a e r o / a f g
A I R C R A F T F I N A N C E G U I D E 2 0 1 3
S p o n s o r e d b y
AIRCRAFT
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INDUSTRY DATA
84
GDP
Trafc growth
Airline results
Aircraft orders
Aircraft deliveries
Airline results
86
Annual GDP growth
Trafc growth

88
Firm orders
90
Firm orders by manufacturer
Firm orders by aircraft type
92
Market values and lease rates

92
Market values and lease rates
(continued)
96
Engine data
98
Order backlog

Industry data
IBAs JetData
The last few years have reminded the commercial aviation industry how risk aware we all need to be. With this in mind,
IBA is launching JetData an online database tool that taps into 25 years of research and experience, providing our
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INDUSTRY DATA: Overview
xxx
Airline results
Source: OAG Fleet iNET, April 2012.
Sources: IATA Economics (Thousand million). IBAs JetData. International Monetary Fund,
World Economic Outlook Database. IATA.
Source: IATA Economics (Thousand million).
GDP, trafc growth, airline results, aircraft orders and aircraft deliveries
Note: Western built - Narrowbody, Widebody, Turboprops, Regional excludes Business Jet.
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Data supplied
by IBAs JetData.
www.ibagroup.com
Data supplied
by IBAs JetData.
www.ibagroup.com
Net orders
Deliveries
Source: IBAs JetData.
Data supplied
by IBAs JetData.
www.ibagroup.com
Data supplied
by IBAs JetData.
www.ibagroup.com
xxx
Trafc growth
Annual world GDP growth
Source: International Monetary Fund, World Economic Outlook Database.
Source: IATA.
Data supplied
by IBAs JetData.
www.ibagroup.com
Data supplied
by IBAs JetData.
www.ibagroup.com
INDUSTRY DATA: Firm orders
FIRM ORDERS - Jan to Aug, 2012
Manufacturer Variant Customer Order Date Number of Engines
Aircraft
Airbus A320 BOC Aviation 06/01/2012 2 Unknown
Airbus A350-900 Cathay Pacic 01/02/2012 6 Trent XWB 84
Airbus A318 Private Customer 16/03/2012 1 Unknown
Airbus A330-200 Air Lease Corporation 20/03/2012 1 Unknown
Airbus A330-300 Air Lease Corporation 31/01/2012 1 Unknown
Airbus A320 BOC Aviation 10/05/2012 1 Unknown
Airbus A320 Air Lease Corporation 31/05/2012 16 Unknown
Airbus A320 Air Lease Corporation 31/05/2012 20 Unknown
Airbus A320 Norwegian 08/06/2012 50 Unknown
Airbus A320 Norwegian 08/06/2012 50 PW1100G
Airbus A380 Tansaero Airlines 20/06/2012 4 Unknown
Airbus A330-200 Private Customer 06/07/2012 1 Unknown
Airbus A321 Arkia Israeli Airlines 09/07/2012 4 Unknown
Airbus A319 Drukair 10/07/2012 1 Unknown
Airbus A330-300 CIT 11/07/2012 10 Unknown
Airbus A330-200 Synergy Aerospace 12/07/2012 6 Unknown
Airbus A330-200F Synergy Aerospace 12/07/2012 3 Unknown
Airbus A321 Utair Aviation 12/07/2012 20 Trent 700
Airbus A330-200 Afriqiyah Airways 13/07/2012 3 Unknown
Airbus A319 Air Namibia 24/01/2012 2 Unknown
Airbus A319 Tibet Airlines 31/01/2012 3 Unknown
Airbus A318 Private Customer 11/04/2012 1 Unknown
Airbus A320 AviancaTaca 26/01/2012 20 Unknown
Airbus A330-200F Etihad Airways 26/01/2012 2 Unknown
Airbus A320 Spirit Airlines 27/01/2012 30 Unknown
Airbus A330-300 Garuda Indonesia 11/04/2012 11 Unknown
ATR ATR72-600 Wings Air 16/02/2012 27 PW127M
ATR ATR72-600 GECAS 03/01/2012 2 PW127M
ATR ATR72-600 TransAsia Airways 11/07/2012 8 PW127M
ATR ATR72-600 Lao Airlines 11/07/2012 2 PW127M
ATR ATR72-600 Air Lease Corporation 11/07/2012 2 PW127M
ATR ATR742-600 Nordic Aviation Capital 11/07/2012 1 PW127M
Boeing 737-800 Virgin Australia Airlines 02/01/2012 1 CFM
Boeing 737-800 Jet Airways 03/01/2012 17 CFM
Boeing 787-9 Japan Airlines 09/01/2012 10 GE
Boeing 737-800 Norwegian 24/01/2012 22 CFM
Boeing 737-MAX Norwegian 24/01/2012 100 CFM
Boeing 737-900ER Lion Air 22/02/2012 29 CFM
Boeing 737-MAX Lion Air 22/02/2012 201 CFM
Boeing 767-300ER Air Astana 23/02/2012 4 PW
Data supplied
by IBAs JetData.
www.ibagroup.com
Manufacturer Variant Customer Order Date Number of Engines
Aircraft
Boeing 737-800 China Eastern 22/03/2012 45 CFM
Boeing 787-9 Air New Zealand 23/03/2012 2 RR
Boeing 777-300ER TAAG (Angola Airlines) 30/03/2012 3 GE
Boeing 777-300ER Air Canada 30/03/2012 3 GE
Boeing 777-300ER EVA Air 08/05/2012 3 GE
Boeing 777-300ER Pakistan Intl Airlines 31/05/2012 5 GE
Boeing 777-300ER American Airlines 01/06/2012 1 GE
Boeing 787-8 Lion Air 08/06/2012 5 RR
Boeing 737-900ER Alaska Airlines 15/06/2012 3 CFM
Boeing 767-300F FedEx 29/06/2012 15 GE
Boeing 737-MAX ALC 03/07/2012 75 CFM
Boeing 737-MAX Virgin Australia Airlines 06/07/2012 23 CFM
Boeing 737-800 Unidentied Customer(s) 06/07/2012 3 CFM
Boeing 737-MAX United Air Lines 12/07/2012 100 CFM
Boeing 737-900ER United Air Lines 12/07/2012 50 CFM
Boeing 777-300ER Unidentied Customer(s) 13/07/2012 2 GE
Boeing 777-200LR Ethiopian Airlines 18/07/2012 1 GE
Boeing 777-300ER Korean Air 20/07/2012 2 GE
Boeing 737-900ER EL AL Israel Airlines 30/07/2012 2 CFM
Boeing 777-300ER Unidentied Customer(s) 31/07/2012 2 GE
Boeing 787-8 Air Astana 23/02/2012 3 RR
Boeing 787-8 Transaero Airlines 03/04/2012 4 RR
Bombardier CRJ-1000ER Garuda Indonesia 10/02/2012 6 CF34-8C5A1
Bombardier DHC8-402Q NG Ethiopian Airlines 13/02/2012 5 PW150A
Bombardier DHC8-402Q NG Horizon Air 15/02/2012 2 PW150A
Bombardier CRJ900 RwandAir 19/03/2012 2 CF34-8C5
Bombardier CRJ1000 Nordic Aviation 20/06/2012 12 CF34-8
Bombardier CS100 Unidentied Customer 08/07/2012 5 PW1500G
Bombardier CS300 Unidentied Customer 08/07/2012 10 PW1500G
Bombardier DHC8-400Q NG Chorus Aviation 12/07/2012 6 PW150
Bombardier DHC8-402Q NG Eurolot 09/03/2012 8 PW150A
Bombardier DHC8-400Q NG Westjet 28/06/2012 20 PW150
Bombardier CRJ900 China Express Airlines 07/07/2012 6 CF34-8
COMAC C919 BOC Aviation 14/02/2012 20 LEAP-1C
COMAC C919 ABC Financial leasing 29/06/2012 45 LEAP-X1C
Embraer E195 Azul Linhas Areas 14/02/2012 10 CF34-10E
Embraer E190 BA CityFlyer 28/03/2012 1 CF34-10E
Embraer E170 Japan Airlines Group 04/04/2012 1 CF34-8E5
Embraer E190 Hebei Airlines 09/07/2012 5 CF34-10E
Embraer E190 Conviasa 31/07/2012 6 CF34-10E
Sukhoi SSJ100 Blue Panorama 11/06/2012 12 SaM 146
Sukhoi SSJ100 Interjet 21/06/2012 5 SaM 146
FIRM ORDERS - Jan to Aug, 2012
Data supplied
by IBAs JetData.
www.ibagroup.com
xxx
Firm orders by aircraft type
Firm orders by manufacturer
Data supplied
by IBAs JetData.
www.ibagroup.com
Data supplied
by IBAs JetData.
www.ibagroup.com
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MARKET VALUES AND LEASE RATES - Aug 2011
Manufacturer Type Current Market Value
Oldest Newest Oldest Newest % AV
Change
Airbus A300-600R $6.33m $15.40m $5.00m $14.00m -15%
Airbus A310-200 $1.85m $2.40m $1.70m $2.40m -4%
Airbus A310-300 $3.90m $8.90m $3.60m $8.50m -6%
Airbus A318-100 $14.00m $24.50m $13.00m $25.00m -3%
Airbus A319-100 $12.50m $34.50m $12.00m $34.40m -2%
Airbus A320-200 $5.50m $40.00m $4.50m $40.50m -8%
Airbus A321-100 $12.00m $19.00m $11.50m $18.50m -3%
Airbus A321-200 $21.00m $49.00m $20.50m $48.50m -2%
Airbus A330-200 $44.00m $86.00m $42.00m $86.50m -2%
Airbus A330-200F $90.00m $96.40m $80.00m $95.00m -6%
Airbus A330-300 $27.00m $97.00m $20.00m $98.00m -12%
Airbus A340-200 $15.00m $20.00m $10.00m $19.00m -19%
Airbus A340-300 $18.00m $70.00m $10.00m $65.00m -26%
Airbus A340-500 $55.00m $97.00m $50.00m $90.00m -8%
Airbus A340-600 $58.00m $104.00m $50.00m $95.00m -11%
Airbus A380-800 $145.00m $195.00m $140.00m $205.00m 1%
Boeing B717-200 $7.75m $11.50m $7.00m $11.00m -7%
Boeing B737-300 $2.00m $6.80m $1.80m $6.00m -11%
Boeing B737-400 $4.00m $8.00m $3.00m $7.50m -16%
Boeing B737-500 $2.50m $6.00m $2.00m $5.00m -18%
Boeing B737-600 $11.00m $20.00m $10.00m $18.00m -10%
Boeing B737-700 $16.20m $35.75m $14.00m $36.00m -6%
Boeing B737-800 $20.00m $44.50m $19.00m $44.50m -3%
Boeing B737-900 $19.80m $24.00m $18.00m $24.00m -5%
Boeing B737-900ER $33.50m $47.40m $33.50m $48.00m 1%
Boeing B747-400 $18.00m $59.50m $12.00m $50.00m -25%
Boeing B747-8F - $185.00m - $185.00m -
Boeing B757-200 $6.00m $22.50m $6.00m $22.00m -1%
Boeing B767-200ER $4.00m $14.50m $3.00m $17.00m -4%
Boeing B767-300ER $11.00m $61.50m $10.00m $61.50m -5%
Boeing B767-300F $30.00m $73.52m $28.00m $70.00m -6%
Boeing B777-200 $24.00m $57.00m $22.00m $53.00m -8%
Boeing B777-200ER $47.70m $118.00m $45.00m $118.00m -3%
Boeing B777-200LR $91.00m $136.50m $87.20m $142.40m 0%
Boeing B777F $140.00m $160.00m $138.00m $163.00m 0%
Boeing B777-300 $47.75m $78.00m $45.40m $76.00m -4%
Boeing B777-300ER $96.50m $155.00m $93.00m $158.00m -1%
Boeing B787-8 $105.00m $110.00m $105.00m $111.00m 0%
Boeing McDonnell Douglas MD-11 $10.00m $17.00m $10.00m $17.00m 0%
Boeing McDonnell Douglas MD-83 $1.30m $3.25m $1.00m $3.25m -12%
Data supplied
by IBAs JetData.
www.ibagroup.com
Manufacturer Type Dry Lease Rate
Change
Airbus A300-600R $0.105m $0.200m $0.090m $0.180m -12%
Airbus A310-200 $0.070m $0.100m $0.070m $0.100m 0%
Airbus A310-300 $0.090m $0.140m $0.090m $0.140m 0%
Airbus A318-100 $0.130m $0.200m $0.120m $0.220m 1%
Airbus A319-100 $0.130m $0.320m $0.120m $0.260m -13%
Airbus A320-200 $0.065m $0.350m $0.065m $0.300m -7%
Airbus A321-100 $0.120m $0.220m $0.090m $0.200m -17%
Airbus A321-200 $0.200m $0.380m $0.170m $0.365m -9%
Airbus A330-200 $0.420m $0.850m $0.400m $0.830m -4%
Airbus A330-200F $0.750m $0.800m $0.750m $0.800m 0%
Airbus A330-300 $0.280m $0.900m $0.240m $0.880m -8%
Airbus A340-200 $0.300m $0.350m $0.150m $0.325m -29%
Airbus A340-300 $0.230m $0.600m $0.180m $0.590m -12%
Airbus A340-500 $0.490m $0.850m $0.470m $0.830m -3%
Airbus A340-600 $0.530m $0.920m $0.500m $0.900m -4%
Airbus A380-800 $1.450m $1.850m $1.450m $1.850m 0%
Boeing B717-200 $0.100m $0.150m $0.080m $0.140m -13%
Boeing B737-300 $0.040m $0.110m $0.040m $0.105m -2%
Boeing B737-400 $0.075m $0.120m $0.070m $0.115m -5%
Boeing B737-500 $0.050m $0.090m $0.050m $0.085m -3%
Boeing B737-600 $0.135m $0.200m $0.100m $0.180m -18%
Boeing B737-700 $0.160m $0.320m $0.120m $0.310m -6%
Boeing B737-800 $0.220m $0.360m $0.190m $0.350m -6%
Boeing B737-900 $0.170m $0.230m $0.140m $0.220m -11%
Boeing B737-900ER $0.320m $0.400m $0.290m $0.390m -6%
Boeing B747-400 $0.300m $0.670m $0.200m $0.550m -26%
Boeing B747-8F $1.400m $1.550m $1.400m $1.550m -
Boeing B757-200 $0.100m $0.230m $0.100m $0.230m 0%
Boeing B767-200ER $0.120m $0.280m $0.110m $0.280m -4%
Boeing B767-300ER $0.180m $0.500m $0.170m $0.460m -7%
Boeing B767-300F $0.340m $0.580m $0.300m $0.580m -6%
Boeing B777-200 $0.350m $0.450m $0.300m $0.440m -8%
Boeing B777-200ER $0.500m $0.990m $0.450m $0.950m -7%
Boeing B777-200LR $0.800m $1.200m $0.800m $1.200m 0%
Boeing B777F $1.200m $1.400m $1.200m $1.400m 0%
Boeing B777-300 $0.450m $0.700m $0.440m $0.700m -1%
Boeing B777-300ER $0.850m $1.400m $0.850m $1.400m 0%
Boeing B787-8 $0.950m $1.100m $0.950m $1.100m 0%
Source: IBAs JetData. JetData.
Data supplied
by IBAs JetData.
www.ibagroup.com
Source: IBA.
Manufacturer Type Current Market Value
Change
Bombardier (Canadair) CRJ-100/200 $1.80m $7.20m $1.80m $6.50m -5%
Bombardier (Canadair) CRJ-700/705 $11.00m $21.50m $10.50m $22.50m 0%
Bombardier (Canadair) CRJ-900 $13.90m $25.00m $13.00m $25.00m -3%
Bombardier (Canadair) CRJ-1000 $24.00m $26.00m $23.30m $27.20m 1%
Bombardier Q200 $4.00m $8.00m $4.00m $8.00m 0%
Embraer ERJ-135ER $3.40m $5.80m $3.00m $5.50m -8%
Embraer E170 LR $14.40m $25.20m $14.40m $26.25m 2%
Embraer E175 LR $17.70m $27.20m $17.50m $28.70m 2%
Embraer E190 LR $20.00m $30.20m $20.70m $32.60m 6%
Embraer E195 LR $22.90m $31.70m $24.27m $34.95m 8%
Fokker Fokker 70 $2.40m $3.00m $2.20m $3.00m -4%
Sukhoi SSJ 100-95B - - $22.12m $23.93m -
Sukhoi SSJ 100-95LR - - $22.60m $24.45m -
ATR ATR 42-500 $4.30m $14.30m $4.30m $14.30m 0%
ATR ATR 72-500 $6.75m $18.10m $6.75m $18.10m 0%
ATR ATR 42-600 - $14.95m - $14.95m -
ATR ATR 72-600 - $19.20m - $19.20m -
xxx
Current market value by type
Data supplied
by IBAs JetData.
www.ibagroup.com
Data supplied
by IBAs JetData.
www.ibagroup.com
Source: IBA.
Manufacturer Type Dry Lease Rate
Change
Bombardier (Canadair) CRJ-100/200 $0.035m $0.080m $0.035m $0.080m 0%
Bombardier (Canadair) CRJ-700/705 $0.110m $0.245m $0.105m $0.235m -4%
Bombardier (Canadair) CRJ-900 $0.140m $0.255m $0.135m $0.250m -3%
Bombardier (Canadair) CRJ-1000 $0.220m $0.255m $0.220m $0.260m 1%
Bombardier Q200 $0.050m $0.080m $0.040m $0.080m -10%
Embraer E170 LR $0.145m $0.230m $0.140m $0.240m 0%
Embraer E175 LR $0.160m $0.240m $0.160m $0.250m 2%
Embraer E190 LR $0.200m $0.270m $0.195m $0.280m 1%
Embraer E195 LR $0.210m $0.290m $0.210m $0.300m 2%
Sukhoi SSJ 100-95B - - $0.177m $0.225m -
Sukhoi SSJ 100-95LR - - $0.182m $0.230m -
ATR ATR 42-500 $0.065m $0.135m $0.065m $0.135m 0%
ATR ATR 72-500 $0.085m $0.180m $0.085m $0.180m 0%
ATR ATR 42-600 - $0.145m - $0.145m -
ATR ATR 72-600 - $0.190m - $0.190m -
Current market value by dry lease rate
Data supplied
by IBAs JetData.
www.ibagroup.com
Data supplied
by IBAs JetData.
www.ibagroup.com
INDUSTRY DATA: Engine data
Engine data August 2011 versus August 2012
Type Engine August 2011 August 2012 % Change August 2011 August 2012 % Change
Half-Life CMV Half-Life CMV Lease Rates Lease Rates
B737-300 CFM56-3B1 $1.00m $0.80m -20% $0.025m $0.023m -8%
B737-400 CFM56-3B2 $1.40m $1.20m -14% $0.028m $0.026m -7%
B737-500 CFM56-3C1 $1.80m $1.80m 0% $0.035m $0.037m 6%
A321-200 CFM56-5B3/P $6.40m $6.40m 0% $0.078m $0.075m -4%
A319-100 CFM56-5B5/P $4.30m $4.40m 2% $0.054m $0.052m -4%
A340-300 CFM56-5C4/P $4.80m $4.20m -13% $0.055m $0.048m -13%
B737-600 CFM56-7B22 $4.80m $4.90m 2% $0.058m $0.052m -10%
B737-700 CFM56-7B24 $5.60m $5.70m 2% $0.068m $0.060m -12%
B737-800 CFM56-7B26 $6.30m $6.50m 3% $0.075m $0.075m 0%
B737-900ER CFM56-7B27 $6.60m $6.75m 2% $0.079m $0.075m -5%
CRJ-200 CF34-3B1 $1.30m $1.30m 0% $0.020m $0.020m 0%
CRJ-700 CF34-8C5 $2.90m $3.12m 8% $0.045m $0.045m 0%
E170/175 CF34-8E5 $2.90m $3.20m 10% $0.045m $0.045m 0%
E190/195 CF34-10E6 $4.60m $4.80m 4% $0.065m $0.065m 0%
A300-600R CF6-80C2A5 $3.40m $3.20m -6% $0.050m $0.042m -16%
B767-300ER CF6-80C2B6F $5.10m $5.20m 2% $0.065m $0.055m -15%
MD-11 CF6-80C2D1F $3.80m $3.80m 0% $0.055m $0.045m -18%
A330-200 CF6-80E1A3 $9.80m $9.85m 1% $0.115m $0.120m 4%
B777-300ER GE90-115B $19.70m $21.80m 11% $0.210m $0.240m 14%
A320-200 V2527-A5 $5.60m $5.50m -2% $0.065m $0.063m -3%
MD-82 JT8D-217C $0.60m $0.60m 0% $0.020m $0.020m 0%
B747-400 PW4056 $4.10m $4.10m 0% $0.060m $0.055m -8%
A310-300 PW4152 $3.40m $3.40m 0% $0.055m $0.048m -13%
B757-200 RB211-535E4 $3.80m $3.80m 0% $0.050m $0.050m 0%
Fokker 100 RB183 Tay 650-15 $1.40m $1.40m 0% $0.024m $0.025m 4%
A340-600 Trent 556-61 $8.90m $8.60m -3% $0.110m $0.110m 0%
A330-300 Trent 772B-60 $8.40m $8.90m 6% $0.120m $0.120m 0%
B777-200ER Trent 895 $14.44m $14.20m -2% $0.170m $0.170m 0%
A380-800 Trent 970 $13.60m $13.90m 2% $0.170m $0.170m 0%
ERJ-145 ER AE3007-A1 $1.50m $1.40m -7% $0.025m $0.025m 0%
B717-200 BR715A $2.50m $2.50m 0% $0.042m $0.042m 0%
Data supplied
by IBAs JetData.
www.ibagroup.com
INDUSTRY DATA: Engine data
Engine versus half life percentage change
Engine versus lease rate percentage change
Data supplied
by IBAs JetData.
www.ibagroup.com
Data supplied
by IBAs JetData.
www.ibagroup.com
INDUSTRY DATA: Order backlog
Source: IBA.
xxx
Order backlog
Order backlog
Model Backlog Model Backlog
737-700 297
737-800 1449
737-900ER 371
737-MAX 649
747-8 30
747-8F 51
767-300ER 17
767-300F 54
777-200ER 10
777-200LR 4
777-300ER 269
777F 66
787-8 505
787-9 339
SSJ 100 236
A318 3
A319-100 139
A319neo 35
A320-200 1374
A320neo 1378
A321-200 305
A321neo 170
A330-200 93
A330-200F 42
A330-300 177
A350 XWB 2
A350-1000XWB 88
A350-800XWB 118
A350-900XWB 350
A380-800 242
CRJ-900 20
CRJ-1000 44
DHC8-400 74
CS100 40
CS300 55
CRJ-700 6
E190 89
E195 30
E170 2
E175 39
ATR72-600 178
ATR42-500 0
ATR42-600 15
ATR72-200 2
ATR72-500 19
Data supplied
by IBAs JetData.
www.ibagroup.com
Data supplied
by IBAs JetData.
www.ibagroup.com
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