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INTERVIEW
PEKKA
VAURAMO
Finding a
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Finnair
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CONTENTS
Volume 33 Number 1
January-February 2017
STRATEGY FOR AIRLINE BOARDROOMS WORLDWIDE
Hot seats
Identifying the
airline chiefs
with the most
Mood change
Apprehensive
nance market
aims to keep
Metal fatigue
Bumper order
backlogs cast
in new light as
INTERACTIVE
momentum in uncertainties
challenging
jobs in 2017 post-peak era cloud outlook
6 Airline Strategy Awards 2017 launched
LEADERSHIP
COVER STORY 16 Toughening trends An increasingly challenging
22 Core strength environment is beginning to test the robustness
Finnair chief executive Pekka of many carriers and their leaders
Vauramo is determined to
CHIEF CHALLENGES
achieve sustained protability SPECIAL REPORT Page 16
HOW TO CONTACT US
FINANCE & LEASING
rstname.lastname@ightglobal.com 28 Growth mode Key metrics from Flight Fleets
LONDON OFFICE Analyzer and Ascend Values
Phone +44 (0)207 911 3105
Flight Airline Business managing editor Lewis Harper 33 Top 50 leasing data Our annual look at global
Flight Dashboard editor Graham Dunn leasing portfolios
Flight Dashboard managing editor Niall OKeeffe
36 Post-peak uncertainty A fascinating aviation
SINGAPORE OFFICE
Phone +65 6 780 4314 nance picture is emerging
Asia managing editor Greg Waldron 41 Slow road to consolidation Lessor M&A has
WASHINGTON DC OFFICE been largely conned to speculation
Phone +1 703 836 8052
Americas managing editor Stephen Trimble 44 The rise of ABS Asset-backed securitisations are
DISPLAY ADVERTISING ENQUIRIES
nding momentum
Phone +44 (0)208 652 8022 46 Crowded market limits premiums Airline
Global sales manager Mark Hillier
insurance costs continue to fall
FLIGHTGLOBAL PUBLISHING MANAGEMENT
Senior vice-president Philippa Edward
Executive director content Max Kingsley-Jones
Commercial director, publishing and conferences ANALYSIS
Stuart Burgess 48 CORSIAs struggle to offset doubt ICAOs
SUBSCRIPTION ENQUIRIES emissions scheme under the microscope PEAK CONDITION
Phone +44 (0)1444 445454
50 Market outlook Downside risks must be Page 36
Download our 2017 media planner at: managed
ightglobal.com/ABplanner
ightglobal.com/airlines Page 46
BillyPix
Kell Ryan
Former Ryanair executive
Michael Kell Ryan, who
spoke at 2016s Airline
Strategy Awards, died in late
December. Ryan left Aer
Lingus in the mid-1980s to join
BillyPix
his brother Tony at Ryanair, go-
ing on to hold several senior Top performers: FlightGlobals Max Kingsley-Jones (sixth from left) and last years award winners
positions before retiring in
2004. Ryan is pictured giving a
speech at last years awards
ceremony after an absent
Celebrating industrys best
he Airline Strategy Awards on the awards since their incep- Michael OLeary took the top
Michael OLeary was an-
nounced as winner of the
Executive Leadership catego-
T 2017 has been ofcially
launched with a call for nomina-
tion in 2002.
Over the next few months,
prize, winning in the Executive
Leadership category.
ry. Ryan regaled the audience tions. This years event will take nominations will be collected for Other winners in 2016 includ-
with fascinating anecdotes place on Sunday 9 July, returning six categories and considered by ed Tony Tyler, then-IATA chief,
about his time with Ryanair. to the stunning Middle Temple a judging panel featuring vastly who took the Flight Airline Busi-
Hall in London. experienced industry veterans. ness Award; Enrique Beltranena,
FlightGlobal will be delivering Julys exclusive invitation-only chief executive of Volaris, for
the 16th annual awards with a ceremony will be attended by a Low-Cost Leadership; David
EVENTS new partner: the executive search select group of airline executives, Neeleman, chief executive of
rm KornFerry. industry professionals and inter- Azul, for Regional Leadership;
ROUTES AMERICAS I am delighted that Flight- national media, making it an ex- Delta Air Lines and Virgin Atlan-
Flight Airline Business Global has agreed to continue our cellent networking opportunity. tic for Finance; JetBlue Airways
daily will be available at strong partnership from my new Attendees will enjoy a cocktail for Marketing; and Emirates Air-
this years Routes Ameri- home at Korn Ferry, says senior reception before a three-course line for Network Strategy.
cas, which takes place client partner at Korn Ferry, Mi- meal, the awards ceremony and To register nominations or nd
on 14-16 February in Las chael Bell, who has worked with post-dinner drinks. out more about the event, visit:
Vegas. For all the up- the Flight Airline Business team At last years event, Ryanairs strategyawards.com
to-the-minute news and
analysis from the network-
planning event, and to
view the issue, visit:
ightglobal.com/
routesamericas
Awards for on-time airlines
lobal ight information ser- Other winners across seven
LOYALTY 2017 G vices provider FlightStats,
which became part of the Flight-
further categories included Alas-
ka Airlines, JAL, Qatar Airways
FlightGlobal and Global
Flight have joined forces Global team in 2016, announced and Copa Airlines.
for the 9th Annual Loyalty the winners of its eighth annual To determine the nalists and
Conference & Awards in On-time Performance Service winners, FlightStats examines its
London on 20-22 February. (OPS) Awards in early January. ight status and arrivals data,
The event includes net- The OPS awards recognise air- which is aggregated from global
working and industry-lead- lines around the world that de- sources including civil aviation
ing masterclasses. For more liver the highest percentage of authorities, airlines, airports and
information, visit: ights to their arrival gates within Iberia in the major international reservation systems.
ightevents.com/ 15min of scheduled arrival. airlines category, who achieved For more information and a
loyalty2017 Airlines awarded for their 88.53% and 87.79% on-time ar- full list of the winners, visit:
punctuality include KLM and rivals, respectively. ightglobal.com/2016otp
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BRIEFING INTERNATIONAL
Airbus
decline to 748 deliveries in 2016, Bregier reafrms earlier statements
it was still rmly in charge in out- Leahy says order and delivery cycles are no longer closely linked that he expects Airbus will be
put terms. Airbuss production ahead again from 2019, although
increase more than offset the Boe- 2017 production plans in Febru- ceed 2016s output, so combined he concedes that he was not aware
ing drop, as its production rose to ary, but Leahy, who is chief operat- production will be heading to- of his rivals latest output forecasts.
688 aircraft from 635, which was ing ofcer for customers, says it wards at least 1,500 units this year. Airbus will be encouraged that
its previous highest. will be at least over 700 aircraft. But while output is rising, the it is back in front in the single-
Airbus will disclose its detailed Boeing is expected to match or ex- same is not true of net orders, aisle market, having dropped be-
which have fallen almost 25%. hind in 2015, but it still trails its
Airbuss tally fell by fully a third, rival in the higher-value wide-
Airbus/Boeing annual deliveries and
while Boeings dropped13%. body stakes. In 2016, Boeing de-
net orders 2006-2016 While net orders have varied livered 258 twin-aisles 80%
Deliveries Net orders
dramatically over recent years, more than Airbus, which is still in
2,100 3,500 from a low of 413 in 2009 to a high ramp-up mode on the A350 and
1,800 3,000 of 2,888 in 2014, Leahy emphasis- shipped a total of 143widebodies.
1,500 2,500
es that Airbus has been managing Morris says: The most impor-
its output consistentlyupwards. tant measurement of market
1,200 2,000
People talk about the end of share is deliveries, which derive
900 1,500 the cycle, but it depends what revenues. In this context we esti-
600 1,000 cycle youre talking about, mate Boeing achieved around
300 500
Leahy says. Ive got to admit, 56% market share of commercial
there is an orders cycle, there al- jet delivery value, compared with
0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ways has been. But the order and Airbuss 44%.
Source: FlightGlobal analysis of Flight Fleets Analyzer data delivery cycle used to be This year Boeing is again set
Airbus deliveries Boeing deliveries Combined net orders
matched almost one-to-one with to beat Airbus in this particular
about a two-year lag. metric with a 53%-47% split.
But if I look at deliveries now, Parity is actually reached in 2018
Jet airliner deliveries, orders and backlog I dont see a cycle. [Airbus has] before we forecast Airbus nally
2016 2015 14 years of increasing our pro- achieves market leadership with
Deliveries Net Orders Backlog* Deliveries Net Orders duction. And this year it will be 52% of the combined revenues.
Airbus another increase and record. But Morris expects that Boeing
Single-aisle 545 607 5,645 491 945 does that mean orders are going will be back at parity by 2020 as
Widebody 143 124 1,229 144 135 up again? Most likely not. 777 rates increase with the intro-
Total 688 731 6,874 635 1,080 Flight Ascend Consultancy duction of the 777X. From there
Boeing chief Rob Morris describes the onwards, the two will probably
Single-aisle 490 550 4,452 495 588 commercial aviation industry as run close together, he says.
Widebody 258 118 1,263 267 180 enduringly cyclical, noting:
Total 748 668 5,715 762 768 Orders reect the demand cycle. For more analysis of the 2016
Grand total 1,436 1,399 12,589 1,397 1,848 Production volumes reect the numbers, visit: ightglobal.
Source: Manufacturers. Data includes corporate and military versions. *As at 31 December 2016
supply cycle. If production vol- com/2016orders
laska Airlines has long faced shaped by Delta Air Lines, which
A intense competition from
Delta Air Lines in Seattle, but
in 2013 began an expansion at
Alaskas primary hub at Seattle.
soon the carrier could experience Between 2013 and 2016, Deltas
increasing pressure from Ameri- available seats in Seattle more
can Airlines, says at least one re- than doubled to 5.7 million. In
search analyst. 2016 it carried 21% of all seats, up
Wolfe Research released a from 12% in 2013, FlightGlobal
report in January suggesting Amer- schedules data shows.
ican might choose to encroach on Alaska faced double-digit year-
Alaskas markets in response to on-year increases in competitive
Guillermo Dietrich, local media operational challenges, following Nealon reports to Kelly in his
reported. The airlines vice-presi- Costantini has stepped down a systems meltdown last July that new role.
dent, Manuel Alvarez, and its affected thousands of ights, Southwest has also expanded
human resources director, Daniel beneted from protectionist pol- Southwest says. the responsibilities of chief oper-
Maggi, also resigned. icy for years under the previous This is a good time for us to ating ofcer Mike Van de Ven,
Costantini, who became the Kirchner administration. make an organisational change, who retained his title. Van de Ven
airlines chief in January 2016, Local media reports cite Mario Kelly said on a 10 January con- had previously also held the role
had been tasked with restructur- DellAcqua, the former president ference call shortly after the air- of executive vice-president, but
ing the loss-making airline, which of air services company Inter- line announced the executive that has been dropped. He also
had relied on state subsidies and cargo, as Costantinis successor. changes. He points to South- reports to Kelly.
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BRIEFING EUROPE
Air Malta
had secured initial capital, co-operate through a codeshare
remain in the market for invest- While talks failed, Air Malta has begun to codeshare with Alitalia launched in December.
ment. Cyprus Airways and Esto- Air Malta now must start
nian Air serve as reminders of the Air Malta top 5 destinations by seats January 2017 again. Alitalia, as an Etihad
potential consequences for carri- Destination Seats Change Group partner, was attractive to
ers unable to nd fresh capital. London Heathrow 10,204 +6% the Maltese government because
As a small island operator, Air Catania Fontanarossa 10,176 +58% it could bring a strategic partner
Malta will be acutely aware of the Brussels 6,406 +51% as well as investment.
Cyprus Airways example. In Air Munich 5,866 +23% We believe that local invest-
Maltas favour, it secured Euro- Rome Fiumicino 5,252 ment, on its own, will not address
Source: FlightGlobal schedules data Note: Change versus January 2016
pean Commission approval for all problems, Maltese tourism
its most recent restructuring minister Edward Zammit Lewis
efforts whereas it was an EC rul- best part of a year has passed view to acquiring a 49% stake in told local media, in conrming it
ing ordering repayment of illegal without progress since Air Mal- the Maltese operator. It had ini- is pursuing other avenues. But
state aid that nally led to the tas dalliance with Alitalia began. tially hoped to conclude a deal by we have also worked on a stan-
demise of the Cypriot carrier. Of The Italian carrier embarked the summer. But no agreement dalone option. We dont exclude
more concern may be that the on due diligence last April with a emerged, and while the Maltese that, either.
Airbus
ary 2016. were made possible after the US
If the government decided such Iran Air received the first A321 from its Airbus order in January Treasury Department removed
acts had occurred, the airline in- Iran Air from the list of sanctioned
volved would be put back on a Last year, Airbus signed an order mally took delivery of the rst of its entities on 16 January 2016.
US-controlled list of sanctioned with Iran Air for 100 aircraft, and 100 Airbus jets, an A321. Aside from the new A321, Iran
people and entities. The sanctions Boeing has signed but not yet Speaking at the handover Airs in-service eet features 22
prohibit companies from selling booked an order for 80 aircraft. event at the Airbus delivery cen- ageing Airbus, Boeing and Fok-
any commercial item with US This potential setback for the tre in Toulouse, Iran Air chief ex- ker aircraft, according to Flight
content greater than 10%. carrier came just days after it for- ecutive Farhad Parvaresh said: Fleets Analyzer.
It all adds up
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RM Bulseco/Creative Commons
include widebody aircraft. The the black in the rst half of 2016.
Indian low-cost carriers chair- It has ruled out expanding to
man, Ajay Singh, said the airline Europe or North America in the
would consider the 787, using it short term, but sees potential in
to launch a long-haul business. China, Japan and India.
Last year, HK Express chief After a tricky start, Cebu Pacific is finding success with its A330s The mixed performance of
executive Andrew Cowen told these operators indicates the long-
FlightGlobal the long-haul low- and the Gulf carriers would and downs. Of the eight years for haul low-cost model is still by no
cost model would work out, and respond so aggressively and dou- which nancials are available, it means a guaranteed winner. One
was an opportunity for the airline ble capacity within a year. was protable in four. Most high-prole airline boss, Lion
in the medium term. Nonetheless, Cebu appears to recently, from 2013 to 2015, it Airs Rusdi Kirana, has expressed
But while short-haul operators have found a comfortable posi- was consistently loss-making. doubts about the concept, and
can cut costs through high aircraft tion, managing to be solidly prof- During those three years, then- Vietnams VietJet Air has been put
utilisation, quick turnarounds, no- itable a year after launching. The chief executive Azran Osman- off for now by the complexity of
frills service and ying to second- carrier has a conservative stance Ranis strategy was to add capac- integrating such operations.
ary airports, things are more com- when it comes to eet size, with ity in order to stimulate demand. Low-cost operators often nd
plicated for long-haul players. seven Airbus A330-300s in ser- Investors lost patience and Ben- they need feed for their ights;
The newest contender in vice. Its ASKs have increased con- yamin Ismail was tasked to lead a that passengers want at least some
Southeast Asia, Cebu Pacic, sistently from 1.3 billion in 2013 turnaround. He froze hiring, rene- frills on longer journeys; and that
launched its long-haul operations to nine billion last year. gotiated contracts and reviewed there are fewer secondary airports
in 2013. Chief executive Lance Its strategy has been simple its network to cut routes that were where their widebodies can land.
Gokongwei readily concedes that to y direct services to destina- bleeding like crazy. They also have to contend with
the units rst year was very tions where there is a concentra- In line with its target of domi- legacy carriers unbundling fares.
painful. It quickly learnt that the tion of price-sensitive Filipino nating the regions long-haul, The regions strong demand for
main distribution channel for workers, tapping the strength of low-cost market, AirAsia X has air travel will no doubt provide
long-haul is unlike that of short- the airlines brand among locals. the largest eet among its peers, long-haul budget operators with
haul. It also did not anticipate that Meanwhile, the pioneer of the including 22 A330s in service. trafc. The model has a potential
once it announced services to the regions long-haul game, AirAsia Of the handful of long-haul that will continue to tempt air-
Middle East, Philippine Airlines X, has had its fair share of ups budget operators in Southeast line bosses.
Toughening trends
An increasingly challenging environment of rising fuel prices and competitive pressures is
already beginning to test the robustness of many carriers and their respective leaders
High Level/REX/Shutterstock
coming through the fall of fuel prices. Now
thats dying away, says Pearce.
That growth is below the 5.6% extra capac-
ity IATA expects airlines to add in 2017. That
would mean a second year of falling load fac-
tor. That has already slipped from the industry
GRAHAM DUNN LONDON & GENEVA line bill of 4% in 2017 to reach $129 billion high of 80.4% in 2015 to 80.2% last year. For
T
accounting for 18.7% of airline operating costs. 2017, IATA sees it falling to 79.8%.
he word most have used to describe While fuel hedging may take the edge off this The challenge of many of these factors for
the mood going into 2017 for airlines cost pain for many, the barrel price of Brent airlines is epitomised by SAS, which reports
and indeed the sentiment through- crude of around $55 seen over the rst half of challenging conditions despite lifting Decem-
out the world is uncertainty. But January is getting on for double the levels air- ber trafc by almost a fth and increasing load
some challenges facing carriers in the year lines were enjoying at the same stage last year. factor by more than four percentage points.
ahead are already evident. Currency movements against the strong US Although the demand is growing, the oper-
Recent announcements of cuts or fresh sav- dollar also continue to take a toll and while it ating environment has become more challeng-
ings targets from the likes Cathay Pacic, SAS is a double-edged sword, the negative cost ing, it said in commentary accompanying the
and Alitalia while reecting these airlines impact continues to hold sway. trafc data released in January.
specic circumstances all have in common Intense competition and pressure on yields, SAS in December warned its rst-quarter
the impact of toughening market conditions. in part a result of this competition, is also performance for its nancial year ending Octo-
Even the Gulf juggernaughts of Emirates and clearly in play. While a bright end to 2016, fol- ber 2017 would be signicantly below previ-
Etihad have showns signs of these challenges. lowing capped capacity growth, has brought ous year levels though it still projects a full-
forward US carrier expectations of a return to year prot before tax and one-off costs and
PROFIT SLIP unit revenue growth, there are plenty of con- that it is raising cost-savings target.
IATA had in December projected industry cerns on yields across the industry. It is also evaluating establishing airline oper-
prots in 2017 will slip from their record Falling yields on one level have reected the ations outside of Scandinavia, as it considers a
highs by around $6 billion to just under $30 lower costs, as airlines have been able to pass range of structural measures to tackle competi-
billion still high by historic levels. fuel savings on in the form of lower fares. tive disadvantages versus lower-cost rivals.
The associations chief economist Brian They also reect continued capacity growth, Tackling evolving competition and taking
Pearce noted the upward momentum in prots leaving the question of how much capacity is advantage of fresh opportunities while
seemed to have run out of steam in the rst half too much. In 2016, the run of above-trend pas- nothing new highlights another theme that
of 2016, and dipped in the third quarter. is running though network carriers.
Essentially our forecast for 2017 is a continua- British Airways and Iberia parent IAG is
tion of that trend we have already seen setting Currency movements considering establishing a new airline to open
in during the second half of the year, he says. against the strong a long-haul operation that will be linked to the
A key factor is the higher fuel price. IATA low-cost carrier Vueling at Barcelona El Prat.
based its 2017 forecast on a barrel price of Brent US dollar also continue Earlier, new Air France-KLM chief execu-
crude oil of $55, a rise of just over $10 per barrel to take a toll tive Jean-Marc Janaillac outlined plans to
on 2016. That would equate to a rise in the air- establish a low-cost long-haul unit. Q
Augstein/AP/REX/Shutterstock
being rolled into a new leisure joint venture carri-
er between Etihad and TUI. Etihad will also begin
The next 12 months look to be crunch time codesharing with Lufthansa, while also striking a
for Etihad and its European investments in deal to wet-lease 38 Airbus narrowbodies from
particular and with it the architect of the Air Berlin.
Abu Dhabi aviation groups investment strat-
egy, James Hogan.
Indeed, if recent media speculation is ac- Alitalia presents Ball with familiar issues
curate, Hogan may already have run out of
time to demonstrate the returns outweigh On the one hand you could probably substi- ers... accept and take on the radical changes we
the losses from this expansion strategy. Ger- tute Cramer Ball for any previous chief execu- need. Only then can we achieve a subsequent
man daily paper Handelsblatt, citing multiple tive of perennially loss-making Italian carrier and signicant funding from shareholders, with-
independent sources, in December reported Alitalia and make the case for a challenging 12 out which Alitalia will have no future.
that Etihad was planning to ditch Hogan and months ahead. Ball seems to be working his way up the chal-
review its European investment strategy. But two years into a three-year turnaround lenges scale, having been deployed by Etihad
plan since Etihad bought into the Italian carrier, to rst turn around Air Seychelles, then Jet Air-
KEEPING FAITH Alitalia is in familiar territory seeking cuts and ways, before arriving at Alitalia in March 2016.
Irrespective of whether Etihad keeps faith concessions to provide enough savings to se- His task is a familiar one for Alitalia of tack-
with Hogan, there is plenty of work required cure fresh investment as prot aspirations slip. ling complex labour negotiations in the attrac-
to restore belief in its European investment The next two months are crucial for Alitalia, tive but fragmented Italian market, one in
strategy. Etihad has, at Air Berlin and Alita- said Ball in December, noting talks would now which Alitalias challenges have merely en-
lia, employed many of the tools that turned begin with stakeholders on securing a radical couraged rivals to step up the competition.
round fortunes at smaller operators like Air reduction in costs. It is of vital importance that Equally, political instability may increase com-
Serbia and Air Seychelles. But refreshing the the companys personnel and key stakehold- plications further.
eet, product and brand have only
scratched the surface amid deeper issues at
the struggling Italian and German carriers.
The greater complexities of stakeholders
and business model, and tough European
markets, have made them harder to turn
around, especially as low-cost rivals contin-
ue to heap pressure on them.
While the equity-alliance strategy has
been about fast-tracking Etihads market
presence and the development of its Abu
Dhabi hub, Hogan has always insisted Eti-
had is not a bank. And the signs are that
Dadi/AGF/REX/Shutterstock
MEIGNEUX/SIPA/REX/Shutterstock
Strategic rethink
for Cathays Chu
Cathay Pacic chief executive Ivan Chu has
pulled no punches in outlining the challenge
facing the carrier. Chu notes a very tough
business environment and that the airline is not
facing a short-term challenge but rather a
structural problem, which will require a careful
and sustained response.
The Hong Kong carrier warned in October
that it had scrapped its prot forecast for the sec-
ond half of the scal year, and it has since con-
ducted a critical review of its business as overca-
pacity and poor yields put pressure on revenue.
QUICK DECISION
After a leadership conference in mid-January,
Cathay outlined a new strategy that will have a
leaner, simpler structure to speed up decision
making and respond quickly to change. It also
Terner and Janaillac seek fresh start listed the four pillars of its strategy: focus on cus-
tomers, operational efciency, raising productivi-
Like almost all European network carriers , Air new Trust Together initiative in November. ty and enhancing employee experience.
France-KLM faces increased pressure to se- Air France maintenance chief Franck Tern- 2017 is going to be a year of signicant
cure cost efciencies in the face of a tougher er took the helm of Air France in November change and an opportunity to better align our
climate in 2017. Yet few airlines labour woes and immediately overhauled the manage- business with the increasingly competitive avia-
have been quite so visible as Air Frances in ment team. tion landscape, the carrier said.
2015, when tensions boiled over and execu- The challenge for both is whether fresh Cathay has been particularly affected by Chi-
tives had to ee from protesting staff after faces will have more success in securing union nese carriers push to go long-haul. This has led
having the shirts ripped from their backs. support for cost efciencies. Failure to secure to lower fares and yields, and also a loss of pas-
A peace was brokered, albeit with long- such efciencies has already prompted a deci- sengers who would transit in Hong Kong but now
term solutions deferred, and the relatively sion to cap growth at the mainline carrier and have the option to y direct with Chinese carriers.
peaceful 2016 that followed probably owed instead channel it into its lower-cost, leisure
Cathay Pacic
much to a changing of the guard at the top of unit Transavia.
Air France and the group. Air France-KLM Janaillacs plan to set up a low-cost, long-
chief executive Alexandre de Juniac quit to haul unit to compete on currently unprotable
head up IATA in April, and his successor Jean- routes is likely to be an early test of the new
Marc Janaillac took stock before unveiling a teams ability to reset the carriers cost base.
Alaska Airlines
Munoz facing test
of United strategy
It was in 2015 that United Airlines chief execu-
tive Oscar Munoz took the helm of the Star Alli-
ance carrier, arriving after the abrupt departure
of Jeff Smisek. However, Munozs subsequent
medical leave means it is only in 2017 that his
strategy will really unfold.
United has, in keeping with other US carriers,
enjoyed strong prots, but it has lagged the -
nancial metrics of its competitors. We need to
be more disruptive in the marketplace, Munoz
said in April, shortly after returning from leave.
Munoz has already made progress. He has
revamped Uniteds senior management team
though chief commercial ofcer Julia Haywood
will leave after just six months in the role and
in December a deal with mechanics sealed the
last outstanding union contract since the merg-
er with Continental in 2010, enabling United to
fully integrate all of its labour group.
It also detailed a long-awaited strategy over-
haul in November. That involved a eet revamp,
deferring delivery of 61 Boeing 737-700s, and a
Virgin brand decision for Alaskas Tilden network rejig expanding the domestic schedule
in an effort to recapture lost market share.
The US airline consolidation game was in 2016 technology-savvy travellers by marketing itself
joined by Alaska Airlines through its acquisition as a hip upstart. We believe different works,
of Virgin America, and the year ahead presents says Tilden. The two airlines may look differ-
big challenges and opportunities as it looks to ent, but our core customer and employee
make the most of its new asset. focus is very much the same.
The $4 billion deal closed in December and Alaska plans to continue to operate the Vir-
Alaska Airlines boss Tilden will remain the gin America eet with its current name and
combined companys chief executive, while product for a period of time, but the crunch
Alaskas chief operating ofcer Ben Minicucci decision for 2017 will be whether to retain its
will become Virgin Americas chief executive, acquisitions brand.
Richard Drew/AP/REX/Shutterstock
succeeding David Cush. This is a big decision, and one that de-
In announcing the deal, executives ac- serves months of thoughtful and thorough
knowledged differences between the two car- analysis, says Tilden. We plan to make a
riers. Alaska operates largely like a traditional decision about the Virgin America brand early
legacy airline, while Virgin America targets [in 2017].
REPORT
DAVID KAMINSKI-MORROW
HELSINKI
PHOTOGRAPHY
TOM CAMPBELL
Core
strength
A leaner Finnair has found a measure of stability in recent
years. Now chief executive Pekka Vauramo is determined
to achieve sustained protability, with Asia the key market
W
hile Finnish mythologists select the A350, signing for the original ver-
might point out that the god of sion of the aircraft with expectations of tak-
the sky, Ukko, is also the god of ing it in 2011 before Airbus redeveloped the
thunder, Finnairs tempestuous twinjet as the XWB family. The airline
passage of late is rooted less in folklore than became the inaugural European operator
harsh economic reality. when its rst A350-900 arrived in 2015.
Finnair has staggered through the six years The main thing is the customers like it. Its
since its balance sheet was hammered by the quiet and spacious, says Vauramo. And
global nancial crisis of 2008-09, swaying were happy on the fuel-consumption side.
between heavy losses and tantalising but Were ying more but fuel burn hasnt
relatively small prots. increased by 7-8% only 3-4%.
Breaking out of this faltering stop-start That difference really comes from
cycle is chief executive Pekka Vauramos pri- the A350s.
mary objective and, three years after he took Finnairs evolution into a leaner operation
the helm, there is evidence that the ag-car- has involved focusing on core activities. Ten
rier has regained a degree of stability. years ago, it shifted away from ground-han-
Were growing, says Vauramo. And we dling operations, and the simplication sub-
havent grown for many years. sequently spread to other businesses.
Finnair has spent much of the past decade It axed its unprotable heavy maintenance
enmeshed in seemingly-interminable restruc- operation in 2011 part of its Finnair Techni-
turing schemes. Although passenger numbers cal Services arm initially intending to focus
have risen steadily, the company has been on higher-margin engine services and compo-
engaged in a long-term battle to slash its cost nent repair. But having established that it did
base, with a series of savings programmes that not have the scale in the sector to compete
tended to keep Finnair frustratingly within effectively, it opted just a year later to out-
reach of sustainable protability but not quite source these operations as well, retaining only
managing to stake a rm hold. its line maintenance work.
But Vauramo is optimistic. Finnairs nan-
cial performance had improved for eight quar-
ters in succession by last September. Its bid to When it comes to
emerge as a lighter, more efcient carrier has
been reected in the modernisation of its eet
size, I think were
and particularly the introduction of the Air- fairly close to what
bus A350. we want to be
Finnair was one of the rst customers to
Around the same time the carrier chose on routes including Bangkok, Beijing, Hong
to participate in a start-up freight airline, intend- Kong, Shanghai and Singapore and Tokyo ser-
ing to capitalise on a cargo market, notably on vice due this year. The carrier has also chosen
Asian routes, which it had predicted would to put the A350 on its connecting service from
recover following the 2008-09 slump. Helsinki to London Heathrow, as a product
Finnair Cargo held a 40% share in the freight improvement for Asian transfer trafc.
carrier Nordic Global Airlines, established with Finnair is intending to capitalise on its strate-
a small Boeing MD-11F eet. But the persistent gic efforts in Asia and believes it has an opportu-
drag of overcapacity in the freight market and nity to accelerate its growth in the period to
the pressure on cargo pricing undermined Fin- 2018 if market conditions remain favourable.
nair Cargos business case for using dedicated
freighters. With the trend towards increased use FUEL UPTURN
of hold capacity on passenger aircraft, notably Nothing is for granted, says Vauramo, how-
the A350, the demise of Nordic Global became ever, pointing out that leisure trafc originat-
inevitable. The airline ceased operations in ing from China slowed last year as a result of
2015, after just four years. security concerns in Europe. He is also aware
Vauramo, who joined Finnair from a divi- of the upturn in fuel prices although they
sion of freight-handling engineering rm Car- still remain relatively low and capacity
gotec, points out that the airlines cargo arm growth is still putting pressure on yields,
remains central to its operation. Hold freight Power play especially on the Atlantic, at a time when Fin-
accounts for close to a fth of revenues on nairs modernisation ambitions necessitate
intercontinental routes. Ice hockey is Finlands most popular sport, higher expenditure.
F
and Pekka Vauramo counts himself among Its hard to cut costs faster than the impact
innair is underscoring this importance those with a passion for this fast-paced game of ticket prices, Vauramo states, stressing
with the construction of a new Nordic of sticks and skates. that growth is vital to ensure the top line rises
cargo hub terminal at its Helsinki Vantaa He has played for years in defence, as costs increase.
base, set to open early this year, and con- mainly illustrating, through the high-ener- While the A350 is replacing older types in
centrating on higher-yield specialised products, gy pastime, his broader enjoyment of physi- the eet, Finnairs decision to push harder for
rather than simply bulk freight. The terminal cal exercise. expansion is evident in its decision to hold off
will feature advanced logistics automation to Vauramo is used to tough, heavy-industry this years planned withdrawal of two A330s.
help keep its handling costs competitive. environments. With an academic background It will use the type on a new route to San
The shedding of non-core activities has in mining, he became an engineer in the eld, Francisco the airlines fourth US destination
also led to Finnairs distancing itself from before branching into executive work in the for the summer season.
catering operations. sector not just in Finland but particularly in Its choice to be an early A350 customer has
Stripping back Finnair to two streams its the Asia-Pacic region. He subsequently meant having to cope with minor technical
airline division, which accounts for about joined Cargotec where, in 2008, he was ap- snags and an operational learning curve. But
90% of revenues, and its travel services arm pointed deputy chief executive, before mov- Finnair has been more concerned with erratic
has halved the companys head count over the ing to head Finnair in 2013. delivery schedules, which have forced the air-
past eight years, from some 9,600 personnel to This is a country of four seasons, says line to wet-lease aircraft because, says Vau-
just 5,000. Vauramo. While ice hockey is a winter occupa- ramo, it would rather maintain the schedule
When it comes to size, I think were fairly tion, he reserves time for more relaxing pur- than cancel ights.
close to what we want to be, says Vauramo, suits at a summer house in warmer months. The main issue is, since were growing,
although he adds: Theres always some ne- making sure we have enough pilots availa-
tuning to be done. ble, he says, pointing out that the airline
Asia underpins the business strategy of this needs to train A330 crews for A350s destined
trimmer Finnair. Vauramo believes the polit-
Finnair for routes including Singapore and Miami.
ico-economic shift to Asia is the strongest of Operating revenue $m, 2015 2,563 We cant send pilots [to train] early,
the trends inuencing air transport, and the Change -14.9% says Vauramo. If weve no aircraft, the
carrier has an objective to double Asian trafc Change local 1.7% training expires.
by 2020 from its 2010 baseline, leveraging the Operating margin 5.2% Finnair is having to juggle its crew
geographic position of Helsinki to offer fast Net margin 3.9% resources, suspending its Chongqing route for
European-Asian connections. the rst ve months of this year and using
Year-end 31 Dec 15
Weve an advantage with the model we wet-leased A330s from Oneworld alliance
AB 2015 Financial ranking 56
have. If you look at developments in aviation, partner Iberia to serve Miami all of which
trafc across the Atlantic has very intense AB 2015 Trafc ranking 68 brings unwanted additional costs.
competition, he says. Asias a different mar- RPK Growth (2015) 3.3% Its long-haul facelift has also required adapta-
ket, its sustainable. ASK Growth (2015) 3.1% tion of its crucial feeder network. The home
Asia has become the focus of the A350 net- Load Factor (2015) 80.4% market in Finland is very small and we need to
work, with the aircraft having been deployed nd connecting trafc, says Vauramo.
The nature of the market, he believes, offers comfort. Finnair is also lifting its feeder capac-
a degree of protection from low-cost carriers, ity through the lease of additional Airbus
about which he is not overly concerned. A321s from the rst half of this year.
So much of our European trafc is tied Vauramo is overseeing installation of wi-
with the long-haul operation, he says. Mar- on the long-haul and Airbus single-aisle eets
kets in the east are not free skies. It takes a as part of a broad connectivity and digitisation
long time to negotiate, and [competitors] strategy, intended to increase productivity.
wont set up overnight.
Developing a feeder strategy, however, has OUTSIDE VIEW
not been a straightforward affair. As part of a But for all of Finnairs efforts to position itself
drive for lower costs, Finnair established a as a sleek, modern carrier, its corporate struc-
joint-venture carrier, Flybe Nordic, to serve ture remains something of a European anach-
thin regional routes. Flybe Nordic, which had ronism. It remains state owned, with 58% of
emerged from feed agreements with the UKs shares held by the government, and is still
Flybe and local ATR operator Finnish Com- effectively a standalone operation, having
muter, expanded to take over a greater propor- remained outside the waves of consolidation,
tion of Finnairs loss-making short-haul busi- with partnerships largely centred on its One-
ness including its Embraer regional jet eet. world links.
But a weakening Finnish domestic market Vauramo is very happy with Finnairs One-
put pressure on the venture, especially its Conict resolution world joint-venture activities on the North
scheduled operations, and losses spurred Atlantic and Japanese routes, adding that they
Flybe to abandon the operation in 2014, selling Finnairs drive to lower its cost base perma- were good moves at the time they were made.
its 60% share to Finnair for a token sum. nently has inevitably led to workforce fric- While Vauramo has described state control
F
tion, but Pekka Vauramo believes the as a barrier, he appears to have softened his
innair has maintained the carrier tension with unions has eased substantially. view. We dont see that as limiting at all, in the
now branded as Norra, Nordic Its a completely different atmosphere way we do things, he insists. Were focused
Regional Airlines after nding new than two years ago, he says. on a strategy of growth in Asia, and I dont
majority partners in the form of Finn- Conict with the unions reached some- think ownership changes that strategy.
ish investors. The airline operates some 24 thing of a nadir in 2014 when Finnair issued Chairman Klaus Heinemann warned three
aircraft for Finnair under contracted ights. an ultimatum threatening to outsource ight years ago that Finnair needed to be open to
Our aim is to stay owners in a company attendant positions effectively cutting over alternative ownership and avoid becoming
thats protable, says Vauramo. But he 500 jobs if it failed to extract the necessary market driftwood. Unlike the owners of
acknowledges that Norras evolution has been savings from the cabin crew union. neighbouring SAS Group, however, the Finn-
problematic a situation partly caused by Although initial outsourcing went ahead on ish government has not indicated any desire to
Finnairs own expansion, with Norra pilots some Asian routes, Finnair halted further im- relinquish control of Finnair.
sapped by crewing demands of the mainline plementation, after just a few weeks, as the But the airlines cost-cutting efforts, insists
carrier, resulting in a spate of ight cancella- union agreed to meet the savings target. Vauramo, will protect the company against
tions and a struggle to restore reliability. Finnair also reached a deal with its pilots, sudden changes in the operating environment
Weve had issues with domestic ights, offering a degree of job protection in return and place it in a strong position should con-
says Vauramo. But were in much better shape for cost cuts. solidation options emerge.
with the domestic ights than we used to be. Vauramo says building a relationship of Consolidation hasnt really taken place [in
Finnair has steered away from increasing trust with the unions has been central to turn- the Nordic region]. Were expecting some-
dependence on smaller aircraft types, opting ing Finnairs performance around, and points thing to happen. If consolidation hits this part
instead to revamp its short-haul eet with to an improvement in the airlines results. of the world, wed need to see very quickly
higher-capacity aircraft. People have also started to see some whether were a part of it or not, he says.
The carrier has analysed its feeder opera- light, he adds. Recruitment has started. I think it boils down to hubs. A big prob-
tion to explore whether it could justify dou- The airline has not fully escaped disrup- lem in consolidation is the number of hubs.
bling to four the number of daily connection tion, however, as a pilot labour agreement Im not sure which is willing to shut down
banks at Helsinki. expired last November, and cockpit union but I think Helsinki wont be on that list.
But it has concluded that rather than restrictions on additional ying and last-min- According to Finnish legend, Ukko is also
expand the number of destinations, which ute cover have recently left the carrier ex- the deity of the harvest. If the sky-god can
would have required more aircraft a better posed to ight cancellations. promise calm conditions and a favourable cli-
strategy would be to pursue market share in a Finnair is seeking to hire hundreds of pilots mate, there is a chance he might also allow
tighter concentration of routes, and upgrade the and cabin crew by 2020, partly to ensure suf- Finnair to reap the returns for which it has
Airbus eet that serves its European network. cient personnel for its A350 operations. It has waited so long.
The carrier is to begin a modication pro- also linked with a training organisation, Patria
gramme this year to raise the seat count on Aviation, to provide A320 rst ofcers through All Flight Airline Business cover interviews
more than 20 Airbus A320-family jets, increas- a multi-crew pilot licence programme. can be viewed in our online issue archive:
ing it by around 4%, without detracting from ightglobal.com/AirlineBusiness
CONTENTS
28 Growth mode Key metrics from Flight 41 Slow road to consolidation Lessor M&A
Fleets Analyzer and Ascend Values has been largely conned to speculation
33 Top 50 leasing data Our annual look at 44 The rise of ABS Asset-backed
global leasing portfolios securitisations are showing momentum
36 Post-peak uncertainty A fascinating 46 Crowded market limits premiums
aviation nance picture is emerging Airline insurance costs continue to fall
Denis Closon/REX/Shutterstock
Growth
mode
As lessors expand their eets and new
aircraft types hit the market, we highlight
Boeing
key industry metrics using data from Flight AVOLON
ACQUISITION
Fleets Analyzer and Ascend Fleets In October, HNA Group sub-
sidiary Avolon reached an agree-
$256bn
ment with CIT Group to buy its aircraft
nancing and leasing business for $10 bil-
lion in an all-cash transaction. In around two
years, Avolon will jump from 140 aircraft at
the end of 2014 to more than 600 aircraft
when the deal to buy CIT closes, according
The combined value of the top 50 lessors portfolios to Flight Fleets Analyzer. With combined
forward orders in excess of 300, the
company is aiming to continue to
swell to over 900 aircraft by
the end of 2023
Top 10 lessors by eet value
8,699
GECAS $27.7bn -11.4%
SMBC Aviation Capital $14.6bn +25.3% Combined Airbus and Boeing leased eet
$150bn
The combined eet value of the top 10 largest lessors
Airbus
SUPPLY
PRESSURE
As lessors such as Air Lease (Air
Astana A320neo delivery pictured)
take on new types, oversupply has become
a hot topic. Lease rate factor pressure has
been seen as ATR 72-600s enter the market and
reduce appetitive for still-relatively-new ATR 72-
500s, and this trend could spread to the A320 and
737. With the Neo and the Max coming into
service, you could see a similar thing happen
there, with newish 737-800s and A320-200s
suddenly worth much less than expect-
ed, says Fred Browne, chief ex-
ecutive of Aergo Capital
Airbus
$11.3bn
AWAS could be in line to join the consolidation trend
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FINANCE & LEASING DATA
DATA COMPILED BY RYAN HAMMACOTT, GARY LIFFORD & ASH WILEMAN FLIGHTGLOBAL DATA RESEARCH TEAM
REPORT
JAMIE BULLEN LONDON
EDWARD RUSSELL WASHINGTON DC
Post-peak
uncertainty
A fascinating aviation nance picture is emerging for 2017 However, while last year brought forth a
bevy of black swans with more waiting in
as a strong market waits for downside risks to play out the wings it also threw up a number of
events that suggest an industry in mostly pos-
A
itive transition.
s 2016 drew to a close, it looked as erendum, all posing threats to globalisation Those events include: mergers, among both
though the aviation cycle had and therefore aviation in the coming years. airlines and lessors; an inux of new investors;
crested a theory reinforced by a Additionally, concerns over a potential and new vehicles for aircraft investment.
slowdown in global trafc growth economic slowdown in China, the spread of Export credit agencies (ECAs) covering
just as an oversupply of aircraft seems likely, nationalism and the spectre of terrorism lurk Boeing and Airbus were unavailable for guar-
by compressed lease rates and aircraft values, in 2017. anteeing deals in 2016.
and by an abundance of liquidity.
The aviation demand cycle does remain
strong, but trends suggest we may be close to Growing appetite for specialised regional lessors
the peak, and the more I think about this, the
more I think we are just past the peak, Flight The regional aircraft leasing sector is undergoing Regional lessor TrueNoord rebranded from
Ascend Consultancys chief Rob Morris said a period of transition. Nordic Aviation Capital GA-Finance in 2016 after securing invest-
at an industry brieng in November. became the worlds largest regional lessor after ment from the private equity rm Bregal
Over the course of 2016, a number of down- adding Aldus Aviation to its portfolio in April, Freshstream. TrueNoords chief executive
side trends such as in values and operating gaining 30 Embraer E-Jets shortly after it had Anne-Bart Tieleman thinks the upshot of this
yields have all neared critical mass at roughly bought Jetscape Aviation and its 28 E-Jets. activity is that the sector is becoming more
the same time, creating an apprehensive mood These acquisitions reect the increasingly professional.
among aviation nance professionals. specialised nature of regional leasing, with I think we are seeing the regional leasing
The past 12 months have, in a wider sense, more mainstream lessors such as Air Lease off- sector start to become more professional and
been chaotic and fragmented. loading their regional portfolios. more specialised, in much the same way as the
Aside from industry-specic factors, there Turboprop lessor Elix, backed by Oaktree mainstream lessors have been doing over the
were the unexpected macro events with Capital, was reported to have been preparing past few years, he says. Nordic have to an
potential downsides, including Donald an asset-backed securitisation (ABS) in 2016 for extent led the way, but TrueNoord and others
Trumps presidential election victory, the launch this year. are also going down this path.
Brexit vote and the outcome of the Italian ref-
Alaska Airlines
tion have been conducted by Airbus and the
European ECAs, but no timeframe for a reversal
of the policy has been disclosed by either side.
As a result of the lack of ECA nancing,
Airbus itself had to extend some 500 million
($525 million) of aircraft nancing to custom-
ers over the rst nine months of 2016.
LIMITED SUPPORT
But a strong and liquid macro nancing mar- Mergers make a mark
ket has limited the amount of customer sup-
port the manufacturer has had to offer, Airbus Two milestone mergers happened in 2016.
nance chief Harald Wilhelm said during a Alaska Airlines agreed to acquire Virgin
brieng on third-quarter results. America for $4 billion in the rst half of the
This liquidity spared weaker airlines year; then, in October, HNA subsidiary Avolon
nancial pain, as they could pursue nanc- formally conrmed the open secret that it had
ing options that might have been unavailable won the bidding to acquire CITs aircraft
in other years. leasing business.
Credit Agricoles global head of asset nance Alaskas merger with Virgin America will
Jose Abramovici says: We have got some ECA make it the USAs fth-largest carrier, while for
mandates which have not been consummated Avolon, the addition of CIT takes the owned,
because of the ECA freeze. Some airlines have managed and committed eet from 429
been able to secure commercial bridge nanc- aircraft to 910, the lessors website indicates.
ings or have selected to do sale-and-leaseback. Once approved, the merger will give
REX/Shutterstock
An alternative to export credit could Avolon a place at leasings top table with
emerge early this year: Boeing Capital, along GECAS and AerCap, as well as the economies
with advisers Citi, Goldman Sachs and Mor- of scale to withstand any headwinds.
gan Stanley, is on the cusp of launching a pro- However, while the merger has prompted
gramme that would allow borrowers to access suggestions that further consolidation is likely
The past 12 months commercial loans wrapped by a syndicate of with both AWAS and Asia Aviation Capital
insurers similar to, though more expensive reportedly on the market many feel that only
have, in a wider sense, than, an Ex-Im guarantee. Sources indicated Chinese investors will be able to pay
been chaotic and in December that the rst bank loan using the premiums for these companies.
fragmented guarantee was near to closing. Given that Avolon itself only recently
If successful, lenders hope to expand the merged with HNA vehicle Hong Kong
insurance product to capital-markets transac- Aviation Capital, lessor Aergo Capitals chief
The US Export-Import Banks absence is tions, as well as possibly Airbus aircraft, executive Fred Browne thinks Avolon may
mostly political, with the agency lacking the sources say. spend some time working out the implications
necessary quorum of board members to This product would also be open to airlines of the merger.
approve new deals. But this is set to be in the home markets because there is no Once the deal closes, Avolon may have a
resolved sooner rather than later, so Boeing export element. tough task assimilating the CIT assets,
aircraft should be eligible for ECA support at Moreover, the availability of attractive bank especially the personnel, into an organisation
some point in 2017. debt has minimised the impact on airlines of that has just spent most of this year digesting
If Ex-Im Bank does not come back online, the absence of European and US ECAs. HKAC, he notes.
Boeing 787 customers may still be eligible for Commercial banking terms remained attrac- Like many in the industry, Browne sees
support from UK Export Finance if they have tive to borrowers in 2016, especially for air- further consolidation as likely, driven by
chosen Rolls-Royce engines. lines looking to nance aircraft with secured Chinese money (see feature page 41).
Airbuss ECA woes are thornier, however. debt, providing a very competitive alternative
In April, UK Export Finance voiced concerns to the capital markets. The market for airlines
over historic applications for ECA support right now is extremely well bid, says one Abramovici adds that lessors also turned to
involving Airbus, and the agencys German investment banker, citing the continuing com- the unsecured bond market for their funding,
and French counterparts subsequently halted petition between commercial banks, invest- a trend likely to continue this year. AerCap,
new Airbus deals. In August, the UKs Serious ment banks and lessors for airlines business. Aircastle and Aviation Capital Group are
Fraud Ofce (SFO) formally launched an Indeed, Abramovici notes that the abun- likely to tap the unsecured markets, one Wall
investigation into the matter. dance of liquidity made some deals unappeal- Street banker indicates.
The SFO is not renowned for speedy inves- ing for banks in the rst half of 2016, in terms Oversupply of aircraft may be an issue in
tigations, so European ECA support may take of either pricing or structuring, whether due to 2017; indeed, it has already caused lease rate
some time to return to Airbus. the leverage, amortisation or balloon demands. factor pressure in the ATR market, says Fred
Browne, chief executive of Aergo Capital. Industry sources point to the capital mar-
SkyWorks
A glut of new ATR 72-600s ordered by les- kets remaining open in 2017.
sors hit the market [in 2016]. Now, to place The AA/A EETC structure continues to be
these aircraft, those lessors had to reduce their popular with both airlines and investors, while
expected lease rates. As a result of this, owners lessors continue to see ample appetite for both
of relatively new ATR 72-500s say, less than their unsecured notes and ABS transactions.
three years old found their mark-to-market This year is already off to a strong start,
values and lease rates under pressure as air- with American Airlines closing a $785 mil-
lines opted for the newer aircraft over the lion EETC in the rst week of January. The
slightly older one, despite minimal technical transaction was not only the tightest for the
differences between the turboprops, he says. airline on a spread basis over US Treasuries,
With the Neo and the Max coming into ser- but was also heavily oversubscribed, says a
vice, you could see a similar thing happen banker familiar with the deal, and grew from
there, with newish 737-800s and A320-200s its original $593 million, allowing the airline
suddenly worth much less than expected. to add six aircraft to the transaction.
The fact is that the The capital markets will still be a major
DOLLAR DYNAMICS total need for aircraft source of funding... and remain strong in
Another issue that European banks faced in 2017, said Betsy Snyder, an S&P Global
2016 was rising US dollar borrowing costs.
nancing is many times director who covers aviation, during the
This left them slightly less competitive for US oversubscribed FlightGlobal Finance Forum in November.
dollar-denominated deals versus the capital STEVEN GAAL An investment banker afrms this, saying
markets, although numerous carriers, includ- Managing director, he expects a pretty robust year in 2017.
ing Alaska Airlines and American Airlines, still SkyWorks Capital
closed commercial loans during the year. Bor- INVESTOR ENTHUSIASM
rowers hope these pressures will abate in 2017. Frequent EETC issuer United is likely to tap the
Ted North, managing director of corporate same market at some point during 2017, while
nance at United Airlines, said at the Flight- native to the traditional bank market for cer- Delta Air Lines is set to raise some capital-mar-
Global Finance Forum West Coast in San Fran- tain borrowers, both airlines and lessors; and kets nancing for a portion of its $2.69 billion
cisco in November: Hopefully, in the back 2016 was no exception. in aircraft capital commitments this year.
half of 2017 those liquidity costs will be lower In November, Air Lease closed its $800 mil- Previous issuers Hawaiian Airlines and
and we can continue to use that market. lion debut securitisation with Blackbird Capi- Spirit Airlines have unnanced 2017 deliver-
Many unknowns loom, nonetheless, includ- tal, pricing at the lowest coupon for a post- ies that could be received well by investors.
ing the impact of the Trump administration, nancial crisis ABS, with its AA tranche At least one new international airline issuer
the lack of export credit support, and the view achieving a 2.49% coupon. is possible in 2017 as well. While the hurdles
that the industry is past its peak with regards to The deal introduced new investors to this to entering the market are high, the inux of
both airline prots and funding cycles. asset class, which is becoming ever more pop- new capital from investors makes the EETC
Even with capital reserves changes loom- ular with lessors as a renancing tool. market an attractive alternative to low-cost
ing under Basel IV, which would be punitive Apollo Aviation, Aergen and Castlelake all bank debt or sale-and-leasebacks.
to those who do secured lending against air- issued ABS deals in 2016, with GECAS and However, the investment banker cautions
craft, nanciers in this market have always Aviation Capital Group coming to market to that the number of new international issuers
been quick to adapt. close their transactions during the last few is unlikely to be more than one or two in
The capital markets have provided an alter- weeks of the year. 2017, saying this rate is a good number con-
sidering the barriers to entry.
It takes a lot for a new airline to access the
Articially low US interest rates likely to increase EETC market, the banker says. You have to
have a signicant number of deliveries.
It is unclear by how much interest costs will rise only its second such increase in nearly a dec- Air Canada, LATAM, Norwegian, Turkish
in 2017. While new investors pushed all-in cou- ade. Further increases are expected in 2017. Airlines and Virgin Australia have all tapped
pons to historic lows in 2016, president-elect EETC rates have been so low over the past the EETC market for the rst time since 2013.
Donald Trump has said that the US federal couple years that we can easily afford to have Given low interest rates, investors have been
funds rate is articially low and suggested some increment to the interest costs, says hunting for opportunities to put capital to
that he intends to push the Federal Reserve to Uniteds managing director of corporate - work. And as US dollar assets with stable and
raise rates. That said, the US Federal Reserve nance, Ted North. decent returns, aircraft investments have
operates independently of the executive United set the current low for EETC coupons appealed to new nanciers.
branch and its chair Janet Yellens term runs with its $920 million 2016-2 transaction in Sep- Steven Gaal, managing director at SkyWorks
through January 2018. tember. The $637 million AA notes due in 2028 Capital, remarks that 2016 saw a surprising
The Federal Reserve raised rates a quarter priced at 2.875%, the rst EETC tranche with number of new investors enter the market.
of a point from 0.5% to 0.75% in December, an all-in rate below 3%. In 2016, what really stood out was the num-
ber of players looking at entering the aircraft
Photography/REX/Shutterstock
Ryanair is adding aircraft, but fares continue to fall
ond aircraft debt fund last year, and it is now in
the process of arranging a third vehicle, Flight-
Global understands.
However, aircraft debt funds did not begin
to trend until 2016, when institutional
demand ballooned.
A number of new vehicles for aircraft
investment emerged last year. French bank
Natixiss asset management arm launched an
aircraft and real estate fund. Additionally, the
former leasing chief of AWAS, Ray Sisson,
announced a new asset-focused fund called
AVi8 Air Capital in late November.
While AVi8 plans to build a young eet of
mainly Boeing 737s and Airbus A320s, as well
as widebodies such as 787s, through traditional
leasing deal structures including sale-and-
leaseback, it will also aim to attract additional
investors into aircraft through separate funds.
In mid-2016, Stellwagen Group announced
its plan to launch its StellCap fund.
Concerns about aircraft oversupply cloud outlook Led by former Ryanair nance chief How-
ard Millar, the 10-year closed-end fund plans
While liquidity may be easy to come by in March. This comes after a 10% decline during to have $1 billion-worth of assets under man-
2017, the industry is not looking as robust as it the six months ending in September. agement by the end of 2017. Within three
has done in the past two years. US airlines have also reported signicant years, it plans to have $5 billion in assets
Moodys Investors Service ranks airlines and declines in unit revenues. However, many expect under management, primarily 737s and
lessors as stable but expects margins will fall in to achieve at to positive growth in 2017. A320s but also A350-900s and 787s.
both sectors and capacity growth will moderate. Lessor margins are expected to fall below We want to disrupt the aircraft nancing
The ratings agency forecasts airline 5%, with the risk of excess capacity for certain market, which is in dire need of innovation,
operating margins to fall below 10% with yields aircraft models in 2017, according to Moodys. Millar told FlightGlobal in June.
continuing to face downward pressure as The main factor causing the industrys own FlightGlobal understands that Brexit-
capacity grows faster than demand, especially imminent downturn is an oversupply of related headwinds put the funds plans
in developed markets, Moodys says. aircraft, says Ray Sisson, executive chairman slightly behind schedule. But in early Novem-
Ryanair has already been lowering their of AVi8 Air Capital. This is driven... by the ber, Canadian private equity rm Acasta
prices for the winter season as they add new enormous amounts of orders placed a few Enterprises bought Stellwagen and commit-
aircraft at the rate of nearly one per week for years ago that are now starting to deliver. ted $100 million to StellCaps fund.
2017, says Fred Browne, chief executive of SriLankan Airlines cancelled leases for four New players appear to pose a threat to
lessor Aergo Capital. You would have to Airbus A350-900s with AerCap in 2016, while banks, who may nd themselves restricted by
wonder if there will be enough bums to put on Gol plans to remove ve 737s in 2017 after Basel IV regulation. However, Credit Agricoles
all these extra seats coming into the European removing 19 last year. Carriers ranging from Abramovici remains sanguine: New players
market during these uncertain times. American, LATAM and United have all deferred are always welcome, as it will force the exist-
In November 2016, Ryanair forecast a 13% to deliveries that were due in 2017 during the ing bank to get smarter in order to survive.
15% fall in average fares in the quarter ending in past six months. This year is likely to provide the rst true
test for these vehicles, especially given the fact
that their target investor base may ee to more
leasing sector, from insurers to pension funds He notes that aircraft as assets have to an familiar asset classes if interest rates rise.
to Korean, Chinese and Japanese investors, he extent been commoditised by this wall of While unpredictability dened 2016s
says. In addition to arranging nancing, Sky- liquidity. There are far more investors who global political climate, stability was the cor-
works advises clients on sourcing capital. want the core assets. For example, a 737 Max 8 nerstone of the aviation market with liquidity
The industry did not anticipate the extent has many more investors willing to look at it providers extending capital even in the stark
to which this has taken place, which is likely a than the 737 Max 9. But when you have so absence of ECA support.
reection of the ongoing hunt for yield, a desire many looking to nance the core, it is easy to With both commercial banks and the capi-
for US dollar-denominated assets, and growing nd the liquidity that wants the assets that are, tal markets open to borrowers, and numer-
investor recognition that aircraft are relatively relatively speaking, on the demand fringe. ous players still attracted to the low-risk
low risk assets, Gaal adds. The fact is that the Institutional moneys attraction to aircraft returns offered by aircraft asset nancing, a
total need for aircraft nancing is many times investment is not new. In 2014, Investec Bank funding gap looks mercifully unlikely to
oversubscribed. launched its rst of two closed-end funds that occur, for now.
REPORT
ELLIS TAYLOR
PERTH
Slow road to
consolidation
The pending sale to Avolon of CITs leasing unit hints at industrys growing maturity,
but mergers and acquisitions activity has still been largely conned to speculation
A
volons emergence as a potential Chinese group HNAs acquisition of Irish les- of having two separate bids rejected by Terra
mega-lessor following two major sor Avolon via subsidiary Bohai Capital. Firma. Then when AWAS was put up for sale,
acquisitions last year reinvigorated Granted its status as Bohais leading aircraft the race reportedly drew other Chinese les-
speculation about structural leasing brand, Avolon quickly moved to inte- sors ICBC Leasing and Ping An Leasing. But
change in the aircraft leasing industry, but the grate Hong Kong Aviation Capitals portfolio the sale stalled, and it soon became clear Avo-
pace of consolidation has been slow. into its own, and under the leadership of chief lon had much larger ambitions.
Consolidation has been a topic of discus- executive Domhnal Slattery set about pursu- A bigger prize came up for grabs when CIT
sion for many years. AerCaps acquisition of ing ambitious plans to grow aggressively both revealed plans to hive off its aircraft leasing
ILFC in 2014 was widely expected to catalyse by organic means and through acquisitions. unit. Avolon was quickly named by many in
imageBROKER/REX/Shutterstock
a major round of mergers within the industry, Bohai had signalled its intentions early, the industry as the front-runner.
but though large buckets of capital poured pumping $1.2 billion of additional equity into In June, Slattery telegraphed his companys
into aircraft nance by investors attracted by the lessor to meet those expansion goals. interest in CIT, noting that a takeover of the
the asset classs strong yields, large-scale Shortly after closure of the Avolon deal, US lessor would be quite transformative for
mergers did not crystallise until late last year. there was strong speculation that Bohai was us, given that the size of the on-offer portfo-
A turning point had perhaps arrived with aggressively bidding for AWAS, to the extent lio and its spread of aircraft types.
Japan
Ireland
2011 eet 178
China
USA
129 % 2011 eet 436
2016 eet 997
54 %
89 % 2011 eet 71
2016 eet 134
2016 eet 129
Singapore
2011 eet 216
107 %
2016 eet 447
Australia
17 % 2011 eet 36
2016 eet 42
Fleet by manager region Sales and consolidation have played major roles in the shifting geography of leasing companies.
2011 2016 According to data from Flight Fleets Analyzer, the leased aircraft eet has increased 25% from 2011 to
Africa 22 6 -72% 2016 globally.
Asia-Pacic 781 1,857 +138% While the number of leased aircraft managed out of the USA has decreased, this is consistent with the
Europe 2,503 4,538 +81% 2014 sale of Los Angeles-based ILFC to Dutch AerCap, shifting nearly 1,000 aircraft to Europe. On top
Middle East 189 260 +38% of that, GECAS, also US-based, has been paring down its assets.
Latin America 1 4 +300% Europes eet has nearly doubled, which is consistent with Ireland being favoured by leasing companies
North America 5,441 4,535 -17% because of tax advantages, but the numbers are skewed by AerCaps acquisition of ILFCs large portfolio.
Total 8,937 11,200 +25% The most signicant growth has come from Asia, where Singapore has doubled its eet and China has
more than doubled the number of aircraft it manages. This trend is likely to continue, given Chinese in-
terest in the sector.
Source: Flight Fleets Analyzer
Following months of speculation, mergers and acquisitions over the next year. nancial ofcer Will Gramolt observed that
including talk of a possible IPO of the unit, This has not quietened rumours that Avolon while the industry had been talking of con-
CIT named Avolon as the winning bidder in a is looking at AWAS, which is back up for sale. solidation for some time, it was Chinese capi-
$10 billion deal. Avolon would pay a 6.7% There are signs that other Chinese lessors are tal driving it along.
premium to the book value of its assets. The still in the M&A market, particularly for Western New money coming from China is not just
transaction is set to close early this year. platforms, and they stand to benet from Avo- about taking delivery of the next aircraft on
In announcing the deal in October, Slat- lons assumed absence. ICBC Leasing, Ping An the production line, he said.
tery indicated in a statement that it would Leasing and AVIC International Leasing have all Nonetheless, he cautioned that while
not be the end of the M&A trail for the ambi- been linked to previous competitions, and it Chinese lessors would seek to continue
tious company. appears likely that they will be involved in any acquiring their Western counterparts, they
While this transaction is strategically further sales of Western lessors. would not be looking to overtake industry
compelling and will double the scale of leaders GECAS and AerCap.
Avolon, it is not the summit of our ambi- DRIVING FORCE Instead, most Chinese involvement is being
tion, he said. Fresh from its oat on the Hong Kong stock driven by a desire to gain access to US dollar-
However, in an interview with Bloomberg exchange last year, CDB Leasing could also producing assets, amid concerns that the
shortly after, he made clear that in the short enter the fray for acquisitions. yuan is set for further depreciation in the near
term Avolon would be looking to integrate Speaking at a conference in Tianjin in Sep- future. Many also believe that the larger les-
CIT, effectively taking it out of the running for tember, CDB Aviation Lease Finances chief sors may need to buy in experience from
REPORT
SOPHIE SEGAL
NEW YORK
The rise
of ABS
Asset-backed securitisations are showing signs of
momentum after a stronger second half of 2016
L
ast year brought a late urry of aircraft lion, says the investment banker. outlook is generally positive for these aircraft
asset-backed securitisations (ABS), Up until the US presidential election, bond types, said the ratings agency in a 23 Decem-
with a total of $4.15 billion issued prices tightened. Post-election, they widened ber report.
across seven transactions. One funded as rates rose. But while the benchmark went While the collateral consists of 737-700s,
the sale of a 20-aircraft portfolio to new inves- up, spreads remained tight. GECASs Labra- 737-800s and A320s, critics of the deal say
tors, while the other ve renanced a total of dor ABS, which closed a month after Air that the market for these aircraft might fall out
175 aircraft plus one engine. Leases Blackbird and the election, achieved a just as they are coming off lease.
The majority of the transactions came to tighter spread on the A notes and was 50bps
market in the last quarter. Last year really inside of the B notes. FINDING HOMES
was a tale of two years when it comes to asset- ACGs portfolio sale, Merlin Aviation Asset values are widely seen as past their
back securities, says a lawyer who works on Finance (MRLN-2016-1), however, came right peak in this cycle, and with Airbus and Boe-
ABS deals. During the rst half of the year, at the end of the year, with most investors ing scheduled to ramp up production on the
there wasnt much going on and a lot of deals shutting their books for the holidays. Even so, 737 Max and A320neo, respectively, towards
got tabled. the deal closed in the same range as compara- the end of the decade, these aircraft could
Apollo Aviation kicked off the rst ABS ble deals, given that the collateral consisting struggle to nd homes.
bond issuance of the year at the end of March. of Airbus and Boeing narrowbodies was In contrast to MRLN-2016-1, GECAS sold a
First-time issuer AerGen subsequently came over 14 years old on average, with an average young 20-aircraft portfolio to Korean inves-
to market with its $325 million loan securiti- of 2.1 years left on the lease. tors in its deal Labrador Aviation Finance
sation, but momentum was slow to build. While the weighted average life of the Mer- (LAFL-2016-1). The sale was in the works for
The rst half of 2016 was tough for ABS lin aircraft portfolio was similar to that of nearly a year before pricing on 8 December,
issues as spreads widened with growing con- mid- to end-of-life ABS transactions like says a source with knowledge of the matter.
cerns that China was slowing down, says an Castlelake and Apollo, the average lease term The transaction took longer because the
investment banker who worked on more than was less, which Kroll Bond Rating Agency investors are new to aircraft, but also, accord-
one aircraft ABS deal last year. As spreads (KBRA) noted as a risk. ing to reports, two equity investors dropped
widened, issuers were reluctant to bring new The shorter remaining contractual lease out before Meritz Securities stepped in to ll
deals to market. terms may allow the Servicer to re-lease air- the role of equity provider.
Castlelake priced its near-$1 billion loan craft during a period in which the short-term Crafting an ABS issuance is no small task. It
deal in August. Later in the year, it seemed requires complex structuring; agreement must
like there was always at least one ABS deal be reached with each lessee in the portfolio,
being shopped around to investors.
As spreads settled in the second half of
2.5% which can leave the issuers exposed to airlines
renegotiating of lease terms; and a lot of time is
the year, ve issuers came to market, includ- Record-low ABS market spent with investors doing credit analyses.
ing marquee names like Air Lease, GECAS coupon achieved by Bucking the trend, however, was Air Lease,
and Aviation Capital Group, all of whom Blackbird in November which as a rst-time issuer structured, marketed
issued 144A bonds totalling over $2 bil- and priced BBIRD-2016-1 in about six weeks.
The 2016 deal looks similar to 2015 deal; the US election beneted from lower, more
thats by design, said Matt Little, managing stable interest rates and were able to achieve
New aircraft such as the 737 Max are director and head of business development at lower coupons by comparison. Yield will
likely to limit the value of older types Castlelake, in August. carry more weight when it comes to trading
Deutsche Bank, which was lead-left on the this paper. But when it comes to comparing
Despite the short time to execute, the com- deal, tells FlightGlobal: We have observed an deals it is important to consider the context
pany spent several months even years ana- investor preference for uniformity of struc- of the interest rate environment in which
lysing this market, trying to assess how to tural provisions. This has created an environ- they were issued. And, last year, as rates
structure a deal that would appeal to the wid- ment in which investor demand and execu- became more volatile after the election, cou-
est range of investors. tion levels are correlated to the willingness of pons stayed pretty static while spreads con-
Blackbird, an investment vehicle Air Lease issuers to adhere to market-standard terms. tinued to tighten.
co-owns with US asset manager Napier Park, Air Leases timing with the Blackbird deal
was a benchmark deal when it priced on 4 LESS TIME was impeccable, pricing the Friday before
November, setting the record for the lowest A positive externality of a high prevalence of Donald Trumps surprise election victory.
coupon in the post-nancial crisis aircraft conforming structures has been a reduction in By the time GECAS came to market one
ABS market at 2.5%. It was also the rst air- the length of time which is required for inves- month later, US treasuries had risen over
craft ABS to include a AA tranche. tors active in the aircraft ABS space to com- 60bps. But despite the volatile rate environ-
Probably the closest prior comparison was plete credit analysis. ment, GECAS still priced LAFL-2016-1 inside
BOC Aviations $808 million, 24-aircraft secu- Investors who play in the older end of the of the Blackbird deal.
ritisation in October 2015. The portfolio had market are typically well-informed asset play- For the older equipment deals, spreads
an average aircraft age of 4.6 years and an ers, particularly when it comes to older col- continued to tighten across the A tranches as
average of 5.7 years remaining lease term. lateral often destined for part-out if not re- well. The only exception was MRLN-2016-1,
BOC Aviations deal priced wider than BBIRD leased or sold. which was also the last deal of the year, pric-
2016-1, with the $747 million A notes pricing Unlike the AA investors in the BBIRD-2016-1 ing on 21 December after the US Federal
at 4.75% and the $60 million B notes coming deal who need only consider the credit proles Reserve announced plans to raise rates.
in at 5.75%. of the lessees because they are not exposed to Importantly, MRLN-2016-1s A notes
Blackbirds AA notes introduced short- residual values those who purchase ABS priced in the same range as those of AerGens
dated seniority, while the transaction was paper secured by older aircraft usually have a ABS HAIL-2016-1, which was also a rst-time
structured to provide more debt protections deeper understanding of the risks involved with issuer. The B and C tranches closed mostly
in order to attract more investors. Unlike the owning more mature collateral. tighter than other comparable deals.
four transactions that came before it in 2016, For instance, as KBRA notes in its New Issu- In 2017, a few deals are already waiting in
BBIRD-2016-1 was the rst to showcase a ance Report for MRLN-2016-1, ABS transac- the wings, including a securitisation for turbo-
young eet, with an average age of 4.9 years. tions typically have liquidity facilities that cover prop lessor Elix Aviation. Can the market can
This bifurcation between old and new nine months of interest on the senior notes. retain investor appetite? The ABS-specialist
assets has new investors looking at the space, MRLN-2016-1 has a liquidity facility provided lawyer offers this take: 2016 was a good year
especially those who are not comfortable tak- by MUFG Securities covering 18 months of overall, and the second half is hopefully mean-
ing residual value risk. interest due on the Class A Notes and $25 mil- ingful for whats to come this year.
Crowded market
limits premiums
Doubts surround the sustainability of falling airline insurance costs as hull and liability claims
continue to outstrip policy income, but abundant availability suggests carriers have little to
worry about in the short term, explains FlightGlobals director of air safety, Paul Hayes
T
he average hull and legal liability Airline hull and liability claims: cost and premium
insurance rate for a typical airline is $m
lower now than in any year since 6,000
1990. Carriers have come to expect a
reduction in annual renewal costs, but there 5,000
are questions around how long this situation
4,000
can be maintained.
Based on preliminary data, FlightGlobal 3,000
estimates that airline insurance rates fell by
another 10-15% during 2016, with the global 2,000
all-risk net written premium in the year com-
1,000
ing in at about $1.2 billion.
Written net premiums in 1998 and 1999 0
1990 1993 1996 1999 2002 2005 2008 2011 2014
were lower, at $960 and $980 million respec-
Notes: The amount of premium written in an "underwriting year" and the cost of claims incurred
tively, but airline exposure in the form of the 19911992 19941995 19971998 20002001 20032004 20062007 20092010 20122013 20152016
in a calendar year are not directly comparable. Excludes hull war and excess TP war
value of the eet at risk and the number of Source: FlightGlobal
passengers carried was less than half what it Claims cost Written premium
is today, suggesting that rates in 2016 were
40% lower than in those earlier years.
The last time airline insurance rates were FlightGlobal currently estimates that the cost Apart from a brief levelling off in 2014, air-
this low was probably in 1990 when the of incurred airline all-risk hull and legal lia- line premiums have fallen each year since
much smaller eet generated net written pre- bility losses for 2016 was about $1.4 billion, 2010. In 2010, net written premiums were an
miums of only about $350 million. some $200 million more than the written pre- estimated $2.1 billion, 40% more than those
With insurance rates and the resulting pre- mium for the year and $100m more than the in 2016. During the years since, airline expo-
mium continuing to fall, 2016 again saw the earned premium (mostly written in 2015). sure has increased by some 40-50%, so rates
cost of incurred claims exceeding premium. The estimated cost of the incurred losses in are down by about two thirds.
2016 was about $300 million less than in 2015 As well as reduced rates, the market also
and $500 million less than in 2014. However, seems to be providing additional cover for free.
As well as reduced rates, with the cost of airline claims easily exceeding Incorporating an additional cost of working in
the insurance markets income from this class respect of a total loss amount now seems more
the market seems to be of business during the year, 2016 became the or less standard on major airline programmes.
providing additional fourth year running where claims have It is also understood that some insurers are
cover for free exceeded premiums. The total claims decit in throwing in, at no apparent extra cost, higher
recent years is now approaching $1 billion. liability limits than their probable maximum
loss calculations might suggest are needed. It Insurance is a true market in the sense that insurers are still writing for their top line [for
could be argued that giving away a higher liabil- there is no airline tariff and the rates being market share] and have yet to properly address
ity limit than is needed costs nothing, but it is achieved reect the tremendous competition the bottom line, one market source notes.
never a good idea to give the plaintives bar a to write this class of business. It is estimated Premiums cannot continue to fall inde-
target to aim for, says one market source. that about 60 insurers are in the market glob- nitely and must bottom out or even reverse at
However, despite the continued erosion of ally to write airline business. For a large airline some point. Airline insurance may represent
written premiums in 2016, some in the market programme with high limits, say $2 billion, only a vanishingly small percentage of the
claim to have seen small signs of the market perhaps 30 insurers 50% of the market will global casualty insurance market, but a $1
beginning to harden as the year drew to a close. be needed to provide the required security. billion-plus decit is still a billion dollars.
A couple of big programmes large airlines However, with insurance rates and premi-
with high limits only just squeaked through HIGH LIMITS ums having fallen for a number of years, air-
at the end of the year, one source says, while For medium-sized airlines with lower limits, line insurance buyers may have come to
another points to a widening spread in terms individual insurers are able to take larger lines (a expect a reduction on renewal. It will be a
on some covers with some in the following bigger percentage of the risk), so the cover might shock for them when the market nally turns
market getting a higher rate than the leader. be completed using only 15 insurers. Simplisti- but, unless there is a change in external condi-
Similar comments were made at the begin- cally, there is something like 200% capacity in tions or some other shock causing a with-
ning of 2016 but, as it would appear, came to the market for large airline programmes, rising drawal of capacity from aviation as an insur-
nothing. Nevertheless, some programmes, with to perhaps 300% for smaller ones. ance class, the status quo is likely to continue
a poor claims experience during 2016, main- The market does need more than 100% in the short term.
tained their core premium level unchanged capacity to function perhaps 150% but cur-
on renewal but got hit on top by a signicant rent capacity, which, depending on the FlightGlobals Airline Safety and Losses
multi-year loss additional premium, payable assumptions made, is the highest for very many Annual Review 2016 can be viewed here:
only to those insurers who bore the losses. years, is driving down the market. Too many ightglobal.com/safetyreport
Airline "all-risk" hull and liability claims costs and written premium 20072016 ($m)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*
Written premium 1,575 1,660 1,960 2,100 2,050 1,825 1,600 1,650 1,300 1,200
Hull cost 861 826 858 1,262 729 457 765 511 665 632
Liability cost 665 321 930 361 88 102 297 824 425 125
Minor liability 450 450 475 500 525 550 575 600 625 650
Total cost 1,976 1,597 2,263 2,123 1,342 1,109 1,637 1,935 1,715 1,407
Premium/cost difference -401 +63 -303 -23 +708 +716 -37 -285 -415 -207
Source: FlightGlobal Note: *Estimate
Dinendra Haria/REX/Shutterstock
from 2020 onwards. Therefore, all instruments and can be used by
additional emissions post-2020 companies for compliance in an
have to be offset by acquiring and emissions trading system (ETS)
handing in one offset for each or in the voluntary market.
tonne of CO2 emitted. The ETS around the world have
It will be implemented in three historically led to the largest
phases. In the pilot phase (2021- Fuel efficiency has improved, but at a slower pace since 2011 demand for offsets. Each ETS,
2023) and the rst phase (2024- however, has different rules on the
2026), participation is voluntary, sions within Europe (an addi- The current signatory countries kind and amount of offsets that
and 66 countries have signed up. tional 2%), and it is possible other are primarily the more developed companies are allowed to use.
In the second phase (2027-2035), countries may implement their economies, although China, Indo- The European ETS, launched
participation is obligatory for own schemes. The USA is the nesia, Turkey and the United in 2005 by the European Commis-
states with a signicant share of largest domestic aviation market Arab Emirates have all agreed to sion, covering power generators
revenue tonne-km (RTKs). (14% of global available seat-km take part. Around one-third of and energy-intensive industries,
In all phases, only ights (ASKs)), but it is unlikely to have a todays CORSIA-included ASKs
between two included states will scheme. are in faster-growing developing
be covered. The compliance obli- markets, and two-thirds are in FlightGlobal
gation lies with the aviation oper- LIMITED SCOPE developed economies. expects growth in
ators, which means they are CORSIA also only covers interna- A similar pattern occurs in
responsible for acquiring offsets tional ights that both depart and domestic markets. On ights
fuel use of around
to account for the increase in arrive in participating countries. If from a CORSIA country to a non- 4% per year
emissions in the aviation sector. CORSIA was introduced today, it CORSIA country, most capacity
But domestic capacity repre- would directly cover 3.46 billion will involve emerging markets.
sents 35% of the global total and ASKs. This is just 39% of global The data suggests that by 2020, was historically the largest source
CORSIA does not address this. It passenger capacity (see bottom the reference year for CO2 emis- of demand for offsets, and compa-
is assumed that the European ETS table), and, by approximation, the sions, the proportion covered by nies could cover up to 11% of
scheme will cover domestic emis- same proportion of CO2 emissions. CORSIA will perhaps be margin- their compliance obligation with
them. They came from the Clean
Industry fuel and CO2 emissions projection post-2020 Development Mechanism (CDM)
2020 2021 2022 2023 2024 2025 2026 and Joint Implementation (JI),
Jet fuel consumption (billion litres) 381 396 412 428 445 463 482 international project-based mech-
Industry CO2 emissions (million tonnes) 956 994 1,034 1,075 1,118 1,163 1,209 anisms governed by the United
CORSIA CO2 @ 39% coverage 373 388 403 419 436 454 472 Nations Framework Convention
Cumulative offsets required (million) - 15 45 92 155 236 335 on Climate Change (UNFCCC).
Source: ICIS and Flight Ascend Consultancy analysis CDM and JI projects are usually
based in developing countries.
2016 scheduled passenger capacity In total, European Union
Flights between/within Flights between CORSIA and Flights between/within companies used 1.47 billion off-
Country Total capacity
CORSIA signatory countries non-CORSIA countries non-CORSIA countries sets from 2008 through 2016.
International ASKs (000bn) 3.46 (39%) 1.92 0.35 5.73 However, for 2013-2020 the EU
Domestic ASKs (000bn) 2.58 N/A 0.51 3.09 changed its rules, allowing only
Total ASKs (000bn) 6.04 1.92 0.86 8.82 small amounts of offsets per
Source: FlightGlobal schedules data
year and putting rigid rules on
Canada
consumed 310 billion litres of jet Passenger capacity increase total costs by 2.8%. If fuel Richard Evans is senior consultant at
Flight Ascend Consultancy, and
fuel in 2015. Fuel efciency covered if CORSIA prices increased to levels seen in Judith Schrter is business director,
(measured in litres/seat kilometre) was enforced today 2014, offsets would increase total carbon market analytics, at energy
has improved 1.85% per annum costs by a lower amount about market information provider ICIS
Garcia/BP/REX/Shutterstock
for contemplation of the coming Against this background it is
12 months. reasonable to expect a decline
While it will be some time in yields of some 4% in real
before we know the actual out- terms but with no amelioration
come for 2016, it is reasonable to from lower fuel prices.
assume that at an industry level As has been argued in previous Emirates has deferred 12 A380s amid an unclear industry outlook
it may not be materially different columns, the continuing fall in
from that of 2015. However, fares is a structural change. The The risk to prots posed by the More are likely across the board
there will be a wide variation in notion that fares will increase as strength of the US dollar to air- as 2017 progresses. Attention
experience. Indeed, in some fuel prices rise is likely to be mis- lines where the dollar is not their within airlines is already on
regions that performed well in placed; there has been no evi- home currency has been high- 2018 and beyond, when the
2015, the results to date show a dence of this happening as fuel lighted many times. While the environment is likely to be more
different outcome in 2016, prices have risen from their early general expectation is that the dol- demanding still.
reecting a marked turnaround 2016 low point of $0.93/USgal to lar will strengthen further, it is That said, capacity growth is
in nancial performance. The $1.48. In fact, average fares in important also to look at the exter- likely to moderate when aircraft
Gulf would appear to provide a 2016 appear to have fallen by nal value of other currencies, come off lease and out of the mar-
case in point. some 10-11%. which will be determined by local ket. This could have a meaning-
A number of clear trends in economic conditions, including ful impact on residual values and
2016 are likely to be evident in the path of interest rates. A coun- on lessors and other nanciers
2017 too. The three that stand out
are excessive capacity growth; ris-
4% trys currency is, after all, a sign of
its economic health.
realising the value of the equity
they have in an aircraft, but could
ing fuel prices, which remove a Expected decline in In this respect, the euro create an opportunity for others.
method to absorb the impact of yields over 2017 in appears fundamentally weak, Furthermore, at the basic level
lower yields resulting from excess real terms and with a series of elections in the strength of the dollar makes
capacity; and the continuing key member states including new aircraft more expensive. It is
strength of the dollar. On the lat- France, Germany and the Nether- then tough to make the economics
ter point, although some believe The number of special fare lands due to take place in 2017 work against a background of fall-
the dollar may recede from recent offers and advertising campaigns against the background of dissat- ing yields in particular.
peaks, the greater likelihood is seen from airlines today provides isfaction on the part of voters, it is If anything, recent events, and
that as interest rates rise in the clear, albeit anecdotal, evidence likely to weaken further over the the near- and medium-term out-
USA, so will its currency. of the pricing environment. course of the year. look, only act to reinforce the view
There is another factor that has Forecasting the near-term that the only constant is change.
come to the fore since the middle development of the oil price is LOWER POUND While the elements that are
of last year, and that is uncer- always a challenge. It was, how- More parochially, the value of changing are broadly the same
tainty. Even the most cursory ever, interesting to see one of the the British pound will be deter- ones as in the past, they are three
glance at the so-called uncer- charts in the Bank of Englands mined by the newsow and the of the more important variables
tainty indices provides clear evi- latest quarterly report, which interpretation of that newsow that determine performance at the
dence of how unpredictable the highlighted how oil demand was around the Brexit negotiations. level of an individual airline.
world has become, whether from now ahead of supply. It will take Any comments regarding a so- Still, the outlook for 2017 is
an economic or geopolitical point some time to see whether this is a called hard Brexit will push likely to be on the optimistic side
of view. Uncertainty affects con- resetting of the balance or just a its value lower. where downside risk remains. As
sumer and business sentiment, temporary seasonal factor. Turning to the supply side, ever, the ability to manage in
where the default outcome is to An impact on margins from there have already been some changing circumstances will be
stop spending. higher fuel is inevitable, even if announcements regarding air- an important attribute for all
Looking at current forecasts for hedging may act to delay the craft deferrals, most recently leadership teams. The coming
GDP into 2017, passenger yield full impact. with Emirates and the A380. year is unlikely to be dull.
5
Latin American airlines (ALTA members): November
0 Passenger trafc RPK Capacity Load factors Freight FTK
Region million change change per cent change million change
36.9%
/US gal 1 month 1 year /US gal 1 month 1 year
Jan 92.1 -17.4% -40.2% Sep 132.6 2.2% -6.7%
Feb 98.6 7.1% -44.8% Oct 146.4 10.4% 3.8%
March 111.6 13.2% -33.4% Nov 136.3 -6.9% 0.9%
April 117.5 5.3% -31.9% Dec 152.6 12.0% 36.9%
May 131.8 12.2% -29.2% Av.16 126.5 -18.7%
DECEMBER 2016 FUEL PRICE INCREASE June 139.5 5.8% -21.8%
The year-on-year rise in jet kerosene prices Source: ICIS. Note: Prices are world
July 129.4 -7.2% -18.5% average=median of Europe/Singapore cargo and
hints at a rm trend reversal going into 2017 US pipeline spot prices in US/gallon.
Aug 129.7 0.2% -7.7%
Capacity snapshot
January capacity:
A monthly breakdown of airline capacity across the different
regions using data from FlightGlobals schedule database, 165.8bn ASKs/wk 7.9%
vs January 2016
illustrating the fastest-growing regional markets
Asia
lines from Hangzhou via carriers Tway Air and
Qingdao and Sichuan Jin Air lead this
-Paci
Airlines from Chengdu growth, accounting
c
via Zhengzhou. for 41.6% of those
extra seats.
Middle E
ast
9.5% YoY
Am
rth
rth
rth
rth
No
No
No
No
No
Asia
Asia
Asia
Asia
Asia
-Paci
-Paci
-Paci
-Paci
-Paci
c
c
Middle E
Middle E
Middle E
Middle E
Middle E
ast
ast
ast
ast
ast
La
La
La
La
La
tin
tin
tin
tin
tin
Am
Am
Am
Am
Am
er
er
er
er
er
ca ca ca ca ca
i
39.5bn ASKs/wk 35.7bn ASKs/wk 13.1bn ASKs/wk 12.3bn ASKs/wk 5.4bn ASKs/wk
5.5% YoY 9.1% YoY 3.3% YoY 10.3% YoY 6.8% YoY
Notes: Data based on one week of schedules data, January 2017 against January 2016. Figures reect airlines operating nonstop unrestricted scheduled passenger services
Amadeus
when airlines tted into nology to improve personalisation and
two neat categories differentiation. In this context, a best-in-
based on business class IT environment is critical to ensur-
model. On one hand, you had tradi- ing products are positioned correctly at
tional, full service network carriers, the right price, in the right channel and
usually displaying their national ag. at the right cost per acquisition.
On the other, you had the industry dis-
ruptors in the form of the low-cost car- INTERLINE GROWTH
rier, with stripped-back offerings and Consider how LCCs are seeking to use
simplied operational models. technology to underpin long-haul busi-
Today, its not nearly so simple. As ness models. Today, a traditional airline
airlines explored ways to secure growth is able to offer a connecting trip that
and expand their customer base both Industry will evolve may conclude in a long-haul ight,
domestically and internationally, they to categorise airline often thanks to interline partnerships.
embarked on a journey of continuous LCCs have traditionally eschewed for-
evolution of business models, of tech-
types based on three mal interline agreements. However,
nology, and, of course, of their product, parameters there has been a steady increase in LCC
service and airport route offering. ROBERT SINCLAIR-BARNES interline and codeshare ights in Ama-
Now the lines have blurred and we Strategic marketing director, deus, and they now account for 19% of
have seen the emergence of the hybrid Airline IT, Amadeus LCC volumes booked in Amadeus.
carrier, which blends elements that Looking to the future, we could see
have traditionally characterised full- and the inherent logic at play is that the potential emergence of a virtual
service or low-cost models. This blend every airline needs to be able to com- interline, where the integration
is unique to each airline and is shaped pete on price for an economy fare, espe- between a LCCs schedule and those of
by its objectives and ambitions. cially on short-haul routes where travel- other airlines occurs at the OTA or
lers place a higher priority on price travel agency level keeping things
EVOLVING TYPES point versus comfort and convenience. simple for the airline and increasing
In the years ahead, full service and The trick is to layer additional value on choice for the traveller.
low cost will no longer be the pri- top of this economy fare for those trav- All carriers are facing erce competi-
mary monikers we use to describe air- ellers that are willing to pay for it and tion as digital touchpoints and IT opera-
line business models. Instead, the to then market and merchandise that tions offer new ways to engage travellers
industry will evolve to categorise airline additional value effectively. at each stage of their journey. By achiev-
types based on three parameters: prod- A recent example of innovation in ing engagement, a highly trusted airline
uct and merchandising options such as this area is British Airways decision to with a strong brand can prove the added
in-ight meals, cabin class, lounges and discontinue complimentary in-ight value of each service to a traveller.
ancillary upgrades; the level of service meals on selected short-haul routes, In an era of unprecedented price
and comfort they are able to offer travel- and instead offer the choice to purchase transparency and competition, the air-
lers through digital and staff touch Marks & Spencer food. Through such a lines that thrive will be those that pro-
points; and, nally, convenience partnership, an airline can improve its vide the best service to the customer.
through the timing of the ight, the loca- service while also increasing revenues. They will leverage complementary alli-
tion of the airport, connections and dis- Similarly, SASs subscription model ance or group network partnerships and
ruption management recovery planning. Travel Pass is a great example of IT expertise to innovate and help dene
The industry has changed drastically using a new approach to support a strat- their brand value and
and thats largely due to the unrivalled egy of delivering value to customers in place in the market,
The home of Flight access to information and transparency the long term. SAS travellers are able to closely matched to trav-
Airline Business on
travellers experience when shopping. y on subscription with a 6% discount eller expectations.
the web is on the
Airlines channel of
Metasearch engines and new online on ights, with one version of the deal
ightglobal.com: search capabilities empower customers operating on a pay-as-you-go basis. Robert Sinclair-Barnes is strategic market-
ightglobal.com/ like never before. Consequently, com- As hybrid business models evolve ing director, Airline IT, at Amadeus. For
airlines petition in the airline industry is erce further, airlines of every type will con- more information, visit amadeus.com
Cycle paths
Although orders are slowing fast, output across the Airbus and Boeing production lines is
set to maintain its upward trajectory. But could increasing global uncertainty start to take
its toll on airlines seemingly insatiable appetite for aircraft?
A nother year, another airliner deliv- coup and several terrorist attacks.
Tom Campbell
ery record. 2016 marked the sixth Unsurprisingly, the global airliner
consecutive rise in mainline jet pro- order outlook is somewhat pessimis-
duction and the 14th time in a row Air- tic. But even though Leahy concedes
bus had increased its annual output. that Airbuss book-to-bill ratio looks
And there is no end in sight to this set to drop below one in 2017 for the
production growth as the two adver- rst time in almost a decade, he says
saries push each other onwards and that doesnt mean we cant increase
upwards in the output stakes, with the our production. And we will this
industry set to break clean through the year and the year after that, and the
1,500 deliveries threshold in 2017. year after that.
Orders tell a different story, tum- OEMs will sell to The biggest problem, says Leahy, is
bling from the eye-watering record tal- anyone with a pulse, that in single-aisle at least, I dont
lies of 2,800-plus net sales in 2013 and have anything to sell until about
2014, to just shy of 1,400 last year.
as they dont know 2021. So hes got to build his backlog.
Airbuss super salesman John Leahy wholl make it... but Aengus Kelly, who runs the worlds
and others wax lyrical about irrefuta- know someone will largest leasing company, AerCap, has
ble evidence of a disconnect between some sympathy for the manufacturers,
AENGUS KELLY
the order and delivery cycles. But Chief executive, AerCap who he says will sell to anyone with a
could 2017 be the year when it all pulse, because they dont know whos
starts to unravel and the consequences going to make it... but they know some-
of industry over-ordering play out? Amid speculation around the rea- one will.
Elsewhere in this issue, Flight sons behind Emirates Airbus A380 He believes that there has been
Ascend Consultancy chief Rob Morris delivery deferral, its Abu Dhabi over-ordering in certain regions, and
says that while the demand cycle neighbour is also running into turbu- expects we will denitely see defer-
remains strong, he thinks it has proba- lence. Having sought to fast-track its rals, noting that Emirates and Etihad
bly peaked. If it has, and the manufac- expansion through more than ve have both recently pushed back wide-
turers remain committed to their ramp- years of empire-building, Etihads bodies. However, Kelly does not
ups, then something else will have to James Hogan faces a massive chal- believe this will affect deliveries. And
give. The likelihood is that we will see lenge to make his European invest- nor does Leahy.
more metal particularly younger ment strategy deliver on its protabil- Deferrals dont bother me that much
machinery heading for the desert. ity promises. because we are right now overbooked
There are certainly more questions And another airline powerhouse and if I dont get some deferrals some-
than answers at the moment. Capacity Turkish Airlines is facing some seri- ones going to be very unhappy. Cancel-
is expected to rise ahead of trafc ous challenges after a decade creating a lations I obviously dont like because
growth and IATA is forecasting a global network. The airline is under thats somebody leaving the pro-
decline in global prots after several new management after the departure gramme, but they rarely happen.
years of unprecedented returns. The of its longstanding architect of growth, So you heard it here: Leahys not
stimulus of cheap fuel looks set to end Temel Kotil, as Turkey reels from a concerned about 2017. Weve got
amid questions over sustained air-travel series of shocks including a failed nothing to worry about. Or have we?
demand as the world is gripped by geo-
political changes and the threat of more
terrorist atrocities. APPRAISER OF THE YEAR
And even for the seemingly gravity- Flight Ascend Consultancy,
defying Middle East carriers, the out- FlightGlobals consultancy arm,
look is less rosy. Emirates announced a was again crowned appraiser of The home of Flight
Airline Business on
surprise 75% fall in rst-half prot back the year at the Aviation 100
the web is on the
in November, blaming increased com- Awards in mid-January. More Airlines channel of
petition, as well as the sustained eco- than 10,000 industry peers vote ightglobal.com:
nomic and political uncertainty... with for the awards. ightglobal.com/
no immediate resolution in sight. ightglobal.com/consultancy airlines
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