Aviation Leasing & Trading in an Ever- 2017 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 Distribution Part-Out Inventory Programs Leasing Engine Component Composite Go-Team
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
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 2 nd tier • operators 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 New Aircraft Lessor • 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
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 Mid-Life Aircraft Lessor aftermarket parts Refurbishment cost on 100”+ engines (not • on 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.
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 End of Life Aircraft Lessor • 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 Strong aftermarket is significant driver of demand for mid-life to mature aircraft and therefore residual values, and are driven by: • Import regulations • Technology impacting reliability • Number of aircraft manufactured • Engine trading values • Demand for Used Serviceable Material • No aftermarket in future 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
The Age Factor Belarus: 15 Bahrain: 15 Kazakhstan: 20 Iran: 10 Kyrgyzstan: 20 Iraq: 15 Russia: 12 Jordan: 15 Kuwait: 5 Lebanon: 15 Oman: 15 Syria: 20 Saudi Arabia: 15 Mexico: UAE: 20 15 Bolivia: 25 Brazil: 15/20 China: 10 Ecuador: 20 Indonesia: 10 Mexico: 15 Japan: 10 Peru: 20 Mongolia: 15 Venezuela: Myanmar: 20 12 South Korea: 20 Bangladesh: Taiwan: 10 Algeria: 12 15 • Thailand: 14 44 countries have age restrictions Congo: 15 India: 15 Vietnam: 15 Egypt: 15 • 17 of those have loose enforcement Nepal: 14 Ethiopia: 12 Pakistan: 25 • This impacts lessors differently Ghana: 25 Sri Lanka: 15 Libya: 20 New lessor – 2 nd deployments • Mauritania: 10 Mid-Life lessor – 1 st deployments • Nigeria: 20 Sudan: 20 • End of life lessor – no deployments
Engine Values Drive Residuals 737-800/A320 777 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 Unprecedented Reliability ` • Green-time • • • Will be vastly Highly competitive Green-time leases are very covered by environment leases are very common • maintenance Market is over spared common • Often cheaper • • agreements with Engines are Often cheaper to buy versus OEMs reliable…too reliable to buy versus rebuild • • Operating leases Engine reliability is rebuild • Not many • will become more leading to a lesser Not many credible MROs risky because of need for spare credible MROs maintaining inability to collect engines maintaining capability to • maintenance Engine reliability is capability to repair reserves impacting the part- repair • Core engines • • Lessors will have to out market Core engines not worth • become a party to Independent MROs not worth much anything at the Engine maintenance can make a significant at the end of a end of a lease agreement impact on cost lease
Engine Leasing Evolution Risk seems to be shifting to the lessor 2016 2018 2020 2022 2024 Operating Lease Mechanical Lease Green-time Lease` 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, or rather anyone interested in buying assets • If there is no residual value then aircraft ownership will be impacted
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