special report: finance & leasing 2016

Jan-feb 2016

special report:

finance & leasing2016

flightglobal.com/airlines | Airline Business | 25

SPECIAL REPORT FINANCE & LEASING

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The leasing sector is evolving as players consolidate and entrants from the east expand through acquisitions. And as rising airliner production rates push up the industry’s financing requirements, more airlines are set to tap capital markets. Meanwhile the insurance sector is continuing to see a decline in premiums

CONTENTS

26 Under the spotlight Our snapshot of the leasing sector outlines recent highlights

29 Top 50 leasing survey A deep dive on the fleet data, powered by Fleets Analyzer

32 Building up the business After Bohai’s Avolon deal, just how big is China’s appetite?

33 Leaving a legacy An insight from outgoing boss Norm Liu on life running GECAS

40 Changing tide How sector is consolidating42 Money on tap Outlook bullish despite

rising aircraft financing requirements42 Loss leaders Insurers take financial strain

January-February 2016

All our special reports are available online at : flightglobal.com/airlines

flightglobal.com/ab26 | Airline Business |

FINANCE & LEASING SNAPSHOT


UNDER THE SPOTLIGHTWith Chinese players making bold advances in the lessor business, we highlight the sector’s key metrics using data from Flightglobal’s Fleets Analyzer and values by Ascend

AerCap $31.6bn -4.5%

Avolon $6.4bn 3.5%

AWAS $7.0bn -24.1%

ICBC Leasing $7.7bn 12.2%

CIT Aerospace $9.5bn 5.8%

BOC Aviation $10.2bn 7.6%

Air Lease $10.5bn 19.0%

SMBC Aviation Capital $10.9bn -1.5%

BBAM $12.8bn 15.8%

GECAS $30.9bn -5.0%

TOP 10 LESSORS BY FLEET VALUE

THE BOHAI BOUNCEIn October, Avolon

shareholders voted strongly in support of the merger with Bohai Leasing, which was confirmed in

January 2016. Commenting last year on the deal, Avolon chief Dómhnal Slattery (pictured left, with Airbus boss Fabrice

Brégier) said: “There is no question, with Bohai and [parent] HNA Group’s deep positioning in the Chinese market –

through the investor equity, bank, and aviation markets – demonstrably

positions Avolon in a good place for the foreseeable

future”

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333After 2014’s boom, the lessors splashed less cash last year with orders declining by more than 50%

flightglobal.com/ab | Airline Business | 27January-February 2016

AerCap $11.0bn

GECAS$6.8bn

Avolon $0.4bn

China Aircraft Leasing

$0.2bn

Aviation Capital Group$0.1bn

NOTE: data for Airbus/Boeing types

Am28.1%

Af1.1%

SOURCE: Flightglobal Ascend????

e%

2015 LESSOR ORDER SHARE VALUE

$44.5bnGrand total

Air Lease$12.5bn

International Airfinance$8.0bn

BOC Aviation$3.3bn

SMBC Aviation Capital$1.1bn

Standard Chartered Aviation Finance$0.5bn

CIT Aerospace

$0.6bn

$137bnCombined fleet value of the 10 largest lessors, well over half that of the top 50

BOC PLANS LISTINGBank of China’s

shareholders approved the proposed listing of Singapore-

based leasing arm BOC Aviation on the Hong Kong Exchange in

December. The deal involves the bank selling a 20% stake in the lessor via

an initial public offering, while a further 20% stake will be sold as new shares. BOC Aviation says

the proposed deal remains subject to regulatory

approvals

Boeing$15.6bn

Airbus$28.9bn

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Flightglobal Ascend????AIRBUS/BOEING 2015 LESSOR

ORDER SHARE VALUE

$44.5bnGrand total

Boe

ing

NOTE: Order values based on 2015 list prices

$228bnThe combined value of the top 50 lessors’ portfolios, based on fair market value

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FINANCE & LEASING DATA

TOP 50 LEASING DATADATA COMPILED BY NIGEL FISHER, ASHLEY WILEMAN & MIKE REED FLIGHTGLOBAL DATA RESEARCH TEAM

Our annual examination (P25-43) of the global leasing portfolios highlights the big players and those who are on the up, with the help of Flightglobal’s Fleets Analyzer and Values databases

MAJOR NARROWBODY LESSORS BY FLEET VALUE

Rank Company Value ($m) Fleet Change

1 GECAS 20,077 1,008 -402 AerCap 17,940 947 -403 SMBC Aviation Capital 10,307 382 +154 BOC Aviation 6,712 214 +165 Aviation Capital Group 5,943 255 -86 Air Lease 5,653 183 +377 BBAM 5,564 226 -128 CIT Aerospace 5,504 227 -19 AWAS 5,351 217 -4410 ICBC Leasing 5,246 158 +30

MAJOR WIDEBODY LESSORS BY FLEET VALUE

Rank Company Value ($m) Fleet Change

1 AerCap 13,628 305 -72 GECAS 7,866 161 -123 BBAM 7,201 69 +174 Air Lease 3,867 46 +85 Doric 3,245 26 -56 CIT Aerospace 3,234 57 +97 BOC Aviation 3,050 38 +68 Aircastle Advisor 2,846 54 -69 Intrepid Aviaton Group 2,304 27 +710 DAE Capital 2,138 25 +1

MAJOR REGIONAL JET AND TURBOPROP LESSORS BY FLEET SIZE

Rank Company Value ($m) Fleet Jets Tprops Change

1 GECAS 2,952 398 361 37 -52 Nordic Aviation Capital 3,053 238 19 219 +763 Avmax Aircraft Leasing 307 118 54 64 +84 Falko 388 68 62 6 +105 ECC Leasing 187 64 63 1 -66 AVIC International Leasing 503 52 20 32 +17 Elix Aviation Capital 407 51 0 51 +268 Castlelake 274 48 6 42 +59 Air Lease 959 47 27 20 -410 Jetscape 777 44 44 0 +3

MAINLINE AIRCRAFT: LEASED FLEET

Manufacturer/category Type Value ($m) Fleet Av. value ($m)

Airbus narrowbody A318 394 33 12.0A319 8,844 651 13.6A320 49,758 2,019 24.6A321 14,181 495 28.6

AIRBUS NARROWBODY TOTAL 73,177 3,198 22.9Airbus widebody A300 160 17 9.4

A310 20 6 3.3A330 26,822 512 52.4A340 1,300 89 14.6A350 1,825 13 140.4A380 6,832 40 170.8

AIRBUS WIDEBODY TOTAL 36,959 677 54.6AIRBUS TOTAL 110,136 3,875 28.4Boeing narrowbody 717 890 107 8.3

727 3 6 0.4737 CFMI 1,203 434 2.8737 JT8D 1 8 0.1737NG 67,889 2,507 27.1757 1,926 210 9.2DC-8 1 1 1.0DC-9 1 6 0.1MD-80/90 190 135 1.4

BOEING NARROWBODY TOTAL 72,104 3,414 21.1Boeing widebody 747 3,548 154 23.0

767 3,374 279 12.1777 31,017 358 86.6787 8,187 75 109.2DC-10 1 1 0.8MD-11 151 19 7.9

BOEING WIDEBODY TOTAL 46,278 886 52.2BOEING TOTAL 118,382 4,300 27.5MAINLINE AIRCRAFT GRAND TOTAL* 228,518 8,175 28.0

REGIONAL JETS: LEASED FLEET

Manufacturer Type Value ($m) Fleet Av. value ($m)

Bombardier CRJ100/200 491 283 1.7CRJ700/900/1000 1,787 133 13.4

BOMBARDIER TOTAL 2,278 416 5.5Embraer E-170/175 1,340 93 14.4

E-190/195 6,300 293 21.5ERJ-145 family 700 205 3.4

EMBRAER TOTAL 8,340 591 14.1BAE Systems BAe 146/Avro RJ 137 71 1.9Fokker Fokker F28/70/100 74 28 2.6Sukhoi Superjet 100 571 31 18.4Other types 185 21 8.8REGIONAL JET GRAND TOTAL 11,585 1,158 10.0NOTES: *Mainline types include Airbus and Boeing only; Embraer data includes Harbin Chinese production; “Other types” include Antonov An-148/158 and Fairchild/Dornier 328Jet; BBAM excludes FLY Leasing, whose portfolio is managed by BBAM. SOURCE: Returns to annual leasing survey and Flightglobal’s Fleets Analyser and Values databases. Survey data covers all firms with an active operating lease business and a substantial investment in fleet and is not restricted to top 50 aircraft lessors.

TURBOPROPS: LEASED FLEET

Manufacturer Type Value ($m) Fleet Av. value ($m)

ATR ATR 42/72 4,567 367 12.4BAE Systems ATP/J31/41 88 51 1.7Bombardier Twin Otter/Dash 8 2,490 313 8.0Embraer EMB-120 24 12 2.0Fokker 50 65 33 2.0Saab 340/2000 190 95 2.0Other types 284 102 2.8TURBOPROP GRAND TOTAL 7,708 973 7.9MAINLINE/REGIONAL GRAND TOTAL 247,811 10,306 24.0NOTES: Other types include Aircraft Industries (Let) 410, Antonov An-An-26/An-140, AVIC XAC MA60, Fairchild Dornier 228/Metro, Harbin Y-12, and Hawker Beechcraft 1900


flightglobal.com/airlines32 | Airline Business |

FINANCE & LEASING CHINA

In November 2015, delegates gathering at the aircraft leasing conferences in Hong Kong were pondering a new phenome-non: the “Bohai boost”.

Coined in the aftermath of Bohai Leasing’s successful takeover offer for Irish lessor Avolon, the “boost” refers to the price – which many perceive as a premium – that the Shenzhen Stock Exchange-listed lessor had paid for the fast-growing Irish outfit.

Following a short bidding war involving a third party – widely rumoured to be fellow Chinese company AVIC Capital – Avolon’s board settled on a $31-per-share takeover bid from Bohai. That valued the entity at $7.6 billion, including an enter-prise value of $2.6 billion.

At the time, the target’s chairman Denis Nayden said the deal would “enhance Avolon’s profile, positioning and relation-ships in the Chinese aviation market” thanks to Bohai’s strong relationships in the nation.


Following a landmark takeover of Ireland-based Avolon by China’s Bohai Leasing, the market is closely watching the country’s players for further acquisition moves

BUILDING UP THE BUSINESS

REPORTELLIS TAYLOR SINGAPORE


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Bohai completed its acquisition of Avolon in early January, and the Dublin-based lessor assumed management of its new owner’s subsidiary Hong Kong Aviation Capital.

Following the purchase, the Bohai’s par-ent, the HNA Group, now has a portfolio of owned and managed aircraft in excess of 500 units.

The deal represents China’s first successful takeover of a Western aircraft lessor, following the failure of the ILFC bid in 2013 and a previ-ous tilt by AVIC at Avolon in 2014.

For those in Hong Kong, the talk centred on the premium that Bohai paid, especially as Avolon’s share price had been lagging at around $25 per share beforehand.

A number of sources say the premium represents the price of experience, given that most Chinese lessors have not had to deal with the challenges of lessee insolvency and repossessions that are an everyday occur-rence outside of China.

However, Astro Aircraft Leasing chief executive Johnny Lau believes this may be a harsh judgment.

“‘Premium’ is a very subjective term,” he said. “In a perfect bidding situation, the bidder always pays a premium.”

With the ink on the Avolon deal barely dry, Bohai was also linked to a possible sale of slimmed-down lessor AWAS, alongside old sparring partner AVIC and China’s largest aircraft lessor, ICBC Leasing.

Bohai was also seen as a potential bidder for CIT Aerospace, after CIT signalled in October it was looking at options for the business as it focuses on becoming a US commercial bank.

In a panel discussion at the Airline Economics Growth Frontiers conference in November, Transportation Partners chief operating officer John Duffy posited that the renewed frenzy of possible merger and acqui-sition activity was positive for the industry.

“You could argue that we have waited 30 years for leasing companies to be decoupled from where institutional investors viewed airlines,” says Duffy.

CAPITAL RICHHe adds that there is a lot of capital in mainland China that “wants to get out of China”, and that the strong US dollar cash flows of aircraft leasing are attractive for a number of institutions and high-net-worth individuals there.

Similarly, Orix Aviation chief executive David Power said at the same conference: “There is now a marketplace where there wasn’t five years ago.”

In part, the overseas interest from Chinese lessors has been driven by intense competition in the domestic market. Competition for sale-and-leaseback transac-tions with Chinese carriers – which have been the primary form of growth for local lessors – has been cut-throat, as still more players enter the field.

The other key driver has been political, as Beijing pushes both state-owned and privately held companies to become more internationalised as part of its wider ambi-tions to be a major player in global finance.

“The Chinese institutions are all encour-aged by the government to do more in the international market,” says Lau. “So this kind of outbound investment is driven by both the commercial need for further growth and also political dimensions.”

Although little-known outside China, Bohai Leasing has been quietly building

itself into a multidisciplinary lessor, and has shown a strong desire to expand its aircraft leasing business.

Bohai unites the HNA Group’s financial and operating lease platforms into a single, listed entity. The company is still controlled by HNA Capital, but has been able to build strong links with mainland banks, investors and other institutions. Rarely has it been short of capital to deploy in priority areas.

Indeed, Bohai’s takeover offer for Avolon came amid a flurry of HNA deals, such as its $2.8 billion acquisition of ground handler Swissport and, in December, a $450 million deal to take a 23.7% stake in Brazilian carrier Azul. HNA already had links to Azul as Bohai subsidiary Hong Kong Aviation Capital leases Embraer 195s to the David Neeleman-helmed carrier.

Unlike other Chinese lessors, Bohai has diversified its asset and customer base. Apart from its aircraft leasing units, it owns two of the world’s largest shipping-container leas-ing companies – Cronos and Seaco – as well as other businesses involved in equipment leasing and real estate, in China and beyond.

That foreign exposure has proven a posi-tive over the past year, following devalua-tions of the yuan. After one such event in July, Bohai announced to the stock exchange that, as most of its subsidiaries’ cashflow was in US dollars, the devaluation represented a “net positive” for the company.

Until the Avolon acquisition, its primary aircraft leasing unit with international expo-

“We tend to be counter-cyclical and so for us the

timing is not right, but there are opportunities out there for buyers”

ROBERT MARTINChief executive, BOC Aviation




DEFINITIONS: Ranking: The survey is based on the Top 50 companies with a substantial operating lease business ranked by the value of their owned and/or managed fleets at 31 December 2015. Change: The change figures are based on fleets/values supplied by Flightglobal’s Fleets Analyzer and Values databases for December 2015 and 2014. Operating lessors: Lessors are defined as those with an active operating lease business and a substantial investment in fleet. Companies that are solely or predominantly financiers have been excluded. Fleets and values: The survey represents a snapshot of fleets, including stored aircraft, with fair market generic values supplied by Ascend. Note the composition of fleets is constantly changing.

TOP 50 LESSORS BY FLEET VALUE

Rank Total fleet value Total fleet

Average value Managed only2015 (2014) Company $m Change $m Change $m Share

1 (1) AerCap 31,613 -4.5% 1,256 25.2 -0.8% 2,018 6.4%2 (2) GECAS 30,894 -5.0% 1,567 19.7 -1.5% 2,387 7.7%3 (3) BBAM 12,803 15.8% 297 43.1 13.8% 11,595 90.6%4 (4) SMBC Aviation Capital 10,869 -1.5% 395 27.5 -3.8% 611 5.6%5 (8) Air Lease 10,479 19.0% 276 38.0 1.3% 834 8.0%6 (5) BOC Aviation 10,159 7.6% 267 38.1 -0.9% 1,190 11.7%7 (7) CIT Aerospace 9,528 5.8% 326 29.2 1.3% 848 8.9%8 (9) ICBC Leasing 7,692 12.2% 204 37.7 -7.6% 267 3.5%9 (6) AWAS 6,998 -24.1% 260 26.9 -8.6% 312 4.5%10 (11) Avolon 6,420 3.5% 158 40.6 -8.3% 804 12.5%11 (10) Aviation Capital Group 6,087 -7.2% 263 23.1 -4.1% 914 15.0%12 (15) Aircastle Advisor 5,027 23.1% 164 30.7 2.1% 214 4.3%13 (12) CDB Leasing 4,949 -5.8% 134 36.9 -9.3% 0 0.0%14 (20) Macquarie AirFinance 4,880 85.2% 196 24.9 24.7% 74 1.5%15 (16) Jackson Square Aviation 4,295 17.0% 110 39.0 -1.1% 181 4.2%16 (14) Standard Chartered Avn Finance 3,625 -15.0% 100 36.3 -10.7% 0 0.0%17 (24) BoCom Leasing 3,528 67.9% 93 37.9 1.1% 0 0.0%18 (13) Doric 3,427 -21.8% 37 92.6 -19.7% 2,390 69.7%19 (22) ORIX Aviation 3,411 37.4% 157 21.7 7.7% 448 13.1%20 (27) Nordic Aviation Capital 3,074 56.2% 249 12.3 9.2% 0 0.0%21 (19) DAE Capital 3,074 10.7% 70 43.9 -11.5% 0 0.0%22 (18) MC Aviation Partners 2,946 3.6% 88 33.5 6.0% 1,457 49.5%23 (17) FLY Leasing 2,942 -2.0% 116 25.4 7.3% 0 0.0%24 (23) Hong Kong Aviation Capital 2,661 17.2% 76 35.0 12.6% 790 29.7%25 (28) Intrepid Aviation Group 2,344 20.0% 28 83.7 -10.0% 0 0.0%26 (21) VEB-Leasing JSC 2,288 -7.8% 70 32.7 -7.8% 0 0.0%27 (26) Aircraft Leasing & Management 2,271 15.2% 70 32.4 2.0% 2,237 98.5%28 (29) China Aircraft Leasing 2,258 27.4% 64 35.3 -6.4% 0 0.0%29 (25) Boeing Capital 2,233 12.7% 243 9.2 5.3% 35 1.6%30 (30) Novus Aviation 1,997 19.4% 24 83.2 -0.5% 1,110 55.6%31 (33) Changjiang Leasing 1,594 7.0% 70 22.8 -2.2% 0 0.0%32 (56) CCB Financial Leasing 1,560 237.0% 34 45.9 28.9% 0 0.0%33 (60) Amedeo 1,558 269.1% 8 194.7 -7.7% 1,558 100.0%34 (35) AVIC International Leasing 1,496 16.8% 80 18.7 3.6% 0 0.0%35 (31) Amentum Capital 1,484 -7.2% 44 33.7 -7.2% 1,329 89.6%36 (32) ALAFCO 1,473 -5.3% 50 29.5 -5.3% 0 0.0%37 (37) CMB Financial Leasing 1,225 5.5% 30 40.8 -12.0% 0 0.0%38 (51) Castlelake 1,194 49.3% 125 9.5 33.3% 1,004 84.1%39 (34) Guggenheim Aviation Partners 1,136 -14.7% 36 31.5 1.9% 0 0.0%40 (36) Jackson Square Aviation Ireland 1,052 -14.8% 23 45.7 -7.4% 0 0.0%40 (48) VTB-Leasing 1,052 61.5% 58 18.1 28.1% 162 15.4%42 (43) Banc of America Leasing Ireland 1,013 30.4% 29 34.9 16.9% 0 0.0%43 (38) Comsys Aviation Leasing 993 -7.4% 20 49.6 -7.4% 0 0.0%44 (41) Apollo Aviation Group 988 24.4% 66 15.0 3.6% 633 64.0%45 (42) Dragon Aviation Leasing 985 26.4% 30 32.8 -3.1% 0 0.0%46 (44) Transportation Partners 921 25.9% 33 27.9 -8.4% 0 0.0%47 (90) SPDB Financial Leasing 887 509.8% 19 46.7 -35.8% 0 0.0%48 (58) GTLK – State Transport Leasing 862 91.9% 31 27.8 61.0% 0 0.0%49 (39) Showa Leasing 821 -5.8% 32 25.7 -5.8% 0 0.0%50 (40) Jetscape 808 -1.3% 46 17.6 -7.7% 595 73.7%

TOTAL 227,873 6.0% 8,222 27.7 -0.7% 35,997 15.8%NOTES: FLY Leasing aircraft managed by BBAM, but not included in BBAM figures to avoid double counting. SOURCE: Flightglobal’s Fleets Analyzer and Values databases

sure was HKAC, which has its fleet of around 75 aircraft deployed in markets primarily outside China.

Bohai still has a strong presence in China through its local aircraft leasing units Changjiang Leasing, Yangtze River Leasing and Tianjin Bohai Leasing. Flightglobal’s Fleets Analyzer database shows the majority of aircraft owned by those units are leased to HNA Group carriers such as Hainan Airlines, West Air and Capital Airlines.

As such, some argue Bohai primarily serves as an in-house lessor and financier to the HNA Group. Even HKAC, which has a more global footprint, has not been immune to such criticism. In 2014, four HNA-linked airlines took options to lease or purchase some of the Airbus A320neos HKAC had on order, while Tianjin Bohai completed sale-and-leasebacks on four Airbus A330s with Hainan Airlines last year.

HKAC chief executive Donal Boylan last year told Flightglobal the lessor had been heavily involved in negotiating Boeing 737 Max orders for Hainan Airlines and a separate order by Tianjin Airlines for Embraer 190s.

In an interview with the South China Morning Post in October, Bohai’s chief operating officer Ren Weidong said the company had established a new joint venture, Tianjin Air Capital, to deal with asset management and provide consult-ancy services to other lessors.

Despite its broad portfolio, Bohai has made no secret of its plans to bulk up its aviation businesses. In April 2015, it announced plans to raise CNY16 billion ($2.4 billion) through a rights issue, of which half was dedicated to investment in aircraft. At that time, it had been thought the majority of those funds would flow into HKAC to allow it to gain more scale by adding to its portfolio.

Bohai had backed HKAC’s bid for AWAS’s Skyfin portfolio, but in the end was pipped to the post by Macquarie Group.

NEXT STEPSThis year more Chinese companies will step up to take acquisition opportunities.

Lau believes the natural targets will be mid-tier Western lessors with portfolios of more than 100 aircraft.

“After the success story of Avolon, I think people in China are saying that it can be done. With the right team and the right investment banker, deals could happen,” he says.

“They may not be as big as ILFC or Bohai-Avolon, but they will be there.”

With AWAS in play, the other two bidders

flightglobal.com/airlines | Airline Business | 35January-February 2016

BOHAI LEASING SUBSIDIARIES’ PORTFOLIOS

Fleet On order Total

Avolon

Airbus A320 family 67 24 91

Airbus A330 10 15 25

Boeing 737NG 66 1 67

Boeing 737 Max 0 20 20

Boeing 777 5 5

Boeing 787 4 6 10

Embraer E190 6 6

TOTAL 158 66 224Changjiang Leasing

Airbus A320 family 24 24

Boeing 737 Classic 2 2

Boeing 737NG 26 26

Embraer E190 5 5

Embraer ERJ-145 13 13

TOTAL 70 - 70Hong Kong Aviation Capital

Airbus A320 family 39 70 109

Airbus A330 18 18

Boeing 737NG 5 5

Boeing 747 1 1

Boeing 777 1 1

Embraer E195 12 12

TOTAL 76 70 146Tianjin Bohai Leasing

Airbus A330 1 1

Boeing 737NG 1 1

TOTAL 2 - 2

GRAND TOTAL 306 136 442SOURCE: Flightglobal’s Fleets Analyzer database (January 2016)

apart from Bohai – ICBC Leasing and AVIC Capital – are likely to be the next players sizing up acquisition opportunities.

ICBC Leasing, while already active globally, seems likely to look at opportuni-ties to diversify its portfolio further through a Western acquisition. Having been part of the failed bid for ILFC in 2008, the company has for many years focused on organic growth through sale-and-leasebacks, while it also has a strong stream of speculative orders.

Some point out, however, that ICBC has yet to show that it has reached the level of being a true, full-service lessor. Detractors point to the recent example of an A330 returned to the lessor by Singapore Airlines – which sat dormant for the best part of nine months in 2015 without a new operator – as a sign it has yet to master the art of marketing used aircraft to other operators.

TAKEOVER TARGETSThe other AWAS bidder, AVIC Capital, is less globally focused but has shown it is keen to expand its portfolio and target more custom-ers outside China.

Like Bohai, AVIC Capital is tied to a larger entity – state-owned AVIC – and describes itself as a “full-licence” financial holding company. As well as holding stakes in a number of other AVIC-linked companies, it finances ships and general aviation aircraft.

Subsidiary AVIC International Leasing has had a reasonably busy year, acquiring Boeing 737s from Air Berlin and SMBC. It has also agreed to finance an order for 30 737 Max aircraft from start-up Chinese carrier Ruili Airlines, a deal disclosed at the Paris air show in July.

Those have added to what is seen as its more traditional role of supporting other AVIC-made products, such as the Xian Aircraft MA60 and forthcoming MA700 turboprops.

Having been beaten twice for Avolon, it appears AVIC Capital will explore other oppor-tunities to buy Western lessors. That could involve partnering with sovereign wealth fund China Investment Corporation, which sources say is also on the lookout for acquisition oppor-tunities. The two companies teamed up in 2014 to make a takeover offer for Avolon that was rejected by management, clearing the way for the lessor to proceed to an IPO.

At the November event, there were warn-ings for potential takeover targets being sized up by cash-rich Chinese investors.

“This may sound unkind, but the valua-tion you get from a Chinese buyer may not be the value that is in there,” says

Transportation Partners’ Duffy.Expanding further on the point, CIT’s

president of commercial air, Tony Diaz, expresses concern the high valuations some Chinese companies are willing to put on Western lessors would place impossibly high expectations on the management team once a merger or acquisition is closed.

“I don’t know if, as a management team, you can manage the business to achieve a certain multiple,” he says.

While mergers and acquisitions are a tantalising prospect, other investment opportunities are set to open up this year, with at least two Chinese-linked lessors poised to list on the Hong Kong stock exchange in what are likely to be IPOs worth up to $1 billion.

Bank of China announced in October it plans to take BOC Aviation public with a list-ing on the Hong Kong Stock Exchange. BOC Aviation would become the second lessor on the exchange after China Aircraft Leasing (CALC). The Singapore-based lessor plans to sell a 20% stake in the float, while a further 20% will be used to raise new capital.

Although no timetable has been given, shareholders approved the IPO in November, signalling it could launch in early 2016.

Despite the merger and acquisition activi-ty around, BOC Aviation’s chief executive Robert Martin says his company will not be going down that path.

COUNTER-CYCLICAL“Are we a buyer? The answer is no,” he says. “We tend to be counter-cyclical and so for us the timing is not right, but for someone who is looking to go in and buy a platform, there are opportunities out there.”

Although less advanced in its plans, mar-ket sources say China Development Bank is also pursuing a listing of its CDB Leasing unit, in 2016. As well as the usual sale-and-leaseback activity of Chinese lessors, CDB Leasing signed on to take 30 Boeing 737-800s as part of a 300-aircraft order by China Avia-tion Supplies Holdings disclosed in September.

The acquisition activity and IPOs in the pipeline reinforce just how quickly the Chinese leasing sector has grown since Beijing allowed banks to establish leasing operations, in 2008.

Thomas Kaplan, a senior analyst at Flightglobal’s Ascend consultancy, notes the industry has grown at a phenomenal annual growth rate of 37% over the past five years, although around two-thirds of the leased

fleet are operated by Chinese carriers.BOC Aviation’s Martin says for most of the

Chinese banks with leasing arms, it is merely an extension of their existing business.

“In the leasing market, people see it as an alternative way of lending to their customers, particularly through finance leasing,” he says.

Over the past year, carriers such as Juneyao Airlines, Spring Airlines and even China Eastern Airlines have also been setting up and operating their own leasing plat-forms, usually based in one of China’s free-trade zones.

“So far, they are setting up finance leasing, more for tax purposes, but some may be interested in operating leasing too, so they are ones to look out for,” says Kaplan.

Overall though, Astro’s Lau says Chinese lessors still have a lot more growing to do before they can be truly global players.

“I think they are still maturing,” he says. “Maybe, like Bohai, if they can jump those big hurdles to make a major acquisition and become international, they will speed up their own growth path, but that’s not easy.” ■



TOP 50 LESSORS BY FLEET SIZE

Rank Total fleet Fleet by type Value2015 (2014) Company Number Change Units +/- Wide Narrow RJ/T’prop Fleet ($m) Rank Average

1 (1) GECAS 1,567 -3.5% -57 161 1,008 398 30,894 2 19.72 (2) AerCap 1,256 -3.8% -49 305 947 4 31,613 1 25.23 (3) SMBC Aviation Capital 395 2.3% +9 7 382 6 10,869 4 27.54 (5) CIT Aerospace 326 4.5% +14 57 227 42 9,528 7 29.25 (6) BBAM 297 1.7% +5 69 226 2 12,803 3 43.16 (9) Air Lease 276 17.4% +41 46 183 47 10,479 5 38.07 (8) BOC Aviation 267 8.5% +21 38 214 15 10,159 6 38.18 (7) Aviation Capital Group 263 -3.3% -9 8 255 0 6,087 11 23.19 (4) AWAS 260 -16.9% -53 43 217 0 6,998 9 26.910 (11) Nordic Aviation Capital 249 43.1% +75 0 11 238 3,074 20 12.311 (10) Boeing Capital 243 7.0% +16 45 184 14 2,233 29 9.212 (12) ICBC Leasing 204 21.4% +36 25 158 21 7,692 8 37.713 (15) Macquarie AirFinance 196 48.5% +64 12 180 4 4,880 14 24.914 (14) Aircastle Advisor 164 20.6% +28 54 105 5 5,027 12 30.715 (13) Avolon 158 12.9% +18 19 133 6 6,420 10 40.616 (18) ORIX Aviation 157 27.6% +34 17 138 2 3,411 19 21.717 (16) CDB Leasing 134 3.9% +5 31 83 20 4,949 13 36.918 (23) Castlelake 125 48.8% +41 25 52 48 1,194 38 9.519 (19) Avmax Aircraft Leasing 118 7.3% +8 0 0 118 307 74 2.620 (17) FLY Leasing 116 -8.7% -11 12 104 0 2,942 23 25.421 (21) Jackson Square Aviation 110 18.3% +17 13 97 0 4,295 15 39.022 (20) Standard Chartered Avn Finance 100 -4.8% -5 18 82 0 3,625 16 36.323 (33) BoCom Leasing 93 66.1% +37 13 78 2 3,528 17 37.924 (22) MC Aviation Partners 88 -2.2% -2 19 68 1 2,946 22 33.525 (26) AVIC International Leasing 80 12.7% +9 1 27 52 1,496 34 18.726 (25) Hong Kong Aviation Capital 76 4.1% +3 20 44 12 2,661 24 35.027 (29) Falko 74 12.1% +8 0 6 68 434 64 5.928 (32) Aircraft Leasing & Management 70 12.9% +8 11 55 4 2,271 27 32.428 (31) Changjiang Leasing 70 9.4% +6 0 52 18 1,594 31 22.828 (33) DAE Capital 70 25.0% +14 25 31 14 3,074 21 43.928 (27) VEB-Leasing JSC 70 0.0% +0 28 24 18 2,288 26 32.732 (35) Apollo Aviation Group 66 20.0% +11 15 51 0 988 44 15.033 (39) China Aircraft Leasing 64 36.2% +17 4 60 0 2,258 28 35.333 (27) ECC Leasing 64 -8.6% -6 0 0 64 187 89 2.935 (24) SkyWorks Leasing 59 -26.3% -21 14 25 20 491 63 8.336 (36) Cargo Aircraft Management 58 7.4% +4 49 9 0 611 54 10.536 (30) Jet Midwest 58 -10.8% -7 13 34 11 141 98 2.436 (41) VTB-Leasing 58 26.1% +12 14 42 2 1,052 40 18.139 (39) AerSale 55 17.0% +8 17 38 0 366 69 6.740 (68) Elix Avn Capital 51 104.0% +26 0 0 51 407 66 8.041 (37) ALAFCO 50 0.0% +0 3 47 0 1,473 36 29.542 (45) Jetscape 46 7.0% +3 0 2 44 808 50 17.642 (51) Sberbank Leasing 46 24.3% +9 8 19 19 651 53 14.144 (44) FPG Amentum 44 0.0% +0 12 28 4 1,484 35 33.745 (38) Sky Holding 43 -12.2% -6 9 34 0 232 82 5.445 (42) West Atlantic Acft Management 43 -4.4% -2 0 5 38 98 107 2.347 (42) ACIA Aero 42 -6.7% -3 0 0 42 187 90 4.448 (54) Jetstream Aviation Capital 40 21.2% +7 0 0 40 73 119 1.849 (49) GOAL 39 -7.1% -3 3 15 21 573 57 14.749 (123) WNG Capital 39 387.5% +31 4 33 2 526 59 13.5

TOTAL 8,637 5.0% +411 1,287 5,813 1,537 212,376 24.6NOTES: Figures based on fleet data from Flightglobal's Fleets Analyzer database at December 2015. Total fleet is owned and managed.

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Norm Liu looks back on his days at the helm of GECAS, steering the lessor through times of economic and political distress, even as the company forges ahead amid growing competition and industry consolidation

FINANCE & LEASING GECAS

LEAVING A LEGACY

REPORTLAURA MUELLER LONDON

After seven years as GECAS’s chief executive, Norm Liu has passed the torch to former GE real-estate head Alec Burger, who took charge on 1 January.

Liu, a General Electric veteran with 30 years’ service, including 20 at GECAS, will remain with the aircraft lessor until late 2016 as chairman.

The timing of his departure has raised eye-brows as it coincides with the sell-off of most of GECAS’s parent, GE Capital. This unwind-ing process has included the sale of GE’s real-estate division – a task Liu’s successor Burger was charged with implementing.

“I don’t think you should read anything more here than me retiring,” says Liu, giving Flightglobal his last industry interview as head of GECAS. “I know that doesn’t make for great cocktail chatter, but it is what it is.”

GE is offloading $200 billion worth of finan-cial assets under a plan disclosed in April 2015 so the corporate behemoth can refocus its atten-tion on its industrial portfolio and related fi-nancing units, such as GECAS and Energy Fi-nancial Services. The sales will also allow GE to apply to regulators to shed its status as a “sys-temically important financial institution”.

Liu notes: “I’ve had a great three-decade run at GE, and I turn 60 in 2017. My successor led another big GE financial business, so the place is in good hands. Fortunately, I’m finishing up with record earnings and I can’t think of any-thing else we can logically expand into, so now is the time for some fresh thinking.”


No doubt, market rumours about a GECAS sale are also being fuelled by recent heavy port-folio sales and slow asset growth. Liu admits the lessor has been an active seller of aircraft in re-cent years, but stresses this is because “the time was right to sell versus buy, and because of the new technology on the horizon”. GECAS typi-cally invests $6-7 billion a year in the aircraft market, a figure which is multiples larger than the competition. Although it beat its target in 2015, he says, the lessor had to “pick the spots” as good deals were harder to come by.

“Look, as long as we have the engine busi-ness, this thing [GECAS] makes total sense with the GE family. Our ROEs [returns on equity] have been in the mid- to upper-teens, we have scale and deep domain expertise, and though we haven’t grown in recent times we generate $1 billion-plus of earnings and significant cash-flow,” he adds. “There are solid reasons why it makes sense to keep GECAS in the combine, plus 85% of our fleet is GE/CFM kit.”

But even with a strong parent, scale, and a global stronghold, the road to retirement has not always been an easy one. GE lost its triple-A rating right after the 2008 financial crisis,

taking some of the wind out of the the sails of the storied company and, ultimately, creating the backdrop for the sale of GE Capital.

In fact, most of Liu’s time at the helm has been amid economic and political distress, including the global financial crisis.

However, it was earlier in the millennium’s first decade – when the 2003 invasion of Iraq and the SARS outbreaks combined with the aftermath of 9/11 – that Liu endured his most difficult period as GECAS commercial leader.

“Those were the really tough times – the US industry was on the edge of failure. We had several majors that were on the brink of col-lapse, but it was also when we realised, for the first time, the huge potential of the emerging markets,” he says. “I remember moving some ex-US Airways [Boeing] 737s to AirAsia, and that this was the first time the emerging mar-kets really started to come into the fore.”

Liu declines to take credit for opening up emerging markets to GECAS. “It happened be-cause we are so global. I’d love to say it was some master grand design, but we sort of just fell into this. We started realising this was an opportunity, and that’s when we rapidly built out our network.”

TIMING IS EVERYTHINGAgainst a backdrop of abundant liquidity, cheap oil, low returns across various asset types, and a strong US dollar, the number of competitors in the leasing sector has swelled during Liu’s time at GECAS.

“I was fortunate starting 20 years ago – it was

“Today, lessors are at 44% of the fleet, but will we get to 75%? I don’t think so”

NORM LIUChairman, GECAS


Liu expects at least one Chinese player to make it

to top three

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a prime time to enter the leasing market due to the growth potential in various markets. The OEMs didn’t have sale networks all over the place. The emerging markets still offered a lot of potential and there were multiple expansion areas like engine leasing, debt, and regional and cargo jets.

“It was a good period riding this growth curve, but that has attracted more competi-tion. Back then, there were maybe five com-petitors. There are multiple handfuls now.”

Increased competition in the aircraft leasing sector, particularly in sale-and-leaseback deals – coupled with value uncertainty looming in the face of last-off-the-line aircraft and new-tech-nology replacements – eventually forced Liu to look beyond fixed-wing assets for growth.

In March 2014, he disclosed his intent to spend $2 billion on the buying and renting out of helicopters as part of a move to diversify the business and keep the platform churning.

Less than a year later, GECAS closed the purchase of Dublin-based Milestone Aviation Group for $1.78 billion, making it the largest helicopter lessor in the market.

Even with a difficult outlook for the oil and gas sector, due to falling fuel prices, the pur-chase of Milestone marked an important and necessary move for GECAS, he argues.

“Not only does it offer another growth venue and about $100 million in earnings, it is flying equipment that is powered by GE so it fits the GE domain,” he says. “While a struggle in the short term, this is a long-term investment that also suits our infrastructure core, serving ener-

gy, medical, and government markets.”Liu remains cautious about further growth

prospects for aircraft leasing despite the steady flow of new entrants to the sector.

“I am not as starry-eyed as others about how big this market can get. I am an ex-fi-nance guy, so I look at the numbers and bonds are cheaper than leases, but obviously leasing is needed for flexibility.”

On the one hand, Liu reckons there could be an uptick in demand due to the approaching technology shift. However, he sees this being off-set by healthier airlines, which are so profitable they can raise financing through various means, including bonds and export credit financing.

He also sees airline industry consolidation as a longer-term limiting factor for leasing.

“There is this steady drumbeat of consolida-tion – it is happening in the USA and it is hap-pening in other prime markets. Once you have large-scale airline buying power and capital-markets execution, then you go for the most ef-fective financing,” he says. “Today, lessors are

probably at 44% of the fleet; and we could get to 50%. But will we get to 75%? I don’t think so.”

SLOW BUT STEADYHowever, one thing that Liu is sure will con-tinue to grow is China’s share of the leasing market. Liu, a Chinese American, remains adamant that the Chinese lessors are more than an ephemeral phenomenon.

“Many people are dismissive of China, but I believe there will be two to three major Chinese leasing players, and one of those will make it into the top three. The question, though, is when.”

He adds: “The Chinese have liquidity and a major home market. Sure, there is a bit of a cul-ture thing, but there are a lot of talented young Chinese people out there, learning this business.”

Boeing foresees that over the next 20 years there will be demand in China for 6,330 new air-craft with an estimated value of $950 billion. The region’s fleet will almost triple to 7,210 aircraft in 2034, from 2,570 airplanes in 2014, with more than 70% of deliveries accommodating growth.

Chinese economic growth in the near term is likely to slow to 6.2% in 2016, from around 7% in 2015, but Liu insists the long-term growth prospects for the region are firmly in place.

“The mainland has a pro-consumer policy in place and remember, we are talking about some 1.3 billion people in China, so millions of these people will want to see the world. That growth isn’t going away.”

No doubt the devaluation of the yuan has made leasing and its US dollar rental streams more attractive to Chinese financiers, but “even after some of this air has gone out” the leasing company P/E multiples in China are “quite high, so local investors will continue to be attracted to and fuel this sector”, he says.

He dismisses the idea that this growth will come about by “roll-ups” – the investment tactic of acquiring then integrating multiple compa-nies – or the buying-up of Western competitors and “yesterday’s technology” aircraft fleets. In-stead, he believes this will come about by “slow and steady money with strong funding costs”.

Liu asserts: “Roll-ups don’t make sense in our industry if you don’t have superior capital costs. Cost synergies are relatively small. You would have to string together a lot of these roll-ups to get to anything of size.”

A way around this is to “string together a bunch of $10 billion operations”.

However, he notes that GECAS is a $40 bil-lion-plus business, so “a lot” of smaller leas-ing companies would need to be acquired to match that level. “I just don’t see this making sense at present, but I also could be wrong, so let’s chat five years from now.” ■

GECAS AT A GLANCE

Fleet value $30.9bn Fleet (aircraft) 1,567Orders (aircraft) 287Lessees >220Total revenue 2014 $5.24bnAB 2015 ranking (fleet value) 2AB 2015 ranking (fleet size) 1Rankings based on Airline Business 2015 leasing surveyFleet/value data: Flightglobal’s Fleets Analyzer/Values databases


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A series of consolidation moves and the emergence of bold Asian

players have transformed the leasing arena, and are expected

to continue to alter the power play in the sector this year

FINANCE & LEASING LESSORS

CHANGING TIDE


One theme that dominated the air-craft lessor industry last year was the change of landscape.

There have been a spate of mergers and acquisitions among

aircraft lessors, with cash-rich Asian busi-ness entities entering a sector that is increas-ingly viewed favourably by yield-hungry long-term investors.

The year 2015 saw an increase in M&A les-sor activity and the landscape among differ-ent platforms is gradually changing. Many believe the momentum will continue in 2016.

Last year saw the fragmentation of the AWAS platform through the sale of an 89-air-craft portfolio to Macquarie AirFinance, an asset-backed securitisation (ABS) deal with the sale of E-notes covering 30 aircraft. The remaining 200 or so aircraft, and its platform, have been subject to sale speculation since the final quarter of last year.

Speculation as to its future has also been on the cards since the final quarter for US lessor CIT Aerospace, after its parent com-pany, CIT Bank, announced it is exploring “strategic alternatives”.

On the back of the sale of 24 aircraft through an ABS transaction that included the sale of eq-uity notes, BOC Aviation surprised the market with the announcement that parent Bank of China had approved a proposal to spin off on the Hong Kong Stock Exchange. The leasing

REPORTOLIVIER BONNASSIESLONDON

unit will raise funds by selling no more than 40% of the firm through the listing of old and new shares. The Beijing-based bank will remain a majority shareholder of BOC Aviation, which plans to sell 10% of the offering to Hong Kong investors and 90% to international investors.

OPPORTUNITIES OF SCALEOne entity that keeps growing is Bohai Leas-ing, which is majority owned by HNA Group.

Avolon’s sale to Bohai was completed on 8 January and the Dublin-based lessor was merged with Bohai’s leasing entity, Hong Kong Aviation Capital.

HKAC has managed assets and future com-mitments totalling 420 aircraft with a value of $22 billion. HNA Group – Bohai’s parent – now has a portfolio of owned and managed aircraft “in excess of 500”.

In addition, Bohai Leasing emerged as a pos-sible buyer for Dublin-based AWAS, in the final quarter of last year. ICBC Leasing and Chinese manufacturer AVIC have also expressed interest in the Dublin-based lessor, according to sources.

The purchase of AWAS would allow Bohai to further expand its aviation leasing scope, a strategy it has been working on since 2013 through wholly owned subsidiary Tianjin Bohai Leasing. The combination of the three, AWAS, Avolon and HKAC, would propel Bohai into the top five, just above Air Lease in terms of number of aircraft.

Avolon’s chief executive Dómhnal Slattery believes consolidation will be a theme in the leasing sector for the next few years.

“Our thesis is, consolidation is either driv-en by distress or strategic scale. We don’t see any distress, and we don’t foresee any distress any time in the near future. So the consolida-tion that has occurred, or is occurring, or po-tentially [will], is driven by strategic scale and the desires to achieve scale,” he says.

“I suspect there will be quite a bit of M&A activity in the sector over the next 12-18 months,” he adds.

In the last quarter. Aircastle’s chief execu-tive Ron Wainshal said there appeared to be

“increasing momentum” for change and con-solidation. “Some of this may be driven by the desire by some for sheer size, while others look for exits and strategic repositioning. Oth-ers still might be motivated by needs to en-hance their capabilities.”

He agrees consolidation has been a theme for years but in the last year or so, there have

“The consolidation that is occurring is driven by the desires to achieve scale”

DÓMHNAL SLATTERYChief executive, Avolon


been two big deals. “Maybe we’re on the cusp of a third,” he says.

“What I had observed is when you look at the top 10 leasing companies right now, there is a lot of change going on and all these things could give rise to something.

“Avolon is in the process of being acquired by a Chinese company. CIT just announced that aircraft leasing business is exploring stra-tegic alternatives. We’re seeing AWAS for sale. GECAS just replaced its leader and Bank of China announced that it’s going to take its aviation group and put it on the Hong Kong Stock Exchange. These are all pretty big deals. It’s all happened in a fairly short timeframe.”

Slattery says it will be interesting to see where CIT ends up, whether in public mar-kets or otherwise. “I think they’ve still got to decide where they’re going there,” he says.

LISTING BENEFITSAerCap’s chief executive Aengus Kelly says when whole portfolios have traded from pub-lic to private or private to private, they have seen a significant “premium over” where pub-lic stocks are trading.

He does not take a bet on the future of CIT but points out the more participants that are listed, the better it will be. “We do believe that is what we saw in the debt markets, where initially the debt market was similar to the equity market, [and consequently charged very wide spreads] but as more and more volume came into the debt market then spreads aligned with compa-rable credits and other industries. This was due to the volume that came into the market.”

“We would be very supportive of any addi-tional public equity companies, particularly a reasonable sized one like CIT,” he adds.

CIT Transportation & International Finance president Jeffrey Knittel sees no “huge catalyst”

for consolidation in the fragmented aircraft leas-ing industry.

“Consolidation is a function of opportunities around,” he notes. “People have been talking about consolidation for 15 years in this space.”

He adds: “There has been one major trade in which the seller [AIG] was getting out at the bottom ... That was a unique trade that created a very large leasing company.”

Of the more recent move for Avolon by Bohai Leasing, he notes: “They will, I assume, merge it with the Hong Kong Aviation entity. On a relative basis, this is a smaller trade.”

Knittel says consolidation is a function of sellers and buyers, and whether there is a strate-gic fit. “There is not necessarily this huge cata-lyst for consolidation in the space,” he argues.

“What are the catalyst for consolidations? If you find people having troubles borrowing, who don’t feel they have leverage in terms of costs, leverage with manufacturers ... then that may be a catalyst for consolidation, but eventually it de-pends on the owners of the specific companies.”

Guggenheim Aviation Partners’ chief execu-tive Steve Rimmer believes consolidation is

“inevitable” as efficient financing of the liabili-ty side of the balance sheet is essential in to-day’s competitive market. “Size matters when you are financing your balance sheet,” he says.

“New entrants into the leasing space want to have the platforms to allow them to grow and grow fast, so acquisition of platforms and then portfolios are top of their lists.”

BIGGER PLAYERSAerCap and GECAS continue to dominate aviation leasing, with committed balance sheets in excess of $45 billion each – but a large majority of delegates at last year’s ISTAT Europe conference expected additional mega-lessors to emerge in future.

In a poll, 37% of voters predicted the num-ber of aviation leasing players of the size of AerCap and GECAS would increase to four by 2025, while 26% went for five or more, and 22% for three. Only 15% believe the market will stay the same, with two superpowers.

Knittel says we will see the potential for an “opportunistic trade”, that could begin to close the gap. “Once you get to be a certain size, the growth is all about opportunity,” he says.

Air Lease chief executive Steve Udvar-Házy, recalling his days at ILFC, indicates there is a crossover point “where the workload, the ad-ministrative aspects, the human resources, the people problems, can be a disproportionate utilisation of management’s talent and time”.

He adds: “Financial size is one thing, but the number of aircraft units... is more signifi-cant than the dollar value. Once you get above 700 or 800 airplanes, you do have a lot of sleepless nights and a lot of challenges. And a higher probability that airlines are going to default and so there are a lot of things that de-rail your focus on the core business.”

But no one denies that the industry as a whole is growing. Slattery recalls the “key and positive message” to institutional investors, be it equity or debt, is: there is still a very strong bid for well-run platforms that are strategically relevant.

“It is a growing sector in a growing industry. Looking back, selling a large portfolio as well as another portfolio with a platform was viewed as a risky strategy,” says a leasing source, referring to AWAS.

“They seem to have achieved that hard sale. Maybe CIT could do a similar thing,” he adds.

Another leasing source says: “You will also see CIT’s aviation unit on a lot of people’s target list, and possibly to fuel growth. GECAS is prob-ably also something that one should consider as a potential for change, given Norm Liu’s retire-ment and the stated intent to reposition the larger General Electric.” ■

Kelly sees a premium on private lessors

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TOP 15 LESSORS BY FLEET AND ORDERS

SOURCE: Flightglobal's Fleets Analyzer database

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Boeing is upbeat about financing prospects, expecting more customers will turn to capital markets than ever before

FINANCE & LEASING FUNDING

REPORTOLIVIER BONNASSIES LONDON

Boeing Capital (BCC), the Seattle manufacturer’s financing and leas-ing unit, says the aircraft finance industry is projected to deliver broad and deep liquidity in 2016,

attract new market participants, and innovate to meet the needs of investors and borrowers.

Through its latest Current Aircraft Finance Market Outlook (CAFMO), aircraft financiers at BCC predict the funding requirement for commercial aircraft deliver-ies will reach $127 billion this year and the capital markets will absorb 36% of the total deliveries. This translates into $45.7 billion worth of deliveries.

BCC anticipates commercial aircraft buyers will take advantage of the efficient funding available in capital markets for new deliveries and refinancing, with capital markets’ share of the overall financing pool rising to its highest level.

“We project that aircraft finance markets,


MONEY ON TAP

2015

INDUSTRY ANNUAL DELIVERY VALUEPROJECTION: 2015-2020

SOURCE: Boeing

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20202019201820172016

$122bn

$bn

$127bn $130bn$142bn

$161bn$172bn

with their ability to offer a broad and balanced array of financing options at competitive prices, will be well positioned to meet these rising funding requirements,” says BCC.

BCC’s financing requirement outlook expects commercial aircraft deliveries to increase steadily to $142 billion by 2018 and $172 billion by 2020.

In 2016, its view of the major financing sources – commercial banks, the capital markets, export credit agencies and the leas-ing companies primarily – is encouraging, with funding expected to be sufficient for deliveries.

REMAINED CAUTIOUSThe outlook shows sources of funding for 2016 include export credit agencies (ECAs) participating at 11% of total deliveries, 2% less than 2015.

The Boeing leasing arm remained cau-tious in 2014 about the ECAs contribution, mainly because of the US Export-Import Bank’s reauthorisation situation.

“Having Ex-Im withdrawn is not the ideal situation, but we don’t see it as a long-term problem, and it will be re-authorised,” said BCC vice-president and general manager of aircraft financial services Tim Myers, in December 2014. Ex-Im bank support was withdrawn last July and reauthorised at the end of last year.

In 2016, 24% of deliveries will be funded with cash and 2% will be tax equity, BCC foresees.

Historically, commercial bank debt has provided the bulk of financing, satisfying more than 30% of demand. The last few years have seen a reduction of commercial debt-backed financings in volume deliver-

ies but commercial bank activity is expected to remain strong.

Last year commercial banks provided about $34 billion, or 28%, of the total $122 billion of the total market requirement. This year, their contribution will be margin-ally down, to an estimated 27%, despite an increase in volume deliveries.

The 2016 aircraft finance markets for large and regional jets remain healthy and balanced.

All sectors in the Boeing updated “traffic light” assessment of the various aircraft financing sources will remain satisfactory, except for the ECAs and OEMs, which stay rated “cautionary”.

Boeing predicts the requirement for deliv-ery financing will reach $130 billion in 2017. This compares with $62 billion in 2010.

Financing sources for Boeing deliveries this year are expected to reflect the trend of declining reliance on export credit. BCC expects the ECAs to contribute 9% of this year’s output, down from 11% in 2015. The ECAs participated in almost one in three Boeing deliveries in 2012.

The outlook shows 2016 sources of Boeing funding include cash, at 25% of total deliver-ies, unchanged from 2015. Capital markets are expected to grow to 38%, 5% more than in 2015.


Capital markets will again provide a slew of funding according to Seattle’s estimates

Boein

g


Cash$28bn

Cash$30bn

INDUSTRY DELIVERY FINANCING SOURCES: 2015-2016

Bank debt $34bn

Bank debt $34bn

Tax equity$2bn

Tax equity$3bn

Capital markets$46bn

Capital markets$41bn

Export credit$16bn

Export credit$14bn

SOURCE: Boeing

est2%Africa

1.1%

OURCE: B

oeing

$122bn2015 total 2016 forecast

$127bn

Lessors are expected to use capital markets to leverage Boeing acquisitions. According to the CAFMO forecast, 53% of funding will come from the capital markets, up from 11% in 2012. “Last year was a blockbuster year for capital market funding of commercial aircraft, and we anticipate 2016 will bring more of the

same. Innovative structures and new funding sources continue to emerge, with the growth in private placement activity and non-US enhanced equipment trust certificates notable examples,” says BCC.

The strongest credits are expected to keep tapping unsecured funding while interest

rates are low. US airlines should continue using capital markets for delivery and refi-nancing needs. Bank debt is expected to sup-port 28% of 2016 Boeing deliveries, in line with overall aircraft deliveries. This compares with 30% in 2015 but is up from 25% in 2012. ■


Underwriters are feeling the pain as airlines enjoy a decline in insurance costs, in part thanks to a global overcapacity, explains Flightglobal’s director of air safety Paul Hayes

FINANCE & LEASING INSURANCE

Despite accidents like this, the cost of airline insurance has been declining

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Last year was another poor 12 months for airline insurers, with incurred losses again exceeding premiums by a significant amount. But airline insurance premiums,

already at a 15-year low, are generally expected to continue to fall in 2016 with the insurance market wondering just how low they will eventually go.

Flightglobal estimates airline hull and legal liability all-risk net written premiums for 2015 probably did not exceed $1.4 billion, with some estimates by insurance brokers


15%The year-on-year declinein net written premiums

from 2014 to 2015

LOSS LEADERS

suggesting it may have fallen as low as $1.2 billion. Incurred losses are thought to total almost $1.7 billion.

The last time premiums for this class of

business were this low was in 2000, when net written premiums were estimated at $1.3 bil-lion. The market hardened considerably after the 9/11 terrorist attacks and written premi-ums in 2001 leaped to $3.6 billion but, since then, apart from a brief upturn in 2009/2010 largely driven by airline disasters – including the Air France AF447 loss in 2009 – rates and premium levels have fallen almost every year. Net written premiums in 2014 were estimated to be around $1.6 billion, about the same as in 2013 but 15% more than last year.

Since 2006, losses have exceeded premi-


ums in six out of the 10 years although, despite this, for the ten-year period as a whole, the two have more or less balanced each other out with aggregated premiums and losses coming in at around $17.5 billion – a simple average of $1.75 billion each per year.

CANCELLED OUTAlthough the totals for premiums and losses for the last 10 years roughly cancel each other out insurers, of course, have other costs above paying claims. With limited opportunity for investment income at current rates, virtually all operating costs must come out of premium income and the insurers’ capital providers might also reasonably expect some return on their money. The estimated average annual cost-of-claims figure of $1.75 billion suggests that, to pay claims, meet operating costs and return a reasonable profit, the average annual net premium should be at least $2.3 billion, about 65% more than in 2015.

However, it is not thought airline insurance rates and premiums for a typical risk are likely to increase any time soon. The expecta-tion in the insurance market is that rates will continue to fall in 2016 unless something exceptional happens.

The insurance sector is a true market and responds to market forces like any other. In recent years there has been considerable over-capacity, perhaps 200% or more for a reason-able risk, and this has the result of driving

Aviation adds little to the cost of natural disasters

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rates down. At the moment there seems to be no sign of this capacity reducing so the down-wards pressure on rates will continue.

It is difficult to know why so much insur-ance capacity should be available to airlines

$mCost of airline losses ($m)

Annual written net premium ($m)

AIRLINE ALL-RISK INSURANCE PREMIUM & INCURRED LOSSES

0

500

1,000

1,500

2,000

2,500

3,000

2015201420132012201120102009200820072006

Linear trend - Losses ($m)

Linear trend - Premium ($m)

SOURCE: Flightglobal

– it is certainly not because insurers are making large profits or, indeed, any profit on the business. However, it is said that, in today’s economic conditions, airline insur-ance as a class is one of the “least worse” uses for insurers’ money.

Supporting casualty insurers as an invest-ment can be seen as a hedge against falls in other types of investments since accidents (losses), except in certain extreme situations, are not thought to correlate with movements in other investments such as equities.

Looking at diversifying the investment risk further, aviation insurance – as a class within casualty insurance – is similarly attractive as aircraft crashes do not normally aggregate with other significant casualty losses. For example in 2011 there were two major natural disasters, the Thailand floods and the earthquake and tsunami in Japan. The estimated insured loss from the Thailand floods was some $12 billion, while aviation losses in the event were about $100 million, less than 1% of the total. Similarly insured losses from the Japanese tsunami are thought to total about $35 billion but aviation losses are only believed to be around $60 million, about 0.2% of the total. In January 2016, of the 22 Corporation of Lloyds realistic disaster scenarios (RDS), apart from the single aviation-specific RDS, none assume

AIRLINE ‘ALL-RISK’ HULL & LIABILITY CLAIMS AND WRITTEN PREMIUMS 2006 – 2015 ($M)

Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Written Premium 1,770 1,575 1,660 1,960 2,100 2,050 1,825 1,600 1,650 1,400Hull Claims 662 855 817 864 1,263 734 466 767 495 650Liability Claims 477 706 336 1,122 361 94 105 300 824 400Minor Liability 425 450 450 475 500 525 550 575 600 625TOTAL COST OF CLAIMS 1,564 2,011 1,603 2,461 2,124 1,353 1,121 1,642 1,919 1,675NOTE: *Provisional SOURCE: Flightglobal

flightglobal.com/airlines46 | Airline Business | January-February 2016

Airline safety is now better than it has ever been

but many people still feel apprehensive about

flying, with a significant minority avoiding flights

where possible, preferring to expose themselves

to the greater risks of driving.

It has been estimated between 10% and 40%

of the general population in industrialised coun-

tries have some fear of flying, ranging from “mild

apprehension” in some to an “incapacitating

phobia” in others.

That a large part of the population is scared of

flying seems to be taken as a given and this is

reflected in the media. One, admittedly not very

scientific, article in the UK press about phobias

was headlined “Clowns – scarier than flying!”

The exclamation mark suggests this was a

surprise finding, at least in terms of the journal-

ist’s perception of his audience. But why would

anyone be surprised clowns are scarier than

flying? Probably far more of us have been

exposed to the unsettling slapstick of clowns

than have ever had a bad experience flying.

Many phobias result from adverse exper-

iences but this cannot be the case for flying as

very few of us have ever been in an air crash, ex-

perienced a threatening situation or even known

anyone who has while on an aircraft. That a fear

of flying is so common seems to be a paradox

given the industry’s very good safety record.

A fear of flying can arise from a number of

situations but it has been recognised for some

time that this irrational fear mainly comes about

from an increased exposure to reports and

images of air crashes in the media. Air crashes

are always “sensational” and, as increasingly

rare events, their news value is very high. With

the advent of 24-hour news and online news

reporting, there is a need for more and more

sensational stories and, as we all have mobile

phones, we now all have cameras with us at all

times so there are plenty of photos of damaged

aircraft, many taken by passengers themselves,

to enliven a story.

MEDIA EXPOSURESurprisingly, there was a paper given at a Flight

Safety Foundation conference in the 1950s that

actually complained the newspapers did not give

enough coverage to air crashes. It was

apparently thought, more exposure in the media

might encourage better safety. Be careful what

you wish for.

Flightglobal’s consultancy arm Ascend has

conducted an annual global airline safety

perception survey among aviation professionals

for the last eight years.

In the latest survey – conducted at the end of

2015 – when asked if airline safety over the

previous five years had improved, stayed about

the same or worsened, only 39% of respondents

said safety had improved. This is a considerable

fall in confidence in the industry from the year

before, when 57% thought it had got better. Last

year is also the first year in which a greater

percentage of respondents – 41% – thought

there had been no improvement in safety than

those who thought it had improved. Of the

remaining respondents, 13% thought air safety

had worsened and 6% expressed no opinion.

In 2009, the first year in which we conducted

IN THE WORLD OF 24-HOUR NEWS, AIR DISASTERS PROVE SENSATIONAL

SOURCE: Flightglobal’s Ascend airline safety perception survey

AIRLINE SAFETY PERCEPTION – PREVIOUS FIVE YEARS

0%

10%

20%

30%

40%

50%

60%

70%

80%

2015201420132012201120102009

Worsened Stayed the same Don’t knowImproved

Survey year

significant aviation losses. In Europe, an unintended consequence of regulation is also helping to drive overcapacity in aviation insurance. Amongst other things, Solvency II encourages diversification within an insurer’s business and, as already noted, since aviation losses are not seen as normally aggregating with other casualty losses, writing an aviation book is seen as increasing diversification – a good thing.

BOTTOM LINEIn recent years, aviation insurers have some-times been described as “writing for revenue – the top line” rather than the bottom line and, with rates falling, there is increasing pressure to write more to achieve revenue targets, further depressing rates – a vicious circle! However within the very large

FINANCE & LEASING INSURANCE


this part of the survey, 68% of respondents

thought air safety had improved in the previous

five years, 25% that it had stayed the same and

7% that it had worsened. Following the “high

point” in 2009, the general trend in results has

shown a gradual fall in confidence over the

years. The 2015 result is 29 percentage points

lower than it was in 2009.

SAFETY UNCHANGEDThe fall in the percentage of respondents think-

ing air safety had improved has been closely

mirrored in the survey by an increase in the

number of respondents thinking it has stayed

the same. In 2009, 25% of respondents thought

air safety had remained unchanged during the

previous five years compared to 41% now, an

increase of 16 percentage points.

The share of respondents thinking air safety

worsened has stayed broadly the same, at

around 10%. The lowest years for this category

were 2009 and 2013, at 7%, while the highest,

with 15% of respondents, was 2012.

The survey did not ask for reasons for any

change in the perception of safety levels but did

ask what threats to air safety were most impor-

tant. In 2015 a “shortage of experienced person-

nel” was ranked as the greatest perceived threat

with 36% rating it “significant” and 98% seeing it

as being at least some threat to safety. This view

was supported by many of the comments submit-

ted by respondents, one example being “piloting

skills need to improve, especially basic aircraft

control in degraded circumstances”.

A need to improve basic flying skills was also

highlighted in a US Department of

Transportation report released on 7 January

which noted: “Relying too heavily on automation

systems may hinder a pilot’s ability to manually

fly the aircraft during unexpected events.”

Other significant threats were seen to be

“complacency” and “fatigue/work practice”.

Factors thought to pose the least threat to safe-

ty were “ageing aircraft”, a “rapid growth in

airline size” and “airport/airway congestion”.

Looking ahead, when asked about changes in

air safety during the next five years, respondents

were slightly more confident than they were

about the past, with 44% believing things will

improve. However, this did show a marked fall

on 2014, when 61% thought safety would get

better. In 2015, 38% of respondents thought

safety would stay more or less the same and

14% that it would worsen. Again the fall in the

percentage of respondents expecting things to

get better has been mirrored by an increase in

the percentage expecting safety levels to stay

the same. In 2014, 27% of respondents thought

there would be no change in safety.

Unlike respondents’ view of the past, over the

last eight years their view of the future has been

broadly consistent. Opinion may go up or down

from one year to another but the longer term

trend is flat across the three main categories.

Factors that were expected to be most impor-

tant in driving improvements in safety were,

perhaps not surprisingly, “management account-

ability for safety”, with 36% of respondents

rating this as “significant” and 96% seeing it as

having at least some positive impact on safety.

Other areas thought to be “significant” drivers

for safety tended to be centred on the use of

technology with “new technology (aircraft)” and

“increased adoption of available safety equip-

ment” both scoring highly, followed closely by

“new technology (ground/ATC)”.

SOURCE: Flightglobal’s Ascend airline safety perception survey

AIRLINE SAFETY PERCEPTION – THE NEXT FIVE YEARS

0%

10%

20%

30%

40%

50%

60%

70%

80%

20152014201320122011201020092008

Worsen Unchanged Don’t knowImprove

Survey year

composite insurers, aviation can be expected to represent perhaps only about 1% or 2% of their total, non-life, insurance business, and losses on the aviation book may not therefore be significant in terms of their total operation. Nevertheless, if the class makes losses year after year, there may come a time when it is thought enough is enough.

Insurance for an airline’s aviation risks is, on average, cheap. The cost to airlines in 2015 of buying “the full set” – hull and legal liability all-risk, hull war and excess third party war li-ability insurance, including fees and commissions – might be around $2 billion. With an estimated 3.5 billion passenger sectors in the year, this equates to less than $0.60 per passenger per sector to cover insurance costs. What is the cost to an airline of a packet of pret-zels for a passenger with their drink? ■

At $2 billion, carriers would face a cost of $0.60 per passenger to

hedge against unexpected events

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FlightglobalQuadrant House, The Quadrant, Sutton, Surrey, SM2 5AS, UK

Documents

special report: finance & leasing 2016