Aviation Global Leaders

Airline Economics Podcast Insights Series 2020 – Bobby Janagan, Rolls-Royce Partners Finance

In the latest of the Airline Economics Insights Series of podcasts Bobby Janagan, Managing Director at Rolls-Royce Partners Finance, share his insights into the impact of the pandemic on engine lessors and their customers as well as the long-term future for certain engine types and values.

A series of podcasts from Airline Economics speaks to veterans of the commercial aviation finance and leasing industry, who share their thoughts on the impact of the pandemic crisis on the aviation industry.

In the latest of the Sage Series of podcasts, Victoria Tozer-Pennington, editor and co-founder of Airline Economics magazine, speaks to Harry Forsythe, a veteran of the aviation leasing industry.

A Principal of aviation consulting firm, AeroInterface, Forsythe has over 45 years of experience across the OEM and aircraft leasing sectors. He set up AeroInterface in early 2019 with five other experienced executives: Andrew Pearce, Jon O’Connell, Peter Greensmith, Lance Strong and Will Gramolt.

Before heading back to Sydney to establish AeroInterface, Forsythe was deputy CEO and chief commercial officer of Singapore-based Asia Aviation Capital (AAC), the AirAsia-owned aircraft lessor, where he was instrumental in the sale of the company’s 70+ aircraft & 14 engine portfolio to BBAM in 2018. Prior to AAC, he was EVP marketing for Macquarie AirFinance (MAF), in San Francisco, and he also held several other marketing roles with MAF in Australia & Singapore. From 1989 to 2006, Harry was with AWAS, initially in Hong Kong until 1999, then Sydney until mid-2005 and finally Seattle until September 2006 when he was VP marketing, responsible for the company’s global marketing activities.

Having worked for aviation OEMs and aircraft lessors since 1973, Forsythe is a well-known industry professional with deep experience of downturns in this cyclical industry. But he is also an optimist, and despite his clearly frustrated views on the actions of world governments that have aggravated a health crisis into an economic recession, he believes that people still long to travel. On the podcast, Forsythe shares his views on how airlines and lessors should navigate this crisis and predicts the future pain all sectors of the market will likely experience before the recovery occurs. Ending on another optimistic note, Forsythe reiterates his view that the market will come back, and come back strongly so long as the economic impact of the crisis also recovers.

A series of podcasts from Airline Economics speaks to veterans of the commercial aviation finance and leasing industry, who share their thoughts on the impact of the pandemic crisis on the aviation industry.

In the latest of the Sage Series of podcasts, Victoria Tozer-Pennington, editor and co-founder of Airline Economics magazine, speaks to John Feren, a partner at Split Rock Aviation, which boasts five industry veterans.

John Feren spent 30 years with Boeing in various sales and marketing roles for many aircraft types from the MD-80s right up to the 787. After Boeing, John spent 10 years with aircraft leasing company, Aviation Capital Group as senior vice-president of business development and as a member of the senior leadership team.

In 2018 Feren joined L3 Technologies where he supported commercial business development before forming Split Rock Aviation, an aviation advisory firm based in the US, with former ACG colleague Andy Mansell in late 2019. Tom Woodward, Clay Smith and Steve Welo complete the Split Rock Aviation team.

At troubled times like these for the aviation industry and the world, drawing on the experience of experienced industry veterans is a significant competitive advantage. For the Split Rock Aviation team, as Feren says in the podcast, those years of experience give a broader perspective on the current situation. After working through the period after 9/11 and then after the global financial crisis, the aftermath of the global pandemic is unprecedented. “[COVID-10] is global and it's an invisible disease, impacting the entirety of the travel experience,” he says. “The aftermath of 9/11 really only impacted a small component of the whole travel experience… Right now, the number of people traveling is at an insignificant number to sustain global operation. So not only do you have consumers quite traumatized by the disease, you also have a financial model that's really not working.” Added to those factors, says Feren, is the fact that the industry had been in a period of very high growth and airlines had been adding record amounts of capacity and ordering new aircraft for a growth curve that today may not be achievable for several years.

Feren shares his thoughts on the likely survivors of the crisis being those companies that prioritise strong cash management, act decisively and quickly to cut costs and capacity and that have a pragmatic plans in place that recognises strength, access to revenue generating channels and any controllable variables. Although government support at this time is needed and welcomed by airlines, that cannot be relied upon for the long-term, adds Feren, who suggests how airlines can manage their way through the next few months. Lessors, he adds, have slightly different challenges, not least managing their fleets, especially those with large widebody portfolios.

Despite the crisis and even though many investors have stalling their investment into the sector, Feren comments that for “every investor that wants to run from the space in downturns, there are many that want to get in because they think it's a good opportunity”. He comments on the private equity opportunists that see the aviation industry as a good place to deploy measurable amounts of capital. “It's a fairly well developed business. It's global. It's largely standardized, so airplanes are traded in dollars. It’s a very attractive investment proposition. And for long-term investors [looking over the] 15, 20 year horizon, [this] might be just the perfect investment time. I think that you'll see evidence of maybe five or six companies coming into the industry.”

On the flipside, however, there will be investors seeking to exit the business altogether that Feren expects may lead to a “changing of the old guard” in the aviation industry. Click here to listen to the full podcast interview with John Feren.

A new series of podcasts from Airline Economics speaks to figures from the commercial aviation finance and leasing industry, about the emerging issues in the aviation industry.

In the first of the Insights Series of podcasts, Aaron Woolner, senior reporter Airline Economics magazine, speaks to Elise Weber and Matthew Tringham, about Skytra – a wholly-owned subsidiary of Airbus, which is developing a series of indices and derivatives to enable aviation industry players to manage the risk of ticket price volatility.

In her 15 year career within Airbus, Weber has held various international management roles in communications, performance management, strategy and business development. Tringham has been working in the aviation industry since the 1990’s, first at an airline before starting at Airbus in 2004 as an Aeronautical Engineer developing new Aircrafts. He then went on to work in a variety of management positions both in Europe as well as India and China. Tringham has worked in business development and strategy since 2014 where he led the development of a number of major new projects before establishing Skytra alongside Weber.

During the podcast Weber explains the thinking behind Skytra development and the key problems that airlines face in terms of revenue visibility, with earning volatility an issue, even in normal times. “Our value proposition is about making these revenues less volatile with the help of new instrument that are based on our Skytra prices indices , this means in future airlines will be able to hedge both their fuel and their revenues,” she says.

Weber says the COVID 19 pandemic has highlighted aviation’s need for more risk-management tools, while Tringham said that the current “interesting times”, means that all normal market dynamics have changed with revenues and pricing move down markedly worldwide. This occurred first in intra-Asia in January, then Asia long-haul to both European and North America before finally both those region’s domestic market saw a decline. US domestic travel was the final the final market to be hit in March – but there was an exception to the trend, according to Tringham.

“One unexpected phenomenon on the long-haul market from Europe and US to Asia, was that we saw wave of reparations travel, where actually the pricing was much higher than normal and for certain carriers experienced higher revenues in the short-term.”

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which assessed the general state of the industry based on interviews with a variety of industry leaders. Now that the aviation landscape has changed dramatically with the devastating impact of the COVID-19 pandemic continuing to ravage the industry, Airline Economics and KPMG are returning to those same leaders for their reaction to the current crisis in a series of podcast interviews.

In this latest podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Bénédicte Bedaine-Renault, who is head of aviation finance within Natixis covering the Europe, Middle East and African regions. Her team, based in Paris and London, covers both airlines and lessors in the EMEA region. Natixis has four decades of experience in aviation finance and has a current portfolio of 850 aviation assets worth approximately $5bn.

Bedaine-Renault says that the quality of client relationships has been key for both operating lessors and banks during the past few months. “Banks, including Natixis, during this particular phase, has been to support to the strongest relationships, which are those that have been built in a trustworthy environment for the past few years,” she says. “It doesn’t always mean highly-profitable relationships, but must have that strong element of trust.”

Natixis has been supporting operating leasing companies with various facilities that were already in place as airlines turn to lessors for deferrals and other means of support, Bedaine-Renault believes that more airlines will now turn to the commercial banks for help as a second step in raising cash to survive this crisis. “It’s going to be interesting to see how that develops notably after the summer season.”

She notes the industry-wide challenge regarding asset valuations, which were already considered to be high before the crisis. She expects there to be an increased scrutiny of aviation asset exposures for banks. “It is difficult to determine what is the real exposure at risk. It will be interesting to see how the different financiers in the industry will react to the new level of risk, and if there can be a significant incremental amount of debt poured into this sector.”

Valuing aircraft is difficult in this market, she adds, suggesting that one way is to determine values and NPV from recent sale-leaseback deals conducted between airlines and lessors, which can be cross-checked with the different appraiser values. “To have a view on the asset class and the asset prices using the different metrics, it’s a call that you take on the airline creditworthiness, maybe looking at the level of state support it has received and how you value the firm with an NPV type of mechanism to determine aircraft residual value.”

Bedaine-Renault adds that the additional challenge to this will be ESG elements: “We clearly see a trend of moving towards younger, more efficient aircraft. And because some of the state guaranteed loans came with strings attached to regarding carbon emissions, there is an open question regarding residual value.” She notes that this is a challenge for airlines and banks but also present new opportunities in the field of green finance.

In terms of more immediate financing, Bedaine-Renault sees the increase in the importance of the export credit agencies, which she says will certainly “come back into fashion” noting the innovative transactions the ECAs have closes in the past few years using different collateral and financial structures. “There is an opportunity for certain players to gain market share and to keep exposure in the aviation sector, while limiting dramatically the risk, thanks to the offset of the export credit guarantee.”

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which assessed the general state of the industry based on interviews with a variety of industry leaders. Now that the aviation landscape has changed dramatically with the devastating impact of the COVID-19 pandemic continuing to ravage the industry, Airline Economics and KPMG are returning to those same leaders for their reaction to the current crisis in a series of podcast interviews.

In this latest podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Marc Iarchy, a partner at aircraft leasing company World Star aviation, about his thoughts on the impact of the crisis so far and for the future of the market.

Based in San Francisco and London, World Star Aviation is a full service lessor that currently owns or manages a portfolio of approximately 75 assets, mainly in the mid-life space. Iarchy and the team has been working closely with lessees to help them and the broader industry weather the current crisis, where they can make a difference.

“We are trying to be helpful where we can, and particularly where our help can make a difference,” he says. “There is limited value where we’ve got an old aircraft with a large airline that has 500 aircraft, because helping them makes zero difference to their chances of surviving. Whereas where we have two out of five aircraft with an airline, our help makes a very big difference to them.”

World Star Aviation’s main aim is to help airlines avoid bankruptcies where possible, therefore avoiding a repossession situation in a market where aircraft demand is so low. The lessor has negotiated deferral agreements that involved longer lease terms, power-by-the-hour agreements and other lessee friendly terms for a short period. As those three-month arrangements come to an end however, Iarchy notes that airlines are beginning to request another three-month or even longer reductions in rent obligations, which will begin to impact the chain more severely.

“A loss of three months cashflow was a bit of a problem for sure,” he says. “But we expected and hoped that things would recover by the summer so that we can also stand by our own obligations vis a vis our financiers and our investment partners… we now need to look at extending those arrangements for another three months or longer… We have also had one or two airlines wanting to talk to us about returning aircraft. That’s obviously a much more difficult conversation.”

The damage to airline balance sheets is becoming much more apparent now, says Iarchy, adding that the next round of renegotiating leases will have much greater ramifications for leasing companies and their own obligations.

“We have been in a deep freeze for three months, but now that airlines are trying to reopen and relaunch routes, it is becoming very painfully obvious that there’s going to be some deep, deep changes in the industry, as well as a decent amount of bankruptcies,” says Iarchy. “Airlines that haven’t paid their bills for three months are going to be catching up for the rest of 2020 and with a reduced capacity they simply aren’t going to be able to do it in that time. Unfortunately for many airlines, they may never be able to get there.”

Iarchy goes on to doubt even the ability of the big US carriers to avoid a Chapter 11 scenario: “Even though in the US the government aid is massive, it may be no more than a Band-Aid,” he says. “When companies like American Airlines borrow in double digits in the capital markets, then a Chapter 11 bankruptcy solution is probably not too far off. And what I’m particularly worried about in terms of the US is that when one of them goes Chapter 11, they all will.”

Iarchy talks in more depth about the aviation financing market including the impact of the crisis on asset-backed securitisation vehicles. “At the moment, for our SPRITE ABS we have paid all the tranches and have avoided a downgrade but the situation obviously is what it is and we can’t conjure money [if the airlines can’t pay].”

Despite the stressed environment, Iarchy remains surprised at the prices that aircraft are being sold in the market as expensive: “Maybe there’s some people that still have very low cost of capital, or they have money that they have to deploy before the end of this year.” World Star remains an active player in the aircraft trading market and is working on a number of acquisitions but Iarchy states that those are only opportunities “where we truly feel comfortable that in a mayday scenario, we’ll still end up okay”.

Listen to the full podcast for more from Iarchy on the broader aviation finance and leasing industry. On the whole, despite the extreme challenges facing the market, he remains confident in the future and the recovery of this industry.

“The demand for travel will remain; people like to travel and go on holiday. The middle class continues to grow. These trends remain and although there will be a dip that will take longer to recover from than previous crises, I have no doubt that we will.”

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which took a general state of the industry based on interviews with a variety of industry leaders. Now that the aviation landscape has change dramatically with the devastating impact of the COVID-19 pandemic continuing to ravage the market, Airline Economics and KPMG are returning to those same leaders for their reaction to the current crisis in a series of podcast interviews.

In this latest podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Firoz Tarapore, CEO of DAE Capital, about his thoughts on the impact of the crisis so far and for the future of the market. DAE owns and manages approximately 400 aircraft worth $15bn.

Firoz praises the rapid and substantial government intervention to date but feels more support will be required:

“Based on our figures, over $110bn of government-backed support has been announced – with 80% of that in the US and Europe,” says Tarapore. “About 60% of that total is the form of repayable loans, some which have come with quite a few conditions. While we are really encouraged by the quantum and the speed of government to support for a critical industry in a lot of these jurisdictions, what we haven’t seen and most seen is governmental support in other parts of the world where airlines play an even a bigger role in national economic development. Those governments will need to step up sooner rather than later, and make sure that their national champions are well supported.”

This varied national response to the crisis means an uneven recovery and driven by health concerns first and foremost, observes Tarapore: “The recovery is going to be driven by how comfortable people feel on the health side compared to theirs reasons for stepping on a plane in the first place.”

The entire industry is focused on rebuilding confidence in flying, and for Tarapore the key will be for industry to work with governments and global organisations to ensure there are clear and standardised rules and precautions for ensuring safe flying. “There needs to be a good degree of uniformity in how different jurisdictions around the world approach that to make people feel more safe and secure that when they travel, and to know if something does go wrong, that that there is a solution available, be it treatment, vaccination etc., which then in turn will support a very decent trajectory in the recovery of our industry.”

For lessors like DAE Capital, which are well capitalised and have exercised strong financial underwriting discipline, Tarapore says have an advantage in the current environment but for those who haven’t been so diligent that it is “too late to fix” the portfolios now. “If you underwrote the asset that you wanted at the price that you wanted, and selected the lessee and put the right lease in place, then I think your ability to navigate the current situation is actually quite good,” he says. “So even if an airline gets into trouble, if you have the right structural protection around the asset and the exposure, lessors will do fine. If on the other hand, you had excessive concentrations of credit or aircraft types, , you are are going to end up hurting.”

DAE Capital has been approaching negotiations with lessees on a case-by-case basis, with the perspective that as the company is secure from a liquidity standpoint, it is able to offer its clients assistance at this time. “The approach that we have taken is that if our customer needs help, we are here to provide it because we have entered this crisis in a relatively decent position from a liquidity perspective, but all of those discussions need to be had around the concept of partnership because it just cannot be that one person does well and the other one doesn’t.”

Tarapore acknowledges that the leasing fleet is currently between 35-40%, which he believes will increase as the airline industry seeks additional funding help. “Although leasing may be suppressed for a while, when the world deals with this health issue, the airline industry will want the flexibility that the leasing capital provides to further accelerate its growth over the next decade and the decade after that. Our primary message is that we have enabled an industry by providing capital that allowed them to grow. It’s a difficult period for everybody. We’re here to help, to the extent we can, but the solution always has to be where both people do well. Most clients have internalized this message and are looking to the future because ultimately it’s not just that today you need to survive. The reason you’re surviving today is that you want to prosper tomorrow. And so far that’s the fundamental approach we’ve taken with our clients.”

For Tarapore and DAE Capital, the spikes in infection rates in certain jurisdictions hopefully will push the world to act together that will help “propel a more predictable path to recovery”.

During the podcast, Tarapore remarks on the manufacturers reaction to the crisis and any impact on the recovery, as well as the many challenges facing lessors and asset managers, including negotiating with clients, managing rent deferrals and managing returned aircraft, and financing, added to the potential opportunities the recovery will hold for an acquisitive company.

A new series of podcasts from Airline Economics speaks to veterans of the commercial aviation finance and leasing industry, who share their thoughts on the impact of the pandemic crisis on the aviation industry.

In the first of the Sage Series of podcasts, Victoria Tozer-Pennington, editor and co-founder of Airline Economics magazine, speaks to Garry Burke. A Guinness Peat Aviation (GPA) alumnus, Burke joined Pembroke Capital in 1995, where he was CEO from 2001 for 11 years. Having led a management buyout (MBO) in 2006 he moved to Standard Chartered in 2007 when Pembroke was sold to the bank. Although Burke retired from Standard Chartered where he was Global Head, Structured Finance in 2019, he has kept a presence in the aviation industry via a non-executive board seat of SDH Wings International Leasing Limited – the aircraft leasing company owned by the Sichuan Development Holding company, which has continued to expand its portfolio even during this crisis period – as well as offering advisory services to leasing companies and financing entities via his own company Hippocrene.

During the podcast, Burke comments on the crisis impacting airlines and leasing companies as unprecedented and deeper than any previous downturn, however he points to a number of lessons learned following the September 11, 2001 terrorist attacks on New York and the bankruptcy of Lehman Brothers, which precipitated the global financial crisis. Post-Lehman there were 60 airline failures in one year with 300-400 surplus aircraft thrown onto the market, with 40 airline failures already this year involving around 1,200 aircraft, Burke predicts more bankruptcies and a surplus of aircraft in excess of 2,500. The emphasis for lessors needs to be on holding the “right aircraft with the right counterparty” – highlighting the need to refocus on liquid narrowbody aircraft and leaving the widebody aircraft to specialist lessors. As repossessions are unattractive in an effectively closed market, Burke suggests that under a wave of rent deferral and forgiveness requests, lessors will need access to plentiful liquidity and may also seek to transfer aircraft onto finance leases, a trend seen before in previous downturns. Not all lessors will survive in their current form, he warns, betting more on the established larger lessors that have access to capital markets financing since the bank market may be more compressed due to heightened risk weight and probability of default limits. Retaining access to liquidity will be paramount for survival for airlines and lessors alike. M&A activity will likely rise, which presents an opportunity for stronger companies to expand. He also expects new players to enter the industry – for example in the ABS market, where existing bond holders are forced to sell their ABS paper as portfolios are downgraded, new investors with the funds and patience will buy and hold that paper.

Burke expects the recovery to be protracted – certainly not V-shaped – with passenger traffic levels not expected to return to 2019 levels until 2023, which is also dependent on airlines, airports and governments working to rebuild passenger confidence to travel.

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which took a general state of the industry based on interviews with a variety of industry leaders. At that time, the industry was focused on the impact of the grounding of the 737 MAX as well as a general slowing in growth and the rise of the climate change agenda. The novel coronavirus, COVID-19, was only just beginning to make headlines and despite the downturn, the market was still awash with liquidity and the future looked positive. Even those with a more pessimistic outlook that were predicting a shock to the system could never have envisaged such a significant exogeneous shock as the current pandemic.

With many countries in Europe and the US on total lockdown to slow the spread of the disease, the aviation industry has been hit particularly hard. Most of the world’s airlines have the majority of their fleet grounded. And with the virus setting the timetable, the aviation industry is taking stock of its options to ride out this crisis to survive intact by the time the recovery surely comes.

As an addenda to the Aviation Industry Global Leaders project, Airline Economics, once more supported by KPMG, has launched the next in a series of podcast interviews with industry leaders to assess their reaction to the current crisis.

In this podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Ted O’Byrne, Managing Director, Co-Head of Aviation at Carlyle Aviation Partners, about the current crisis weighing on his decades of experience in the aviation industry through many downturns working at AerCap and Airbus before joining Carlyle Aviation.

O’Byrne speaks about his refusal to accept that this crisis will change travel forever and that although this is a deeper crisis for sure, current actions echo those of previous crises: parking older equipment in favour of new aircraft; defaulting airlines probably leading to consolidation – this time most likely in Europe rather than the US which occurred after 9/11, that could be viewed as a positive. O’Byrne points to the positive bounce back in traffic in China, which gives the rest of the world a reason to be optimistic, but drawing on his manufacturer background experience, he also predicts more pain for the OEMs as airlines defer and cancel deliveries. One positive he highlights from the slowdown in OEM production and R&D is a more stable environment for aircraft investors. As a lessor and asset manager, O’Byrne further describes how Carlyle Aviation Partners is working with its lessees to negotiate longer leases rather than rent deferrals, which works well for investors and the airlines, as well as managing the company’s capital position and relationships with its equity investors and bond holders.

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which took a general state of the industry based on interviews with a variety of industry leaders. At that time, the industry was focused on the impact of the grounding of the 737 MAX as well as a general slowing in growth and the rise of the climate change agenda. The novel coronavirus, COVID-19, was only just beginning to make headlines and despite the downturn, the market was still awash with liquidity and the future looked positive. Even those with a more pessimistic outlook that were predicting a shock to the system could never have envisaged such a significant exogeneous shock as the current pandemic.

With many countries in Europe and the US on total lockdown to slow the spread of the disease, the aviation industry has been hit particularly hard. Most of the world’s airlines have the majority of their fleet grounded. And with the virus setting the timetable, the aviation industry is taking stock of its options to ride out this crisis to survive intact by the time the recovery surely comes.

As an addenda to the Aviation Industry Global Leaders project, Airline Economics, once more supported by KPMG, has launched the first in a series of podcast interviews with industry leaders to assess their reaction to the current crisis.

In this first podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Stephen Hannahs, CEO of Wings Capital Partners, about the current crisis weighing on his decades of experience of the impact of exogeneous shocks to the aviation industry.