Ideal Aircraft Asset SA Final - Aircraft Monitor - Home · Characteristics of an Ideal Aircraft Asset ... A320 1960 1970 1980 1990 2000 2010 2020 2030 ... EIS Production Run

Shannon Ackert : SVP, Commercial Operations – Jackson Square Aviation

What is an Ideal Aircraft Asset

January 2016

What is an Ideal Aircraft Asset

Agenda:

I. Characteristic of an Ideal Aircraft Asset

II. Aircraft Residual Value Retention Factors

III. Value Cycles & When to Invest

January 2016

Characteristics of an Ideal Aircraft AssetFrom an investor perspective, an ideal aircraft is one where:

The aircraft has robust market liquidity owing to: competitive market share,

large customer & lessor base, and

robust geographical spread

The aircraft is easily financeable and cost effectively transferredfrom one operator to another in an active, liquid and global market

The value of the aircraft does not decline substantially given a keycomponent of the overall economic return is the residual value.

January 2016

Residual Value Retention Factors

January 2016

Aircraft Price

ROE

Revenue

Cost

Net Profit

Financing

Free Cash Flow

Debt

Reinvestment ofCash Flow

SG & A

Extraordinary Costs

Tax

Financing Costs

Loan Advance

Residual Sale

Lease Rate

The residual value is a keycomponent of an investor’s overalleconomic return. If residual values donot meet projections :

• the net present value of the transaction can be diminished

• equity investors can potentially lose a portion of their investment

Components of overall economic return – investor perspective

Residual Value Retention FactorsMost of the inputs to overall economic return are determinative.

However :

this does not apply to residual values - future residual values areforecasted and subject to variability, uncertainty & RISK.

But we can mitigate this RISK by :

forming a policy to analyze those factors that influence anaircraft’s residual value over time.

January 2016

Residual Value Retention Factors

January 2016

Aircraft Residual Value Retention Factors

Aircraft FactorsMarket Factors

Technology

Specification

Market Liquidity

Production Run / Cycles

Secondary Market

Storage / Surplus

Inflation

Fuel Prices

Economic Factors

Interest Rates

Family

Residual Value Retention - Market FactorsMarket Liquidity is composed of an aircraft’s: A.) Order Book, and B.) Market Penetration. Market liquidity represents one of the largest influences on value

retention.

A. Order Book reflects the number of firm orders broken down by : a.) firm backlog, and b.) deliveries.

Order book serves to highlight the market share an aircraft has achieved

B. Market Penetration consists of the number of customers & lessors, and their associated geographical distribution

January 2016

Region Fleet153

1,2361,088275113886

3%

38%

31%

6%

3%

19%AfricaAsia PacificEuropeLatin AmericaMiddle EastNorth America

Example : 737-800 Market Liquidity

January 2016

Residual Value Retention - Market Factors

Source: Ascend as Jul-2015

Firm Orders Deliveries Firm Backlog Customers Lessors4,891 3,799 1,092 150 + 40 +

Aircraft with long production runs have greater value retention compared with shorter product life cycles.

January 2016

727

DC-9

737-200

MD-80/-90

757-200

737 CFMI

737 NG

A320

1960 1970 1980 1990 2000 2010 2020 2030

21 Years

17 Years

21 Years

21 Years

23 Years

15 Years21 Years

30 Years


Aircraft’s position in the production cycle influences value retention

January 2016

EISProduction Run ‐ Time Interval

1 32

#of Aircraft M

anufactured

Early Stable Late


January 2016

Residual Value Retention - Market FactorsKey Observations:

Early production units can experience value volatility as they tend beheavier, have lower operating weights & incur higher operating costs.However, these units are often the beneficiary of competitive OEM pricing.

Stabilized production units tend to have production issues resolved andthus experience stable declines in values

Late production units often experience higher declines in values giventhey are competing against newer technology units offering improvementsin operating efficiency. However, these units are often the beneficiary ofcompetitive OEM pricing.

Aircraft built at the end of production lifecycle depreciate more quickly than earlier vintages, and are often heavily discounted.

January 2016

3 4 652 71 80 9 2520 24 26

737‐300 Historical Value Trends

27

New

val

ue (%

)

23

100

25

75

50

21 22191817161514131211100

737‐300 end of production lifecycle737‐300 early in production lifecycle

Aircraft Age

Linear Trend‐line


Other Production Observations:

During an aircraft’s production run it’s important to trackconversions rights (e.g. A320 to A321) as this serves as abarometer to future guidance

An aircraft’s production rate is a leading determinant of capacitygrowth, with impact on market penetration.

Investors tend to have concerns over high production rates,which they view as creating an oversupply leading tovolatility in lease rates & values.

January 2016


The number of stored aircraft is often used as an indicator ofaircraft surpluses; in valuation terms, surpluses push values down.

January 2016

It’s important to note whether aircraft are stored for economicobsolescence or owing to the cyclic nature of the business



There are several viable secondary markets that exist for olderaircraft, key among them:

Lease to second and/or third tier operators

Passenger-to-freighter conversion, and

Part out for engine and other rotable components

January 2016


Secondary market influence on aircraft economic lives

January 2016


1.0

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

00 5 10 15 20 25 30 35 40 45 50

Commercial Jet Survivor Curve

Age

Perc

ent i

n Se

rvic

e

Robust Secondary Market

Lackluster Secondary Market

Normal Fit

The role of inflation should also be considered by aircraftinvestors. The residual value of an aircraft is a function of “real”future asset value and the rate of inflation over the given period.

January 2016

0

20

40

60

80

100

120

16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

$M

Year

0% 2% 4%

Falling inflation rates depressnominal aircraft residual values.

Effects of Inflation

Residual Value Retention - Economic Factors

Fuel prices are now an added layer of complexity to aircraftresidual values. Sustained low fuel prices, all else equal, are likely to support demand

for older aircraft at the expense of certain newer types.

January 2016

Residual Value Retention - Economic Factors

Aircraft are offered with optional features such as engine models,operating weights, avionics, winglets, brakes, & interior layouts.

Options with the greatest influences on aircraft values consist of:

Engines & Thrust Options,

Operating Weights, Winglets,

Cabin Layout & Crew Rest Area

Aircraft equipped with generic & higher specification featurestend to retain their values better & are more marketable relative tothose with unique features.

January 2016

Residual Value Retention - Aircraft Factors

Fragmentation among multiple engine manufacturers tends tomake remarketing more difficult (Example 777-200ER)

January 2016


Higher operating weights – particularly MTOW - enhance anaircraft’s utility and marketability (Example A321-200)

January 2016

Lower MTOW models are generally unpopular,and require costly weight upgrades to convertthem to higher standards.



Standard configurations are easier to lease, and have higherresale value. The rule for cabin specification is “generic is good,and unique is bad”.

January 2016


Customers operating a family of aircraft such as the A320 &737NG incur lower investment in parts, equipment, & training.

January 2016

100% Engine commonality

100% Flight deck commonality

Common ground support equip

Common ground handling

98%-100% common airframe spares

737-900ER

737-800

737-700

737NG Family


Aircraft Value Cycles & When to InvestConstant age historical half-life CMVs for 5-yr Old 737-800 & A320

January 2016

Normalized Volatility1

Source: Avitas & ASG20

22

24

26

28

30

32

34

36

38

40

Mar

-03

Aug

-03

Jan-

04Ju

n-04

Nov

-04

Apr

-05

Sep

-05

Feb-

06Ju

l-06

Dec

-06

May

-07

Oct

-07

Mar

-08

Aug

-08

Jan-

09Ju

n-09

Nov

-09

Apr

-10

Sep

-10

Feb-

11Ju

l-11

Dec

-11

May

-12

Oct

-12

Mar

-13

Aug

-13

Jan-

14Ju

n-14

Nov

-14

737-800

A320Global Financial Crisis

-19%

-13%

1. Normalized Volatility measure given by standard deviation divided by the mean (given in %)

3.9%

6.7%

Aircraft values fluctuate greatly over the cycle

Global Financial Crisis

Aircraft Value Cycles & When to InvestRelative half-life CMV performance through the cycle

January 2016

Source: Avitas & ASG1st-05 2nd-

05 1st-06 2nd-06 1st-07 2nd-

07 1st-08 2nd-08 1st-09 2nd-

09 1st-10 2nd-10 1st-11 2nd-

11 1st-12 2nd-12 1st-13 2nd-

13 1st-14 2nd-14 1st-15

737-800 100% 99% 95% 94% 93% 91% 92% 91% 81% 77% 76% 73% 72% 70% 68% 65% 63% 60% 58% 58% 56%747-400 100% 98% 88% 86% 84% 81% 80% 75% 62% 56% 48% 37% 35% 36% 33% 29% 26% 24% 23% 21% 20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110% 737-800

747-400

Theoretical Future Base Value Curve

The qualities of the aircraft will dictate the size of the market value movement above and below base value

Aircraft Value Cycles & When to InvestWhen aircraft market values rise above intrinsic base values, it indicates market is reaching cyclical peak

January 2016

0.8

0.8

0.9

0.9

1.0

1.0

1.1

1.1

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

MV/BV

During upturn good practice to • Avoid orders• Sell assets where possible

During downturn good practice to • Order aircraft where possible• Buy assets

Global Financial Crisis

Forecasts shown represent an index of all vintages

Aircraft Value Cycles & When to Invest

Rule # 1: Most economic events prove to be cyclical

Rule # 2 : Some of the greatest opportunities for gain and loss come when other people forget rule number one

Thank You

January 2016

Documents

Ideal Aircraft Asset SA Final - Aircraft Monitor - Home · Characteristics of an Ideal Aircraft Asset ... A320 1960 1970 1980 1990 2000 2010 2020 2030 ... EIS Production Run