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  • youcanpickum youcanpickum Apr 14, 2008 2:54 PM Flag

    FLY and GLS vs. AYR

    Aircraft Lessors
    Mixed Impact on Aircraft Values and Lease Rates from Airline
    Bankruptcies, Aerospace Production Delays and New Start-Ups
     Recent airline bankruptcies clearly not positive — 4 small US carriers (Aloha,
    ATA, Frontier and SkyBus) and 1 Asian airline (Oasis Hong Kong) have filed for
    bankruptcy recently. Apart from Frontier, all have ceased flying. All were lossmaking
    and given a weak economy and record fuel prices, their demise was not
    surprising. Further filings are expected in the US and Europe. 42 planes are
    grounded. The US failures cover 7% of domestic capacity, with Frontier the
    largest at around 4%. Survivor airlines should benefit from capacity discipline.
     Quoted lessor exposures limited — Genesis had 2x9 year old B737-700s with
    Aloha and 1x5 year old A319 with Skybus. B&BAir had 4x10-12 year old B757s
    with ATA. AerCap had 4x1-year old A319s with SkyBus, 3 of which via its 50%
    owned AerVenture. Security deposits of up to 3 months’ rent should cover any
    non-payment of monthly rent. Re-possession is relatively straight-forward with
    airlines that have ceased flying as opposed to continuing (like Frontier). Main
    cost is around $0.3m per plane re-painting/light maintenance/downtime/S,G &
    A between lessees. GECAS and ILFC are the most exposed lessors.
     Current strong demand in emerging markets should absorb aircraft freed up —
    Air Arabia and Tiger Airways, for example, urgently need aircraft. Emirates
    Group has announced a new LCC to launch ASAP. We expect strong demand in
    the Middle East and Russia. Reports by our China and India analysts, however,
    suggest a cooling of demand in these countries (‘Indian Aviation – Passenger
    Traffic Growth Trends Down’, Jamshed Dadabhoy, 24 March, and ‘Chinese
    Airlines – Downgrading Sector: The Upcycle Is Softening’, Ally Ma, 10 April).
     Narrowbody values and lease rates likely to fall — In the last downturn, aircraft
    values and lease rates fell by 40-50% from their peaks in exceptional
    circumstances (9/11, Iraqi War, Sars). We expect a decline of around 20% this
    time (as already reflected in depressed lessor share prices), followed by a rebound.
    Aircraft values have proven to decline by an average 4% p.a. over their
    25 year lives. New gen and widebody planes should hold their values better.
     B787 and A380 production delays positive for widebodies — A330s, A340s,
    B767s and B777s are in high demand as launch customers seek alternative
    capacity, mainly in the form of leasing due to their interim requirements.
    Increasing aviation liberalization in also supporting demand with the launch of
    new start-ups, such as Fly Asia X and V Australia, seeking long-haul planes.
     AER and AYR best placed - AerCap and Aircastle would benefit most from widebody
    strength and are proportionately less exposed to so-far failed airlines.

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