February/March 2017

YOUR ESSENTIAL INTELLIGENCE RESOURCE FOR AVIATION FINANCE

North Africa’s
shifting sands
Will the local carriers
overcome the challenges
in the region?

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 Editor’s letter

Quick-learning Korean
investors and factors African
carriers need to be wary of
Jack Dutton outlines plans for the Inaugural Korea Airfinance Conference in
March, and compares and contrasts two state-owned African carriers.

T he next two months are busy ones for the

Airfinance Journal team, with our second
Africa Airfinance Conference in Johannesburg in
government owned, but have different business
models.
In its latest financial performance report,
February, as well as our Inaugural Korea Airfinance Ethiopian Airlines reported an increase of 12%
Conference in Seoul in March. in operating profit, making Br3.53 billion ($156
The Korean event will focus on domestic banks, million) in 2015 compared with Br3.15 billion in 2014.
institutional investors, security firms and asset The airline registered a 6% growth in revenue
managers to explore new structures and trends in passenger traffic from a 7% capacity increase
dealmaking. Being relatively new to the aviation in available seat kilometres. The carrier’s cargo
finance market, Korean investors have traditionally business increased its capacity by 25%, which
focused on the top-tier credits, but sources say resulted in a 34% growth in traffic.
that, as these investors become more educated South African Airways, on the other hand,
with the assets, they are likely to start financing refused to post its financial results for the year
lower-tier credits. Michael Allen, our Asia-based ending 31 March 2015 until September 2016. The
senior reporter, speaks to financiers who work in airline declared a R4.69 billion ($330 million) loss
the region on page 16. for that year and has not posted a profit since the
The Africa conference will focus on the airlines 2011 financial year, when it made $54.5 million after
and lessors which work in the region rather than tax, according to The Airline Analyst. The carrier is
the domestic investors. At a glance, the outlook surviving on state-guaranteed loans and last year it
for the continent looks fairly positive: Africa’s suspended several senior staff, including its former
gross domestic product (GDP) has been growing acting chief executive officer, Thuli Mpshe, and
consistently for the past 20 years, outperforming airline treasurer, Cynthia Stimpel.
the global economy, according to the African With Ethiopian Airlines, the local government is at
Development Bank Statistics Department. The arm’s length from the airline’s management, leaving
department anticipates this continuing, projecting a the executive management to make the majority of
GDP growth of 4.5% in 2017. the key decisions in running the airline. However,
Yet despite these promising signs, the carriers with South African Airways, its management is ever
in Africa have had varying success. Factors such changing and often the major decisions are made
as the state of the local economy, the geopolitical by close allies of Jacob Zuma, the South African
climate, the role of the government in an airline’s president. In this case, government intervention has
strategy and competition from foreign carriers all hindered the progress of a carrier.
have potential to turn a carrier that was once a According to Airfinance Journal’s Fleet Tracker,
success story into a financial basket case. 671 regional aircraft operate in Africa, making up
On page 32 in our cover story, we focus on 7% of the global regional fleet. Africa is a continent
North Africa, speaking to Royal Air Maroc (RAM) that relies heavily on regional connectivity and
about operating in a region where there is a this number has the potential to increase hugely.
lot of competition from the likes of easyJet and But because of poor infrastructure and regulatory
Ryanair. Because of recent terrorist attacks in constraints, often, to fly from one African country to
other countries in the region, there has been a another, passengers need to fly out of Africa and
slight decrease in tourist traffic into Morocco from connect to a flight in Europe or the Middle East –
Europe. However, because of this, RAM says it which is hardly practical. There is a lot of potential
has experienced less competition from low-cost for African carriers to expand intra-regional
carriers in the region over the past year. networks through acquiring regional aircraft.
Many of the main airlines in Africa are And investors in regional aircraft should look no
government owned. This can be polarising: some further. This edition includes Airfinance Journal’s
see government ownership as a hindrance, while first regional aircraft supplement, which provides
others see it as something that adds stability to an data from Fleet Tracker on the global regional JACK DUTTON
airline. Take two very different cases in Ethiopian aircraft fleet, as well as info on lease rates on the Editor,
Airlines and South African Airlines. Both are 50-seat regional aircraft market. Airfinance Journal

www.airfinancejournal.com 3
 Contents

Cover Story Analysis and Interviews

North Africa: Headwinds
hold back carriers
12 Airline interview:
Transformation of Air Baltic
Jack Dutton speaks to Martin Gauss, the
26 Denis Kalscheur interview:
A career at the top
Denis Kalscheur, Aviation Capital Group’s
Latvian airline’s chief executive officer, about former chief executive officer, left the company
North African airlines have faced a the carrier’s plans to streamline its fleet and at the end of 2016. Joe Kavanagh caught
the future of the CSeries programme. up with him at the 19th Annual Airfinance
number of challenges in recent times, Conference in Dublin to hear about some
including a dearth of export credit
14
career highlights, his final months at ACG and
financing, geopolitical instability and View From Dublin his new role at Avolon.
several terrorist attacks. Jack Dutton
investigates. Joe Kavanagh provides a roundup of the
biggest stories from the 19th Global Airfinance
Conference in Dublin.
28 Cautious confidence in the
post-Kingfisher era
Michael Allen explores how recent legal and
infrastructural developments in the Indian

22 16 New names and narrowbodies

for Korean investors
In the run-up to the Inaugural Korea Airfinance
leasing market are helping repair the country’s
damaged reputation after the disastrous
collapse of Kingfisher Airlines in 2012.
Conference in Seoul on 23-24 March, Michael
Allen examines how Korean investors are
getting savvier with their investments in
aircraft, gaining the courage to branch out into
31 Changing composition of
financing sources in aviation
David Yu, Istat certified aviation appraiser,
narrowbodies, as well as lesser credit airlines. examines trends in the aviation finance sector
driven by the role of insurance companies
and commercial banks.

19 Lessor interview: Chorus takes

on the regional market
Chorus’ new leasing subsidiary was
established in January with funding from a
34 Aircraft profile: 777-300ER

The current widebody market is a difficult one

Canadian insurance company. It plans to
carve out a space in the regional leasing and not even Boeing’s most successful twin-
market. Joe Kavanagh speaks with its aisle is immune to declining values, according
to appraisers.
president, Steven Ridolfi, about his plans for
the year ahead.

36 Aircraft comparison:
Fighting old battles

News
21 Deal focus: Alaska’s strong
profile improves merger
prospects
The success of the A320neo and 737 Max
families will determine the positions of Airbus
and Boeing in the narrowbody market, but the
Joe Kavanagh examines the North American relative merits of the manufacturers’ previous-
carrier’s financial position after closing its $2.6 generation single-aisle models will be of

4 People News million takeover of Virgin America in December. interest to owners and operators for years to
come. Geoff Hearn looks at how the A320-

24 Why lessors will continue 200 and 737-800 match up.

to consolidate
The aviation leasing sector will continue to face 39 Data

6 News Analysis further consolidation following the purchase of

CIT Aerospace by Avolon and its Bohai Leasing
parent group, say lessor sources. 42 Pilarski

Editor Managing director Managing director, The Ariline Analyst Printed in the UK by Buxton Press, Buxton,
Jack Dutton Olivier Bonnassies Mike Duff Derbyshire.
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Geoff Hearn T: +44 (0) 207 779 8015 +44 (0)20 7779 8610 accuracy of this publication, neither it
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Directors: John Botts (Chairman), Andrew arise from errors or omissions or any
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[email protected] [email protected] Ballingal, Tristan Hillgarth Investor 2013

4 Airfinance Journal February/March 2017

 People News

BOC Aviation’s Fabian to lead Elix Aviation

I rish-based turboprop lessor Elix Aviation
Capital has appointed Volker Fabian as its
new chief executive officer, starting 1 March
company’s next growth phase through their
new mandates at the company’s board
of directors. The current deputy chief
2017. Fabian, who has more than has 20 executive officer and chief Investment
years’ experience in aviation finance and officer Carousos has been promoted to
leasing, replaces Antonis Simigdalas, who the board of directors where he will serve
stepped up to the role of chairman. as executive director with responsibility for
Fabian joins from BOC Aviation where strategy, risk, and finance.
he had been executive vice president of “Volker is a strong leader, and brings a
airline leasing and sales for the Europe and wealth of experience from the leasing and
Africa region since May 2015. aircraft-finance markets. I look forward to
Previously, he served as chief working closely with him as Elix continues
commercial officer of Intrepid Aviation for its journey towards further successes. I am
three years. also delighted that Emmanuel Carousos will
Elix Aviation Capital also announced that join us on the board of directors where his
ex-co founders Antonis Simigdalas and insight and expertise will be of benefit to all
Emmanuel Carousos will be supporting the Volker Fabian, CEO, Elix Aviation Capital of us,” says Simigdalas.

Ex-ACG CEO joins employed in senior commercial positions

at BMW Rolls-Royce, Lufthansa Technik
been finalised, though Airfinance Journal
understands that Gao is likely to base
as well as being managing director at himself in either China or Hong Kong.
Avolon board Nordcapital Aviation. The company’s Dublin office, which was
His experience covers the full spectrum established in December 2016, will do most

A volon has appointed ex-Aviation

Capital Group’s chief executive officer
(CEO) and chairman Denis Kalscheur as
of technical, commercial and capital
markets and he has dealt extensively with
the senior management of airlines, lessors,
of the leasing, but CMIG also intends to
establish a Hong Kong platform.
CMIG Aviation Capital is affiliated with
a non-executive director of its board. banks, aircraft investors and closed-end China Minsheng Investment Group (CMIG),
Kalscheur joined the US-based lessor funds globally. a Beijing-based company which owns
in January 2013. In December 2015, Huijbers will be based in the CALS Shanghai-based CMIG Leasing in Shanghai.
he stepped down from the CEO role headquarters in Shanghai.
and assumed the role of vice chairman.
Avolon has also appointed two other
non-executive directors to its board. The
ALAFCO hires
first appointment is Joe Nellis, managing CMIG Aviation Capital Aengus Whelan
director of the business development makes senior hires
team at GE Capital, which oversaw the
signing and closing of nearly $200 billion O
perating lessor ALAFCO has hired
Aengus Whelan as the head of trading,
of transactions in a 24 month period as part
of GE’s transition to a more focused, digital
C MIG Aviation Capital, the Dublin
office of Chinese leasing company of
CMIG Leasing, has expanded its platform,
beginning in January.
Whelan previously served ten years as
industrial company. the executive director of aviation finance at
sources indicate.
The second appointment is Ciarán Standard Chartered Bank in Dublin.
Sixiang Gao (Peter Gao), former Bocomm
ÓhÓgartaigh, professor of accounting and The Kuwait-based lessor told Airfinance
Leasing deputy GM aviation, has been
Dean of University College Dublin College Journal in September that it was looking to
named as president and chief executive
of Business. He has been published in hire more staff in Dublin, after it appointed
officer.
international peer-reviewed journals on Jane O’Callaghan as chief commercial
Luo Le, former director/senior vice-
audit and accounting matters and he also officer to head the office in August.
president marketing of Bocomm’s Irish
serves on a number of audit committees The lessor is also in the market taking
company JY Aviation Leasing, has joined bids on a mixed portfolio of narrowbody
including the Audit Committee of Ireland’s
as managing director marketing. JY aircraft with leases attached, sources
department of finance.
Aviation has not yet hired a replacement indicate.
for Luo Le, but plans to do so as well as ALAFCO, which recently boosted it
make additional hires to expand the team, credit line by $50 million with a local
Huijbers joins CALS as CEO sources say. lender, is excepting proposals on an 11-unit
Huang Zheng, former managing director portfolio, including five Boeing 737-800s

C hina International Aviation Leasing

Service (CALS) has appointed Peter
Huijbers as its new chief executive officer.
and head of aviation at Ping An Leasing,
has been hired as executive vice president
and chief operating officer. Joe Tian Ye,
on lease to Turkish Airlines through 2018,
and two Boeing 737-900ERs with Ukraine
International Airlines.
Further representatives from CALS Ping An Leasing’s deputy head of aviation, The 737-900ERs, which have leases
executive team are chairman Jiedong has been promoted to head of aviation. running through 2021, carry the longest
Min, executive officer Mr. Li and general Yiping Ke, senior trading manager, lease terms in the portfolio, say sources.
manager and chief economist Dr. Wang. aviation at Bocomm Leasing, has also The portfolio also includes two Airbus
Huijbers was most recently the head of joined the team. Sources could not confirm A320s with VietJet, another A320 with
marketing at Hong Kong Aviation Capital. his role at the time of publication. Royal Jordanian and a single A320 with
He has over 30 years aviation industry Luo Le will be based in Dublin. The IndiGo. The lessor was not available for
experience, and prior to HKAC was positions of the other three have not yet comment at time of publication.

www.airfinancejournal.com 5
 People News

Bombardier: Buchholz moves to Clyde & Co

SVP strategic initiative role hires aviation
B ombardier has announced that its chief
procurement officer Nico Buchholz
September 2015 and served as the
company’s chief procurement officer,
has been instrumental in establishing a
partner
will move to the position of senior vice
president, strategic initiatives with
immediate effect.
Jim Vounassis will assume the chief
more centralised, focused and efficient
procurement organisation,” said Alain
Bellemare, president and chief executive
L aw firm Clyde & Co has hired Robert
Lawson as a partner in its aviation group.
Lawson joins Clyde & Co from Quadrant
procurement officer responsibilities officer, Bombardier. Chambers where he has a general
in addition to continuing to lead the Before joining the Canadian commercial and common law practice, with
company’s operations transformation as manufacturer, Buchholz worked at particular emphasis on aviation law.
Bombardier’s chief transformation officer Lufthansa for 14 years, most recently The firm called the hiring “a rare
and procurement officer. as executive vice president of fleet lateral move from the senior ranks of the
“Nico, who joined Bombardier in management. independent bar”.

Jazeera Airways K&L Gates hires two partners

names new CEO K&Lpartners
Gates has hired two aviation finance
to work in the firm’s London
businesses across the globe, primarily on
secured debt and leasing matters.
office, Airfinance Journal understands. Tony Griffiths, administrative partner of

K uwaiti airline Jazeera Airways has

named Rohit Ramachandran as its new
chief executive officer (CEO).
The new partners, Philip Perrotta and
Sidanth Rajagopal, will be joining the
firm from Arnold & Porter Kaye Scholer.
K&L Gates’ London office, says: “With air
traffic forecast to grow at 4.5% annually
over the next 20 years, we expect there
Jazeera Airways Group chairman Rajagopal was a partner at the firm to be significant demand for passenger
Marwan Boodai stepped up to serve as and Perrotta headed the firm’s aviation — and, indeed, other types of — aircraft
the CEO in 2013 when the previous chief finance and leasing practice and served in a wide variety of aviation markets
Stefan Pichler resigned in order to head up as managing partner of legacy firm Kaye around the globe and, consequently, the
Fiji Airways. Scholer’s London office. legal advice and business know-how
Ramachandran brings 20 years of They are accompanied in their move surrounding the acquisition and leasing
aviation experience to the role, having by a team of associates. Perrotta and of these assets and related matters
worked at airlines including KLM, Singapore Rajagopal, as a team, have concluded resulting from that trend. With the arrival
Airlines and more recently Air Arabia and hundreds of transactions and projects of this group, we are delighted to add
its joint ventures and subsidiaries. involving commercial and business aircraft, the experience and capabilities of one
According to Airfinance Journal’s Fleet aero engines, and other aviation assets of the leading aviation finance teams,
Tracker, the airline operates a fleet of around the world. They act for aircraft representing the ideal fit for our existing
seven Airbus A320s, manufactured in 2015 lenders, lessors, operators, and aviation global practice.”
and 2016.
In the third quarter of 2016, the latest
quarter for which the airline’s financial
results are available, the airline generated
$62.3 million in total revenue, resulting
in $20 million of net income, according
to data collected by The Airline Analyst.
Earnings before interest, tax, depreciation,
amortization and rent (EBITDAR) totalled
$37.8 million, with an EBITDAR margin
(EBITDAR/total revenue) of 49.3%. Philip Perrotta, partner, K&L Gates Sidanth Rajagopal, partner, K&L Gates

Calc reappoints director and chairman of CALC. In a

stock exchange filing, CALC said this
listing on the Stock Exchange of Hong
Kong in 2014, which made the Group the
first listed aircraft lessor in Asia.”
arrangement will alleviate Chen’s
Poon as CEO workload and raise the level of CALC’s
corporate governance.
Poon is also the founder of Friedmann
Pacific Asset Management (FPAM), which
Poon founded CALC in March 2006 is a major shareholder in CALC.

M ike Poon Ho Man, the founder and

former chief executive officer (CEO)
and executive director of Hong Kong
and was the former CEO and executive
director until his resignation took effect
from 18 June 2015.
In addition, he founded China Airport
Synergy Investment in 2014, which
acquired Toulouse-Blagnac Airport in the
lessor China Aircraft Leasing Group “He played an instrumental role in first deal involving a Chinese consortium
Holdings (CALC), has been reappointed as developing the Group into the largest purchasing an overseas airport.
chief of the lessor. independent aircraft lessor in China and He also initiated Aircraft Recycling
The company’s former chairman, Chen one of the leading global players in the International (ARI) in 2014 and its aircraft
Shuang, stepped down as CEO on 19 aviation industry,” CALC says. disassembly project in China in 2015.
January, but will remain as executive “He was the key driver of the company’s

6 Airfinance Journal February/March 2017

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 News analysis

Floreat targets $132m

securitisation at aviation
F loreat Group is embarking on a
securitisation programme focused
on the aviation sector to provide long
December. The aircraft is on lease to Virgin
Australia through April 2025.
A second A330-200, MSN 1310, was
We have previously
funded individual
term fixed income investments to their acquired from Avolon. The aircraft is on
institutional and high net worth clients. lease to Hawaiian Airlines through May transactions in the aviation
The company tapped the commercial 2024.
paper market late in December to raise a One A330-300, MSN 1518, was acquired
space to satisfy the
total of $132 million. from Intrepid in late December. The aircraft demand from our core
The eight-year notes were issued by is on lease to Asiana Airlines through April
a Luxembourg securitisation vehicle on 2026. clients for long term income
21 December and were listed on the The three aircraft acquisition closed on
Euro MTF market of the Luxembourg 30 December.
producing transactions
Stock Exchange. Part of the notes will be Floreat plans to aquire a fourth aircraft secured by real assets.
structured as being Sharia compliant for as Airfinance Journal went to press. The
Floreat’s Middle Eastern investors. financing of the A330-200, MSN 904, is Ben Churchill, partner, Floreat Capital
The notes, which were issued by Floreat subject to further notes issuance, according Markets.
Fixed Income, carried a 7% coupon and to the company’s offering circular.
mature on 23 December 2024. Floreat Aviation is due to decide whether
The notes, which are in denomination to issue further notes in the amount of respect of its Floreat Aviation Notes Series
of $1,000 each, were sold to non-retail $26.2 million to invest in the net issue B and by the payment of an amount of $9.7
investors. proceeds in the indirect acquisition of the million in cash to the issuer.
The series A notes totalled $51 million, 2008-vintage aircraft acquired from TAP “We have previously funded individual
while the series B were issued in the Portugal. The aircraft is on lease to TAP transactions in the aviation space to satisfy
amount of $81 million. through 1 May 2024. the demand from our core clients for
Floreat Fixed Income acted as Doric Asset Finance is acting as asset long term income producing transactions
bookrunner. Floreat Capital Markets manager for Guernsey-based Floreat secured by real assets. The issuance of
originated and structured the transaction. Aviation. listed notes was a natural next step for our
Deutsche Bank acted as paying agent. Floreat Aviation also used the proceeds asset based lending programme, which, to
Allen & Overy acted as legal adviser. from the issue of the preference shares date, has only been open to the group’s
The multiple waterfall per tranche deal to inject equity into its subsidiaries (other core clients,” said Ben Churchill a partner at
use the proceeds to finance two Airbus than MSN 1407) and to repay a $44 million Floreat Capital Markets.
A330-200s and one A330-300 recently equity bridge. Floreat is looking to follow this initial
acquired by the company. The company repaid the equity bridge issuance with a second issuance this year.
One A330-200 unit, MSN 1407, loan by the delivery of preference shares The company plans to issue $1 billion in
was purchased from Aircastle in early in an amount of $34.3 million, acting in notes.

2016: not a year for lessor orders engine option models sales and less than
1% of new engine option orders.
Airbus delivered a total of 688 aircraft

A ircraft leasing companies placed

orders for a total of 97 Airbus and
Boeing aircraft last year, representing
Calc ordered two A320s while Air
Lease placed orders for two A320s, one
A321 and two A320neos during the year.
to customers last year and lessors
represented 20% of direct deliveries by
value. Asia accounted for 31% of deliveries
a mere 5% of the manufacturers’ gross Aviation Capital Group was the most ahead of Europe with 19%, Americas with
figures. active lessor. It placed follow-on orders 16% and Middle East/Africa with 14%.
In 2016, Airbus recorded 949 orders for 35 A320-family aircraft including 30 Lessors represented about 2% of the
and 218 cancellations finishing the year A320neos, two A320s and three A321s, as Boeing’s total orders. The lessors placed
with 731 net orders. Boeing had 848 well as options for a further 10 A320neo orders for 18 units including Air Lease for
orders and 180 cancellations during the aircraft. six 737 Max and Standard Chartered Bank
year, meaning 668 net orders. Awas ordered 12 A320s and three for 10 737s. Silk Road Leasing placed an
Lessors ordered 79 Airbus aircraft last A321s, while AerCap ordered 10 A320neo order for one 737. Air Lease also ordered
year, equivalent to 10.8% of manufacturer’s and BOC Aviation placed follow-on orders one 787 unit during the year.
731 net orders. for five A320s and five A321s. In 2015, Boeing booked narrowbody
A total of 33 orders were for the current New lessor Hong Kong International orders from AerCap (101), Air Lease (8),
engine option models while another 40 Aviation Leasing extended an order for BOC Aviation (28), Gecas (2) and SMBC
orders were for the new engine option five A330-300s in December while Air Aviation Capital (10).
models, according to Airbus’ order figures. Lease ordered one A350-900 unit. Boeing delivered a total of 748 aircraft
The remaining six orders were for the In the narrowbody market, lessors during 2016 and lessors represented 16%
A330 and the A350 models. represented 17.5% of Airbus current of direct deliveries, with 121 units.

8 Airfinance Journal February/March 2017

 News analysis

Another real estate firm

moves into aircraft leasing
Century City Holdings, part of a group of Hong Kong real estate companies, owns a fleet
of 15 aircraft managed by a low-key London-based aircraft manager. Kenneth Szeto,
executive officer, tells Michael Allen why the business chose to move into aviation.

T he downturn in the Chinese and global

real estate markets has driven two
Hong Kong companies owned by tycoons
aircraft-leasing business. Szeto reports to
the company’s chairman, Lo Yuk Sui.
Century City Holdings is part of a group
leasing business. As we gradually gained
more experience, we wanted to further
expand our portfolio... and seek suitable
Li Ka-shing and Cheng Yu-tung to diversify of four other listed companies – Regal opportunities for further expansion,” says
into the aircraft leasing business. Hotels International Holdings, Regal Real Szeto.
Cheung Kong Holdings recently Estate Investment Trust, Paliburg Holdings “We think narrowbody aircraft markets
restructured its aviation businesses, and Cosmopolitan International Holdings – are more lucrative with a wider customer
bringing lessor Accipiter and MC Aviation whose primary focus is real estate. base than widebody aircraft. As demand
Partners joint venture Vermillion under the “From time to time we look at different for air travel will continue to grow,
ownership of Cheung Kong Property in a business opportunities as part of our especially in the developing regions,
bid to streamline the aviation business and group’s diversification plan and there short-haul and regional routes should
give it more access to cash. are people approaching us to present benefit the most in the next five to 10
Goshawk Aviation, Chow Tai Fook’s different kinds of business opportunities years. Therefore, we will probably focus
Dublin-based lessor, told Airfinance other than hotels or real estate,” Szeto on these narrowbody aircraft that fly
Journal in an interview that it had 71 tells Airfinance Journal in an interview at regional routes in our short- to medium-
aircraft in its portfolio and has committed Century City’s offices in Causeway Bay. term expansion strategy.”
to acquire 20 more over the next 12 He adds: “When we came across to As of 26 January, the portfolio under the
months. review the aircraft leasing industry, we group consists of 15 aircraft: two A320s,
However, another Hong Kong tycoon – thought there was a good potential for one 737-800, one 737-300F, six ERJ-135s
this time through Century City Holdings – growth in the sector which led us to invest and five ERJ-145s.
has been quietly accumulating a portfolio in our first aircraft in 2012.
of aircraft. So far, it has stayed out of the “We believed this business would Real estate downturn
limelight that has illuminated Cheung Kong generate recurring income for us and Similar to Chow Tai Fook and Cheung
and Chow Tai Fook. Several experienced could complement our investment income Kong, Century City’s foray into aircraft
industry sources based in Hong Kong base in the long term.” leasing has been partly influenced by
were unaware that Century City is involved softness in the real estate market.
in aircraft leasing when Airfinance Journal History of Century City “While real estate projects generally
contacted them about the company. Szeto declined to provide specific up-to- have a longer investment cycle with a
But since 2012, Century City, which is date information on MSNs and lessees, but larger potential upside, aircraft leasing, on
chaired by a member of the influential Lo publicly available information is available. the other hand, could still generate good
family (see Meet the Los box), has been In July 2012, Century City bought returns over a shorter period of time if
accumulating a portfolio of regional jets 84.9% of JAR Aviation Fund for HK$110 well-managed,” says Szeto.
and narrowbody aircraft, from its office in million ($14.1 million). The fund owned a “Moreover, as the investment amounts
Hong Kong. 1998-vintage 737-800 (MSN 27979) on a for aircraft leasing could be much smaller
A little-known London-based company, 62-month lease to South Korean carrier as compared to real estate investments,
Plane Business Leasing (see What is T’way Air. there are actually more opportunities out
Plane Business Leasing? box), is Century At the end of 2012 and in 2013, Century there to choose from and it is easier to
City’s aircraft manager, helping it manage City acquired two Airbus A321s (MSNs 1017 find something that suits our investment
a portfolio of aircraft on a daily basis and and 781). The aircraft were leased out to appetite. With a shorter investment cycle
source and place aircraft from and to the Thai carrier R Airlines and Ukrainian airline in aircraft leasing and a reasonably liquid
market. Windrose Aviation, respectively. market, we can also be more flexible in
Now, with 15 aircraft under its belt after By 2015, the company further our investment strategy to adapt market
a major regional jet portfolio purchase expanded its aircraft leasing business, changes.”
in 2015, Century City is eyeing further acquiring a fleet of 12 Embraer aircraft for With increasing competition and overall
expansion cautiously, and says it has a $34.5 million. Four of the aircraft were costs going up, the returns in real estate
long-term outlook for its aircraft leasing subsequently sold. The following year, it investments are reduced, adds Szeto.
ambitions and is “continuously looking for purchased a 737-300SF, which it leased to Overall, though, he remains positive about
growth opportunities”. Indonesian cargo carrier Tri-MG Airlines on the Hong Kong and mainland China real
Kenneth Szeto, executive officer, a 62-month finance lease from April 2016. estate markets in the long term.
chairman’s office, is one of several Century “Our group was being quite cautious in “It’s just harder to find a good
City personnel overseeing the company’s the first few years entering into the aircraft opportunity to invest these days,” he says.

www.airfinancejournal.com 9
 News analysis

Fleet
of Shanghai’s upmarket Xintiandi
Although the company’s fleet is now Meet the Los entertainment district.
composed of mostly Embraers, Szeto says
Century City is not committing itself to Lo Ying-Shek was a Hong Kong property Kai Shui serves as deputy managing
Embraer aircraft only. tycoon who cofounded real estate firm director, executive director and member
“We have looked at a lot of Airbus Great Eagle Company in 1963 with his of the finance committee of Great Eagle.
and Boeing aircraft too, but I think wife, Lo To Lee Kwan, according to Forbes. He is also the founder of Sun Fook Kong
probably because they are more popular Besides Yuk Sui, who majority owns Group, which engages in the real estate,
among lessors... there is lower return for Century City, Ying-Shek has two other construction and oil and gas industries.
investment,” he says. sons, Vincent and Kai Shui. Yuk Sui’s two children, Jimmy Lo Chun
However, he adds this is not absolute Vincent is chairman of Hong Kong- To and Lo Po Man, are involved in the
and is why Century City needs to evaluate based Shui On Group, whose most family business, holding executive-level
deals on a case-by-case basis. Szeto says famous project is the development positions in the group’s companies.
his company’s aircraft leasing business has
involved investing in midlife aircraft, but it
is prepared to add some newer aircraft to
its portfolio when the suitable opportunity What is Plane Business Leasing?
arises.
Plane Business Leasing (PBL) started has since been renamed Plurimi Aircraft
Century City’s aircraft are now leased
life in 1995/96 as a leasing company Leasing Fund, and is affiliated to London-
to T’Way Air, Windrose Aviation, R Airlines,
attached to Dublin-based airline Aviajet, based Plurimi Capital. Airfinance Journal
Aeromexico Connect and South African
which was later bought out by London understands that the fund is expected to
Airlink, according to the most up-to-date
Southend-based Flightline, which ceased close shortly after two aircraft are sold.
publicly available data.
operations in 2008. Plurimi will resume investment in aircraft
“In any case, we try to be very cautious
PBL’s first deal was a 737-300 leased but not through a fund structure.
when selecting our lessees. Although the
into Indonesia. The company, which likes It was Plurimi that initially connected
risks associated with our lessees might be
to maintain a low-key public profile, has PBL with the Lo family. The two
slightly higher, at the same time we were
never had a portfolio of more than 30 companies came out to Hong Kong
also expecting a higher return from these
aircraft and has recently gone through a together to visit Century City.
investments and they generally lived up to
“very big” period of selling. “Century City loved investment in
our expectations so far,” he says.
PBL does not hold any equity or aircraft but they didn’t love the fund
Szeto adds: “We heard some lessors
interest in Century City’s aircraft, but does structure, so they said: ‘How about we
were willing to accept a 3% to 4% return with
in other aircraft in its portfolio. buy some aircraft and PBL manage
brand new aircraft but if this were the case,
Plane Business Leasing previously them for us?’” a source close to those
we would have other investment options to
invested in JAR Aviation Fund, which discussions tells Airfinance Journal.
choose from.”

Export credit to play limited role in 2017

E xport credit funding for the aviation
sector, which is still unavailable for We have all heard of
Bank, but hopefully since Trump is all
about job creating, if he is seen to be
Airbus assets and available on a limited
basis for Boeing products, will not play a
lessors who are picking doing something that is killing jobs, he
could be caught in a catch 22,” Streeter
significant role in helping to pay for the up deals that should have says, adding: “The one thing we know
industry’s $126 billion financing bill for about Trump is to expect the unexpected,
commercial aircraft deliveries this year. gone to the export credit so I don’t think anyone can say with
However, Mark Streeter, managing
director of JP Morgan, speaking at
market and that is helping certainty what is going to happen with
how his administration will deal with Ex-Im
Airfinance Journal’s Aviation Investors’ Day them out. Bank.”
in January, said export credit funding could If there is a “European corollary up and
be “up and running” as early as this year. Mark Streeter, managing director of running” then there will be a lot more
Though he insists export credit support JP Morgan incentive to have a level playing field in
will not pay for a “large piece of the the USA, he adds.
aviation funding pie in 2017”. As for Ex-Im, Streeter says it is a matter
“Everyone has learned to live without a has been operating with just two board of wait and see whether the agency’s
functioning export credit environment,” he members for nearly 19 months, one capability “gets expanded or gets stuck”
says, adding: “We have all heard of lessors board member shy of the three needed with the “small” $10 million deals the bank
who are picking up deals that should have to approve transactions greater than $10 is authorised to work on.
gone to the export credit market and that is million. He adds: “It is not that important now
helping them out.” Ex-Im faces opposition from Republicans until we get to the downturn.”
While Streeter would not be drawn on that view the agency’s use of government In Europe, regarding Airbus’s
when he believes export credit funding funding as corporate welfare, and just how “controversy”, he says: “We will see how it
could return to the aviation sector in full the Trump administration will weigh in on all plays out but my sense is at some point
force, he indicates the export credit door the matter has yet to be seen. in time we will have a green light again.”
is still open under US president Donald “It is interesting as Trump is all about Export credit financing is due to account
Trump. creating jobs and the Tea Party is always for 9% of the 2017’s funding bill, according
The US Export-Import Bank (Ex-Im) whispering in his ear about killing Ex-Im to Boeing.

10 Airfinance Journal February/March 2017

 News analysis

ABS market off to good start

The asset-backed securities (ABS) market continues to attract new issuers as
shown by the first two issuances in the second part of January: Dubai Aerospace
Enterprise (DAE) and Elix Aviation Capital.

T wo leasing companies, although

addressing different parts of the market,
tapped the capital markets for a similar
line schedule thereafter.
The Series-C loans amortise on a 15-year
straight-line schedule for the first two years
I think 2017 is going
amount in February. and a seven-year straight-line schedule
to be strong for the ABS
DAE packaged loans in a $410 million thereafter. market, especially with
bond issuance through its Falcon Kroll Bond Ratings Agency assigned an A
Aerospace trust. preliminary rating to the Series-A loans, BBB the deals we are seeing
Proceeds from the sale of the transaction to the Series-B loans and BB to the Series-C
will be used to purchase a fleet of 21 aircraft, loans.
in the pipeline.
comprising five Airbus A319s, five A320s,
three Boeing 737-700s and eight 737-800s 100% turboprop Steven Chung, partner, Hughes Hubbard
on lease to 13 airlines. The initial weighted Irish-based turboprop lessor Elix Aviation and Reed
average aircraft age of the portfolio is about Capital also brought to market a $411 million
9.2 years, with a remaining lease term of 4.5 ABS transaction featuring 100% turboprops. Q200s, 11 Q300s and two Q400s.
years. The transaction, which features 63 used The asset-backed securities (ABS) are
The lessor structured the deal in three turboprop assets, does not include the sale expected to perform well in 2017.
tranches: $315 million Series-A loans with of E-note certificates. A total of $4.45 billion-worth of deals
a 63.5% loan-to-value (LTV); $65 million Elix Aviation acts as the servicer for the were issued in 2016, according to Airfinance
Series-B loans with a 76.6% LTV; and $30 transaction. Phoenix American Financial Journal market research.
million Series-C loans with an 82.6% LTV. Services is the managing agent, Wells Fargo Those included first-time issuers including
The portfolio’s initial value is $496.1 is the trustee, while Deutsche Bank is the Bocom Leasing ($300 million dual-tranche
million, based on the average of the half-life facility provider. transaction) in December. The deal is
base values provided by three appraisers as The lessor structured the deal in three backed by 13 aircraft.
of June 2016 and adjusted for maintenance tranches: $300 million Series-A loans with Merlin Aviation Holdings closed a $250.8
conditions. The portfolio has an aggregate a 55.5% loan-to-value (LTV); $57 million million ABS in December. The transaction –
maintenance-adjusted current market value Series-B loans with a 65.5% LTV; and $54 in which Aviation Capital Group is a servicer
of about $488.1 million. As of 31 December, million Series-C loans with a 75.4% LTV. – is backed by eight aircraft and is split
the 21 aircraft included in the portfolio The Series-A loans and Series-B loans between three classes of notes.
represent about 18.9%, by number of aircraft, amortise on an 11-year straight-line schedule In October, Blackbird Capital 1, the joint
of DAE’s owned and committed aircraft. for the first four years and a 13-year straight- venture established by ALC and Napier Park
The loans are borrowed by Falcon line schedule thereafter. Global Capital, issued $800 million-worth of
Aerospace and Falcon Aerospace USA. The Series-C loans amortise on a five- notes to refinance 16 aircraft.
Dubai Aerospace Enterprise will act as year straight-line schedule for the first US lessor AerGen also tapped the ABS
the servicer for the transaction. two years and a seven-year straight-line market in June with a $325 million issuance.
Phoenix American Financial Services schedule thereafter. The three-class notes issuance was backed
is the managing agent, Wells Fargo is the In November 2015, Castlelake Aircraft by 19 in-production narrowbody aircraft.
trustee, while Crédit Agricole Corporate and Securitisation Trust 2015-1, which was “I think 2017 is going to be strong for the
Investment Bank is the facility provider. backed by 54 aircraft, featured two ATR 42- ABS market, especially with the deals we
Goldman Sachs is the structuring agent 500s and three Bombardier Dash 8-100s, or are seeing in the pipeline. If other lessors
and left lead, while Goldman Sachs Bank is 2.5% of the collateral. or joint ventures are able to bring in similar
they global coordinator. Previously Castlelake Aircraft commitment and focus to Air Lease and
Crédit Agricole Corporate and Investment Securitisation Trust 2014-1 transaction closed Blackbird as they did to their deal, I think
Bank is the joint lead arranger. in February 2014 and featured 79 aircraft. from a time and cost-efficiency perspective,
The Series-A loans and Series-B loans Among those, turboprops accounted for you’ll really see the upside for lessors,” said
amortise on a 15-year straight-line schedule 53% of the portfolio with one ATR 42-500, Steven Chung, partner at law firm Hughes
for the first two years and a 13-year straight- three ATR 72-500s, seven Dash 8-100s, 18 Hubbard and Reed at the 19th Global
Annual Airfinance Conference in Dublin.
Air Lease’s head of strategic planning,
Source: Dubai Aerospace Enterprise
Ryan McKenna, sees ABS transactions
trading at better rates than unsecured
bonds.
He says: “I look at this product and say it
can trade better than our unsecured paper
at some point. I think there’s a chance with
the structured products that we have the
opportunity to tap into a market that aviation
hasn’t used efficiently.”

www.airfinancejournal.com 11
 Airline interview

Transformation of Air Baltic

Jack Dutton speaks to Martin Gauss, the Latvian airline’s chief executive officer, about
the carrier’s plans to streamline its fleet and the future of the CSeries programme.

I n 2011, Latvian flag carrier Air Baltic was

on the rocks. The airline was facing a
potential closure because of its weakened
financial position. In September 2011, the
airline announced plans to lay off about
half its employees and cancel around 700
flights a month to avoid possible grounding.
The mass layoffs were later repealed when
the airline’s shareholders, the Government
of Latvia and Baltijas Aviacijas Sistemas,
agreed to invest L100 million ($153 million) in
the airline’s share capital.
After the shareholders injected their
capital into the struggling airline, Martin
Gauss, who had previously turned around
former BA subsidiary Deutsche BA to make
it profitable again, joined Air Baltic in 2011.
The company then went through a heavy
restructuring after he outlined his ReShape
strategy to the airline’s shareholders and
the Latvian cabinet. Source: Air Baltic
Air Baltic is a different airline now
compared to what it was six years ago. The
carrier has been profitable since 2014 and providing a “standard industry amount “Even if you pay five or 10 million more
took delivery of the second Bombardier of the overall loan”, in the region of 85%, for the aircraft you will easily offset this
CS300 of its 20-aircraft order at the start of according to Gauss. in the lifetime of the operating cost,” he
January. Clyde & Co is representing the airline says, adding: “You take off now with this
When the carrier’s first CS300 was on the deal, while Norton Rose Fulbright is aircraft and now we have the second thing
delivered in December, it also provided a acting for EDC. coming: the noise levels, which are lower
major milestone for Bombardier: it was the Although Gauss will not be drawn on on the CSeries. While you are lighter, you
first CS300 to be delivered to a customer, which banks are involved, he confirms the have to pay less money for flying, landing
after the programme experienced several airline has appointed one European bank charges, overflying charges.”
technical hiccups and delays. Air Baltic will so far for the financing of certain aircraft. The airline operates 13 Boeing 737s, 12
receive six more CS300s this year, eight He says that Air Baltic is looking to put Q400s and two CS300s. All the Q400s are
more in 2018 and four more in 2019. all the new Bombardier jets on its balance under operating lease. All the 737s were
sheet and is in discussions about financing previously leased but now the carrier has
Aircraft of choice options for the other 13 aircraft. Gauss bought nine of them. The new CS300s will
Speaking to Airfinance Journal in the airline’s adds it is “too early” to test the sale and replace the carrier’s fleet of 13 737-300
head office in Riga, Latvia, Gauss explains leaseback appetite for the aircraft with only and 737-500 Classic aircraft. Four of the
why he opted for the CS300 model. one of the type in operation. Classics are leased and nine of them are
“You can take a 737-700, A319neo and He says the cost of the aircraft does owned.
the CS300 (and later on, the Max and not matter as much because the cost to The airline will have received all of its
the Neo). You put all three next to each operate the aircraft is lower. CSeries aircraft by 2019. Between now and
other and you take the weight. You take 2021, Gauss plans to sell the 737 Classics
the weight of the aircraft and you put the or scrap them, depending on the status
engines on, not on the Boeings, [where] it’s of the aircraft after D checks. He says the
the LEAP engine or something similar, but aircraft were originally bought “at a good
on the others it’s exactly the same engine. Even if you pay five price”.
You put that on the aircraft and then you
take off. You have the same passengers
or 10 million more for the Gauss says the airline is now “in a solid
position” because of its €132 million ($142
on board and the same engine. What will C series you will easily million) capital injection last year and being
happen? You will burn more fuel on the able to increase some of its route capacity
Airbus because it’s heavier.” offset this in the lifetime of over the past year.
Air Baltic has secured 12-year financing
from Export Development Canada (EDC)
the operating cost. In 2014, Air Baltic had several other
aircraft types in its fleet, including Fokker
for seven of the 20 CS300s it is adding to 50s and 757s. As part of the restructuring
its fleet. The deal will also involve lending Martin Gauss, airBaltics chief executive plan, the carrier is looking to operate only
from several different banks, with EDC officer two aircraft types – 12 Q400s and 20

12 Airfinance Journal February/March 2017

 Airline interview

CS300s – in 2021, at the end of the business “But there is interest and there was
plan. Air Baltic plans to keep the 12 Q400s Watch this space – interest all the time,” he says. “People
under leases, while the 20 Bombardier
aircraft will be on the balance sheet.
2017 will be a very are always visiting us; at the delivery
ceremony there were many people there
interesting year for the from the industry. Watch this space – 2017
Growth and diversification will be a very interesting year for the
2016 was the first year the airline could CSeries. CSeries.”
grow, according to Gauss. He adds that low
fuel prices have not had a profound impact Martin Gauss, AirBaltic’s chief executive officer Regional competition
on his business plan, saying that they did Although Gauss keeps an eye on the
improve the airline’s results, but that was strength of the dollar and the fuel price,
because the business plan assumed that CS300’s small orderbook, saying it will he is not worried about changes having
fuel prices would stay higher. have a similar journey to the Embraer 170 too big an effect on the carrier’s business.
Apart from export credit financing, Gauss and 190 programme, which initially started The airline does hedge its fuel, but Gauss
says he is also open to looking at other with few orders and is now considered to admits that it cannot hedge to the same
ways of financing Air Baltic’s fleet. “That be an operational success. He adds that extent the larger airlines can.
was the whole idea because this airline it is unfair to compare a new programme But this has not stopped it outcompeting
only had leased aircraft and now we want such as the CSeries to those that are some of the bigger names in the Baltic
to strengthen the balance sheet by putting already established. region.
the aircraft on. A lot of airlines say ‘no, no “They have a good orderbook for the “Operationally, over the last few years
it’s better you lease them’, but as airlines CSeries,” he says. “They have just two of we have shown that we can compete.
get bigger, they’ve always had a mixture them in commercial service, so for that, In terms of market share, we’re first –
between leased and owned aircraft and we the orderbook is not bad. Of course, number two here is Ryanair, number three
want the same, even being a small airline. comparing it to Airbus or Boeing, who have is Wizz Air, number four is Norwegian.
We are able to because we’ve got capital thousands of orders, it’s different, but the There’s a long break before Lufthansa
from the shareholders, which we don’t use media always writes in a negative way comes, meaning we are competing with
in operations – we use it for aircraft.” about that aircraft, for the aircraft to be in the top low-cost guys.
At 237 aircraft, the CS300 orderbook the sky now and to see who orders it.” “And we’re doing this by keeping
is small compared to its more established He adds that it is too early to test the market share above 50% and being the
competitors, the 737 Max and the sale and leaseback market appetite for the strongest carrier in the region. We had to
A320neo, at 3,336 and 3,385 orders, aircraft, because it has just entered into go through heavy restructuring, and now
respectively. But Gauss is unfazed by the service. we’re flying with them head to head.”

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www.airfinancejournal.com 13
 View from Dublin

Aviation demand to grow

despite protectionism
Joe Kavanagh provides a roundup of the biggest stories from the
19th Global Airfinance Conference in Dublin.

A s the industry gathered in January for

the 19th Global Airfinance Conference
in Dublin, there could hardly have been
an enhanced equipment trust certificate
(EETC) to fund the widebody programme.
Helen Kotsovos, director planning of
more to talk about. treasury, says Air Canada is also financing
President-elect Trump was just days new deliveries through sale and leaseback
away from being inaugurated, causing transactions.
concern about the likely effects of rising Tom Weir, American Airlines’ vice-
protectionism. Meanwhile, Boeing and president and treasurer, says the term loan
Airbus were on course to post a book- B market has become very strong, and the
to-bill ratio of below one for the first time airline is also seeing “a lot of strong bids for
since 2009, suggesting that the industry is sale and leaseback transactions”.
tipping into a down cycle. Borrowing costs Candice Li, vice-president finance and
have risen for airlines and lessors alike. fleet management at WestJet, says the
However, global demand for air Canadian airline plans to diversify beyond
transport will grow in the long term, even unsecured bonds, potentially into products
if protectionist policies become the norm, such as Japanese operating leases with
according to Iata’s chief economist, call options/Japanese operating leases
Brian Pierce. Speaking to a full room of and EETCs. Aeromexico plans to move
delegates, Pierce said: “In the long term, more aircraft onto its balance sheet – from
we shouldn’t get too pessimistic about The Convention Centre Dublin
about 25% now to about 50%, according
prospects for growth, or indeed demand to chief financial officer Ricardo Sanchez
for aircraft.” Baker. Chilean low-cost carrier Sky Airline is
the Embraer E-Jet family to renew its Avro mulling private placements or commercial
Deals RJ85 fleet, according to sources who said loans for its future A320neo deliveries,
This year, the conference had a new the regional airline will take 10 used E190s, says chief financial officer Jose Ignacio
feature – the Open Lounge – which as well as three E170s. Dougnac, who adds that lease agreements
was a space featuring meeting areas for New operating lessor Avi8 Air has for six Neo deliveries are close to being
delegates and non-delegates. The lounge selected an investment bank for its equity finalised.
was busy throughout the day, but was raise to secure funding for a portfolio of
particularly well attended at about 5pm, new and used assets, valued at more ECA support
which may have had something to do with than $1 billion. The company was founded Export credit funding, which is still
the open bar. last year by Ray Sisson, the former chief unavailable in a meaningful way for Airbus
The number of deals uncovered by executive officer at Awas, and Ed Wegel, and Boeing aircraft, is unlikely to play a
Airfinance Journal’s editorial team showed founder and former president and chief significant role in helping to pay for the
the level of business being conducted executive officer at Eastern Air Lines. industry’s $126 billion financing bill for new
there. In October, Sisson said he believed the commercial aircraft deliveries in 2017, say
A number of airlines were close leasing market had “finally begun to tip delegates.
to mandating banks and lessors for over” into a down cycle, because of low US Ex-Im Bank, which has been unable to
incoming aircraft deliveries. Icelandair fuel prices, large orders and low interest authorise deals larger than $10 million since
was discovered to be close to appointing rates. late 2015, now has a $4 billion backlog of
financiers for six Boeing 737 Max aircraft; There was also talk of a new US airline aircraft deals.
Indian low-cost airline SpiceJet has already seeking convertible debt to fund its Mark Streeter, managing director at JP
closed lease agreements for five 737-800s operations. The carrier, which will be a Morgan, says that export credit agency
in 2017; Wow Air will soon mandate banks “very niche player”, according to a source, funding may be up and running as early
for up to four Airbus A321s; Turkish carrier is set to mandate an investment bank soon. as this year. However, he stresses that US
Pegasus Airlines, whose cost of financing Meanwhile, several airline executives politics are unpredictable right now.
has risen because of the attempted coup spoke about their financing plans for 2017 Streeter adds: “The one thing we know
in Turkey last year, has reportedly issued and beyond. about Trump is to expect the unexpected,
a request for proposal for the financing Air Canada will fund its upcoming Boeing so I don’t think anyone can say with certainty
of a number of incoming Airbus aircraft; 787 deliveries in the commercial banking what is going to happen with how his
and South Africa’s Airlink has selected market this year and has no plans to issue administration will deal with Ex-Im Bank.”

14 Airfinance Journal February/March 2017

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www.airfinancejournal.com 15
 Korea investor deals survey

New names and narrowbodies

for Korean investors
In the run-up to the Inaugural Korea Airfinance Conference in Seoul on 23-24
March, Michael Allen examines how Korean investors are getting savvier with their
investments in aircraft, gaining the courage to branch out into narrowbodies, as
well as lesser credit airlines.

“I n [South] Korea, we need aviation

to fly our people in and out of the
“Real estate in the US and UK was the
first pick from 2009 to 2014 for Korean The aviation
country – otherwise we have to go through
North Korea,” says one South Korean
investors seeking an alternative asset
class. Most Korean investors got exposed
transaction is very
aircraft finance practitioner explaining the to the UK, US and even German property standardised and you
importance of the aviation industry to his but, from the asset allocation perspective,
country. they cannot put all their money in one asset can easily contact the
Both aviation and shipping have been class,” explains one source at a Korean
pivotal to the peninsula’s history since securities firm active in aircraft financing.
right person for feasibility
Korea was divided along the 38th parallel “The aviation transaction is very assessment and
after World War II and along a military standardised and you can easily contact
demarcation line after the Korean War. the right person for feasibility assessment information gathering.
Since it became impossible to transport and information gathering. Most reputable
goods and people out of the country Korean institutions which have a big Most reputable Korean
by land via North Korea, these two
transportation industries have been seen
presence in the Korean market now have at
least one aircraft in their balance sheet.”
institutions who have a big
as vital to the health of the south. All of the deals done so far involving presence in the Korean
But while the South Korean shipping Korean investors have been for the crème-
industry – along with real estate – has long de-la-crème credits of the airline industry, market now have at
been a key investment target of Korean
institutional investors, investment in aircraft
with a particular focus on Middle Eastern
heavyweights such as Emirates and Etihad.
least one aircraft in their
is a new area for them. With the shipping Matthew Leigh, a senior associate balance sheet.
industry now being far from shipshape and at Norton Rose Fulbright in Singapore,
real estate returns lacklustre, aircraft are believes Korean investors are showing a
proving more reliable assets for yield- greater receptiveness to financings with
hungry investors. operating lessors as the demand for aircraft

16 Airfinance Journal February/March 2017

 Korea investor deals survey

deliveries starts to come from the lessors the top 10 lessors,” he says. credit profile alongside a good underlying
more than the airlines. Despite this overwhelming preference asset,” says a source with experience of
“It is probably reflective of the shift in for top-tier names, preferably government- the Korean market.
the market towards the volume of direct owned flag carriers, market sources “However, they are now starting to be
lessor orders, but I think that they [Korean believe there is room for deal arrangers willing to look at new names in terms of the
investors] are certainly much more aware to introduce lesser credits to the Korean returns. The credit rating remains important
now of those opportunities – though I think institutional investor base. – though provided there is the ability to
in the same way the investors are looking “There is still the mentality they want demonstrate a good asset and that it’s a well-
at the top-tier airlines, the focus will be on to have a full-service carrier with a strong run airline with a history of good lease return
Continued on page 18 >>>
Korean Investor Deal Survey: Korean deals closed between 1 January 2014 and 31 December 2016
Airline/ Aircraft financed Deal size Financing parties Structure Law firms
Lessor
AerCap 787-9 Undisclosed KEB Hana Undisclosed Clifford Chance,
Kim&Chang

AerCap 787-9 Undisclosed KEB Hana, KDB Undisclosed Clifford Chance,

Kim&Chang

All Nippon 777 300ER, KRW The Bank of Tokyo-Mitsubishi UFJ (senior Lease ends 16 Dec 2025 (10 years, 3 months) Lee&Ko, Clifford Chance
Airways delivering 16 Sep 2015 38,862,084, tranche A & B lender); Santander (Mezzanine
(ANA) 997 & Equity); JB Fund; Construction Workers
Mutual Aid Association

ANA 777-300ER, Undisclosed Banco Santander (arranger), Construction Banco Santander sold down a junior loan on a 2015-vintage PricewaterhouseCoopers
closing on 21 September 2016 Workers Mutual Aid Association (investor), JB Boeing 777-300ER aircraft to Construction Workers Mutual (buy-side advisory), Lee & Ko
Asset Management acted as asset managers, Aid Association (CWMAA). Santander did not sell 100% of the (legal advisory)
Samil junior loan, so both Santander and CWMAA are now new junior
lenders.

Air France 777-300ER $34m Public Officials Benefit Association (POBA) and Mezzanine debt. European banks also will invest in equity and Not available
Yellow Umbrella Mutual Aid (investors) senior debt financing, while the POBA and the savings fund for
small business owners purchase the whole mezzanine tranche.
In return, the two Korean funds will receive a fixed annual return
at the upper end of the 5% range for seven years to maturity.

Air France 777-300ER $115.7m Dongbu Securities and undisclosed Undisclosed Clifford Chance, Yulchon as
acting legal representative of
Dongbu Securities

Asiana A380 Undisclosed Korea Development Bank (lead arranger), The financing was a US dollar denominated commercial loan Norton Rose Fulbright (counsel
Airlines KDB Asset Management (arranger for Korean on the senior side and a Korean won denominated junior to KDB), Milbank (counsel to
investors on junior side) note issuance. The split between the senior and junior parts Asiana)
was roughly 70/30. On the junior side there is one note issuer
and one trustee, both of whom are South Korean. The deal
represents the first transaction in which Korean investors
provided 100% financing for an A380 for a local carrier.

Avianca 8 aircraft (6 A320 family and $379m Burnham Sterling + Of the participating EAIV private placement structure. 12-year final maturity Not available
2 787s) investors, one domiciled in Korea

DHL 2x 777-200LRF. $320m ($160m Helaba, DZ and Nord LB (senior loan), NPS Senior loan, mezzanine and equity. Lease expiring in 2024. Lee&Ko, Vedder Price and
Financing closed June 2015. per aircraft) and other Korean institutions (mezzanine), Maples & Calder (legal counsel
Mirae Asset Securities HK (equity) to Mirae).

Etihad A380 100% financing; Magi Partners and Youjee Partners (arrangers), Etihad Airways has agreed a finance lease deal for one A380 Allen & Overy (counsel to
Airways amount supported by Korean institutional investors. Magi Partners and its Etihad), Stephenson Harwood
undisclosed Korean associates Youjee Partners arranged the transaction for (counsel to Korean investors)
the Abu Dhabi-based airline. The deal provides 100% financing
for the aircraft through a 15 year fixed coupon full payout finance
lease. The deal was the first ever Korean backed pre-funded
financing for an A380. It is also the first time an A380 financing
has been sourced solely with Korean funds with no other
commercial debt involved.

Emirates 777-300ER. $144m DVB and MUFG (senior loan), NPS and other Senior loan, mezzanine and equity. Lease expiring in 2024. Bae, Kim & Lee, Clifford
Financing closed March 2015 Korean institutions (mezzanine), Mirae Asset Chance and Maples & Calder
Securities HK (equity). (legal counsel to Mirae).

Emirates 777-300ER. $175m MUFG and Société Générale (senior loan), Senior loan, mezzanine and equity. Lease expiring in 2027. Bae, Kim & Lee, Clifford
Financing closed September 2015 NPS (mezzanine), Mirae Asset Securities HK Chance and Maples & Calder
(equity). (legal counsel to Mirae)

Emirates 2x 777-300ERs Undisclosed EMP Structured Assets (arranger), Seraph Both aircraft, which delivered at the end of March, are two years Bird & Bird (counsel to EMP
Aviation Management (lease manager to old and are on 10 year leases. Air Finance Company (AFC) and Deka Bank), Pillsbury
EMP’s equity investors), Dekabank (senior purchased the aircraft initially before ownership transferred to (counsel to Emirates), Allen
loan provider), undisclosed Korean investors EMP after the lease novation. Dekabank is providing a senior & Overy (counsel to AFC),
( junior loan provider), undisclosed German loan and a group of Korean investors is providing a junior loan Yulchon (counsel to Korean
institutional investor (100% equity purchaser) for the two aircraft. A German institutional investor has bought investors).
100% the equity in the widebodies.

Emirates 2x A380s Undisclosed Investec (sole arranger for financing and Sale and leaseback transaction for two new A380-800s.The first Clifford Chance (counsel to
leasing elements), The National Bank of A380, MSN 205, delivered in late January. The second A380 lenders), Bird & Bird (counsel
Abu Dhabi and Qatar National Bank ( joint delivered in April. Both jets will be on lease for 12 years. to airline)
senior underwriters of the senior financing),
undisclosed Korean institutional investors
(mezzanine financing),

Emirates A380-800 Confidential Stellwagen Finance Company (lenders) The operating lease for the A380 was placed with the Korean Allen & Overy (acting for AFC)
Korean institutional investors institutional investor market, by means of a private placement Yulchon (Seoul), Clifford
Magi Partners and Youjee Partners (arrangers) with a group of Korean non-bank financial institutions investing Chance (Singpore), Walkers
in a Korean fund structure. (Cayman) acting for the Korean
investors)
Pillsbury (acting for Emirates)

GECAS Portfolio of 20 aircraft. The $900m Mizuho Securities and Meritz Securities The debt consists of $655m from an asset-backed securities Not available
portfolio mainly consists of (arrangers) issuance by Mizuho Securities, and $244.5m in equity from
narrowbodies, which are on lease South Korean securities and derivatives firm Meritz. The
to a range of low-cost airlines $244.5m contribution from Meritz will consist of a $150m
and flag carriers, including some mezzanine tranche and a $94.5m subordinate tranche.
Chinese airlines. The average
remaining lease length of the
aircraft in the portfolio is 7.6 years. Continued on page 18 >>>

www.airfinancejournal.com 17
 Korea investor deals survey

Airline/ Aircraft financed Deal size Financing parties Structure Law firms
Lessor
KAL A380 Undisclosed KEB Hana Junior term loan Kim&Chang

KAL 3x A330 Undisclosed KEB Hana, KDB Junior term loan Kim&Chang

KAL 2x B777-300ERs Undisclosed KEB Hana Junior term loan Kim&Chang

PAL A321-200 $42m KEB Hana as MLA, KEB Hana and CCB as Secured term loan Clifford Chance Thailand,
Lenders Lee&Ko

Qantas 2x A330-200 $15m and The Local Finance Association (mezzanine The Local Finance Association, which oversees disaster Not available
$20m investor), Hana Financial Investment (arranger). insurance and savings money of South Korea’s local
governments, opted to invest $15 million on 31 October in
mezzanine loans on two A330-200 aircraft that Qantas Airways
will lease. Hana Financial Investment, which is in charge of the
$20 million fundraising covering the two A330-200s, plans to
attract one or two more institutions for mezzanine financing.
The mezzanine debt is expected to deliver an annual return of
about 6%.

Singapore A330-300 $85 million KTB Investment & Securities and Korea $60 million senior loans with expected returns at 4.05%, $20 Not available
Airlines Investment & Securities (established the fund), million mezzanine loans and $5 million subordinated loans. The
Wealth Capital Management (seller), BBAM mezzanine and subordinated loans have 6.2% and 9.1% return
(asset manager), Eastmerchant (asset manager targets, respectively.
& advisor to WealthCap)

Singapore Airbus A330-300, Sep. 2015 KRW Kyobo Securities (organiser); Meritz, JB Fund, Lease end date: August 2023 (8 years). Lessee has option to Yulchon (Korean Law Firm)
Airlines 58,077,880,146 Lotte Insurance, Hanwha Insurance, Daewoo finish lease agreement at six and seven years after the start of
Securities, Scientists and Engineers Mutual-aid the lease
Association, EastMerchant (equity)

Unknown A330-300, delivering in 2009. Undisclosed Nord LB (senior loan), mezzanine (Korean Senior loan, mezzanine and equity. Lease expiring in 2021. Bae, Kim & Lee and Maples &
Financing closed March 2014. institutions), Equity (Mirae Asset Securities HK). Calder (legal counsel to Mirae)

Source: Airfinance Journal, January 2017

conditions, then that goes quite a long way jurisdiction because Koreans have a long
now with the investors.”
Korean investors history with investing in Vietnam, albeit not
As with Japan’s Japanese operating for some of the top-tier in aircraft, say sources.
lease and call option market, in which deal
arrangers are experiencing more demand airlines seem to have GECAS portfolio deal
from investors than deal opportunities with Late last year, Mizuho Securities and Meritz
top-tier carriers can satisfy, Korean arrangers
been tapped out at Securities launched a seven-year, $900
are finding they are needing gradually to this point, so almost by million fund to buy a portfolio of 20 aircraft
introduce new names to their investor clients. from US lessor GECAS. The debt consisted
“Korean investors for some of the top-tier necessity they are looking of $655 million from an asset-backed
airlines seem to have been tapped out at securities issuance by Mizuho Securities,
this point, so almost by necessity they are
at lesser-known airlines. and $244.5 million in equity from South
looking at lesser-known airlines,” says Ji Korean securities and derivatives firm Meritz.
Hoon Hong, a partner in White & Case’s Ji Hoon Hong, partner, White & Case The $244.5 million contribution from Meritz
South Korea office. consisted of a $150 million mezzanine
“I think they are looking at deal – just like investors from any other country tranche and a $94.5 million subordinate
possibilities involving those airlines that may these days – are hungry for yield. But tranche.
not necessarily be flag carriers or household as they get more knowledgeable about Sources tell Airfinance Journal that the
names. Depending on how the structure this space, they see the attractiveness of portfolio contained some poor credit airlines,
works, I think deals involving below-top-tier narrowbody aircraft in terms of their stable such as EgyptAir, in which Korean investors
airlines would be seriously considered by values and secondary market tradability,” would not usually prefer to invest in a single
Korean players. Some arrangers are quite says White & Case’s Ji. transaction because of the heightened risk.
willing to take a leap forward – maybe a He cautions, however, that this could be However, because of the involvement of
giant leap forward – and try to lead some of a “double-edged sword”, as the yield on GECAS – which is the number one lessor in
these sophisticated and large transactions narrowbodies would tend to be lower than the world by number of aircraft (according
on their own.” that available for widebody transactions. to Airfinance Journal’s The Leasing Top 50
In addition, the deterioration of certain A source from a South Korean securities 2016) – investors are sufficiently reassured
top-tier airline credits such as Air France firm says: “If we consider the market that the risk could be managed.
(because of financial difficulties) and Turkish situation separately for widebodies and “A couple of portfolios are coming around
Airlines (because of political instability in narrowbodies, we believe the narrowbody the market but have not yet been done.
Turkey) means Korean investors may have to market is safer in terms of exit and residual There are better aircraft and airlines in
look at other names, says a source in South value risk but there is a tough competition these, but their servicer names are not good
Korea. among global lessors. enough from a Korean investor perspective,”
“Lease rates for narrowbodies are getting says a source who works with Korean
Narrowbodies versus widebodies lower and lower and the rate of return for investors.
Korean investors have mostly favoured the equity investment is not very attractive.
investment in widebodies over Still, widebodies can provide an attractive Hard to ignore
narrowbodies because of the larger, more rate of return, so we need to mix up these More and more international players are
expensive aircraft offering higher returns narrowbodies and widebodies properly and taking notice of the South Korean market as
than narrowbodies. However, investment in manage the portfolio risk.” a viable source of financing for aircraft, and
widebodies carries a higher residual value One airline that could be a potentially many believe it will remain so for several
risk and the aircraft are more difficult to huge target of financing for Korean investors years to come.
remarket at the end of their lease term. is Vietnam’s VietJet Air, which is taking One source says: “It’s not going to replace
“Korean investors have been attracted delivery of A320-family aircraft to fuel its other sources of financing but if you’re
to widebodies because they tend to offer rapid growth. Korean investors might feel looking at what’s out there at the moment, I
higher yields and because Korean investors comfortable with Vietnam as an investment don’t think that you can ignore it.”

18 Airfinance Journal February/March 2017

 Lessor interview: Chorus Aviation Capital

Chorus takes on
regional market
Chorus’ new leasing subsidiary was established in January with funding from a
Canadian insurance company. It plans to carve out a space in the regional leasing
market. Joe Kavanagh speaks with its president, Steven Ridolfi, about his plans
for the year ahead.

C horus Aviation, the Canadian aviation

holding company, will become a
more familiar name this year. With the
“Remember that Chorus has a ton of
technical capacity, to modify and transition
airplanes, to provide our customers with
marks an important step for Chorus
Aviation’s expansion into aircraft leasing.
The parent company already owns
establishment of a new leasing joint more than just the metal but with ancillary Bombardier aircraft, which it leases to Jazz
venture, regional operators around the services as well such as technical support, Aviation under the CPA with Air Canada. At
world may soon be doing business with the training capacity, spares support and pilot the end of the third quarter 2016, it leased
company for the first time. pools. We wanted to keep it in the family. 39 aircraft under the deal.
The company already leases aircraft to The [decision to issue a] convertible bond The lessor will initially target aircraft with
its airline subsidiary, Jazz Aviation, which was driven by that,” he adds. leases attached. However, it is open to the
operates flights on behalf of Air Canada With the capital behind it, and with plans full range of acquisition types.
under a capacity purchase agreement to expand rapidly, Chorus Aviation Capital “Immediately in front of us, we are
(CPA). But it has planned to expand will most likely be closing its first deals in studying three potential transaction types:
its aircraft leasing business with new the very near future. there are some interesting portfolios for
customers for some time. The company sale, some airline sale [and] leasebacks
told Airfinance Journal in 2015 about its Buying opportunities that we’ve been looking at, and potentially
plan to place regional aircraft with airlines The mission statement is clear for Chorus some skyline orders in store. So we are
further afield than Canada. Aviation Capital: to stick to its roots with the likely to end up with a mix of these,” he
This plan became reality in November purchase of regional aircraft. says.
2016, with the signing of a sale and “We’re staying with regional aircraft, both Asked whether Chorus Aviation Capital
leaseback agreement for four Bombardier jets and turboprops,” says Ridolfi. would consider buying Bombardier’s
CRJ1000s with Air Nostrum, which became However, the company also plans to CSeries family of aircraft, Ridolfi confirms
Chorus Aviation’s first leasing customer buy Embraer and ATR, as well as the that a deal is not off the table. “We could
outside of a capacity purchase agreement Bombardier models that it already has have a look at the CSeries if the right
with Air Canada. experience of. situation warrants it,” he says.
Now, with the foundation of Chorus “Chorus is primarily a Bombardier The initial investment by Fairfax will be
Aviation Capital, the company has begun customer, with Q400s, legacy Dash-8s supplemented by debt capital, which will
the expansion of its leasing business in and the CRJ family. But we’d certainly boost the company’s buying power.
earnest. like to diversify into the Embraer and ATR “The C$200 million [private placement]
The new subsidiary will be funded with product families as well. As a global leasing will be leveraged up with debt to
a C$200 million ($149.5 million) convertible company, we’ll start to look a lot like the something like C$800 million, and we’ll
private placement from Canadian insurance fleet mix of the overall market,” he adds. evaluate which opportunities generate the
firm Fairfax Financial. It will also expand its Diversifying with other regional aircraft best combination of returns and strategic
purchasing power by leveraging up until it
has about C$800 million to chase deals.
Steven Ridolfi, who is president of
the new company, says that Chorus Remember that Chorus has a tonne of technical
has decided to launch a wholly owned
subsidiary, rather than a joint venture, in
capacity, to modify and transition airplanes, to provide
order to retain control. our customers with more than just the metal but with
“We did look at joint-venture options
and the pros and cons of how they would ancillary services as well such as technical support,
work. We ended up with a totally owned
subsidiary because it best fit with our
training capacity, spares support and pilot pools. We
strategic goals: we wanted to maintain wanted to keep it in the family. The [decision to issue
control, we wanted to grow organically with
full freedom of asset selection, we wanted a] convertible bond was driven by that.
to take full advantage of Chorus synergies,”
he says. Steven Ridolfi, president, Chorus

www.airfinancejournal.com 19
 Lessor interview: Chorus Aviation Capital

fit and go after these. The C$200 million narrowbody space – or even the widebody
arrives over the next three months of the
Just like most leasing space – there’s 40-plus companies chasing
year and, as the opportunities present companies, we’ll try that business. On the regional side, there’s
themselves, we’ll structure transactions to Nordic Aviation Capital, which is very large,
deploy the full capital,” says Ridolfi. to do a wide range of and then there’s a few smaller ones, some
“Just like most leasing companies, we’ll that have only recently started. We have an
try to do a wide range of transactions to
transactions to diversify ambition to grow very quickly, to stay inside
diversify your supply channel. We’ll look at your supply channel. We’ll the regional market place.”
all opportunities and selectively choose the Ridolfi notes that some large lessors
ones that best fit our criteria,” he adds. look at all opportunities have divested from regional aircraft in

Is there space in the regional market?

and selectively choose recent months. Citing ALC’s sale of 25
E190 and E175 aircraft to NAC, he says
The smaller operator base for regional the ones that best fit our that portfolio sales will represent great
aircraft has dissuaded many players from opportunities for Chorus Aviation Capital as
getting involved in this space. Some larger criteria. it looks to increase in size.
lessors prefer to focus on Airbus and “Many of those 40 narrowbody/mainline
Boeing’s most popular single-aisle offerings Steven Ridolfi, president, Chorus leasing companies do have regional
instead, leaving regional aircraft leasing to portfolios, but they’re non-core and, in fact,
the specialists. some of them are being sold off,” he says,
However, many lessors choose to own “so we see opportunities to pick up some
regional aircraft to diversify their portfolio, How will Chorus Aviation Capital try to of those non-core portfolios.”
and there are several active lessors which compete with the established players? As he sees it, there is plenty of space for
focus on this market segment exclusively. Is there even room in this section of new contenders.
There has recently been a flurry of mergers the market for a new contender? Ridolfi “We think Martin Møller [Nordic Aviation
in regional leasing, as Nordic Aviation believes so. Capital’s founder and chairman] and
Capital (NAC) expanded aggressively last “[Regional aircraft leasing] is a very Nordic have done a tremendous job, but
year. Having bought up regional lessors intriguing market that has quite a bit of we believe there’s room for others in this
Jetscape and Aldus, NAC seems to be headroom, from our perspective.” market. We have ambitions to be one of the
pinning down this market. He adds: “If you think about the leading players before long.”

What is Chorus Aviation?

Chorus Aviation is a Canadian holding company that owns various aviation-related subsidiaries.

Chorus Aviation

Jazz Aviation Voyageur Aviation Chorus Aviation

Capital
Air Canada Express Voyageur Airways – operates
– under a capacity special flying operations for The latest
purchase agreement blue chip clients in Canada subsidiary, focused
(CPA), the airline operates and Africa with a fleet of 17 on commercial
113 Bombardier aircraft on Bombardier aircraft. aircraft leasing.
behalf of Air Canada.
Voyageur Aerotech –
Jazz – operates North specialises in engineering
American charter flights and maintenance. Generates
with three Bombardier 25% of Voyageur Aviation’s
aircraft. revenues.

Source: Chorus Aviation

20 Airfinance Journal February/March 2017

 Deal focus

Alaska’s strong profile

improves merger prospects
Joe Kavanagh examines the North American carrier’s financial position after
closing its $2.6 million takeover of Virgin America in December.

O n 14 December, Alaska Airlines closed

its takeover of Virgin America, in a
$2.6 billion transaction that will bring the
combined airline’s fleet to 286 aircraft with
an average age of 8.1 years.
Although the two businesses have not
fully merged yet, Alaska Airlines, which
will soon be the fifth-largest airline in the
United States, is well-placed to take over
Virgin America and looks set to enjoy
a strong credit profile despite raising
leverage in order to fund the deal.
Data provided by The Airline Analyst
(TAA) shows that Alaska Airlines is one of Source: Alaska Airlines
the strongest-performing airline credits
in the world, with strong earnings before
interest, tax, depreciation, amortisation and agency affirmed Alaska at BBB- once the discussions with executives from JetBlue
rent cost (Ebitdar) margins, healthy fixed takeover was closed in December, after and Hawaiian Airlines.
charge cover and high levels of liquidity. having placed it on a watch list because of JetBlue liked the airline enough to
pending approval from the US Department make an offer of $54 a share – but was
Resilient financial performance of Justice. eventually outbid by Alaska Airlines’ offer
The Airline Analyst Financial Ratings Score Alaska funded the deal with cash on of $57 a share.
(TAAFRS) ranks Alaska Air Group second hand and about $2 billion of secured debt Data collected by TAA shows that while
out of the 150 airlines it covers. financing provided by multiple lenders. Virgin America is less profitable than
Narrowly behind Ryanair, the airline is About $1.6 billion of the loans are secured Alaska, it has recently made substantial
recognised for its high margins, liquidity against 56 of the company’s Boeing 737 improvements. At 5.3 out of eight, its
and low leverage, with an overall score of fleet, including 37 737-900ERs and 19 overall rating score for the last 12-month
7.3 out of a possible eight. 737-800s. period is nowhere near as strong as
The airline’s Ebitdar margin for the last In a report issued in December, Alaska’s. However, it represents great
12-month period was 32.8%, which places Fitch notes: “Aircraft tend to be readily progress, up from 5.1 in the preceding
it 11th in the world for this metric. The financeable assets, and the reduction in 12-month period and 3.3 in the 12-month
top 10 – AirAsia, Jazeera Airways, PSA unencumbered planes reduces one of period before that.
Airlines, Hainan Airlines, Allegiant, Volaris, [Alaska’s] easiest and potentially cheapest It has generated healthy Ebitdar margins
Spirit, Frontier, IndiGo and SpiceJet – are sources of future financing. Nevertheless, (29.5%) in the last 12-month period, while
mostly low-cost carriers. Generating such we believe that [the airline] will still liquidity as a percentage of revenue stands
strong margins as a full-service airline is have plenty of capacity to tap the debt at 37.8% – generating the maximum score
remarkable. markets in the future if it were in need of eight, according to TAA methodology.
The carrier is similarly impressive of capital given the company’s relatively However, its Ebitdar is only twice as high
in terms of liquidity, with liquidity as a low leverage, history of free cash flow as its net interest plus rent, generating a
percentage of revenue at 55.8% – the generation, and relatively strong credit score of three out of eight. Meanwhile,
sixth highest of all airlines covered by profile.” adjusted net debt is 3.5x Ebitdar –
TAAFRS. substantially higher than Alaska’s.
Meanwhile, its fixed charge cover Virgin America: most improved By one key metric, however, Virgin
(calculated by dividing Ebitdar by Although it began operations in 2008, America beats Alaska Airlines: average
net interest plus rent) is 20x, which Virgin America did not turn a profit until fleet age. While Alaska’s average fleet age
demonstrates how substantially its 2013. is nine years, according to the data, Virgin
earnings outweigh its financial obligations. TAA shows that its net income was $10 America’s average age is 6.3 years.
In short, the airline’s financial million in 2013, $60 million in 2014 and The improved financial health of Virgin
performance sets it up well for the $351 million in 2015 (the last full year for America, as well as that of Alaska, means
challenging months ahead, as it integrates which data is available). that the merger has every chance of
with Virgin America. The improved financial health of Virgin success. The logistical challenges related
The debt that it raised to fund the America is indicated by the interest that to merging two airlines are substantial, but
takeover will increase its leverage but its sale generated from other US airlines. the credit profiles of both carriers suggest
is unlikely to affect its ratings in the near Although Alaska Airlines won the deal, that the new entity will be able to benefit
future, according to Fitch Ratings. The Virgin America’s leadership also held from strong ratings in the future.

www.airfinancejournal.com 21
 North Africa

Headwinds
hold back carriers
North African airlines have faced a number of challenges in recent times,
including a dearth of export credit financing, geopolitical instability and several
terrorist attacks. Jack Dutton investigates.

B rian Pearce, chief economist of

the International Air Transport
Association, told delegates at the fourth
One leasing executive, who works with
North African carriers, tells Airfinance
Journal: “Tunisair has suffered a lot
same pronounced negative effects as
some of the other North African countries.
Royal Air Maroc (RAM), the country’s
Iata Airline Cost Conference in Geneva because they had less tourists come into national airline, is viewed by many in the
last year that carriers had “never had the country since the attacks. The same industry as being the main African airline
it so good” and, after decades of poor thing happened in Turkey with Turkish that connects Africa with Europe, the
performance, airlines were finally making Airlines.” Middle East and North America.
money. As well as seeing a drop in tourist But that has not stopped the carrier’s
The representatives from North African numbers, North African regions that have operating environment from being
airlines, who were in the audience during been affected by terrorism and political challenging. Like many carriers in Africa,
the speech, looked at each other in a instability have experienced some RAM has financed a number of its aircraft
way that said Pearce’s statements were hesitation from lessors, says the source. with help of export credit agencies (ECAs).
far from their realities. Over the past “I think they are more reticent right now. But with the current inactivity of the main
few years, the region has witnessed Overall, it’s not stable, but people are ECAs, airlines such as RAM have had to
geopolitical instability with the Arab still doing deals. It’s just that when the look at alternative financing options.
Spring and several terrorist attacks, often airlines in those regions go to the market Although the airline initially issued
in regions where tourism plays a vital role themselves, they often find it harder to a request for proposal to fund three
in the local economy. get the financing.” 787-8s by the Export-Import Bank of the
“As someone who has been to all If there is a dampening in tourist traffic, United States, the dearth of export credit
of these countries, you can see the overcapacity can be a concern. One financing has caused it to look at other
diminished air traffic,” says one industry industry source says that EgyptAir has modes of financing. Although this has
source, who works with several airlines in got some widebody capacity but “doesn’t been negative for some carriers in the
the region. “I was at the pyramids in Cairo really need it” and “there’s a move away region, Yassine Berrada, vice-president
a few years ago, and some people came from needing a Boeing 777 and Airbus corporate finance at Royal Air Maroc,
up to me saying ‘We miss the Americans, A330 into something that’s not as large says the carrier has not had its financing
we miss the Europeans’.” as that” with some of the North African options limited through Ex-Im Bank’s
One striking example of an airline that carriers. current inactivity and political instability in
has been negatively affected is Tunisian the Middle East and North Africa (MENA)
flag carrier Tunisair. Its traffic suffered Morocco’s safe haven region. During the past six months, RAM
after a terrorist mass-shooting against Seen as a more politically stable region has closed three commercial deals for
foreign tourists on a resort in Sousse that than some of its neighbours, Morocco three new 787s, with the loans being paid
killed 38 people. does not seem to be experiencing the in euros from two Moroccan banks.

The global environment is not helpful for tourism in North Africa. Many
Europeans prefer going to Portugal and Spain – they see them as safer.
Yassine Berrada, vice-president corporate finance at Royal Air Maroc

22 Airfinance Journal February/March 2017

 North Africa

Unlike many African carriers, RAM has of stability despite the challenges that the
not seen a decline in interest from some
I think the Arab Spring country faces.
of the banks when financing the aircraft. came as such a shock “It does pose a challenge having our
“We’ve had offers on both leases and dominant currency devalued in November.
commercial financings,” says Berrada. “We to everyone, it really has But with our airline, we’re not just relying on
did not expect to see the interest we saw.
We had South African banks, European
changed the culture among local currency – you also rely on currencies
like the Saudi riyal and Emirati dirham,
banks, US banks approach us – frankly, we foreign investors. which also provides a support system.”
were quite amazed. I think the appetite was Aly adds that Egypt is “not reliant on
due to the strong credit risk of the airline.” Victoria Mackay, founder, VLM Advisory, a just tourism traffic” and it is viewed a
The carrier will be taking delivery of MENA political risk consultancy geographically attractive location across
more 787s and a 737 Max aircraft from Africa and the Middle East.
2018 to 2020, which it looks likely to take EgyptAir, the country’s flag carrier,
on its balance sheet. Berrada adds that the operates a 75-aircraft fleet, including
carrier will lease all incoming aircraft this A320s, A330s and A340s, as well as
year. 600s, two 737-700Cs, three 767-300s and 737-800s and 777-300ERs, according to
“Although we have no big problems, still one Lockheed Hercules L100, according Airfinance Journal’s Fleets.
we are working in difficult environments,” to Airfinance Journal’s Fleet Tracker. Tassili The airline is due to issue a request for
he says. “Indeed, despite Morocco being Airlines operates a fleet of 15 aircraft, proposal (RFP) in the coming weeks, adds
a safe haven within the region, an average indicates Fleet Tracker: four 737-800s, the leasing source. The RFP will be for
European or American considers Morocco four Q200s, four Q400s and three Beech 250-seater narrowbody aircraft, according
as part of the North Africa-Middle East 1900s. to the source, who adds that the carrier will
troubled region. As a consequence, foreign “They use a lot of ECAs,” says the leasing be open to all types of financing to fund the
tourist (excluding Moroccans abroad) executive. “But they have a problem with deliveries.
arrivals dropped by 4% in 2016 after a drop that because Ex-Im and the European
of 5% in 2015.” ECAs are not doing many deals right now. Increase risk monitoring from lessors
Berrada adds that the airline has seen If there is any expansion from the airlines, it Mackay has seen an increase in lessors
an 11% growth in traffic at fiscal year-end 30 would be by acquiring aircraft from lessors carrying out political risk analysis when
October 2016, thanks to the performance or using commercial banks to finance determining which airlines to work with in
of its Casablanca hub and new routes from aircraft. Sometimes international banks will the region.
this hub. The first two months of 2017 fiscal finance them but it will be more expensive. Phil Seymour, chief executive officer of
year are in the same trend of two-digit In my view, they will have no choice – they aircraft advisory IBA, agrees. “Typically,
growth in traffic and he hopes traffic will will have to go to lessors to have 100% a lessor will go and visit an airline and
continue growing by a two-digit percentage financing.” the aircraft every two or three years.
at the end of next year. We’ve seen that they’re now taking the
Although Berrada is optimistic about Egypt’s other opportunities opportunity to get in there more frequently.
Morocco, he is less optimistic about North Egypt is also experiencing its own Coupled with that, the local currencies in
Africa as a whole. “The global environment problems, at times finding it difficult to the region are probably worth less now,
is not helpful for tourism in North Africa attract the foreign investment its tourism and all of the costs are in dollars: fuel,
right now. At the moment, many Europeans and airline industry needs. leases and financings are probably based
prefer going to Portugal and Spain – they “I think the Arab Spring came as such a on US dollars that are probably going to be
see them as safer.” shock to everyone, it really has changed more expensive for them now.”
The main part of the carrier’s traffic the culture among foreign investors. When looking at credits in the region,
is connecting Africa to Europe and the Political risk is now part of the due lessors often have to look further than the
Middle East. Berrada says that this traffic diligence process in a way it hasn’t been profit and loss and the balance sheet of
is growing, but he has seen a decline previously and I don’t see that changing the airline. They also look at the airline
in competition from foreign carriers into any time soon,” says Victoria Mackay, management teams, the capacity, the
Morocco. founder of VLM Advisory, a MENA political codeshares and the alliances – to name a
“EasyJet has decreased this year from risk consultancy. few variables.
Morocco,” he says. “Like us, they have seen She adds that it takes only one big “It brings up a whole new area in terms
that the pure Moroccan-Europe tourism is incident such as the Russian Metrojet of assessing the risk in those areas from a
decreasing, so there is less LCC [low-cost passenger aircraft coming down over lessor perspective,” says Seymour.
carrier] competition.” the Sinai Peninsula in 2015 to reduce the Mackay adds “It’s very difficult to conduct
amount of foreign investment into that due diligence on a company or individual in
Algeria’s oil and ECA worries country. that region without assessing their political
Unlike Morocco, its neighbour Algeria is In response to these attacks and a context because political change has such
mainly an oil-driven economy. The country’s change in the Egyptian tourism landscape, a bearing on the financial fortunes of local
two main airlines in Algeria are Air Algerie Cairo-based airline Nile Air has managed entities and individuals.”
and Tassili Airlines. to find additional revenue through other Seymour says that if the situation is to
The leasing source says: “Now with the avenues by adding new routes to its improve for North African airlines, security
oil price going down, it’s less financially network, such as from Sharm El Sheikh to needs to remain a priority for the countries
attractive for those airlines, because Air Amman in Jordan. in which they operate.
Algerie is owned by the state and Tassili Speaking to Airfinance Journal, the “They’ve got to think, ‘We’ve got to prove
Airlines is owned by Sonatrach, an oil carrier’s chief executive officer, Ahmed Aly, to the industry that we’re a safe place to
company.” says: “I think one thing financial institutions be’. There is nothing much they can do
Air Algerie has a fleet of 59 aircraft, and leasing companies understand is that about the low oil price, but they can do a
comprising 25 737-800s, 12 ATR 72-500s, Egypt’s still a very strategically-important lot about security,” adds Seymour. “That’s
eight A330s, five 737-600s, three ATR 72- country and there is an overriding sense within their control.”

www.airfinancejournal.com 23
 Consolidation analysis

Why lessors will continue

to consolidate
The aviation leasing sector will continue to face further consolidation following
the purchase of CIT Aerospace by Avolon and its Bohai Leasing parent group, say
lessor sources.

S ince 2014, the leasing industry has

evolved through consolidation and the
emergence of new platforms.
A spate of mergers and acquisitions
has allowed cash-rich Asian businesses
to enter the sector as the industry is
increasingly viewed favourably by yield-
hungry long-term investors.
The momentum is expected to carry on
this year.
A leasing source says: “2017 will see
more platform acquisitions, given the drive
to consolidate and the continued influx
of capital to the sector that will quickly
determine that a ‘go alone’ strategy is not
the right way forward.”
More second-tier lessors could fuel
their growth by acquiring platforms and/or
Robert Martin (left), Managing Director and Chief Executive Officer of BOC Aviation and
portfolios to become first-tier lessors. Domhnal Slattery (right), CEO of Avolon, Hong Kong, November 2016
“It is a possibility because generic
growth is so hard in today’s market with
lease returns being so low. We see the “First, it is the desire of equity to switch of AerCap, said there will be continued
likes of AerCap selling off its portfolio to a different investment sector and consolidation in the leasing sector as
and returning cash to investors via share second, it is because so many of the new there are significant benefits of scale.
repurchases vs reinvesting in aircraft,” says entrants are staffed for good times – they “I would expect to see more of the
another source. have no real ability to deal with a single second-tier guys roll over,” he says.
“We are still seeing plenty of liquidity and repossession – let alone, say, several – However, another lessor argues that
not only in China. Canada has, at present, and lease restructurings simultaneously.” size is not essential.
only slightly cracked open its coffers and “I think it’s more important to ensure
there’s a lot more there. We have a number More mega-lessors? that the liability side of the balance sheet
of sources in the Middle East suggesting In a poll at the 17th Asia Pacific Airfinance is financed efficiently and that doesn’t
they are ready to invest. Korea is a quickly conference last November, 85% of the necessarily have to come as a result of
developing market also,” he adds. audience expected more operating leasing size,” the lessor says.
Another leasing source believes the platforms to be acquired by Chinese He points out the difficulties of making
catalyst for acquiring other platforms “will be entities in 2017. good returns in today’s market, especially
a softening in the market” where the smaller Another 12% opined that this will not be the on sale and leaseback transactions.
or boutique lessors start to struggle. case, while the remaining 4% were unsure. “With the OEM’s juggling an order
The main reason for this struggle will be In an interview with Airfinance Journal backlog it is impeding their placement
two-fold, he says. Aengus Kelly, chief executive officer (CEO) opportunities for their own orderbooks.
Options are few, but doesn’t it point
to the fundamental structure of the
leasing business changing? You have
We are still seeing plenty of liquidity and not only to restructure your balance sheet to
China. Canada has, at present, only slightly cracked be a lender via some hybrid leasing
structures as well as a traditional lessor,”
open its coffers and there’s a lot more there. We have he comments.
Airfinance Journal’s 2016 top 50 lessors
a number of sources in the Middle East suggesting showed the lessors represented $260
they are ready to invest. Korea is a quickly developing billion-worth of assets, up from $234
billion in 2015.
market also.

24 Airfinance Journal February/March 2017

 Consolidation analysis

Their revenues and net income are also fleet size – GECAS, AerCap, SMBC Aviation a group of operating lessors, sources
up on aggregate. The top 10 lessors had Capital, BBAM and Nordic Aviation Capital indicate. Avolon, Dubai Aerospace
$18.6 billion combined revenues this year, (NAC) – contracted by 200 units year-on- Enterprise and Macquarie Group, which
up from $15.7 billion last year. Net income year. The race to the top could potentially has teamed up with Ping An, are all
has gone up to $4.1 billion from $3.1 billion mean a group of five large lessors by 2020. involved in sales talks regarding the AWAS
over the past 12 months. platform, say sources.
The top 50 lessors ranking showed Lessor number three However, bids for AWAS were due as
a fleet of approximately 8,675 aircraft Avolon’s CEO Domhnal Slattery has said Airfinance Journal went to press. Following
under ownership and management. This the purchase of CIT Aerospace is “not the the bids the market should “know more
compares with 8,185 units a year ago. summit” of the lessor’s ambition. then” about which firms will emerge as the
The top 10 lessors account for 5,200 Bohai Leasing, which is majority owned leading bidders for the platform, says a
aircraft or 60% of the top 50 ranking. In last by HNA Group, completed the purchase of source involved in the sale process.
year’s ranking they represented almost two Avolon in the first quarter of 2016. Avolon Terra Firma entered into sales talks
thirds with 5,330 units. merged with Bohai’s existing leasing entity, last year with Chinese-owned entities
Exposure to the widebody market by Hong Kong Aviation Capital. regarding the purchase of AWAS. But talks
the top 50 further reduced over the past The completion of the acquisition of CIT with ICBC Financial Leasing and Bohai
12 months to 15% from 15.3% a year ago. Aerospace, which is scheduled for the Leasing broke down due to turmoil in the
However the top 50’s narrowbody market first-half of 2017, would propel Avolon to the Chinese market, which resulted in the
share is now at 69%, a 0.5 percentage number three spot in the lessor ranking by nation’s stock market coming to a halt
point up from the 2015 figures. fleet size behind AerCap and GECAS. twice in one week, triggering a further
Aside from NAC, a regional lessor Now all eyes are on the sale of Terra weakening of the yuan.
specialist, the top 50’s footprint in the Firma Capital Partners’ AWAS, which So will a sale happen this time around?
regional jet and turboprop market over the has been downsizing its fleet size and BOC Aviation’s CEO Robert Martin opines
past 12 months has contracted by more personnel during the past couple of years. that a sale is more likely now, but it
than 10%, confirming a trend to focus on the The lessor sold a 90-aircraft portfolio “depends on the price and what Guy Hands,
mainline sector. to Macquarie AirFinance as well as the founder of Terra Firma, has in his head.”
The report shows that 455 regional E-notes of an asset-backed securitisation Avolon’s Slattery believes AWAS will be
jets and turboprops were owned and/or (ABS) deal covering 30 aircraft to Kahala sold and the owners will get a “fair price”.
managed by the top 10 lessors, down from Aviation in 2015. “If they don’t sell it, I would not like being
last year’s 510 total. The remaining 245-aircraft and its a limited partner investor in Guy Hands’
Overall, the largest lessors in terms of platform have attracted the attention of fund. I would be pretty upset,” he adds.

Tamweel Aviation Finance to further

expand its platform
D ubai-based Novus Aviation Capital
is looking to further expand the size
of its financing leasing platform, Tamweel
and outlook for this product especially
with the ongoing changes we have been
witnessing on both the export credit
structured by Novus offering the customer
a turn-key solution.
TAF also financed its first A330-300
Aviation Finance (TAF). agencies and regulatory fronts,” he adds. model for Hong Kong Aviation Capital,
The company was initially formed in The company was set up to facilitate but in late 2015 it expanded its asset
2013 by Novus in partnership with Airbus the funding of aircraft acquisitions, with investment profile with its first single-aisle
and Japanese lender Development Bank a focus on the twin-aisle segment. The transaction.
of Japan (DBJ) as a sponsors of the project. Airbus A380 has been the core of the initial TAF agreed a financing deal with Virgin
German lender NordLB then joined in investments. America covering three A320s that were
October 2014. TAF has grown to a portfolio size of more delivered in the first half of 2016.
In an interview with Airfinance Journal, than $1 billion of assets by market value. It also closed financing on two A319s for
Novus’s managing director Mounir Kuzbari Its first deals includes the finance leases Avianca.
says the financing vehicle intends to further of Emirates A380s with Novus acting as “The mandate has always been to
grow this year after a “very successful” overall structuring agent and providing include all types of the Airbus product
ramp up. mezzanine and junior tranches through TAF. range including narrowbody aircraft in the
“We are working with our partners to The refinancing of two A380s through portfolio with different customer profiles in
expand the platform over the next few a finance lease for British Airways in Europe, Middle East, Asia, United States
months,” he tells Airfinance Journal. November 2014 was innovative as it and Latin America.”
The vehicle is an integrated financing provided dual denominated tranches. The In January, TAF provided mezzanine
platform that offers alternative financing deal was structured as a 14-year senior loan loans for the financing of three A321s for
solutions to airlines and aircraft leasing and a seven-year junior loan. The senior Singapore-based lessor Avation. Two
companies by providing secured junior and loan is 50% euro-denominated and 50% European banks provided the US dollars
mezzanine debt loans. US-denominated, with NordLB providing loans on the aircraft that are on lease to
“TAF provides financing solutions to the Euro potion and Qatar National VietJet Air.
airlines and lessors who are looking for Bank the dollar-denominated loans. The “TAF’s mezzanine facilities are a useful
that incremental loan-to-values. We will junior loan is 100% in dollars, with Qatar leverage tool for transactions of this
continue growing this part of our business National Bank providing 50% and Tamweel nature,” said Jeff Chatfield, executive
based on the very good market reception providing 50%. The deal was arranged and chairman at Avation

www.airfinancejournal.com 25
 Interview

A career at the top

Denis Kalscheur, Aviation Capital Group’s former chief executive officer, left the
company at the end of 2016. Joe Kavanagh caught up with him at the 19th Annual
Airfinance Conference in Dublin to hear about some career highlights, his final
months at ACG and his new role at Avolon.

A irfinance Journal: One of your first

major aviation deals took place
after you were parachuted from the
global markets and key international airport
slots and service protected by bilateral
agreements that we had to preserve. If
parent company in to US cargo airline we hadn’t been careful in how we dealt
Flying Tigers in 1983, to manage a major with the lenders, we could have lost all of
debt restructuring. The airline had run that. The real task, stepping in, was to get
into serious problems after increased all these people to come to the table. We
competition in the freight market and had to come up with a creative solution
a dramatic increase in borrowing costs because there was no way to go back and
during the recession and credit crunch of renegotiate each deal in the short time we
the early 1980s. What was that process had. It was like playing a three-dimensional
like? chess game.
So what we did, which was very creative,
Denis Kalscheur: I started out at the along with the more than 60 lenders
holding company, Tiger International, we had, was to create an “override
which was Flying Tiger’s NYSE-traded agreement”. We all agreed on a common
parent company, and then went to the document that overrode the provisions of
airline to do the restructuring. The prime every other document, which took 100%
rate had reached 20.5% in the early ’80s of the lenders. That allowed everybody
and capital-intensive companies such as to move forward. It got a little tricky at the
airlines, which carried heavy financing, end, because we had accumulated cash
were hit hard. after having announced the restructuring,
I think we went about it the right way. which was a moratorium on repayment until
Maybe other companies would have taken we came to an agreement. The lenders
more drastic actions, but we successfully wanted a pay down from most of that cash.
restructured the airline outside of a Any deal has deal The banks had been most exposed, so
bankruptcy. We had a complex set of
lenders: we had unsecured and secured
momentum. You build they were willing to work with us within
limits and we negotiated a new revolving
banks, we had institutional investors it and you get things credit with the banks for the liquidity we
investing in our equipment trusts and we needed to run the business. This allowed
had equity and debt investors through tax to a marshalling point us to take our cash and make a pay down
leveraged leases on 747s. where the deal is ready under the new override terms and then
The complexity of the restructuring was rely on this new revolving credit facility
this: we had lenders in many different to happen. If you miss it, for liquidity. So you had to make sure
categories, some who were highly secured, everything was in place before parting with
who couldn’t care less what happened to
it’s like the wave cresting the cash.
the airline from a collateral protection point and then you have to Any deal has deal momentum. You build
of view. They could sell their assets and it and you get things to a marshalling point
our equipment trust would get paid back. wait for the wave to form where the deal is ready to happen. If you
But it was the under-secured and totally miss it, it’s like the wave cresting and then
unsecured lenders for whom everything
again. We were able you have to wait for the wave to form again.
depended on a successful restructuring to to bring this disparate We were able to bring this disparate group
get their money back. When you’re doing of lenders to that marshalling point on the
an overall financial restructuring like that, it group of lenders to that very last business day of 1983. We had to
takes 100%. Everybody has to agree. Every get it done, and we did. There’s nothing
equipment trust holder, all the leveraged
marshalling point on the like a deadline.
lease pieces, all the foreign currency debt, very last business day
all the banks have to agree and sign off or As chief financial officer at AirCal, you
it doesn’t get done. If you went and fixed of 1983. We had to get it were involved in diversifying the airline’s
one to the disadvantage of somebody else,
the other people could take you down.
done, and we did. There’s sources of financing. Generally speaking,
how does the capital structure of airlines
So how do you convince everybody to nothing like a deadline. differ now from back then?
cooperate?
There was a lot that Flying Tigers had Denis Kalscheur, Aviation Capital Group’s There was not a big operating lease option
in terms of franchise value, such as its former chief executive officer at the time. It was at an early enough

26 Airfinance Journal February/March 2017

 Interview

market stage where the amount of aircraft

available for operating lease was quite
Since I was scheduled to retire at the end of 2016,
small compared to the total population of it made sense to make the move to a new CEO a bit
aircraft that was out there. So you’re talking
a small percentage of what it is today, in earlier than planned. It doesn’t matter how good you
terms of the operating lease market. are – if the runway is short it’s not a great pitch to say
But post-deregulation of the US aviation
market there was a lot of airline growth to investors, “Here, buy our stock, but by the way I’m
and interest in aircraft as an asset by equity
investors who could use the tax benefits not going to be here.
of ownership. So a lot of leveraged leases
became prevalent because the investors
could use the tax benefits and pass some Pacific Life decided it would let a portion of Avolon’s overarching strategy is to
of them on to you in terms of lower lease the company go public. That would provide be one of the leading aircraft-leasing
rates. The battle at the time for airlines extra capital for growth while keeping enterprises, if not the global number
was not only getting the lower rate but at control of the business, which provides one, focused on building a portfolio of
the end still to control ownership of the good diversification benefits to Pacific Life. modern, young and fuel-efficient aircraft.
asset while keeping the transaction off the Since I was scheduled to retire at the end The CIT acquisition clearly puts Avolon
balance sheet. . of 2016, it made sense to make the move in the number three spot and closing
Today, the more flexible operating to a new CEO a bit earlier than planned. It in on the couple of larger competitors.
leasing option is available which gives doesn’t matter how good you are – if the What has been impressive to me is to see
airlines more optionality in dealing with runway is short it’s not a great pitch to say to the thoughtful risk management baked
their fleet over time. This is the best of investors, “Here, buy our stock, but by the into all the company’s key processes
both worlds between controlling the asset way I’m not going to be here.” and decision-making, which has guided
and having fleet flexibility. If you lease a So a logical choice was for Khanh Tran, the company during its rapid growth.
new aircraft, you can have it for up to 12 then the president of Pacific Life, to step This does not happen without a skilled
years without the headache of ownership in to do the CEO role for ACG and take it management team and the Avolon team,
at the end, and with more flexibility in public. We’ve known each other for years which I have known over the years, is
the meantime because the lessor owns so it was an easy transition. equally impressive. Before Avolon, that
the aircraft and can move it around if [Note: ACG’s partial IPO is ongoing] team built another global top five player in
necessary. You have to negotiate your way the leasing industry and their experience
out of the cancellation, of course, and that Finally, in January 2017, you accepted across business cycles is evident in how
might involve other lease arrangements, a place on the board of directors of they run the business – most particularly
but it just gives you a lot more flexibility. Avolon. What made you take the role, in their approach to risk management.
and can you share some insight into the Another strategy objective of the
You joined ACG from its parent, US leasing company’s strategic goals? company is to achieve investment-
insurance company Pacific Life, at the grade [IG] status for its debt. While not
end of 2012. How did you find your I wanted to continue to be engaged in the quite rated IG for now, the substantial
way to the lessor, and what was the aviation industry without taking on a day- oversubscription of Avolon’s just-
company’s thinking behind its planned to-day executive role but in an influential completed $8.5 billion of institutional
partial initial public offering? role with a global company accomplishing funding and the fact that it is operating
meaningful things. Serving on the board of with investment-grade metrics today
I joined Pacific Life in late 2007 and one of Avolon clearly meets all those goals points toward achieving investment-grade
the attractions was that part of the role was for me. status with a bit more seasoning.
involvement with ACG. I knew the aircraft-
leasing business and had introduced the
companies to each other in the mid-1990s.
Then the financial crisis hit, right after I
joined Pacific Life. My main focus had to be
maintaining the financial strength of Pacific
Life, which was the parent company, and
taking advantage of acquisitions following
the onset of the financial crisis.
But I always stayed close to ACG. When
Steve Hannahs, former CEO, retired, I was
asked to step in and run the aircraft leasing
business.
At the end of 2015, when the Pacific Life
board decided to consider a public offering
of ACG, it wasn’t to sell ACG outright – it
was to provide ACG with a new source of
capital for growth while retaining control of
ACG. ACG had become a sizeable piece of
the parent company, hitting the mid-teens
as a percent of capital – and that’s pretty
significant. And looking at the scaling up
that was going on in the aircraft-leasing
Source: Avolon
business and the capital that was taking,

www.airfinancejournal.com 27
 India

Cautious confidence in
post-Kingfisher era
Michael Allen explores how recent legal and infrastructural developments in
the Indian leasing market are helping repair the country’s damaged reputation
after the disastrous collapse of Kingfisher Airlines in 2012.

“I f your flight lands in Delhi, you will

see in one corner of the airfield a few
Kingfisher A320s parked on the side just
by the airline’s failure. DVB confirmed it
had two A320s with Kingfisher. ILFC, which
is now owned by AerCap, had at least six
The Indian aviation
industry went through
gathering dust – it’s like a little Kingfisher aircraft with the airline.
graveyard,” says Sidanth Rajagopal*, a The phrase “Indian airline” therefore has a bit of a rough patch...
partner at K&L Gates, who makes frequent
trips to India.
an unpleasant ring to it; not just for lessors
which dealt directly with Kingfisher, but
leaving the aircraft finance
India suffered a disastrous blow to its also those not exposed to Kingfisher, who and leasing community
reputation with the international lessor followed the situation and heard industry
community when Kingfisher Airlines folded colleagues’ tales about the difficulties with cautious, but the market
in 2012 (see box, Kingfisher’s downfall).
Few working in the industry at the time
the jurisdiction.
But with India’s recent advances in the
now seems to be booming
will be unfamiliar with the horror stories application of the Cape Town Convention and it’s easy to see why.
of cannibalised aircraft and protracted (CTC), coupled with voracious demand
negotiations to get aircraft out of India, with for aircraft from its fast-growing low-cost Leo Fattorini, head of the Asia-Pacific
DVB Bank and ILFC being the hardest hit carriers (see box, SpiceJet’s big order), aviation group, Bird & Bird

*Shortly after this interview, Rajagopal left Kaye Scholer to join K&L Gates as a partner

28 Airfinance Journal February/March 2017

 India

those who can forgive India for its past

transgressions are reaping the rewards
India is a signatory and has ratified the Cape
– though full CTC implementation is still Town Convention, but it is still to enact the underlying
ongoing and there remains room for
improvement. legislation, although it has enacted some subsidiary
“The renewed growth is in line with the regulation which requires the Indian Directorate
enthusiasm seen in the overall domestic
economy and the strong appetite for General of Civil Aviation (DGCA) to deregister an
aircraft in the surrounding geographies in
Asia. We see more renewed interest for aircraft upon request of an Idera holder.
financing aircraft in the region, especially
with the right backer and the risk profiles,” Ravi Nath, chairman and managing partner of Rajinder Narain & Co
says David Yu, International Bureau of
Aviation’s head of Asia.
Ravi Nath, chairman and managing
partner of Rajinder Narain & Co, says that any spare engines. inevitably translates into more flights and
while the market is growing, regulations are Airfinance Journal understands that the the need for more aircraft,” adds Fattorini.
not quite keeping pace. idea behind the Idera is that the lessor
“India is a signatory and has ratified the holds it, and if the lessor needs to go to DVB and ILFC
Cape Town Convention, but it is still to deregister the aircraft and fly it out, it does Airfinance Journal’s Fleet Tracker indicates
enact the underlying legislation, although not need to go to the airline. that AWAS, ACG, AerCap, Amentum, BBAM,
it has enacted some subsidiary regulation “There is absolute clarity – judicial BOC Aviation, DAE Capital, ILFC, Pembroke
which requires the Indian Directorate precedent says that there is no choice but Capital, RBS Aviation Capital and Volito
General of Civil Aviation (DGCA) to for the DGCA to deregister the aircraft,” Aviation Services all had exposure to
deregister an aircraft upon request of an says a source. Kingfisher.
Idera holder,” he says. Leo Fattorini, head of the Asia-Pacific But DVB and ILFC’s exposures were the
An Idera is an Irrevocable Deregistration aviation group at Bird & Bird in Singapore, most widely publicised because of their
and Export Request Authorisation, a says that he and his colleagues have public battles with the Indian government
voluntary measure that provides greater recently advised banks, lessors and airlines to get their aircraft back.
security to creditors by preventing a debtor on increasing numbers of deliveries into At the end of 2012, DVB suspended all
from flying an aircraft to a jurisdiction where India and he expects this trend to continue. financing to Indian carriers and sued the
the Cape Town Convention does not apply. “It’s no secret that the Indian aviation Indian DGCA for its failure to deregister two
In October, the Indian government industry went through a bit of a rough patch jets it wanted to repossess from Kingfisher.
announced a draft rule that would benefit following the demise of Kingfisher, leaving Bertrand Grabowski, then member of the
lessors seeking to repossess aircraft from the aircraft finance and leasing community board at DVB, said at the time that holding
India. cautious, but the market now seems to be security over aircraft registered in India did
Rule 32A, concerning the export of booming and it’s easy to see why,” he says. not give acceptable protection to owners
aircraft, states that if an Idera holder “India has a vast population and, more and mortgagees.
applies for export of an aircraft, the central recently, there has been a surge in those ILFC had to repossess six jets on lease
government will take action within five with disposable income, which, coupled to Kingfisher. Henri Courpron, then chief of
working days to facilitate the export and with the rapid growth of Indian LCCs ILFC, said that his lessor had never faced a
physical transfer of the aircraft, along with [low-cost carriers] offering cheap fares, situation as bad as Kingfisher.
Courpron added that complying with
Cape Town is critical for the air finance
industry, and those who do not comply may
struggle to obtain financing for aircraft at all.
“Comply or don’t fly,” was his pithy
warning to India.
DVB Bank declined to be interviewed
for this article, saying only: “We don’t really
have much new to say on the topic of DVB
and India. Our position on India remains as
it has been for the last several years since
the collapse of Kingfisher. That said, we
continue to observe the development of
the airline industry in India and monitor the
changes to the country’s legal system and
may re-enter the market when we again
It’s no secret that the Indian aviation industry went feel comfortable.”
AerCap, which now owns 100% of ILFC,
through a bit of a rough patch following the demise declined to comment.
of Kingfisher, leaving the aircraft finance and leasing 5/20 rule – minus the five
community cautious, but the market now seems to be Another restriction on some Indian carriers’
growth plans has been the government’s
booming and it’s easy to see why. enforcement of the 5/20 rule.
In the early 1990s, India privatised some
Leo Fattorini, head of the Asia-Pacific aviation group at Bird & Bird of its industries, including aviation, and

www.airfinancejournal.com 29
 India

with that came several new entrants. A Cautious confidence making India a completely comfortable
new regulation was brought in – the 5/20 With these positive steps towards making jurisdiction for lessors both from a legal
rule – which stated that to be able to fly India a more lessor-friendly jurisdiction, it and infrastructure perspective, market
internationally as an Indian carrier, an airline seems the main thing that could still hold participants should be optimistic about the
must be five years old and have at least 20 the country back is its infrastructure, which future of the country.
aircraft in its fleet. Some industry heads view remains crucially underdeveloped. Rajagopal says: “Cautious confidence is
it as a protectionist rule for the government- “To allow India’s airlines to expand, there what all lessors should have.”
owned flag carrier Air India. is a pressing need to further develop the
Newer Indian carriers such as Vistara country’s airport infrastructure and build
and AirAsia India are affected by the rule more airports and runways at a much faster
and therefore are restricted to flying only pace than current developments if they are
domestic routes. to meet their projected growth plans,” says Kingfisher’s downfall
“Some of the more established Indian Jacovides.
carriers with more than 20 aircraft and over Kaye Scholer’s Rajagopal says: “The Kingfisher Airlines collapsed in 2012
five years of operation were presumably infrastructure gap is the fact that, of about because of financial difficulties. DVB
quite happy with the rule as it made it harder 450 airfields in India, only about 70 of them Bank and ILFC (now owned by AerCap)
for relative newcomers such as Vistara and are useable. The interconnectivity is really were the main creditors.
AirAsia India to operate internationally,” says poor. They have airstrips, but they don’t Kingfisher had its operating license
Bird & Bird’s Fattorini. have air traffic control, for example.” revoked by the Indian Directorate General
“There’s no reason why the existing But the government is working on of Civil Aviation (DGCA) in October 2012
carriers would want to change the rule that improvements, and the city of Vijayawada after failing to supply the regulators with
was effectively hampering the progress of in the state of Andhra Pradesh is one an acceptable turnaround plan.
new carriers,” he adds. example. Its airport serves as a hub for Air DVB Bank sued the DGCA for failing to
Airlines including IndiGo, SpiceJet, Jet Costa, but just five years ago it lacked even deregister two Kingfisher A320s.
Airways and Air India are exempt from a proper luggage belt, so disembarking Airfinance Journal argued in March
the rule, and are able to fly internationally. passengers would simply select their 2013 that the situation was “obviously
Foreign carriers such as Singapore Airlines luggage directly from the luggage trolley calamitous for the lessor and banks
and Emirates are able to fly routes such as like at the end of a long-distance bus involved, but it has wider implications for
Singapore to Delhi in much larger aircraft journey. “Even with that really small airfield the aviation community as a whole”.
than the Indian carriers. Because some it’s still a city of about six million people,” An Airfinance Journal editorial at the
Indian airlines are impeded by the rule, says Rajagopal. time said: “The Indian government’s
foreign carriers reap the benefits. But in January, a new terminal was delay over its return of the jets shows
But Airfinance Journal understands that inaugurated and the country’s civil the weakness of rule of law in the
the “5” aspect of the rule has now been aviation minister said the runway would be country. Depressingly, it also highlights
relaxed, while the “20” remains – for now. extended to accommodate bigger aircraft. some of the limitations of the culture of
“The 5/20 issue is going to go away. The “If it’s successful, the Indian aviation compliance that Cape Town supposedly
government has already said that that is industry 10 years from now will look helps promote.”
almost a non-issue,” says Rajinder Narain & significantly different from what it looks
Co’s Nath. today,” says Rajagopal.
Mario Jacovides, global head of the The Indian government has a so-called
structured and asset finance group at Allen Regional Connectivity Scheme in draft
& Overy, says that the Indian government’s phase, and the industry hopes this will lead SpiceJet’s big order
proposal to relax the 5/20 rule would to more improvements in the country’s
enable new airline entrants in the market, aviation infrastructure. SpiceJet has announced a commitment
such as Vistara and AirAsia, to compete The scheme, Rajagopal explains, allows for up to 205 aircraft with Boeing.
on international routes without having to airlines to approach the DGCA to choose Booked at the end of 2016, the order
wait for the current five years of operations. a route from those offered under the includes 100 new 737 Max 8s, SpiceJet’s
While this would be beneficial for them, it scheme – which are all tier 2-tier 3 or current order for 42 Maxs, 13 additional
may affect the market share of incumbent tier 3-tier 4 city routes – whereupon the 737 Maxs, which were previously
airlines which are complying with those DGCA can issue that airline an exclusive attributed to an unidentified customer
rules. 10-year permit to operate the route, though on Boeing’s orders and deliveries
“These rules have been the subject the airline must commit to investing in website, as well as purchase rights for 50
of much debate and discussion and a providing services on that route. additional aircraft.
compromise may be needed to move Some of these lower tier cities only have SpiceJet, an all-Boeing jet operator,
forward,” he says. runways capable of landing small aircraft, placed its first order with Boeing in 2005
even sometimes only unpressurised aircraft for next-generation (NG) 737s and now
such as Dornier 228s. operates 32 737NGs in its fleet.
“It will have to be a very, very new Kiran Koteshwar, chief financial officer
The 5/20 issue is concept developing here, which hasn’t
been done anywhere else. You will have to
of SpiceJet, told Airfinance Journal that
the “long-term order” gives the company
going to go away. The have proper scheduled airlines with these “strategic direction”.
super tiny aircraft,” says Rajagopal. He says: “We have [now] restructured
government has already “Yes, there is an infrastructure issue. Yes, completely: We have paid our dues, we
said that that is almost a it’s being addressed to a certain extent,
but it won’t be addressed fully unless you
have not taken any haircuts, we have
paid the taxes and everything that is
non-issue. have carriers who actually look specifically required. We are now in a growth part
at using their aircraft and connecting tier 4 and our load factors have been the
Ravi Nath, chairman and managing partner and tier 3 cities to tier 2 cities.” highest in the market.”
of Rajinder Narain & Co While there is still work to be done in

30 Airfinance Journal February/March 2017

 Financing

Changing composition of
financing sources in aviation
Professor David Yu, Istat certified aviation appraiser, examines trends in the aviation
finance sector driven by the role of insurance companies and commercial banks.

Throughout the history of aircraft

leasing, various financing trends
have come and gone while the industry
operating leasing industry in the mid-1970s
by the pioneering International Lease
Finance Corporation (ILFC) and Guinness
players such as private equity and hedge
funds, and tax equity; capital markets
(30% of 2016 funding), including asset-
has grown significantly to the current $126 Peat Aviation (GPA), aircraft leasing has backed securities (ABSs) and enhanced
billion forecasted of new delivery funding continued to grow to where it is 42% of equipment trust certificates (EETCs);
requirements for 20171. the world’s fleet2. and aircraft and engine manufacturer
There are now more commercial This growth continues to be driven financings (2% of 2016 funding) with a
banks than ever before involved in the by the demand for air travel as global total of $122 billion of new aircraft funding
equity side of the business, along with economies have grown along with the requirements in 20163.
newer capital sources such as insurance number of airlines, as well as revenue
companies. These new players are passenger kilometres and available seat Export credit financing
additionally more diverse in geographical kilometres. Export credit agencies (ECAs) have been
break down by their funding sources a significant source of funding, especially
compared with the traditional western Global state of aircraft funding during the financial crisis, but this has
players and newer eastern players. Airlines and aircraft have traditionally been been trending lower as capital markets
As 2017 further develops, several financed by equity and bank financing financing has increased. The recent low
trends can be observed in relation to facilities. These sources have continued exhibited in 2016 has been the uncertainty
geographical sources of the funding as to evolve with the support of the aircraft of US Export-Import Bank (US Exim), given
well as its characteristics. manufacturers and other innovative its large historical support, especially to
structures by the continued increase in aircraft deliveries.
Background demand from the users, mainly the airlines. After letting its charter expire in July
Sources of capital for aircraft transactions These innovative financing structures 2015, the US Congress reauthorised the
have had many forms since the days of include the use of the operating lease by bank in December 2015, but it is still in
the original aircraft finance leases back in capital sources such as commercial banks a state of limbo because it is not able
1968 with the start of McDonnell Douglas and leasing companies both captive and to conduct new business given it awaits
Finance Corporation (later after the non-captive to banks or manufacturers. Senate confirmation of members to
merger renamed as Boeing Capital) and The other sources of funding include: reconstitute a quorum. Only with a quorum
leases of DC-8s and DC-9s. Before that, cash or equity (28% of 2016 funding); can new funding decisions be made.
the aircraft industry was mainly funded by export credit agencies (7% of 2016
classic equity and bank debt. funding); bank debt (33% of 2016 funding) Graph 4: Percentage of Boeing
From that time to the start of the aircraft by commercial banks, institutional Deliveries Funded By US Exim
(Source: Boeing Capital Corporation)

China’s history of a formal export

Boeing Delivery Funding 2016 credit bank is far shorter that the West’s.
The Exim-Import Bank of China (CExim),
● Manufacturing one of the three policy banks under the
● Cash 26% State Council, was founded in 1994 with
● Capital Markets a mission to implement state policies to
● Bank Debt promote the export of Chinese products
● Export Credit and services. Unlike US Exim, CExim
31% funds projects directly instead of through
guarantees or insurance, which is akin to
what US Exim did in its early years.
While direct aggregate funding numbers
34% are not published, the author has seen
a significant rise in new financings by
CExim especially over the past few years.
9%
This increase in funding is in line with the
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F continued increased share of China’s new
deliveries in the global aviation market.
Source: Boeing Capital Corporation
CExim will continue to have a larger impact
1
Boeing Capital Corporation Current Market Finance Outlook 2017. in respect to the global ECAs and the
2
JP Morgan.
3
Boeing Capital Corporation Current Market Finance Outlook 2017.

www.airfinancejournal.com 31
 Financing

Airbus Delivery Funding through October 2016 The story of Boullioun is interesting
because it was bought from Sumitomo
Trust and Banking by Deutsche Bank in
1998 and subsequently sold to WestLB,
another German bank, in 2001. WestLB,
● SLB 30% once quite active as an equity investor, also
● Manufacturing 1% had a 35.5% shareholding in Singapore
Aircraft Leasing Enterprise (SALE) (now
● Commercial Debt Airline 29% BOC Aviation) until its sale to Bank of China
● Commercial Debt Lessor 3% in 2006, when it decided these were non-
core assets and refocused on its traditional
● Capital Market 6% European banking business. WestLB too
● Cash Airline 19% had issues in its shipping portfolio and has
further retrenched and this could be said
● Cash Lessor 12% about many of the European banks in the
space. The shipping problem story will
continue to be an impact, especially for
Source: Airbus European banks.
In Russia, VEB, Serbank and VTB
banking groups have also been active
overall global aircraft financing market. also used their balance sheets to become through their leasing subsidiaries. Lately,
This, in addition to the hopeful resolution equity investors. Dean Witter was one of the they have encountered difficulties with
of the quorum issue at US Exim, will have original founding shareholders of Aviation sanctions and currency issues.
global ECAs play a larger role in the overall Capital Group (ACG) in 1986. The merged All of the above has happened as the
aircraft finance market. Morgan Stanley Dean Witter combined their East and the Middle East have seen large
Since the tail end of the financial aircraft portfolios into the acquired Awas in increases in activity in the sector. Japan
recession, capital markets have seen 2000. The end of this era came when John originally had a lot of interest in aircraft
a significant rise in the number and Mack took over as chief executive officer leasing – for example, with Sumitomo Trust
magnitude of deals and it has risen to and almost immediately sold Awas to Terra and Banking Company’s acquisition of
represent about one-third of all new aircraft Firma once it was determined to be a non- Boullioun in 1994 from the manufacturer’s
funding. These are represented by various strategic asset. namesake founder and its subsequent sale
securitisation transactions, including ABSs Today in the US, Bank of America Merrill to Deutsche Bank in 1998 as a result of the
and EETCs. During this period, the vast Lynch and CIT are still active as bank- financial crisis of Japan Inc. This interest
majority of the capital markets deals have owned lessors through their mainly Irish in aviation was resurrected post-2010 and
been completed in the West but, in Asia, subsidiaries. CIT will soon be removed from was highlighted by SMBC’s acquisition of
the market has only just started. There are this list when the expected closing of the RBS Aviation Capital in 2012, among other
more innovative financing structures now sale to HNA Group is completed in the first merger and acquisition transactions by
being completed in onshore China and quarter of 2017 because it too has been other local parties. Australia’s Macquarie,
Hong Kong. deemed a non-core asset. Commonwealth Bank of Australia and
I predict that this trend will continue Wells Fargo too entered the space Investec have all been active principal
because more capital markets deals will through a joint venture with Avolon in investors. Middle Eastern banks joined the
be completed globally in 2017 but not by 2013. In Europe, DVB, Santander and mix, including the National Bank of Abu
much in relative terms to other sources. Standard Chartered, through its acquisition Dhabi.
The number of capital markets transactions of Pembroke in 2007, are still active as In China, almost all of the top 15 banks
in Asia will increase substantially, along with investors. It is interesting to note that by assets4 are active as investors through
the expanding interest by financial players Standard Chartered is now in a joint venture their owned leasing companies, except
as described below, but as a percentage of with an undisclosed Chinese investor for a for Postal Savings Bank of China and
the overall global market, this will not move separate aircraft leasing investment entity. Agricultural Bank of China, a policy bank.
the needle much in 2017. The once active HSH Nordbank, through With the exception of Bank of China
its formation of the Amentum platform, has through its acquisition of SALE in 2006,
Commercial banks as investors since been sold to its management in an all the other banks’ activities are newly
Commercial banks have always played management buy-out. This was because formed financial leasing entities created
a significant role in the aviation finance the bank has downsized as a result of the after the 2007 edict by the China Banking
market. They have traditionally provided problems with its shipping portfolio. Regulatory Commission allowing the
financing facilities, both secured and creation of financial leasing entities owned
unsecured term or revolving credit facilities. by banks.
Recently there have been more unsecured While financial leasing companies could
term loan facilities completed at the lessor Capital markets be formed under the Ministry of Commerce,
company level where traditionally the bank-owned financial leasing proved
commercial banks have focused on the have seen a significant even more popular as new Administrative
senior secured financing of specific aircraft rise in the number and Measures for Financial Leasing Companies
(Order of China Banking Regulatory
assets. In addition, more commercial banks
have again acted as lessors and have also magnitude of deals and Commission No 3) were issued in 2014
become equity players. that lowered the barriers to entry into the
One of the sub-trends is in the change
it has risen to represent financial leasing industry. These lessors are
of overall mix in terms of geography. In the about one-third of all new now some of the top 20 globally, according
late 1980s and early 1990s, banks such to Airfinance Journal’s Top Lessors 2016
as Morgan Stanley not only arranged but aircraft funding. by aircraft: BOC Aviation is eighth place

32 Airfinance Journal February/March 2017

 Financing

Global Industry Funding Breakdown

2016 2017

● Manufacturer ● Manufacturer
● Cash ● Cash
US$122bn ● Capital Markets US$126bn ● Capital Markets
● Bank Debt ● Bank Debt
● Export Credit ● Export Credit

Source: Boeing Capital Corporation

with 267 aircraft; ICBC Leasing 12th with group has continued to expand, including
218 aircraft; and CDB Leasing 17th with 148 There is a new trend acquiring Boullioun in 2005 and embarking
aircraft. Meanwhile, Minsheng Financial on a new joint venture with NWS in 2016.
Leasing is 46th with 39 aircraft.
that is emerging in aircraft Other mid-sized insurance companies in
Looking at the top 50 lessors by value leasing of commercial Europe have also started to invest directly
2016, BOC Aviation is in sixth place ($11.4 into aircraft leasing assets. Generally,
billion), ICBC Leasing is eighth ($10.2 banks downsizing their these firms have invested in similar profiled
billion), CDB Leasing is 13th ($6 billion), investments such as infrastructure or real
Bocom Leasing is 19th ($4.2 billion) and
investments. assets through ABS, EETC or other public
Minsheng Financial Leasing is in 41st place and non-public equity and debt.
($900 million).5 This trend will continue Increased interest in the sector from
as the demand for aircraft in the region sub-category of the Basel Committee large insurance companies in China
increases. on Banking Supervision, a category that has also emerged. Like its compatriot
In addition, there is a new trend that is “generally exhibits higher risks and losses” banks, most of the major insurance firms
emerging in aircraft leasing of commercial than other categories of lending. Basel IV in China have created financial leasing
banks downsizing their investments. would, therefore, have negative effects for companies under China’s Ministry of
Investec, for example, recently sold its 20% aviation and higher financing costs when it Finance regulations and have primarily
share of Goshawk Aviation to Hong Kong is enacted. focused on finance leases, although some
based co-shareholders Chow Tai Fook ECAs, on the other hand, have a have started specific aviation divisions
Enterprises (CTFE) and NWS Holdings cover effect on this standardised higher and others have diversified into operating
Limited, which now both have 50% risk rating. Areas requiring large capital leases.
shareholding. requirements such as aircraft leasing and These new players include Ping An
Goshawk is Investec’s third aircraft private equity may propel banks to re- Insurance ($753 billion in assets in 2015
leasing platform, along with Global Aircraft examine and restructure further or leave and ranked number five top global
Fund and Aircraft Syndicate Limited. It is these investments. insurance company), China Taiping
also interesting to note that Goshawk was In addition, the industry is seeing more Insurance ($63 billion in assets in financial
originally set up with backing from Investec, insurance companies come into the space. year 20156) through its joint venture with
CTFE and Cheung Kong (CK), but CK Insurance companies with their large Sinopec, and China Life ($378 billion in
subsequently sold its stake in the lessor to investment mandates have traditionally assets in 2015 and number 20 top global
NWS. CK has since established Accipiter invested in public equities, capital markets insurance company) through its joint
and several other joint ventures with global and alternative investments such as hedge venture entity.7
aircraft lessors. funds. Through these asset classes, This is not a surprising trend given
Another driver rationale for this trend insurance companies have had exposure that most financial groups and large
is the increased implementation higher to the aircraft leasing companies through conglomerates have joined the
reserve capital requirements on global one or multiple streams. Some insurance bandwagon in investing directly in aircraft
banks by Basel III regulations enacted companies have direct investments in leasing assets. As the industry continues
by the global financial crisis and set aircraft leasing assets, which started when to grow in 2017 and beyond, even more
for implementation shortly. In addition, ILFC (one of the founding companies in the players from insurance companies and
proposed amendments to the final Basel III space) was acquired by AIG Group in 1990. other sectors will be entering the industry.
even before its implementation, unofficially Subsequently, AIG sold its ILFC subsidiary These new capital sources will continue
Basel IV, has even more stringent after the financial crisis to AerCap and took to change the composition of finance
requirements that would standardise risk a large shareholding in the new combined capital globally and increase weight
models and do away with internal risk entity in 2014. towards insurance companies and Asian-
ratings. Other large notable direct investments based companies along with the continued
Aircraft leasing is under the specialised by insurance firms include Pacific Life growth of the global aircraft leasing
lending exposures class and object finance Insurance Company in ACG in 1996. The industry.
4
The Largest Banks in China (by Assts as of 30 June 2016) http://www.relbanks.com/asia/china.
5
Airfinance Journal Leasing Top 50 2016 Supplement https://airfinancejournal.com/Magazine/Download/84
6
China Taiping 2015 annual reports.
7 Basel Committee on Banking Supervision. Second consultative document. Standards. Revisions to the Standardised approach for credit risk. March 11, 2016 http://www.bis.org/bcbs/publ/d347.pdf

www.airfinancejournal.com 33
 Aircraft profile

Boeing 777-300ER –
a hard sell
The current widebody market is a difficult one and not even Boeing’s most
successful twin-aisle is immune to declining values, according to appraisers.

T he 777-300ER is the most successful

model in Boeing’s popular 777 range.
The formal go-ahead for the 777 family was
announced in October 1990. Original 777-
200 models were available with a choice of
powerplant from General Electric (GE), Pratt
& Whitney or Rolls-Royce.
The stretched 777-300 first flew in 1997
and was sold primarily to Asian airlines,
the large majority of which selected Rolls-
Royce’s Trent engines.
No GE-powered standard 777-
300 aircraft were delivered, but the Source: Boeing

manufacturer was awarded sole supplier

status on the extended-range 777-300ER
version, which was launched in 2002 and ICF believes the initial leases and become available to the
secondary markets, we expect this trend to
entered service in 2003.
777-300ER market will continue for the next 12 to 18 months.
All good things come to an end The demand for this aircraft, reflected in
The 777 continues to sell in both passenger
continue to soften with the current orderbook, had remained fairly
and freighter versions, but orders are further deterioration in stable over the past few years. However,
the lack of recent orders and real demand
getting scarcer. Boeing’s official figures for
2016 show annual net sales of only 17 of values and lease rates in from top-tier operators has started to soften
the market. Another concern is the Airbus
the type. Market conditions and the advent
of new competitors are combining to make
the medium term. A350-1000, which is slated to enter service
sales hard to come by. The contract signed in 2017. With its improved economics, the
Angus Mackay, principal A350 may slow future orders for the 777-
with Iran towards the end of 2016, which
included an order for 15 777-300ERs, was 300ER, which could have an additional
of course welcomed by Boeing, but in the impact on residual values and lease rates.
current US political climate Iran Air might -9X will have a range of more than 8,200 When the replacement for the 777 – the
not be at the top of everybody’s list of nautical miles (15,185km). The second 777X – starts to deliver in larger numbers,
preferred customers. member of the family – the 777-8X – will this will also affect the future of the current
Despite the difficult market background seat 350 passengers and offer a range model, but it is too early to tell when this
for new aircraft orders, existing 777-300ERs capability of more than 9,300 nautical will take place and to what extent. CV also
are still seen as sound assets by some miles. sees continued pressure on values from
investors, as the recent United enhanced Boeing’s launch of the 777X is an attempt some of the aggressive airline campaigns
equipment trust certificate (EETC) confirms to recapture its preeminence in the market Boeing is pursuing. CV still feels that this
(See United EETC shows 5% differential on sector but leaves the manufacturer with aircraft will continue to be a desirable
777-300ERs, Airfinance Journal October/ the problem of how to bridge the gap and viable option for many current and
November 2016, page 18). until production of the new models gets future operators, but some of the current
As part of an attempt to stimulate 777 underway. market trends have increased uncertainty
orders, Boeing and GE are phasing in around the future of the aircraft. Longer
improvements into current production term, a freighter conversion programme,
models aimed at reducing fuel Collateral Verifications (CV) complementing the factory-built 777F, will
consumption by 2%. probably be developed.
Gueric Dechavanne, vice-president,
Future developments commercial aviation services ICF
Boeing launched the 777X family at the In the past 12 months, CV has seen the 777-
Dubai Airshow in November 2013. The 300ER market soften and lease rates drop Angus Mackay, principal
manufacturer is offering two variants of for the type by about 5%. In our view, this The 777-300ER competes in the 350- to
the 777X. The 777-9X provides seating for level of discounting reflects a slightly higher 375-seat, long-haul widebody market
more than 400 passengers, depending level of depreciation than normal, which is segment, with a range exceeding 7,800
on an airline’s configuration choices. because of the higher levels of available nautical miles. This segment, previously
According to the manufacturer’s data, the aircraft. As more aircraft come off of their dominated by the 747-400, exhibits

34 Airfinance Journal February/March 2017

 Aircraft profile

solid demand as operators, particularly Oriel

in the buoyant Asia-Pacific region, have
increasingly employed large widebody Olga Razzhivina, senior Istat appraiser
AIRCRAFT
twins, which offer compelling operating
economics compared to four-engined
The extended-range (ER) version
of the 777-300 has been extremely
CHARACTERISTICS
aircraft such as the 747-400 and A340- successful, having hit the sweet spot of
600. A key factor in the success of the the increasingly cost-conscious airline Seating/range
777-300ER has been the lack of true industry. The aircraft was particularly well Max seating 550
competition after the demise of these four- received by first-tier carriers, because it Typical seating 365 in three-class
engined models. offered trans-pacific with the lower costs of configuration
Over the next few years, the 777-300ER a twin-engined aircraft. Since its entry into Max range 7,930nm (14,685km)
will be challenged by both larger and service in 2004, the 777-300ER has largely
smaller aircraft. At the lower end, the replaced the 747-400 on thinner routes Technical characteristics
Airbus A350-1000 will be a competitor and has complemented the A380 on trunk MTOW 351.5 tonnes
once scheduled deliveries commence in city-pairs. (775,000lbs)
2017. This aircraft, flying 369 passengers Despite the 777-300ER’s relatively OEW 168 tonnes
up to 8,000 nautical miles, has garnered modernity, its successor, the 777X, was (362,000lbs)
211 orders as of December 2016 . Boeing’s launched in November 2013. The new MZFW 238 tonnes
777-8X will also challenge the 777- model will have two variants offering (529,000lbs)
300ER from the lower end of the payload higher capacity and 10% fuel-burn saving. Fuel capacity 181,200 litres (47,890
spectrum, while the 777X will compete from However, before the planned 2020 entry US gallons)
above. Both Boeing products are planned into service of the new models, Boeing Engines GE90-115B
for entry into service in 2020 and could be says the current variant will undergo Thrust 115,300lbf (512kN)
formidable competitors if they perform as “continuous improvement, offering a 2%
planned. fuel burn reduction and an improved cabin
As market interest in the 777-300ER with 14 more seats”. Fuels and times
diminishes, Boeing lacks the orders to The facelift for the current generation 777 Block fuel 1,000 15,610kg
nautical miles (nm)
bridge to the 777X and has announced is timely: it will offer some respite from the
progressive production cuts from the last-off-the-line effect. These improvements Block fuel 2,000nm 29,840kg
current 8.3 aircraft a month to 3.5 by 2018. may, however, not be entirely welcomed by Block fuel 4,000nm 60,900kg
This translates to about three years of the owners of earlier 777-300ERs. Owners Bock time 1,000nm 152 minutes
production based on the firm order backlog. of assets coming off lease in the next two Block time 2,000nm 277 minutes
Values and lease rates for the type to three years will be wise to lock in a lease Block time 4,000nm 525 minutes
have declined with general widebody extension as soon as possible. With no
oversupply and this trend is likely to recovery in the widebody sector expected
Fleet data
accelerate in the near/medium term with in the short term, downward pressures on
Entry into service 2003
the entries into service of the 777X and lease rates and values will only increase.
In service 703
A350-1000. Failing an extension, remarketing a
Prospects for a freighter conversion 350-seat aircraft could prove challenging, Operators 46
(current and planned)
programme seem uncertain in current as has already been shown by the
market conditions, and significant smaller 777-200ER. There is no urgency In storage 1
redeployment to second-tier carriers may for possible leasing candidates such On order 124
be challenging. as the US majors and British Airways, Built peak year 88
ICF believes the 777-300ER market will and they will likely cherry-pick the best (2016)
continue to soften with further deterioration deals offering them sister-ship fleets Estimated 66
in values and lease rates in the medium and lessor contributions towards interior production (2017)
term. reconfiguration. Average age 5.1 years

Source: Airfinance Journal Fleet Tracker and research

VALUES 777-300ER Indicative maintenance reserves

Current market value ($m)
C-check reserve $125-$130 per flight
Build year 2007 2009 2011 2013 2015 2017 hour
Higher checks $90-$95/flight hour
CV view 75.1 85.2 97.5 111.6 130.4 154.7 reserve
ICF view 81.3 93.6 107.8 124.1 142.8 164.3 Engine overhaul $290-$295/engine
flight hour
Oriel view 63.0 67.5 74.5 85.5 100.5 138.3
Engine LLP $450-$455/engine
Values assume standard Istat criteria. cycle
Landing gear $160-$165/cycle
refurbishment
Indicative lease rates ($m) Wheels, brakes $100-$165/cycle
Build year 2007 2009 2011 2013 2015 2017 and tyres
APU $105-$110/APU hour
CV view 0.65 0.75 0.85 0.95 1.05 1.20 Component overhaul $410-$3415/flight hour
ICF view 0.75-0.85 0.85-0.95 0.95-1.05 1.05-1.15 1.15-1.25 1.25-1.35
Source: Airfinance Journal research and analysis
Oriel view 0.63 0.68 0.73 0.83 0.93 1.10

www.airfinancejournal.com 35
 Aircraft comparison

Fighting old battles

The success of the A320neo and 737 Max families will determine the positions
of Airbus and Boeing in the narrowbody market, but the relative merits of the
manufacturers’ previous-generation single-aisle models will be of interest to
owners and operators for years to come. Geoff Hearn looks at how the A320-200
and 737-800 match up.

I t might have been anticipated that by

the beginning of 2017 a comparison
between the Airbus A320 and the Boeing
competitor in the Airbus stable. This is a
significant achievement given the aircraft
was launched, as part of Boeing’s next-
737-800 would be about two out-of- generation (NG) family, nearly a decade
production aircraft, but as the year gets later than its Airbus rival. However, this
underway it is clear that the two models does not take into account that the fastest-
remain very much part of their respective selling model in the Airbus family is now the
manufacturers’ current offerings. Exactly larger A321, which has significantly outsold
how long both models will continue to its most direct competitor – the 737-900ER.
roll out of the production hangars is not Looking at total sales for the two families
completely clear from the manufacturers’ gives Airbus a clear lead. However, there
announcements, but it looks certain that is an argument that some sales of the 737
current-generation models will be built Classic generation should be counted in
alongside their respective A320neo and any direct comparison. Backlogs of the two
737 Max replacements until at least 2019. current families are broadly similar.
Airbus has indicated that A320
production will continue beyond this year, Values and lease rates
but has not specified an exact date for Inputs from appraisers (see tables) suggest
discontinuing the current engine option that the 737-800 has a slightly higher
(Ceo) model. current market value (CMV) than the A320
At a press briefing in early January, for models of the same build year and the
Fabrice Brégier, Airbus Commercial Aircraft Boeing aircraft typically attracts higher
president and Airbus chief operating lease rates. The differences are, however,
officer, admitted that there had been largely explained by the differences in
problems with early A320neo production. The timing of an end to 737-800 seating capacity.
“The transition between the A320ceo production is even less certain because Angus Mackay, principal, ICF, points out
and A320neo is less sharp than what we any hitch in 737 Max flight testing and early the 737-800 has achieved excellent market
expected three or four years ago, so we production could delay its phasing out. penetration with a large in-service fleet and
will continue to deliver substantial numbers In any case, Boeing is unlikely to be in a a broad operator base. However, he adds
of A320ceos beyond 2017,” he says. position to switch from its current model the A320 is a formidable adversary, also
The A321ceo is likely to remain in earlier than Airbus. with a large in-service fleet and operator
production even longer because it has Thanks in part to its additional seating base.
a larger backlog than the baseline A320 capacity, the 737-800 has significantly Mackay points out the latest standard
model. outsold the A320, which is its most direct A320ceos can offer an increase in

Leading characteristics of narrowbody competitors

Model Entry into MTOW Engines Maximum Typical Range In service On Customers
service (tonnes) pax pax (nm) order

737-800 1998 79 CFM56-7C 189 162 3,115 4,195 696 200

A320 1988 73.5/78 CFM56-5Bor V2500 180 150 3,300 3,945 361 268

A321 1996 89/93.5 CFM56-5Bor V2500 236 185 3,200 1,312 446 110

737-900ER 2001 85.1 CFM56-7C 215 180 3,200 409 102 21

Source: Airfinance Journal Fleet Tracker and research

36 Airfinance Journal February/March 2017

 Aircraft comparison

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www.airfinancejournal.com 37
 Aircraft comparison

Current market value ($m) Operating cost

Direct cost comparisons between the
Boeing and Airbus single-aisle models are
Build year 2000 2004 2008 2012 2016
difficult because the two product ranges
A320 12.7 17.6 24.0 31.3 43.4 are not aligned in terms of seat count. The
737-800 typically accommodates between
737-800 15.4 19.5 26.0 33.1 46.3 5% and 10% more seats than the A320,
which gives the Boeing aircraft an obvious
Based on average of inputs from appraisal firms (Collateral Verifications, ICF and Oriel). advantage in seat-mile costs.
Airfinance Journal has carried out
its own analysis (see table) based on
an interpretation of the respective
Indicative lease rates ($’000s/month) manufacturers’ claims and published data.
This analysis suggests the 737-800 trip
Build year 2000 2004 2008 2012 2016 cost on a 500-nautical mile (nm) sector is
between 1% and 2% higher than that for
A320 155-170 175-220 215-270 250-300 300-380 the A320. This translates to an advantage
over the A320 in terms of seat-mile cost of
737-800 165-210 185-250 225-280 265-350 330-400 between 3% and 4%.
These figures show a smaller difference
Based on spread of inputs from appraisal firms (Collateral Verifications, ICF and Oriel).
in seat-mile costs than in previous
Airfinance Journal analyses of these
two aircraft, largely because of the
reduced fuel burn offered by equipping
range over the 737-800 of about 200 phenomenon, it is likely to have an effect the A320 with the optional sharklets.
nautical miles, albeit with slightly lower into 2017. Industry sources suggest that the fuel
capacity. This advantage stems largely Most commentators agree that current burn advantage from the Airbus sharklets
from improved specific fuel consumption fuel prices significantly erode the cash is eroded significantly on sectors shorter
after the introduction, in December 2012, operating cost advantages of A320neos than the 500nm used in the Airfinance
of sharklets (winglets) as an option for and 737 Maxs, which is likely to prop up Journal analysis. The addition of sharklets
A320ceo models. demand for current-generation 737 and would normally increase acquisition costs
The consensus among appraisers is that A320 models, which, in turn, should bolster and impact on the total direct operating
both 737-800 and A320 values will remain values and lease rates. cost of the aircraft.
stable in the short term, particularly for The relatively small percentage
newer aircraft. Investor view differences in cash operating costs
Olga Razzhivina, senior Istat appraiser, In Airfinance Journal’s 2016 Investors’ Poll, are very sensitive to assumptions and
Oriel, says that 737-800 lease rates and the 737-800 was the highest-rated aircraft, are likely to vary depending on an
market values have weakened in the past with investors emphasising its suitability for airline’s operation. Maintenance costs
12 months, but this owes much to the the leasing market. The Boeing aircraft was are particularly difficult to estimate for a
high rates the Boeing aircraft has been one of the few models to increase its score generalised case study. The differentials
achieving recently. Oriel expects 737-800 from the previous year’s poll. are so small that Airfinance Journal
values to remain stable. The A320ceo came only fourth in the believes cash-operating cost is unlikely
Gueric Dechavanne, vice-president, poll, behind the Boeing model and the to be a key factor in an airline’s choice
Collateral Verifications, says market A320 and A321 Neo models, with its between the two rivals. Fleet commonality,
demand for the A320 has remained stable score marginally down from the previous availability and acquisition cost are all
in the past six months, especially for newer year. However, the differences in scores more likely to influence which aircraft is
aircraft. He adds that availability remains between the popular single-aisle aircraft selected.
low, which has helped stabilise values and are small and the A320 also is very highly Perhaps of more significance to
lease rates. He warns that increases in rated by investors. Its lower poll position is investors is the decreased advantage in
the production rate by Airbus may have a in part explained by its successor A320neo cash operating costs of both the 737 Max
negative impact in the longer term. Delays model having entered service, whereas the 8 and the A320neo over their current-
in the delivery of early A320neos have 737-800 replacement – the 737 Max 8 – is generation counterparts, brought about by
played a positive role in the values of not scheduled to enter service until the lower fuel prices.
A320ceos. While this may be a short-lived third quarter of this year.
Everyone’s a winner
The market view and Airfinance Journal’s
Indicative relative direct cash operating costs for new analysis would suggest that the 737-800
and A320 are difficult to separate in
single-aisle aircraft terms of investor appeal. Newer models,
in particular, remain in demand and the
737-800 A320 A320neo 737 Max 8 outlook for values of both the Boeing and
Airbus aircraft is positive.
Relative trip cost 1.5% Base -5.5% -3.4% The testament to this is that even
with the successor aircraft either close
Relative seat cost -3.4% Base -5.5% -8.0% to entering or already in service, the
combined backlog of the two models is in
Assumptions: figures are based on Airfinance Journal’s interpretation of manufacturer claims and published data. Additional
excess of 1,000 aircraft. That is certainly a
assumptions: 500-nautical mile sector, typical seating layouts. first in commercial aviation.

38 Airfinance Journal February/March 2017

 Data

Rating Agency Unsecured Ratings

Airlines
Airline Fitch Moody's S&P
Aeroflot B+(stable) - -
Air Canada B+(pos) B1(pos) BB-(stable)
Air New Zealand - Baa2(stable) -
Alaska Air Group BBB-(stable) - BB+(stable)
Allegiant Travel Company - Baa3(stable) BB-(stable)
American Airlines Group BB-(stable) Baa3(stable) BB-(stable)
Avianca Holdings - IFRS B(neg) - B(stable)
British Airways BB+(pos) Baa3(stable) BB(pos)
Delta Air Lines BBB-(stable) Baa3(stable) BB+(pos)
easyJet - Baa1(stable) BBB+(stable)
Etihad Airways A(stable) - -
GOL CC Caa3(neg) CCC(neg)
Hawaiian Airlines B+(stable) B1(stable) BB-(stable)
jetBlue BB-(stable) Ba3(stable) BB-(stable)
LATAM Airlines Group B+(neg) B1(stable) BB-(neg)
Lufthansa Group - Ba1(stable) BBB-(neg)
Qantas Airways - Baa3(stable) BBB-(stable)
Ryanair BBB+(stable) - BBB+(stable)
SAS - B2(stable) B(stable)
Southwest Airlines BBB+(stable) Baa1(pos) BBB(stable)
Spirit Airlines BB+(stable) - BB-(stable)
Turkish Airlines - Ba3(neg) BB-(neg)
United Continental Holdings BB(stable) Ba2(stable) BB-(pos)
US Airways Group - B1 -
Virgin Australia - B2(neg) B+(neg)
WestJet - Baa2(stable) BBB-(stable)
Source: Ratings Agencies - 31st January 2017

Lessors
Fitch Moody's S&P
AerCap BBB-(stable) Ba1(stable) BBB-(stable)
Air Lease Corp BBB(stable) - BBB(stable)
Aircastle - Ba1(stable) BB+(stable)
Avation PLC B+(stable) - B+(stable)
Aviation Capital Group BBB(stable) - A-(stable)
AWAS Aviation Capital Limited - Ba3(stable) BB(stable)
BOC Aviation A-(stable) - A-(stable)
CIT Group Inc BB+(stable) Ba3(stable) BB+(stable)
DAE Aviation Holdings - B3(stable) B-(stable)
Fly Leasing - B1(pos) BB-(stable)
ILFC (Part of AerCap) - Ba1(stable) -
SMBC Aviation Capital BBB+(neg) - BBB+(stable)
Source: Ratings Agencies - 31st January 2017

Manufacturers
Fitch Moody's S&P
Airbus Group A-(stable) A2(stable) A+(stable)
Boeing A(stable) A2(stable) A(stable)
Bombardier B(neg) B2(stable) B-(stable)
Embraer BBB-(stable) Ba1(neg) BBB(neg)
Rolls-Royce A(neg) A3(stable) BBB+(stable)
United Technologies A-(stable) A3(stable) A-(stable)
Source: Ratings Agencies - 31st January 2017

www.airfinancejournal.com 39
 Data

US Gulf Coast kerosene-type jet fuel (cents per US gallon)

350

300

250

200

149.1
150

100

50

Jul-15

Jul-16
Oct-15

Oct-16
Aug-15

Aug-16
Apr-15

Apr-16
Dec-15

Dec-16
Jul-13

Oct-13

Jul-14

Oct-14

Jun-15

Jun-16
Nov-15

Nov-16
Aug-13

Jan-15

Jan-16
Dec-13

Aug-14
Apr-14

Dec-14
Jun-13

Nov-13

Jun-14

Feb-16
Nov-14

Feb-15
Mar-15

Mar-16
Jan-14

May-15

May-16
Feb-14
Mar-14

May-14

Sep-15

Sep-16
Sep-13

Sep-14

Source: US Energy Infromation Administration

Commercial aircraft orders by customer Aircraft list prices -

Customer Country Quantity/Type new models
September 2016 to 2 January 2017
Model $ millions
Qatar Airways Qatar 30x787-9, 10x777-300ER
Airbus (2017 prices)
Atlas Air USA 9x767-300F
A319neo 99.5
Binter Spain 6xATR72-600
Iran Air Iran 80xBoeing aircraft A320neo 108.4

Iran Air Iran 17xAirbus aircraft A321neo 127

Colorful Guizhou China 2xE190 A330-800neo 254.8
Vietjet Vietnam 2xA321
A330-900neo 290.6
Jetstar Pacific Vietnam 10xA320
A350-800 275.1
Aerolease Aviation USA 10xMRJ90
Hong Kong Airlines Hong Kong 9xA330-300 A350-1000 359.3
Intrepid USA 2x747-8F Boeing (2015)
Swiss Switzerland 1x777-300ER
737 Max7 90.2
UPS Airlines USA 14x747-8
737 Max8 110.0
Donghai Airlines China 5x787-9
PNG Air Papua New Guinea 5xATR72-600 737 Max9 116.6

Peach Aviation Japan 10xA320neo, 3xA320 777-8X 371.0

Fiji Airways Fiji 5x737 Max 8 777-9X 400.0
United Republic of Tanzania Tanzania 2xCS300s, 1xQ400
787-10 306.1
Philippine Airlines Phillipines 5xQ400s
Bombardier (2016)
United Republic of Tanzania Tanzania 1x787-8
BOC Aviation Singapore 5xA320 CS100 76.5

GECAS USA 75x737 Max 8 CS300 85.7

ACG USA 30xA320neo, 2xA320, 3xA321 Embraer (2015)
SpiceJet India 100x737 Max 8s
E175-E2 48.3
Widerøe Sweden 15xEmbraer E2s
E190-E2 55.3
Flynas Saudi Arabia 60xA320neo
CityJet Ireland 10xCRJ900 E195-E2 62.4

Based on Airfinance Journal research and manufacturer announcements as of 2nd February

40 Airfinance Journal February/March 2017

 Data

Current production aircraft prices and Lease rates ($ millions)

values ($ millions)
Model List price Current market value* Model Low High Average
Airbus (2017 price) Airbus
A319 90.5 35.6 A319 230 310 270
A320 99.0 43.7 A320 285 370 328
A321 116.0 51.6 A320neo 300 400 350
A330-200 233.8 90.4 A321 340 420 380
A330-300 259.0 102.1 A330-200 400 830 615
A350-900 311.2 143.5 A330-300 500 900 700
A380 436.9 220.3 A350-900 900 1,200 1,050
ATR (2015) A380 1,500 2,000 1,750
ATR42-600 21.6 16.1 ATR
ATR72-600 25.9 20.4 ATR42-600 110 155 133
Boeing (2015) ATR72-600 150 200 175
737-700 80.6 36.1 Boeing
737-800 96.0 46.8 737-700 240 310 275
737-900ER 101.9 49.0 737-800 295 400 348
747-8 (passenger) 378.5 162.6 737-900ER 320 400 360
777-200LR 313.8 N/A 747-8 (passenger) 1,050 1,440 1,245
777-300ER 339.6 156.9 777-300ER 1,100 1,450 1,275
787-8 224.6 117.3 787-8 850 1,050 950
787-9 264.6 137.1 787-9 950 1,150 1,050
Bombardier (2016 Avitas) Bombardier
CRJ700 41.4 23.6 CRJ700 150 228 189
CRJ900 46.5 26.0 CRJ900 180 233 207
CRJ1000 49.5 27.9 CRJ1000 190 255 223
CS100 76.5 32.4 CS100 215 300 258
CS300 85.7 37.2 CS300 255 330 293
Q400 31.9 21.4 Q400 161 200 181
Embraer (2015 Avitas) Embraer
E170 41.2 25.8 E170 170 230 200
E175 44.4 28.5 E175 190 245 218
E190 49.1 32.5 E190 230 285 258
E195 52.0 34.5 E195 240 290 265
*Based on Istat appraiser inputs for Air Investor 2017

Commercial aircraft orders by manufacturer

Gross orders 2017 Cancellations 2017 Net orders 2017 Net orders 2016
Airbus 172 0 172 731

Boeing 189 2 187 668

Bombardier 10 0 10 161

Embraer 15 0 15 53

ATR 0 0 0 36

Based on Airfinance Journal research and manufacturer announcements as of 2nd February

www.airfinancejournal.com 41
 Pilarski says

The meaning and implications

of aviation cycles
Despite an “undeserved” reputation as a pessimist, Adam Pilarski, senior vice-
president at Avitas, is upbeat about aviation’s the short-term prospects, although a
downturn is on the way.

A t the recent Dublin Airfinance

conference, a speaker addressing the
question as to where we are in the cycle
both oil prices and aircraft purchases
are based on that currency. Yields (ticket
prices) are getting weaker but still there
recited a long list of factors supporting will be demand for added capacity. Despite
the positive long-term prospects for the some movement towards consolidation in
industry. Most people, though, do not need the leasing industry there appears to be
to be reminded of our long-term prospects, more parties planning to enter the field.
but they have no doubt that ours is a Low-cost carriers around the world are
cyclical business. It is also quite obvious advancing their position in respect to their
that we are past the peak and nearing a legacy competitors, except in the USA,
periodic slowdown. where government policies seem to favour
Over the past few years, we enjoyed a comfortable oligopolistic status quo.
continuing growth of world economies, Our author at the 19th Global Annual If my assumptions are correct (and this
good performance of airlines and an Airfinance Conference in Dublin last month. is a big “if”, subject to the usual caveats
apparent order bubble. All these facts economists are famous for) what does
do not contradict the prospects of good it mean with regard to the timing of the
fortunes still awaiting us, but highlight Over the past few aviation business cycle? Starting with
that changes are coming and those most airlines, I see intensifying competition
prepared for them will do better than those years we enjoyed between legacy carriers and low-cost
competitors which are not planning for a continuing growth of carriers, including long-haul low-cost
downturn. carrier routes, as well as between the
To assess where we are related to world economies, good various geographic regions of the world.
the cycle, we need to make a distinction Traffic will grow but profitability will be
between different elements of the aviation
performance of airlines weakening as yields continue their decline.
industry. Airlines are at a different stage and an apparent order For manufacturers, I see an order-to-
than manufacturers, which face a different delivery ratio of definitely below one for
reality than investors or lessors. bubble. All these facts the next few years. This will not prevent
To make life even more exciting, each manufacturers from increasing production
category can be further subdivided into
do not contradict the levels for at least a couple of years
segments that have their own mini-cycle. prospects of good because of the existing huge backlog.
So, passenger and cargo airlines are not Production increases rumoured now will
in the same position, same for legacy and fortunes still awaiting us eventually not materialise though. With
low-cost carriers. Manufacturers of jets intensified competition among lessors,
face a different environment than those
but highlight that changes I see increased downward pressure on
of turboprops and similarly large versus are coming. yields. Since values lag decline in demand
regional jet aircraft producers may be at a I would venture to say we still have steam
different phase of the aviation cycle. Even Adam Pilarski, senior vice-president, Avitas for values before a periodic adjustment will
for the two duopolists, narrowbody lines occur.
face different realities than their widebody Interestingly, despite my professional
brethren. training in the dismal sciences and my
So where are we in the timing of undeserved reputation as a pessimist, I am
the cycle? First, we need to specify of the world, so we can speculate that fairly upbeat about the short-term prospects
assumptions regarding some of the we still have some momentum towards in aviation. A downturn is on the way but I
exogenous factors affecting the various increased worldwide economic growth do not see it just around the corner.
segments of aviation. While the US and world traffic. New economic realities Surprisingly, many of my European
economy is in the fourth-longest expansion point towards higher inflation rates and colleagues see the realities in much
period in its history, a downturn will have to the dollar appears to continue staying at darker colours but many forecasters in
happen eventually. The new administration historically strong levels. Airlines just had Asia share my views. All these views
has explicit plans to expand spending, the most profitable year in their history can be invalidated by unforeseen new
which probably will stimulate the economy but costs are definitely going up, both on developments but right now, this year still
for a year or two. the fuel price and labour cost fronts. And looks fine, with a periodic downturn starting
There are no obvious signs yet of an the high value of the dollar causes cost to come next year. And the long-term future
economic disaster looming in other parts pressures for non-US carriers because of aviation is still good.

42 Airfinance Journal February/March 2017

An Airfinance Journal
special supplement

Regional
Aircraft 2017
 Regional aircraft supplement

Contents

44 Regional aircraft news

54 Misubishi profile

The manufacturer originally planned to focus on the 70-seat market

with the MRJ70 but, in response to changed market requirements after

46
ATR profile
the aircraft’s launch and programme delays, emphasis has switched to
the larger MRJ90.
ATR is the only western commercial aircraft manufacturer that
exclusively produces turboprop aircraft and the company’s fortunes
have been closely linked to those of turboprops in general.
55 Sukhoi profile

48 Bombardier profile The Russian manufacturer is working on the Sukhoi Superjet 100 as
well the Sukhoi Superjet 130, which is due to be introduced in 2020.

The Canadian manufacturer’s prospects have improved considerably

56
over the last 12 months. Other regional manufacturers

50 Embraer profile

Embraer kicked off the year strongly with two orders – one for its re-
As well as the in-production aircraft types, there is a significant portion
of the current regional fleet that is made up of older aircraft models.
According to Airfinance Journal’s Fleet Tracker, 20% of the total current
engined E-2 aircraft and another for its E-Jet family. global regional fleet is made up of out-of-production aircraft.

52 Comac profile

The ARJ21 has suffered numerous delays in its development, but finally
57 Softly, softly

The 50-seat regional aircraft market continues to experience

gained certification from the Civil Aviation Administration of China at challenging conditions, writes Olivier Bonnassies.
the end of 2014.

Regional aircraft news

TrueNoord Falko buys
Bombardier portfolio
CityJet firms
invests in order for 6
F alko Regional Aircraft is adding 11

CRJ900s
Bombardier CRJ900NG aircraft to its
E190s portfolio.
The aircraft are being acquired from
Scandinavian Airline Systems, and are

A msterdam-based TrueNoord Regional

Aircraft Leasing has disclosed its first
investment, six Embraer E190 aircraft.
currently on lease to Cimber A/s in
Denmark.
“We are delighted to have reached
B ombardier Commercial Aircraft
has announced the firm purchase
agreement with Irish carrier CityJet,
The portfolio is made up of aircraft built agreement with SAS on these aircraft which consistent with the conditional agreement
in 2013 and 2014 with leases attached. further expands our portfolio of Bombardier announced on 24 January 2017.
The investment marks the start of a manufactured aircraft” says Mark Hughes, The firm agreement includes six
highly targeted on-going development and executive vice president – corporate Bombardier CRJ900 aircraft and options
growth strategy for the TrueNoord fleet finance, Falko Regional Aircraft. for an additional four aircraft. Upon delivery,
under lease, following investment from The transaction follows the acquisition of the aircraft will operate under wet-lease in
private equity firm Bregal Freshstream in SAS’ subsidiary Cimber A/S by Irish carrier the Scandinavian Airlines (SAS) network.
2016, says the leasing company. Cityjet. As part of the transaction Cityjet On 31 January CityJet completed
TrueNoord Regional Aircraft Leasing has won a six-year wet lease contract from the acquisition of Cimber A/S, the
relaunched last July after capital injection SAS to operate regional services from Copenhagen-based subsidiary of
from a Bregal Freshstream. Copenhagen. Scandinavian Airlines (SAS).

44 Airfinance Journal February/March 2017

 Regional aircraft news

ATR misses deliveries target in 2016

T urboprop manufacturer ATR delivered
a total of 80 aircraft in 2016, but missed
its output target of more than 90 units.
In February, Iran’s flag carrier, Iran Air,
signed an agreement to purchase up to 40
ATR72-600s. The deal includes firm orders
in November, after the resignation of de
Castelbajac.
He adds: “As the environment is getting
The Toulouse-based company recorded for 20 units, as well as 20 options. The tougher, the economic advantages and the
a $1.8 billion turnover, down 10% from its transaction has yet to be finalised. market liquidity of the ATR aircraft versus
record turnover in 2015 of $2 billion, when “ATR remained the preferred choice its competitors prove to be the basis of
it handed over 88 aircraft to customers. of regional airlines in 2016, despite a our success.”
In 2015, ATR indicated that production globally difficult year in the regional aircraft The backlog at the manufacturer is
would reach about 100 aircraft annually. market,” says Christian Scherer, who was estimated at 216 units, down from 260 at
The then chief executive officer, Patrick de appointed chief executive officer of ATR the end of 2015.
Castelbajac, also admitted the turboprop
manufacturer faced supply-chain
“challenges” in ramping up production. ATR orders and deliveries (2011-16)
ATR further consolidated its position
in 2016 with orders for a total of 36 new 100 180
aircraft, including 34 ATR72-600s and two 90 160
ATR42-600s, guaranteeing about three 80 140
years of production. The manufacturer 70
120
sold two ATR42-600s to Aeromar, while its

Firm orders
60
Deliveries

100
largest order was for 12 ATR72-600s for 50
80
40
Argentina’s Avian Lineas Aéreas. 60
30
It also received renewed confidence 40
20
from nearly 30-year-long customer Binter
10 20
of Spain, as well as additional orders from
0 0
Papua New Guinea’s PNG Air (five ATR 72- 2011 2012 2013 2014 2015 2016
600s) and Brazil’s Azul Linhas Aéreas (also Years Number of deliveries Firm orders
five ATR 72-600s).

says: “I certainly would say that Bombardier

MRJ delivery delayed Airfinance Journal understands that
transfer of title was on 19 January and the are looking closely at making a CS500.
handover ceremony on 20 January. They see the family concept as a key

T he Mitsubishi Regional Jets’ (MRJ) first

delivery has been delayed from mid-
2018 to mid-2020.
The aircraft, which was purchased with
cash, will enter into service in late April
after local training.
success factor, and we’ve seen that in
the market having a family is the key to
success. I would not be surprised if they
Mitsubishi Heavy Industries (MHI) says Eight other aircraft will be delivered tried to stretch the aircraft in the next three
in a statement the change is because of over the coming three years as part of the to four years.”
revisions of certain systems and electrical carrier’s fleet modernisation process. Lindsay Webster, director, asset
configurations on the aircraft to meet the JAC will receive the second aircraft in valuations at Morton Beyer & Agnew, adds:
latest requirements for certification. September. It is expected to be funded “Bombardier is pretty adamant that there’s
MHI recently established the MRJ partly by the government for operation on not going to be. But I think that if they want
business promotion committee, chaired specific island routes. The third aircraft is to be in the industry for long, that’s the next
by Shunichi Miyanaga, president and chief due in 2018. option they’ve got to go to.”
executive officer of MHI, to oversee the JAC’s nine new ATRs will start operations However, Rikard de Jounge, vice-
continued development and long-term on both main routes and connections to president, asset valuation at Avitas,
business performance of the MRJ. and from smaller islands and communities disagrees. “It would be tempting to stretch,
“Since the historic MRJ first flight in across the country. but they have enough to do in the sub-
November 2015, we have made significant Airfinance Journal reported on 22 March 150 [seat] market. In the bigger market,
progress in both engineering and test, and that JAC had retired a Q400 aircraft. Airbus and Boeing would likely stomp you
now three aircraft are in flight test in the out,” he says. Olga Razzhivina, director
United States,” states MHI. at Oriel, says that Bombardier needs “a
Appraisers expect family concept” to be successful but going
straight in a new class against Boeing and
Bombardier to look
JAC becomes at CS500
Airbus “will be difficult”.
She adds: “Looking at the history of
Bombardier, we know there has been a
ATR operator bid from China to have ownership in the

B ombardier is likely looking at making

a larger member of the CSeries
company. The Canadian government may
look at that again. The influx of money
J apan Air Commuter (JAC), a subsidiary
of Japan Airlines, the Japanese flag
carrier, became a new ATR operator on 20
family, according to a panel of appraisers
speaking at the 19th Annual Global
from that side of the Pacific means that
Bombardier may not have to look over their
January with the introduction of an ATR 42- Airfinance Conference in Dublin. shoulder in financial terms when looking to
600 (MSN 1215). Stuart Rubin, principal, ICF International, fund a new programme.”

www.airfinancejournal.com 45
 Manufacturer profiles ATR

MANUFACTURER PROFILES

ATR

Source: ATR

E stablished in November 1981, ATR is a

joint partnership between Airbus and the
Italian company Leonardo (formerly known
directly with the manufacturer and via sale
and leaseback transactions.
ATR manufactures two sizes of turboprop
year, although this has yet to be realised. To
meet its production targets, ATR negotiated
for additional space in the production
as Finmeccanica). Production is based in aircraft, the 70-seat ATR72 and the 50-seat facilities it shares with Airbus and set up a
Toulouse alongside Airbus’s commercial ATR42. The aircraft benefit from the inherent dual production line in 2014.
aircraft facilities. At the beginning of 2017, advantages of the turboprop design in After this investment, ATR achieved its
ATR had about 1,300 employees. terms of fuel efficiency, and relatively low record turnover of $2 billion in 2015. During
ATR is the only western commercial emissions and cost efficiencies, particularly that year, the aircraft manufacturer also set
aircraft manufacturer that exclusively on shorter sectors. The original ATR42 a new company record for deliveries, with a
produces turboprop aircraft and the entered service at the end of 1985. The total of 88 aircraft.
company’s fortunes have been closely first commercial operations of the ATR72 However, there is some recent evidence
linked to those of turboprops in general. followed in 1989. Both aircraft types that the market has peaked and sales
The emergence in the 1990s of regional have been the subject of several major are becoming harder to come by. The
jets such as the Embraer ERJ-145 and upgrades and current production aircraft are problem is exacerbated by the increased
Bombardier CRJ200 caused a decline in designated as -600 models. participation of lessors, with leasing
demand for turboprops, but there has been Many commentators predicted the ATR42 companies accounting for significant
a significant revival since the start of this would be phased out because airlines percentages of the manufacturer’s order
decade, not least because the economic seemed increasingly to favour the larger backlog.
advantages of fuel-efficient turboprops ATR72, but sales of the smaller model have Nonetheless, in January, ATR issued
increase as fuel prices rise. continued, albeit in numbers well below briefings saying it had consolidated
The resurgence of commercial turboprop those of the larger variant. historical levels of turnover and deliveries,
sales has been remarkable for a type There has been much speculation that despite a challenging market environment.
of aircraft that many commentators and the company was planning a larger model The briefings noted that, in 2016, the
industry insiders thought had been made to take advantage of the return to favour company recorded its second-highest
obsolete by the advent of the regional jet. of the turboprop, but the plans have not turnover ($1.8 billion) and its third-highest
ATR has been the chief beneficiary of this materialised and the launch of such an yearly total of deliveries (80 aircraft). During
resurgence. aircraft looks unlikely in the short-to-medium the year, the company received orders for
Perhaps even more striking than the term. 36 aircraft: 34 ATR72-600s and two ATR42-
upturn in sales is the improved perception ATR production rates have increased 600s.
of turboprops among financiers. There is an to levels that are unprecedented for As of the beginning of 2017, the Franco-
unprecedented willingness to provide funds 50- to 70-seat turboprops. The company Italian joint venture had sold more than
to customers acquiring aircraft, and leasing has envisaged sufficient demand for a 1,500 aircraft, of which about 1,300 have
companies have placed significant orders production rate of 100 aircraft deliveries a been delivered.

46 Airfinance Journal February/March 2017

 Manufacturer profiles ATR

ATR: Market share of current fleet by region

Europe
North
America 27%
8% Middle
East

1% Asia

Africa
31%
Central
America & 8%
Caribbean

5% Australia
& Pacific

10%

South America

10%

12.7
of global
%

regional
aircraft fleet

1,188
Source: Airfinance Journal’s Fleet Tracker
ATR aircraft in the
current fleet

www.airfinancejournal.com 47
 Manufacturer profiles Bombardier

MANUFACTURER PROFILES

Bombardier

Source: Bombardier

B ombardier’s prospects have improved

considerably in the past 12 months.
At the start of 2016, the company’s new-
50-seat Dash8-300. A 70-seat variant, the
Dash 8-400, followed but is significantly
different to the original family members.
changed last year, with several significant
orders coming from leading airlines,
including Delta and Air Canada. These
technology CSeries programme was failing Later models of all variants were rebranded orders brought its backlog above the target
to book a significant volume of orders, as Q (for Quiet) Series aircraft. Production of of 300 orders by the time of the aircraft’s
more than two years late and $2 billion over the Q200 and Q300 ceased in May 2009. entry into service.
budget. The -400 model continues in production, At the 19th Annual Global Airfinance
However, thanks to a liquidity boost and under the designation Q400. Conference in Dublin in January, a panel
a flurry of orders for CSeries aircraft, 2017 The Canadair Regional Jet (CRJ) was of appraisers said it expected the CSeries
has got off to a much brighter start. derived from the Canadair Challenger jet programme to have a strong year in 2017
In June 2016, the company sealed a deal and was well received by the market, with but to continue facing difficulties.
with Quebec’s provisional government for more than 1,000 of the 50-seat CRJ100/200 Stuart Rubin, principal at ICF International,
the investment of $1 billion in the CSeries being delivered. The CRJ’s success was says: “I think 2016 was an excellent year
programme, which helped to ease its a major factor in the demise of a number for the programme. The Delta order
liquidity problems. Under the agreement, of turboprop manufacturers, which had was key. Still some challenges remain:
the government takes a 49.5% stake in the previously dominated the 50-seat market. Boeing and Airbus have deep pockets
programme. Production of the CRJ200 was suspended on production levels and I think they are
Meanwhile, Bombardier has picked up in 2005. The main competitor to the very well positioned to compete with the
large orders from major airlines, boosting CRJ100/200 is the Embraer 145. CRJ CSeries. The A319neo continues to be a
the credibility and the prospects of its production is expected to fall in 2017 to problem for the programme, so I think 2017
newest aircraft offering. about 10 deliveries, most for replacement will be a good year but there will be some
Bombardier’s turnaround plan seems to purposes, down from between 35 and 40 challenges ahead.”
be taking effect. The company is on target in 2016. Olga Razzhivina, director at Oriel, says
to generate breakeven free cash flow by The CRJ700, CRJ900 and CRJ1000 are the lack of orders for the CSeries may be
2020, while total revenues, driven in part stretched and upgraded versions of the because of market appetite for 108- to 133-
by higher CSeries deliveries, are expected original CRJ200. According to Airfinance seat aircraft.
to increase by a low-single-digit rate. Journal Fleet Tracker, there are 1,450 “It’s a difficult sector of the market
Projected earnings before interest and tax aircraft in operation across the whole to be in. If you look at CSeries’ closest
is expected to range between $530 million aircraft family. competitors – 737 Max 7s and A319neos –
and $630 million – up from 50% at the the orders are disappointing. But it could be
midpoint over 2016’s earnings. Strong year ahead for CSeries? a bellwether for how much demand there is
Bombardier’s latest venture is the CSeries for 108- to 133-seater aircraft. It’s hard to tell
Aircraft types family, which is aimed at the 100-seat-plus whether the CSeries programme is out of
As well as business aircraft, Bombardier market. The two models in the family (the the woods; I think it depends on one more
manufactures a range of regional jets and CS100 and the CS300) compete directly major order from the main operators. It is
turboprops (excluding the CSeries). These with the smaller members of the Boeing 737 really down to Bombardier to score another
include the Dash8, Q Series and CRJ and Airbus A320 families. order, otherwise it might be another niche
families. The programme suffered a number of type that has its merits. You want an aircraft
The original Dash8 family consisted setbacks and delays and initially failed to type that is really diversified between
of the 30-seat Dash8-100/-200 and the attract significant orders. However, that operators.”

48 Airfinance Journal February/March 2017

 Manufacturer profiles Bombardier

Bombardier: Market share of current fleet by region

Europe
North
America 15%
52% Middle
East

1% Asia

Africa
12%
Central
America & 8%
Caribbean

2% Australia
& Pacific

5%

South America

Undisclosed 3% 2%

35.9
of global
%

regional
aircraft fleet

3,345
Source: Airfinance Journal’s Fleet Tracker
Bombardier aircraft
in the current fleet

www.airfinancejournal.com 49
 Manufacturer profiles Embraer

MANUFACTURER PROFILES

Embraer

Source: Embraer

E mbraer kicked off the year strongly

with two announcements – one for its
re-engined E2 aircraft and another for its
representing its highest volume of
deliveries in the past six years. As of 31
December, the backlog totalled $19.6 billion.
prices, representing 25% of the worldwide
demand for the segment in the period.
According to the global Embraer Market
E-Jet family. Still, even with an uptick in deliveries, Outlook for the 70- to 130-seat capacity
Scandinavian regional carrier Wideroe Embraer president and chief executive segment for the next two decades, the
placed an order for 15 E190-E2 re-engined officer, Paulo Cesar de Souza e Silva, entire market will demand 6,350 new jets in
aircraft. The agreement includes three firm indicated at the time of the results that this category, which is valued at $300 billion
aircraft and purchase rights on a further 12, 2016 was a year of “major challenges in the over the period.
with deliveries commencing in 2018. aviation industry due to global economic “We are showing to airlines the benefit
Wideroe is switching to Embraer after and political uncertainties”. of moving from red oceans to blue oceans
being an all-turboprop operator, with a fleet In response to this scenario, Embraer is – that is, to move away from a crowded
entirely comprising Bombardier Dash8s. implementing important actions and making marketplace and seek out opportunities
The order coincides with a shift in adjustments to be well positioned in all in markets that are currently underserved,
strategy at the Brazilian manufacturer. For business segments it operates, he says. or not served at all, where yields are also
some time, Embraer’s focus has been on its The spare parts pool programme stronger, moving from one to two digits,”
successful E-Jet family. However, in 2013, continues to grow, he notes. In the fourth says de Souza e Silva.
the manufacturer announced the launch quarter, Airlink and the UK’s Eastern Airways Embraer notes in Asia-Pacific about
of the E2, which is the second-generation signed contracts for the programme. 30% of narrowbody-exclusive markets are
E-Jet. Embraer has logged more than 1,700 served with less than one daily frequency.
Airlink, Southern Africa’s largest orders for the E-Jets programme alone. It believes markets such as these would
independent regional airline, has selected The manuacturer delivered its 1,300th be better served with 70- to 130-seat
the E-Jet for its Avro RJ85 replecement E-Jet in the fourth quarter, to China’s Tianjin jets, based on the average number of
programe. The carrier plans to acquire a Airlines. passengers per departure. Also, 37%
total of 13 aircraft with second-hand E-Jets Last year, it delivered 90 E175s, eight of intra-regional turboprop capacity is
amongst them three E170s and two E190s more than in 2015. E190 deliveries in 2016 offered on routes longer than 200 nautical
will be sourced from ECC Leasing, a wholly totalled 11, three more than 2015, and E195 miles, which are better suited to jet
owned Embraer subsidiary. The carrier will deliveries for the year totalled seven, one operations, because of their higher network
start receiving the aircraft in the first half of fewer than 2015. productivity, better operating economics
this year. However, Embraer did not deliver a and superior passenger appeal, it believes.
Airlink already operates a large fleet of single E170 in 2016, whereas it delivered Another opportunity in the region, says
ERJ aircraft – last December, it started to two in 2015. Embraer, is the replacement of ageing
add 11 further ERJ-140 jets to its fleet. Looking ahead, Embraer is eyeing Iran’s fleets. There are more than 250 jets in the
By the end of the fourth quarter of 2017, requirement for aircraft with 130 seats or 50- to 150-seat category that are more than
the airline will operate 30 ERJs, comprising fewer after Airbus won orders for 98 aircraft 10 years old, and these are possible targets
all three types – ERJ-135, ERJ-140 and the and Boeing secured a deal for 80. for replacement in the near future.
ERJ-145. It also sees untapped opportunities in
The announcements come after Embraer the Asia-Pacific market. Embraer believes
increased its commercial aviation deliveries that airlines in that region will take delivery
In the December/January edition of Airfinance Journal there was an
by 6.9% to 108 units in 2016. of 1,570 new jets in the 70- to 130-seat incorrect figure in the Investor Poll on the operational success of the
It delivered a total of 225 aircraft to segment over the next 20 years. This E175-E2. The incorrect figure was 5.0 when it should have been N/A,
as the aircraft in question is not in service yet.
the commercial and executive markets, requirement is valued at $75 billion, at list

50 Airfinance Journal February/March 2017

 Manufacturer profiles Embraer

Embraer: Market share of current fleet by region

Europe
North
America 17%
43% Middle
East

2% Asia

Africa
8%
Central
America & 6%
Caribbean

5% Australia
& Pacific

2%

South America

Undisclosed 5% 12%

30.3
of global
%

regional
aircraft fleet

2,822
Source: Airfinance Journal’s Fleet Tracker
Embraer aircraft in
the current fleet

www.airfinancejournal.com 51
 Manufacturer profiles Comac

MANUFACTURER PROFILES

Comac

Source: Comac

T he Commercial Aircraft Corporation

of China (Comac) is a state-owned
limited liability associated with the Aviation
certification from the Civil Aviation
Administration of China at the end of
2014. However, the US Federal Aviation
under 100-seat aircraft in China,” says
Professor David Yu.
“The continued trend is more upsizing
Industry Corporation of China (Avic). Authority, which is shadowing the in the aircraft size especially in crowded
Comac is responsible for large passenger certification process, is not expected to trunk routes, so this will likely have a
aircraft programmes in China. Its principle certify the aircraft in the short term. minimum impact there. How many regional
aircraft is the C919, an A320/737-sized Sichuan-based Chengdu Airlines took aircraft are there in China? Not that many
aircraft, but the company also has delivery of the first ARJ21 in November compared to larger-sized aircraft.”
responsibility for the ARJ21 regional jet. 2015 on lease from SPDB Financial He adds that one benefit of the aircraft
Leasing. is that it could have more impact in
ARJ “The 700 baseline variant has already western China, where it can be utilised for
The ARJ21 has suffered numerous delays come out and is currently in service, but increasing frequencies on underserviced
in its development, but finally gained I don’t think there is much demand for routes or opening up new routes.

Orderbook for ARJ21

Comac: Number of orders by region
Airline/Lessor Number ordered

CALC 30

Chengdu Airlines 29
North
America
Comsys Aviation Leasing 20
3% Asia

96% Congo Brazzaville 3

Gecas 5
Africa

1% Hebei Airlines 10

ICBC Leasing 40

Henan Airlines 50

Myanmar Airways 2

Total number of orders 204 Shandong Airlines 10

Shanghai Airlines 5

Source: Airfinance Journal’s Fleet Tracker

52 Airfinance Journal February/March 2017

 Regional survey

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www.airfinancejournal.com 53
 Manufacturer profiles Mitsubishi

MANUFACTURER PROFILES

Mitsubishi
T he Mitsubishi Aircraft Corporation is
owned principally by Mitsubishi Heavy
Industries, but has a number of smaller
is the US, and this is reflected in the MRJ
orderbook. This includes a firm order of
50 MRJ90 units for Tran States Holdings,
Global Airfinance Conference Dublin 2017.
Embraer has planned a 2020 entry-into-
service for its E175-E2, and Mitsubishi’s
stakeholders, including the Toyota Motor 100 orders from Skywest and 20 units from recent announcement to delay the planned
Corporation. The company is developing Eastern Airlines. entry-into-service by two years to mid-2020
the MRJ family of regional jets. All three US operators have conversion would give airlines more time to reach
Original plans focused on the 70-seat rights for the 70-seat variant, according new scope agreements, allowing a higher
market with the MRJ70 but, in response to Hideyuki Kamiya, head of strategic MTOW.
to changed market requirements after the marketing, Mitsubishi Aircraft. “We can’t forecast the timing of scope
aircraft’s launch and programme delays, The MRJ also has 10 units on order clauses but, historically, it has expanded.
emphasis has switched to the larger MRJ90. from Miami-based lessor Aerolease. In Mitsubishi’s products are good aircraft to
On 23 January, the company announced addition, the aircraft has secured three relax the scope clauses,” says Kamiya.
a further delay to the MRJ programme, with non-US customers so far, including ANA, The smaller MRJ70 would fit the current
the first delivery now scheduled for mid- Air Mandalay and Japan’s flag carrier Japan scope clauses. Kamiya says the model is
2020 rather than mid-2018 as previously Airlines. the same size as the CRJ700 and the E170
planned. In the US market there are two important products. “There are 500 aircraft in this
This is not the first time the MRJ has limits that set the size of aircraft for routes category in the US,” he adds.
encountered setbacks. In April 2015, applications: the maximum limit of 76 seats The MRJ70 is the smaller next-generation
Mitsubishi Aircraft announced a delay in and the 86,000lb maximum take-off weight aircraft available, and Mitsubishi is targeting
the first flight from the second to the third (MTOW) limit. CRJ200 and CRJ700 operators in the US
quarter of 2015. The 86,000 MTOW limit has created market.
problems for the manufacturers because Kamiya says deliveries are expected
Aircraft testing new-technology aircraft, equipped with initially to reach one aircraft a month, with
Mitsubishi Aircraft has used two aircraft new, efficient high-bypass engines, turn an ultimate goal of 10 aircraft a month.
for strength test. One is used for fatigue out heavier than 86,000lb in their 76-seat Lessors represent 10 firm aircraft, or 4% of
strength test, while the other has completed variants. firm orders. Rockton announced a letter of
the static strength test. The manufacturers of new-technology intent for 10 units at the 2016 Farnborough
“The completion of static strength test aircraft gambled on the scope clause Airshow, and Kamiya is confident the
confirmed that the MRJ airframe has the MTOW limit being raised by the end of Swedish leasing entity will firm its order.
structural strength required for test centre,” the decade. The unchanged MTOW limit As of 31 January 2017, the MRJ has
states Mitsubishi Aircraft. favours the two aircraft types that fit under recorded 233 firm orders and 194 options or
Four aircraft are in flight test. Three the scope clauses: Bombardier’s CRJ900 purchase rights. “Lessors will endorse the
flight test aircraft (one, two and four) have and Embraer’s E175. But it makes life difficult MRJ programme,” he says, adding they will
successfully conducted ferry flights and for new products such as the MRJ90 and have the capability to remarket.
flight tests are undergoing in the US. The Embraer’s E175-E2, which currently exceed Overall, Kamiya is confident the MRJ
fourth aircraft is undergoing flights test in the scope limit. programme will perform well.
Japan. The MRJ90 MTOW is 94,000lbs, but “Compared with the E2, we started
The new final assembly hangar has been Kamiya says the configuration depends on the design from scratch. The MRJ
completed and is ready for production the customer. has an optimised fuselage. The wing
“I think they will update and will be able accommodates a high bypass ratio engine.
Customers to reduce it if needed,” he tells Airfinance It gives us some advantages over a re-
The dominant market for regional aircraft Journal on the sidelines of the 19th Annual engined aircraft,” he says.

Orderbook for MRJ90

● Aerolease

●
10
Air Mandalay 6

● Eastern Airlines 20
53 Orders from
Asia 23%
● Japan Airlines 32
Skywest Airlines 100

190
●

● Trans States 50
Orders from North
● All Nippon Airways 15
America 77%
Source: Airfinance Journal’s Fleet Tracker

54 Airfinance Journal February/March 2017

 Manufacturer profiles SCAC

MANUFACTURER PROFILES

Sukhoi Civil Aircraft Company

S ukhoi Civil Aircraft Company (SCAC) is a
civil division of Russia’s Sukhoi Aviation
Holding (a UAC company), manufacturing
239 firm orders, excluding options,
according to Fleet Tracker. Some of the
larger orders for the aircraft include an
the Sukhoi Superjet 100 aircraft (SSJ100). order of 30 from Aeroflot, made in 2005;
There are 85 SSJ100 in the active global an order for 30 made by Mexican carrier
regional fleet and a further 164 on order, InterJet in 2011; and, more recently, an
according to Airfinance Journal’s Fleet order for 32 aircraft, with options for 28
Tracker. from Russian lessor GTLK. Irish regional
The company’s main in-production civil Source: Sukhoi carrier CityJet also placed a firm order
programme – the Sukhoi Superjet 100 for 15 SSJ100s with 16 options in October
(SSJ100) – was designed in cooperation Holding and Alenia Aermacchi, a division 2015, marking another international order
with several foreign partners, but of Italian aerospace conglomerate for the aircraft.
production is based in Russia. The aircraft Leonardo (formerly known as The programme suffered a blow in
entered service in 2011 after certification Finmeccanica). The current-production May 2012 when a test flight of the SSJ100
from the Russian authorities. Certification models are the 100-seater SSJ100 in Basic crashed into a mountain, killing all 45
by Western authorities followed, although version with a range of 3048 kmand a long people on board. The programme also
not without some difficulties. The aircraft is range (LR) version of 4578 km range. suffered a set back in January 2017,
designed to compete internationally with its The company announced at the 2016 when some operators had to ground
Embraer and Bombardier counterparts. Farnborough Airshow that it is developing several of its SSJ100s for safety reasons.
The aircraft’s SaM-146 engines are a stretched version to accommodate 120 Cracks were found in the tail section
designed and produced by the Franco- passengers.This aircraft may bridge the of one aircraft, forcing the Russian
Russian PowerJet joint venture between gap between the Sukhoi Superjet 100 and authorities to order safety inspections of
Snecma (Safran) and NPO Saturn. the Irkut MC-21. It will act as a competitor SSJ100. However all the aircraft with the
Worldwide marketing is undertaken to the Bombardier CSeries, Airbus A319 technical issue have been repaired by the
by SuperJet International, which is a and smaller models of the 737NG. manufacturer the same month and SSJ100
partnership between Sukhoi Aviation Overall, the Sukhoi Superjet 100 has resumed flights.

Sukhoi: Number of orders by region

North
America

6 Europe

125
Central

1.1
America &
Caribbean of global
7 Asia
% regional
26
aircraft fleet

107
Sukhoi
Total number of orders 164 aircraft in the
current fleet
Source: Airfinance Journal’s Fleet Tracker

www.airfinancejournal.com 55
 Other regional manufacturers

Other regional manufacturers

A s well as the in-production aircraft types, there is a
significant portion of the current regional fleet that is made BAE: number of aircraft in current global
up of older aircraft models. According to Airfinance Journal’s regional fleet
Fleet Tracker, 1,833 out of production aircraft are in the current
regional fleet today, making up 20% of the total current global
regional fleet. ● North America 98
These include aircraft from British Aerospace, Fokker, Saab,
● Europe 202
Short Brothers and Boeing. Although it stopped being produced
in 2002, the BAe 146 remains a particularly popular regional ● Asia 99
aircraft today, with its primary users including Ireland’s CityJet ● South America 77
and Brussels Airlines.
There are 246 Bae 146s in the current regional fleet today, ● Africa 75
according to Fleet Tracker. The charts illustrates percentages of ● Australia and Pacific 32
out-of-production aircraft current global regional fleet.
● Central America 30
and Caribbean
● Middle East 32
● Undisclosed 26

Fokker: number of aircraft in current Saab: number of aircraft in current

global regional fleet global regional fleet
● North America 16 ● North America 111
● Europe 108 ● Europe 130
● Asia 93 ● Asia 29
● South America 36 ● South America 7
● Africa 69 ● Africa 0
● Australia and Pacific 80 ● Australia and Pacific 61
● Central America 25 ● Central America 25
and Caribbean and Caribbean
● Middle East 74 ● Middle East 6
● Undisclosed 0 ● Undisclosed 8

Boeing: number of aircraft in current Shorts: number of aircraft in current

global regional fleet global regional fleet
● North America 110 ● North America 92
● Europe 18 ● Europe 6
● Asia 7 ● Asia 8
● South America 0 ● South America 3
● Africa 0 ● Africa 5
● Australia and Pacific 20 ● Australia and Pacific 5
● Central America 0 ● Central America 7
and Caribbean and Caribbean
● Middle East 0 ● Middle East 2
● Undisclosed 0
● Undisclosed 2
Source: Airfinance Journal’s Fleet Tracker

56 Airfinance Journal February/March 2017

 Lease rates

Softly, softly
The 50-seat regional aircraft market continues to experience challenging
conditions, writes Olivier Bonnassies.

I n 2016, appraisers expected the soft

conditions in the turboprop market to
remain as aircraft availability continued
Storage of Bombardier aircraft has
fallen slightly to 89 units during the past
12 months. There are 17 Q400 units in
roles while another 10 are in military use
and government institutions.
“It is a resilient fleet,” says the lessor
to rise. This softening started in 2015, storage, along with 33 Dash8-100s, 15 source. “The [Russian carrier] Polet fleet are
according to Collateral Verifications vice- Dash8-200s and 24 Dash8-300/Q300s. the only aircraft available because of the
president Gueric Dechavanne. “The Q300 market is an interesting bankruptcy,” he says.
One year ago, the number of ATRs in market at the moment because prices Demand is mainly emerging from
storage or moving between customers are going down for no apparent reasons,” Europe, with Loganair and Eastern Airways
marginally increased to 148 units. At 27 says one leasing source. “It is a versatile adding units. Saab registered two new
January 2017, there were 131 ATR aircraft in but also a robust aircraft for operations in customers in 2016: Skywork in Sweden and
storage, according to Airfinance Journal’s rough airfields,” he adds. Tus Airways of Cyprus.
Fleet Tracker. The source notes a recent increase in US regional carrier PenAir continues to
ATR storage has stayed at the same availability after announcements made add Saab 2000s to its fleet and has now
level over the past year for 70-seat aircraft, by Air New Zealand to phase out its five units in operations.
reflecting challenging market conditions. fleet slowly, while US regional carrier In the meantime, more aircraft could be
There were 83 ATR72s – notably 41 Commutair will get some Embraer ERJ- phased out by Swiss carrier Darwin and
ATR72-500s and 21 ATR72-600s – in 145s. Sweden’s Braathens Aviation.
storage compared with 84 units in Early Q300 models are trading at Lease rates are about $40,000 a month
early 2016. A total of 37 ATR72s were about $5 million, while latest models are for a Saab 2000, says the source.
advertised for sale or lease by Airfax, as of about $7 million, according to the source. The ATR42 market is holding up
17 January 2017. The leasing market is in the $50,000 to reasonably well. A total of 11 aircraft are
On the 50-seat side, the storage $70,000-a-month range. advertised, according to Airfax.
situation has decreased. There are 44 In the 50-seat market, the Saab 2000 The lease rate reference for an ATR42
ATR42s in storage compared with 64 in aircraft is still a useful turboprop, despite is between $50,000 and $55,000, says an
early 2016. A total of 26 ATR42s were its small fleet in operation. About 45 units airline source, adding or retrieving $10,000
advertised for sale or lease. are still operated in commercial passenger a month depending on the credit.

www.airfinancejournal.com 57
 Lease rates

Large turboprops under pressure

The high level of storage in the 70-seat
The high level of navigation systems required in Europe.
Airstairs can costs owners $400,000,
market, notably ATR products, is putting storage in the 70-seat including $200,000 for the stairs
the market under pressure, despite oil alone, while another $100,000 has to
prices remaining at reasonable levels. market, notably ATR be budgeted for the service bulletin.
There are 41 ATR72-500s in storage or
transiting between customers, and more
products, is putting the Installation and fitting make the most of the
remaining costs.
than half of the fleet is advertised for sale market under pressure, The part-out market is limited because
or lease. of high penetration of Rolls-Royce service
Lease rates can range between despite oil prices agreements. “There are no buyers for part-
$75,000 and $85,000 for older ATR72- remaining at reasonable out scenarios because more than 95% of
500s, according to the airline source. He the fleet is under the Rolls-Royce TotalCare
adds that 2002-vintage aircraft are leased levels. scheme,” says a leasing source.
at less than $80,000 a month, while a 10- The airframe would sell, in a part-out
year model can reach $100,000 a month. scenario, at $225,000 to $250,000, while
More challenging lessees will lease in each engine would cost $325,000 to
the $120,000-a-month range, according to 50-seat RJs $350,000.
another lessor. The 50-seat regional jet market has The source sees lease rates in the US
There is definitely some softening in the improved over the past year as a result of between $30,000 and $35,000 a month,
market for new Q400s and ATR72-600s the current level of oil prices. There are depending on the credit and on multiple
for placements. 134 ERJ-145s in storage, with half of them aircraft deals basis.
In 2015, there was a slight decline in offered for sale or lease. Some transactions have closed in the
turboprop values reported. The turboprop Embraer ERJ-145 fleets have traded $45,000 to $50,000-a-month range plus
market had been undersupply for a long reasonably well over the past year but this maintenance reserves, says a leasing
time and ATR has ramped up production in mainly is a seller’s market. source.
recent years to catch up with demand. The reference pricing point is between Lease rates in Europe are about
But, in the meantime, the ATR72-600 $1 million and $1.5 million for an ERJ-145, $50,000. A trading source says that lease
model has been subject to aggressive but investment could be needed as most rates are between $30,000 and $55,000
bidding from some leasing companies and US-based fleets have no airstairs, because across the board.
this has translated into some softening in regional airlines have access to jetways. Good-condition aircraft should sell in the
lease rates. Some past trades have recorded as $1.5 million to $1.75 million range, says a
“We are not happy where lease rates much as $2 million but the majority of trading source.
for the -600 series are,” says one source. deals over the past two years have been The 50-seat CRJ market has been a
“At the moment, we will be happy with between $750,000 and $1 million. seller’s market for a long time. According
placements at $180,000 a month,” he It is a distressed market because owners, to Fleet Tracker, there are 102 Bombardier
adds. which are mainly financial institutions, CRJ200s but only one-third is advertised
The lessor representative also notes generally try to sell at a discount rate. for sale or lease.
less aggressiveness in the Q400 market to The news that ExpressJet will be Sources say the units sell at a low level,
place more aircraft. Still, Q400 lease rates offloading 75 aircraft may add further about $1 million. A typical 15-year-old
have softened. pressure on the market, despite some aircraft would be offered in the market for
“The Q400 market is not a selling pockets of demand emerging over the past about $1.5 million.
market. In terms of placements, aircraft few years. A run out aircraft would sell below $1
with new interiors can get placed at Mexico’s TAR Aerolineas has been million, says one source. In a part-out
$150,000 a month in the second-hand taking former Mesa units while Calafia scenario, engines would sell between
market with weak credits. The rate drops Airlines, also in Mexico, has taken some $250,000 and $300,000, he adds.
to the $130,000 region for better credit Trans States aircraft. It has now four The top-end of the market commands
airlines.” ERJ-145s after recently taking delivery prices in the $1.5 million to $1.7 million
But he is optimistic about the Q400 of a 2001-vintage ex-Mesa aircraft from range.
market. “Six months ago, we were looking Aerovision Aircraft Services. A trading source says lease rates are
hard about where we could place aircraft. Trading company Regional One has typically between $30,000 and $40,000
We are more comfortable to find homes been buying some units lately. for older models while the newest aircraft,
now,” he says. In November 2015, US regional carrier especially with more green-time in the
New Q400 placements almost reach CommutAir announced it will add 40 ERJ- engines, command higher rates, adds the
$200,000 a month, while older models are 145s to its all-turboprop fleet, expanding source.
below $110,00 a month. The economics its operations with partner United Airlines Fleet Tracker recorded about 60
of the turboprops over the regional at the New York Newark and Washington transactions in 2016 involving CRJ200s.
jets in a high fuel environment are not Dulles bases. Notably some aircraft were placed with
questionable but the past year has seen Other US regional airlines, including RusLine and Yamal Airlines in Russia and
oil prices at between $28 a barrel and $55 Republic Airways and SkyWest, have been Air Georgian in Georgia.
a barrel. This may have prompted some downsizing their 50-seat regional fleets Applications have also developed in the
operators not to rush to replace aircraft. in favour of 76-seat regional jets for their African market with CemAir and FlightPro
Turboprop values tend to stabilise mainline partners. Zambia adding aircraft last year and in
and bounce back “fairly quickly” as soon Fleet concentration has not helped South America with Boliviana and Star Peru.
as demand returns, and with oil prices remarketing US fleets outside the US SR Jet in China has taken delivery of four
creeping up, market conditions could because they are not EASA-compliant CRJ200s that were previously operated by
improve this year. and need investments, especially in the China Yunnan and China Eastern Airlines.

58 Airfinance Journal February/March 2017

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