2017 changing Environment Airline Economics Growth Frontiers Dublin - - PowerPoint PPT Presentation

2017

Aviation Leasing & Trading in an Ever- changing Environment

Airline Economics Growth Frontiers Dublin Presented by Abdol Moabery, President & CEO GA Telesis

GA Telesis Shareholders

2007 2012 2002 (Founders & Management)

GA Telesis Businesses

$ $ Aircraft Engine Trading Asset Leasing Leasing Management Engine Component Composite Go-Team Distribution Part-Out Inventory Programs Leasing

Things Are Changing

New Aircraft Lessor Mid-Life Aircraft Lessor End of Life Aircraft Lessor

• Used to be a few, now there are many in the market with a huge insurgency from Asia

in all sectors

• With capital availability, more non-traditional players have entered the market
• Value aberration driven by current ABS market; is it sustainable
• Increased competition is putting pressure on LRFs which are continuously dropping
• Aftermarket drives residuals and residuals drive pricing and aftermarket is under

tremendous competitive pressure from all angles

• Macro impacts of oil prices and exchange rates

New Aircraft Lessor

Some Challenges

• Globalization of the leasing industry has

created local lessors with large amounts of capital

• Placement of order book aircraft for new

technology platforms may be a challenge with fuel ~ $50

• Second deployment of aircraft becoming

competitive because of large number of entrants in mid-life leasing

• Low cost of capital allowing typical 2nd tier
• perators to get new airplanes vs used
• Potential rise in interest rates will put

pressure from airlines on lease vs own

• Increased competition will continue to put

pressure on LRFs

• Interior reconfiguration for twin-aisle aircraft

is economically challenging

• Exchange rates – local currency vs USD
• Useful life argument. What if market

perception of useful life changed, especially within the banking community and rating agencies

Mid-Life Aircraft Lessor

Some Challenges

• Globalization of the leasing industry has

created local mid-life aircraft lessors with large amounts of capital seeking higher yields

• There seems to be great interest in this

space in China from Chinese investors looking to capitalize on airline fleet renewal in China

• Deployment of mid-life twin-aisle aircraft

economically challenging when the aircraft comes out of carriers with customized interiors

• Refurbishment cost on mid-life NG/CEO

engines can be quite costly due to lack of aftermarket parts

• Refurbishment cost on 100”+ engines (not
• n program) difficult to justify
• Exchange rates – local currency vs USD
• Not enough demand for widebody

freighters to help manage the residual. Narrowbodies too early to determine.

End of Life Aircraft Lessor

Some Challenges

• Credit risk may be higher
• Repossession risk is often higher due to

geographical location of most carriers taking older aircraft

• Age restrictions inhibit placement in 40+

countries

• Part-out value may be diminished by

virtue of the jurisdiction where the aircraft is placed

• May take significantly more equity, if not

all equity, to structure a lease

• If debt is available, it is expensive
• Sometimes the engines lease for higher

than the airplane making it difficult to finance

• Exchange rates – local currency vs USD
• Asset values can be unpredictable
• It is possible to lease airframe only

Residual Drivers

• Import regulations
• Technology impacting reliability
• Number of aircraft manufactured
• Engine trading values
• Demand for Used Serviceable

Material

• No aftermarket in future

Strong aftermarket is significant driver of demand for mid-life to mature aircraft and therefore residual values, and are driven by:

If there is not a robust aftermarket, then there is a significant impairment on demand for mid-life to mature aircraft and RESIDUAL VALUES will be impacted meaningfully

Bolivia: 25 Brazil: 15/20 Ecuador: 20 Mexico: 15 Peru: 20 Venezuela: 12 Mexico: 15 Bangladesh: 15 India: 15 Nepal: 14 Pakistan: 25 Sri Lanka: 15 Algeria: 12 Congo: 15 Egypt: 15 Ethiopia: 12 Ghana: 25 Libya: 20 Mauritania: 10 Nigeria: 20 Sudan: 20 Bahrain: 15 Iran: 10 Iraq: 15 Jordan: 15 Kuwait: 5 Lebanon: 15 Oman: 15 Syria: 20 Saudi Arabia: 15 UAE: 20 Belarus: 15 Kazakhstan: 20 Kyrgyzstan: 20 Russia: 12 China: 10 Indonesia: 10 Japan: 10 Mongolia: 15 Myanmar: 20 South Korea: 20 Taiwan: 10 Thailand: 14 Vietnam: 15

The Age Factor

• 44 countries have age restrictions
• 17 of those have loose enforcement
• This impacts lessors differently
• New lessor – 2nd deployments
• Mid-Life lessor – 1st deployments
• End of life lessor – no deployments

Engine Values Drive Residuals

777 737-800/A320 A330 747/757/767 A340

• Historically, engine values represented 80%-90% of the residual value

in year 20

• With current technology and demand for airframe USM, it seems

values are leveling out towards a more even scale

• When more aircraft become available for part-out, the scales will tip

in favor of the engines one again

Engine Demand Impact

`

• Will be vastly

covered by maintenance agreements with OEMs

• Operating leases

will become more risky because of inability to collect maintenance reserves

• Lessors will have to

become a party to Engine maintenance agreement

• Highly competitive

environment

• Market is over spared
• Engines are

reliable…too reliable

• Engine reliability is

leading to a lesser need for spare engines

• Engine reliability is

impacting the part-

• ut market
• Independent MROs

can make a significant impact on cost

• Green-time

leases are very common

• Often cheaper

to buy versus rebuild

• Not many

credible MROs maintaining capability to repair

• Core engines

not worth much at the end of a lease

• Green-time

leases are very common

• Often cheaper

to buy versus rebuild

• Not many

credible MROs maintaining capability to repair

• Core engines

not worth anything at the end of a lease

Unprecedented Reliability

Engine Leasing Evolution

2016 2018 2020 2022 2024

Operating Lease Mechanical Lease Green-time Lease` Risk seems to be shifting to the lessor

Graphic representation

Conclusions

• The leasing space across all sectors is getting crowded, regionally

located lessors will have a competitive impact

• There is a need for a solution for the redeployment of twin-aisle

aircraft

• Age regulation will become a greater issue over time as the countries

that enforce them are typically targets for mid-life and mature aircraft

• Engine leasing is evolving and the number of green-time engines will

eventually surpass operating lease engines

• The part/out – aftermarket is absolutely vital to maintain residual value
• forecasts. OEMs need to embrace the need for an open market
• If there is no aftermarket and trading then there is no residual value,
• r rather anyone interested in buying assets
• If there is no residual value then aircraft ownership will be impacted

Intelligently Defining Aviation™