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STRATEGY FOR AIRLINE BOARDROOMS WORLDWIDE

Hot seats Mood change Metal fatigue


Identifying the Apprehensive Bumper order
airline chiefs nance market backlogs cast
with the most aims to keep in new light as
challenging momentum in uncertainties
jobs in 2017 post-peak era cloud outlook

January-February 2017 ightglobal.com/airlines

INTERVIEW

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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

January-February 2017 ightglobal.com/airlines


BRIEFING
INTERNATIONAL
9 Airbus shrugs off decline in orders
AMERICAS
10 Alaska faces new battle in Seattle
Southwest moves will ease Kelly succession
INTERVIEW
EUROPE SEATTLE BATTLE
PEKKA 12 Air Malta goes back to square one Page 10
VAURAMO
Finding a MIDDLE EAST
focus for
Finnair
13 Trump may hold sway on Iran eet
ASIA
15 The low-cost long-haul conundrum

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

BEST INTERNATIONAL PUBLICATION FEEDBACK


Aerospace Media Awards 2016-17
53 Clarity amid blurred lines The evolution of airline
Flight Airline Business is published monthly by business models
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ISSN 0268-7615 (Print) ISSN 2059-3449 (Online).
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ightglobal.com/airlines January-February 2017 | Flight Airline Business | 5


INTERACTIVE

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

6 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


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BRIEFING INTERNATIONAL

MAX KINGSLEY-JONES LONDON

Airbus shrugs off decline in orders


Sluggish 2016 and threat of sustained slump not enough to deter manufacturers drive to ratchet up production

he big two aircraft manufac-


T turers continue to set annual
airliner production records, de-
People talk about
livering 1,436 aircraft in 2016. the end of the cycle,
But after the industry witnessed but it depends
a near 25% decline in combined what cycle
orders last year, Airbuss chief
salesman, John Leahy, says he
has no plans to rein back output,
robustly dismissing any link be- umes remain stable, there must
tween sales and delivery cycles. be some other supply-side cycle.
Airbus and Boeing raised ship- Its probably economic life, as we
ments for a sixth successive year. have seen through this cycle.
The record 1,436 deliveries in Boeing has led in the delivery
2016 was a slight rise from 1,397 stakes now for the past ve years,
deliveries in 2015, when Boeing and looks set to maintain this for at
set a record of 762 aircraft. least a couple more. Airbus com-
Although Seattle saw a slight mercial aircraft president Fabrice

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

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 9


BRIEFING AMERICAS

JON HEMMERDINGER BOSTON

Alaskas potential battle in Seattle


Codeshare concessions required after carriers Virgin America merger mean American could turn from friend to foe

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

Port Authority of Seattle


codeshare changes resulting from capacity in each quarter of 2016,
Alaska Air Groups recent acquisi- Wolfes report says.
tion of Virgin America. Even under such competitive
The revision of the codeshare pressure, Alaska has in recent
between [American] and [Alaska] Alaskas Seattle home is already a focus for Delta expansion quarters returned some of the
as part of the DoJs merger industrys best nancial results.
approval could lead to a response competes with American. How- tions whether the changes have Some analysts expect Alaskas
from [American] in [Alaskas] ever, Seattle-based Alaska, which made American a friend or foe, strong performance to continue.
markets, New York-based Wolfe closed its purchase of Virgin and it suggests American could But part of that prediction has
Researchs report says. America on 14 December, down- respond by expanding further into been based on data showing the
The US Department of Justice played the concessions. Alaskas markets. carriers competitive pressures are
(DoJ) approved the Alaska-Virgin Alaska said only 45 routes were American has not yet made nally easing.
America merger on 6 December, affected. Those routes generate such a move. But any encroach- Wolfes report came just before
but required that the merged about $60 million in revenue, but ment would worsen Alaskas so- Delta announced yet another
company end codeshares with Alaska said it would recapture called competitive capacity, an expansion in Seattle. The carrier
American on dozens of routes. $40 million to $45 million by sell- industry term meaning the capac- intends to begin seven new non-
The DoJ feared Alaska would ing seats to its own passengers. ity that an airline faces from com- stop routes this year, and to add
use its codeshare with American Alaska will continue to codeshare peting carriers on its routes. capacity on existing Seattle routes.
to compete less aggressively, par- with American on other routes. Alaskas competitive position Alaska serves all the routes on
ticularly on routes where Virgin But in its report, Wolfe ques- in recent years has largely been which Delta will expand.

Aerolineas chief quits Southwest moves will


A ease Kelly succession
erolineas Argentinas presi-
dent and chief executive
Isela Costantini resigned from
the loss-making state-owned air- outhwest Airlines move to wests solid nancial perfor-
line in December, less than a
year after she was appointed to
S beef up its senior leadership
ranks will allow it to plan for a
mance, and the projects it has
under way that will dene its
the job and tasked with turning successor to chief executive strategy in the years to come.
around the carrier. Gary Kelly, the carrier says. Kelly remains chief executive
Costantinis departure, which The promotions of two execu- but immediately relinquished his
was said to be for personal rea- tives to the top tier of the manage- role as president to Tom Nealon,
sons, came after a meeting with ment team in January will also previously executive vice-presi-
Argentinas transport minister help it to cope better with IT and dent strategy and innovation.
BillyPix

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.

10 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


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BRIEFING EUROPE

GRAHAM DUNN LONDON

Air Malta goes back to square one


Fruitless conclusion to drawn-out talks with Alitalia returns the carrier to the European pack hunting fresh investors

ews on 13 January that Ali- government insisted that talks


N talia had ended talks over a
potential 49% investment in
remained ongoing, a deal had
seemed increasingly unlikely,
Air Malta came as little sur- given not only the delays but the
prise, but served to conrm an- challenges at Alitalia. The latter
other European operator in the is seeking major cost savings of
market forinvestors. its own to secure further backing.
In recent years, several Euro- Conrming the end of their
pean airlines including Alitalia talks, Alitalia and Air Malta said
itself have successfully secured the current climate in the indus-
airline investors or partners. But try was not ideal for a such a
many, including one or two that transaction. But the carriers will

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.

Discussions but few deals: European airlines court investment


Air Malta joins a series of European to conclude discussions with Me- Polish carrier LOT has been on Croatia Airlines and began 2016
carriers that could be on the look- ridiana by the end of January. the hunt for potential investors carrying out preparations for a
out for fresh investment or a strate- Another carrier seeking a strate- since embarking on a restructur- sale, but the process faltered.
gic partner. gic partner is Air Baltic, in which ing. While a provisional strategic UK leisure carrier Monarch Air-
Like Air Malta, Italys second- the Latvian state retains an 80% partnership pact struck with Turk- lines may be another carrier in play
largest carrier Meridiana spent stake. The airline has enlisted the ish Airlines in 2015 was signposted during 2017. It identied interest
much of last year working on a help of nancial advisory rm La- to lead to a major expansion of from potential buyers early last
deal to seal new investment. A zard in its search for a new investor commercial ties, no subsequent year but is also looking at possible
conditional agreement was struck and chief executive, Martin Gauss, agreements have been an- external acquisitions of its own.
in the summer for Qatar Airways said in December that at least part nounced. In mid-2016 LOT was Meanwhile, talks over a possi-
to take a 49% stake, and in No- of the governments majority also linked to Chinese investors. ble deal for Irish carrier CityJet to
vember the carriers chief execu- shareholding would be sold to a Croatia had hoped to push acquire UK operator Stobart Air
tive, Akbar Al Baker, said it hoped strategic partner in 2017. ahead with the privatisation of broke down late last year.

Download the 2016 Network Planning report


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>V>\
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12 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


BRIEFING MIDDLE EAST

STEPHEN TRIMBLE WASHINGTON DC DAVID KAMINSKI-MORROW TOULOUSE

Trump may hold sway on Iran eet


Carrier was planning new beginning with bumper aircraft order, but new US administration could bring it to abrupt end

group of US lawmakers is Today, for civil aviation in Iran,


A threatening to derail the
sale of Airbus and Boeing air-
is a memorable day.
He cited a change in interna-
craft to Iran Air under a new tional perspective which helped
bill proposed in Congress in lay foundations for the deal.
mid-January. Parvaresh said the distance
The bill would require US caused by biased political ad-
president Donald Trump to deter- versity had been narrowed by
mine whether Iran Air or any peacemakers. I can foresee great
other Iranian airline had used success and dignity for both of our
commercial aircraft for illicit companies, he added.
military purposes since 16 Janu- The Airbus and Boeing deals

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.

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ightglobal.com/airlines January-February 2017 | Flight Airline Business | 13


BRIEFING ASIA

MAVIS TOH SINGAPORE

The low-cost long-haul conundrum


There are signs of Asias carriers nding traction with the model. But there are also still sceptics and tales of woe

he low-cost long-haul model Asia, Singapore Airlines Scoot


T has its share of doubters, but
it also has a distinct allure in
subsidiary has the most advanced
eet with 12 Boeing 787s.
Asia, which is drawing airlines Even with these jets, however,
to contemplate offshoots. its network remains largely
When SpiceJet rmed an order regional. Its longest ight is a 9h
for 100 Boeing 737 Max 8s in mid- 25min service to Jeddah.
January, the broader package had Scoot recorded a rst full-year
50 purchase rights that could prot in scal 2015, and was in

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.

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 15


ANALYSIS LEADERSHIP

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

senger trafc growth and historically high pas-


senger load factors continued, as airlines
largely lled the extra capacity. That industry
prots for 2016 are slated to be a record high of
$35.6 billion suggests this capacity was lled
protably, or at the very least, protably
enough given the lower unit costs.
But IATA is projecting a slowing in passen-
ger trafc growth in 2017 from 6% in 2016 to
5.1% this year. In the last couple of years
weve seen growth much faster than youd
expect given whats been a lacklustre perfor-
mance in the global economy, essentially
because have seen a lot of price stimulation

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

16 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


AGF s.r.1./REX/Shutterstock
Winkelmann steps into Air Berlin breach
Drastic change is under way at Air Berlin. Etihads All the while, low-cost rivals EasyJet and Ry-
rst major investment has consistently lost anair are aggressively expanding in Germany,
money apart from one year where the sale of its the Irish carrier even pitching up at Lufthansa for-
frequent-yer programme to Etihad helped it tress Frankfurt.
claw its way into marginal protability and this It all adds up to a challenging assignment for
has led to ever-deeper cost restructuring efforts. Winkelmann and continued pressure for the
The latest was unveiled in the autumn by chief head of his former employer at Lufthansa Group,
executive Stefan Pichler, and is the most dramatic as Carsten Spohr continues his battle to reset the
yet. It signals a major reshaping of the airline, airlines cost base.
dropping its multi-model approach to focus on
core network operations from Berlin and Dus-
seldforf and shrinking the airline.
But the job of implementing the strategy falls
on former Germanwings chief Thomas Winkel-
mann, who is replacing Pichler in February. He
does so against a backdrop of great change in
the German market.
European woes On the leisure side, former Air Berlin activities
and its old share in Austrian leisure carrier Niki are
for Etihads Hogan

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

Abu Dhabi may need convincing if further


calls for support are required, especially as
Etihad has signalled cuts of its own amid a
more challenging market.

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 17


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ANALYSIS LEADERSHIP

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.

Albrecht readies for Saudia challenge


One of the most eye-catching appointments of Albrecht, the former Star Alliance chief who
2016 involved SunExpress chief executive Jaan also ran Austrian Airlines before joining SunEx-
Albrecht, who quit the leisure carrier to take up press in 2015, in January began working under
the role of chief executive at Saudia. director general Saleh Nasser Al-Jasser and
oversee the SV2020 strategic development
programme being undertaken by the carrier.
The SkyTeam airline is modernising its eet,
having reached agreements in the past two
years to acquire 113 Airbus and Boeing jets.
The appointment of a non-Saudi national is
particularly interesting, suggesting moves to-
wards internationalisation. Saudia is among the
biggest operators in the Middle East, but in
contrast with the expansion of its Gulf state ri-
vals, has largely focused on its home market. It
will be interesting to see to what extent Saudia
SunExpress

attempts to develop its presence further aeld.


ightglobal.com/airlines January-February 2017 | Flight Airline Business | 19


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ANALYSIS LEADERSHIP

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].

Strong headwinds for Eksi at Turkish


After the departure of Turkish Airlines long- aging inbound tourism demand.
standing chief executive Temel Kotil, the The carrier has acted rapidly, dropping
countrys former civil aviation head Bilal Eksi destinations, grounding aircraft and deferring
has taken on the task of managing the ag deliveries to pull back capacity, while working
carrier through its current turbulence. to build transfer trafc. While overall passen-
The airline had grown accustomed to dou- ger numbers for the rst 11 months of 2016
ble-digit expansion over the last decade, but were up only 3%, international transfer pas-
faced a sharp reality check during 2016 amid sengers increased 15%.
ever-increasing challenges in its home market. External factors, of which the devastating
terrorist attack at an Istanbul nightclub on
TOURISM DAMAGE New Years Eve served as a horrible reminder,
Terrorist attacks, including a devastating are likely to dictate to what extent Eksi will
blast at its Istanbul Ataturk home airport, need to keep the brake on at Turkish Airlines
Turkish Airlines

were followed by an attempted coup, dam- in the year ahead.

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 21


INTERVIEW PEKKA VAURAMO

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

22 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


PEKKA VAURAMO INTERVIEW

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 23


INTERVIEW PEKKA VAURAMO

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.

24 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


PEKKA VAURAMO INTERVIEW

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

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 25


Entry deadline: Thursday 13 May 2017
SPECIAL REPORT
FINANCE & LEASING

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

With the aviation cycle appearing to have peaked and


uncertainty surrounding important external factors, nance
and leasing players are looking ahead to the next 12 months
with a degree of apprehension. However, they can take heart
from the industrys strong foundations and the momentum All our special reports
are available online at :
created by several positive developments in 2016 ightglobal.com/airlines

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 27


FINANCE & LEASING SNAPSHOT

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

AerCap $30.2bn -4.8%

8,699
GECAS $27.7bn -11.4%

BBAM $14.9bn +14.0%

SMBC Aviation Capital $14.6bn +25.3% Combined Airbus and Boeing leased eet

ICBC Leasing $12.3bn +37.3%

BOC Aviation $11.6bn +12.3%

Air Lease $11.6bn +9.3%

Avolon $11.5bn +44.2%

CIT Aerospace $9.7bn +2.0%

AWAS $6.4bn -8.9%


Boeing

Air Frances first 787, which is leased through AerCap

28 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


A320neo and 737 Max backlogs at top 10 lessors Airbus and Boeing orders placed by lessors in 2016
Lessor Type Number
AerCap A320neo 10
Air Lease A320ceo 1
523 A350 1
737 Max 6
1,311 787 1
Total aircraft Aviation Capital Group A320neo 5
AWAS A320ceo 15

788 BOC Aviation A320ceo 5


China Aircraft Leasing A320ceo 2
GECAS 737 Max 75
Silk Road Leasing 737NG 1
Source: Flight Fleets Analyzer Standard Chartered Aviation Finance 737NG 10
VEB-Leasing JSC 737 Max 2
A320neo 737 Max
Grand total 134

$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

Total value of regional jet leased eet

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 29


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FINANCE & LEASING DATA

DATA COMPILED BY RYAN HAMMACOTT, GARY LIFFORD & ASH WILEMAN FLIGHTGLOBAL DATA RESEARCH TEAM

Top 50 leasing data


Our annual examination (p33-35) of global leasing portfolios highlights big players and those who
are on the up, with the help of Flightglobals Flight Fleets Analyzer and Ascend Values databases

Mainline aircraft: leased eet Turboprops: leased eet


Manufacturer/category Type Value ($m) Number Av. value ($m) Manufacturer Type Value ($m) Number Av. value ($m)
Airbus narrowbody A318 368 33 11.1 ATR ATR 42/72 4,590 388 11.8
A319 7,960 630 12.6 BAE Systems ATP/J31 77 42 1.8
A320 55,729 2,203 25.3 Dash 8/
Bombardier 2,447 306 8.0
Twin Otter
A321 19,174 612 31.3 Embraer EMB-120 13 11 1.2
Airbus narrowbody total 83,231 3,478 23.9 Fokker 50/F.27 67 40 1.7
Airbus widebody A300 163 18 9.1 Saab 340/2000 181 94 1.9
A310 17 6 2.9 Other types 279 106 2.6
A330 28,193 546 51.6 Turboprop grand total 7,653 987 7.8
A340 755 76 9.9 Mainline/regional grand total 278,018 10,891 25.5
A350 4,013 29 138.4 Notes: Other types include Aircraft Industries (Let) 410, Antonov An-140, AVIC XAC MA60, Fairchild Dornier
228/Metro, Harbin Y-12, Hawker Beechcraft 1900 and Viking Air DHC-6 Twin Otter
A380 7,670 47 163.2
Airbus widebody total 40,811 722 56.5
Major narrowbody lessors by eet value
Airbus total 124,042 4,200 29.5
Rank Company Value ($m) Number Change
Boeing narrowbody DC-8 1 1 1.0
1 GECAS 16,304 894 -114
DC-9 0.25 2 0.1
2 AerCap 16,238 873 -74
MD-80 64 99 0.6
3 SMBC Aviation Capital 11,496 418 +36
717 875 105 8.3
4 BOC Aviation 7,638 233 +19
727 2.70 6 0.5 5 Avolon 7,380 232 +99
737 CFMI 1,138 382 3.0 6 ICBC Leasing 7,380 222 +64
737 JT8D 0.4 3 0.1 7 Air Lease 6,294 206 +23
737NG 71,886 2,740 26.2 8 BBAM 5,808 241 +15
757 1,500 177 8.5 9 Aviation Capital Group 5,690 258 +3
Boeing narrowbody total 75,467 3,515 21.5 10 CIT Aerospace 5,644 238 +11
Boeing widebody DC-10 0.8 1 0.8
MD-11 63 9 7.0
747 3,676 146 25.2
Major widebody lessors by eet value
Rank Company Value ($m) Number Change
767 2,850 266 10.7
1 AerCap 13,908 287 -18
777 36,815 417 88.3
2 BBAM 9,042 86 +17
787 16,107 145 111.1
3 GECAS 8,783 163 +2
Boeing widebody total 59,512 984 60.5
4 Air Lease 5,006 56 +10
Boeing total 134,979 4,499 30.0
5 ICBC Leasing 4,523 49 +24
Mainline aircraft grand total 259,021 8,699 29.8
6 Avolon 3,901 47 +28
7 BOC Aviation 3,677 45 +7
Regional jets: leased eet 8 CIT Aerospace 3,348 60 +3
9 Doric 3,046 28 +2
Manufacturer Type Value ($m) Number Av. value ($m)
10 SMBC Aviation Capital 3,024 30 +23
Bombardier CRJ100/200 497 300 1.7
CRJ700/900/1000 1,716 142 12.1
Bombardier total 2,213 442 5.0 Major regional jet and turboprop lessors by eet size
Embraer E-170/175 1,080 82 13.2 Rank Company Value ($m) Number Jets TPs Change

E-190/195 6,470 332 19.5 1 GECAS 2,643 384 347 37 -14


2 Nordic Aviation Capital 5,170 363 119 244 +125
ERJ-145 family 596 213 2.8
3 Avmax Aircraft Leasing 362 143 76 67 +25
Embraer total 8,145 627 13.0
4 ECC Leasing 232 77 76 1 +13
BAE systems BAe 146/Avro RJ 72 48 1.5 5 Elix Aviation Capital 537 74 0 74 +23
Fokker Fokker 100 55 24 2.3 6 Falko 386 59 56 3 -6
Sukhoi Superjet 100 695 43 16.2 AVIC International
7= 446 51 20 31 -1
Leasing
Other types 165 21 7.8 Jetstream Aviation
7= 82 51 0 51 +11
Regional jet grand total 11,344 1,205 9.4 Capital
9 CIT Aerospace 708 41 41 0 -1
Notes: Other types include Antonov An-148/158, Comac ARJ21 and Fairchild/Dornier 328Jet
Source: Returns to annual leasing survey and FlightGlobals Flight Fleets Analyzer and Ascend Values 10= ACIA Aero 158 37 4 33 -5
databases. Survey data covers all rms with an active operating lease business and a substantial investment 10= Castlelake 252 37 10 27 -11
in eet, and is not restricted to top 50 aircraft lessors

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 33


FINANCE & LEASING DATA

Top 50 lessors by eet value


Rank Total eet value Average value Managed only
2016 2015 Lessor $m Change Total eet $m Change $m Share
1 (1) AerCap 30,146 -4.6% 1,160 26.0 +3.3% 2,050 6.8%
2 (2) GECAS 27,729 -10.2% 1,441 19.2 -2.4% 2,704 9.8%
3 (3) BBAM 14,885 +16.3% 329 45.2 +4.9% 12,792 85.9%
4 (4) SMBC Aviation Capital 14,589 +34.2% 452 32.3 +17.3% 1,786 12.2%
5 (8) ICBC Leasing 12,278 +59.6% 290 42.3 +12.3% 1,181 9.6%
6 (6) BOC Aviation 11,628 +14.5% 291 40.0 +5.0% 1,034 8.9%
7 (5) Air Lease 11,580 +10.5% 276 42.0 +10.5% 1,263 10.9%
8 (10) Avolon 11,470 +78.7% 287 40.0 -1.6% 754 6.6%
9 (7) CIT Aerospace 9,699 +1.8% 339 28.6 -2.1% 0 0.0%
10 (9) AWAS 6,430 -8.1% 241 26.7 -0.9% 246 3.8%
11 (11) Aviation Capital Group 5,811 -4.5% 265 21.9 -5.2% 509 8.8%
12 (12) Aircastle Advisor 5,735 +14.1% 207 27.7 -9.6% 184 3.2%
13 (13) CDB Leasing 5,679 +14.7% 162 35.1 -5.1% 0 0.0%
14 (20) Nordic Aviation Capital 5,189 +68.8% 374 13.9 +12.4% 1,129 21.7%
15 (14) Macquarie AirFinance 5,152 +5.6% 206 25.0 +0.5% 47 0.9%
16 (15) Jackson Square Aviation 5,026 +17.0% 119 42.2 +8.2% 0 0.0%
17 (17) BoCom Leasing 4,768 +35.1% 120 39.7 +4.7% 0 0.0%
18 (19) ORIX Aviation 4,104 +20.3% 165 24.9 +14.5% 696 17.0%
19 (16) Standard Chartered Aviation Finance 3,908 +7.8% 116 33.7 -7.1% 0 0.0%
20 (21) DAE Capital 3,347 +8.9% 81 41.3 -5.9% 0 0.0%
21 (18) Doric 3,287 -4.1% 41 80.2 -13.5% 2,353 71.6%
22 (32) CCB Financial Leasing 3,110 +99.4% 76 40.9 -10.8% 0 0.0%
23 (37) CMB Financial Leasing 2,845 +132.2% 62 45.9 +12.4% 27 0.9%
24 (28) China Aircraft Leasing 2,834 +25.5% 81 35.0 -0.8% 64 2.3%
25 (39) Altavair 2,749 +142.1% 59 46.6 +47.7% 0 0.0%
26 (30) Novus Aviation 2,570 +28.7% 30 85.7 +2.9% 990 38.5%
27 (22) MCAP/MC Aviation Partners 2,529 -14.2% 79 32.0 -4.4% 1,239 49.0%
28 (58) Goshawk 2,417 +334.8% 72 33.6 +8.7% 0 0.0%
29 (25) Intrepid Aviation Group 2,382 +1.6% 29 82.1 -1.9% 0 0.0%
30 (55) Tokyo Century Corporation 2,313 +290.7% 67 34.5 +74.9% 0 0.0%
31 (27) ALM Aircraft Leasing & Management 2,273 +0.1% 74 30.7 -5.3% 2,241 98.6%
32 (29) Boeing Capital 2,211 -1.0% 220 10.0 +9.3% 27 1.2%
33 (33) Amedeo 2,144 +37.6% 12 178.7 -8.2% 1,446 67.4%
34 (23) FLY Leasing 2,125 -27.7% 69 30.8 +21.5% 0 0.0%
35 (26) VEB-Leasing JSC 2,067 -9.6% 69 30.0 -8.3% 89 4.3%
36 (36) ALAFCO 1,792 +21.6% 59 30.4 +3.1% 0 0.0%
37 (31) Changjiang Leasing 1,485 -6.8% 69 21.5 -5.5% 0 0.0%
38 (44) Apollo Aviation Group 1,455 +47.2% 102 14.3 -4.8% 1,347 92.6%
39 (35) FPG Amentum 1,399 -5.7% 40 35.0 +3.7% 1,161 83.0%
40 (67) International Airnance 1,388 +263.1% 18 77.1 +0.9% 0 0.0%
41 (34) AVIC International Leasing 1,360 -9.0% 79 17.2 -7.9% 0 0.0%
42 (40) VTB-Leasing 1,328 +26.2% 66 20.1 +10.9% 191 14.4%
43 (42) Banc of America Leasing Ireland 1,248 +23.2% 27 46.2 +32.3% 0 0.0%
44 (38) Castlelake 1,246 +4.4% 125 10.0 +4.4% 1,169 93.8%
45 (41) Jackson Square Aviation Ireland 1,238 +17.7% 28 44.2 -3.4% 0 0.0%
46 (47) SPDB Financial Leasing 1,075 +21.1% 24 44.8 -4.1% 0 0.0%
47 (45) Dragon Aviation Leasing 1,005 +2.1% 32 31.4 -4.3% 0 0.0%
48 (48) GTLK State Transport Leasing 910 +5.6% 39 23.3 -16.1% 0 0.0%
49 (43) Comsys Aviation Leasing 871 -12.2% 19 45.9 -7.6% 0 0.0%
50 (57) GOAL 863 +50.5% 47 18.4 +24.9% 145 16.8%
Total 255,669 12.2% 8,735 29.3 +5.7% 38,865 15.2%
Source: Flight Fleets Analyzer and Ascend Values data, January 2017
Denitions: Ranking: The survey is based on the Top 50 companies with a substantial operating lease business ranked by the value of their owned and/or managed eets at 31 December 2016. Change: The change gures are
based on eets/values supplied by FlightGlobals Flight Fleets Analyzer and Ascend Values databases for December 2016 and 2015. Operating lessors: Lessors are dened as those with an active operating lease business
and a substantial investment in eet. Companies that are solely or predominantly nanciers have been excluded. Fleets and values: The survey represents a snapshot of eets, including stored aircraft, with fair market generic
values supplied by Flight Ascend Consultancy. Note the composition of eets is constantly changing.

34 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


Top 50 lessors by eet size
Rank Total eet Fleet by type Value
Regional
2016 2015 Lessor Number Change Widebody Narrowbody Fleet ($m) Rank Average
(RJ and TP)
1 (1) GECAS 1,441 -126 163 894 384 27,729 2 19.2
2 (2) AerCap 1,160 -96 287 873 0 30,146 1 26.0
3 (3) SMBC Aviation Capital 452 +57 30 418 4 14,589 4 32.3
4 (10) Nordic Aviation Capital 374 +125 0 11 363 5,189 14 13.9
5 (4) CIT Aerospace 339 +13 60 238 41 9,699 9 28.6
6 (5) BBAM 329 +32 86 241 2 14,885 3 45.2
7 (7) BOC Aviation 291 +24 45 233 13 11,628 6 40.0
8 (12) ICBC Leasing 290 +86 49 222 19 12,278 5 42.3
9 (15) Avolon 287 +129 47 232 8 11,470 8 40.0
10 (6) Air Lease 276 0 56 206 14 11,580 7 42.0
11 (8) Aviation Capital Group 265 +2 7 258 0 5,811 11 21.9
12 (9) AWAS 241 -19 40 201 0 6,430 10 26.7
13 (11) Boeing Capital 220 -23 42 171 7 2,211 32 10.0
14 (14) Aircastle Advisor 207 +43 43 158 6 5,735 12 27.7
15 (13) Macquarie AirFinance 206 +10 12 191 3 5,152 15 25.0
16 (16) ORIX Aviation 165 +8 16 149 0 4,104 18 24.9
17 (17) CDB Leasing Company 162 +28 32 110 20 5,679 13 35.1
18 (19) Avmax Aircraft Leasing 147 +29 1 3 143 371 70 2.5
19 (18) Castlelake 125 0 23 65 37 1,246 44 10.0
20 (23) BoCom Leasing 120 +27 19 96 5 4,768 17 39.7
21 (21) Jackson Square Aviation 119 +9 17 102 0 5,026 16 42.2
22 (22) Standard Chartered Aviation Finance 116 +16 18 98 0 3,908 19 33.7
23 (32) Apollo Aviation Group 102 +36 18 84 0 1,455 38 14.3
24 (35) SkyWorks Leasing 85 +26 22 37 26 698 57 8.2
25= (33) China Aircraft Leasing 81 +17 4 77 0 2,834 24 35.0
25= (28) DAE Capital 81 +11 27 33 21 3,347 20 41.3
27= (24) MCAP/MC Aviation Partners 79 -9 13 65 1 2,529 27 32.0
27= (25) AVIC International Leasing 79 -1 1 27 51 1,360 41 17.2
29 (33) ECC Leasing 77 +13 0 0 77 232 84 3.0
30 (56) CCB Financial Leasing 76 +42 6 68 2 3,110 22 40.9
31= (40) Elix Aviation Capital 74 +23 0 0 74 537 61 7.3
31= (28) ALM Aircraft Leasing & Management 74 +4 10 58 6 2,273 31 30.7
33 (88) Goshawk 72 +54 2 68 2 2,417 28 33.6
34= (20) FLY Leasing 69 -47 11 58 0 2,125 34 30.8
34= (28) VEB-Leasing JSC 69 -1 28 24 17 2,067 35 30.0
34= (36) Cargo Aircraft Management 69 +11 60 9 0 742 56 10.8
34= (28) Changjiang Leasing Company 69 -1 0 52 17 1,485 37 21.5
38 (62) Tokyo Century 67 +37 17 42 8 2,313 30 34.5
39 (36) VTB-Leasing 66 +8 16 48 2 1,328 42 20.1
40 (27) Falko 63 -11 0 4 59 416 68 6.6
41 (62) CMB Financial Leasing 62 +32 10 48 4 2,845 23 45.9
42= (41) ALAFCO 59 +9 2 57 0 1,792 36 30.4
42= (55) Altavair 59 +23 34 25 0 2,749 25 46.6
44 (48) Jetstream Aviation Capital 51 +11 0 0 51 82 110 1.6
45 (42) Sberbank Leasing 49 +3 8 19 22 783 53 16.0
46= (62) Jetran International Ltd 48 +18 10 26 12 164 92 3.4
46= (45) SKY Leasing 48 +5 9 39 0 468 65 9.8
48 (49) GOAL 47 +8 3 22 22 863 50 18.4
49 (36) Jet Midwest 44 -14 5 29 10 77 112 1.8
50 (53) Doric 41 +4 28 7 6 3,287 21 80.2
Total 9,192 +685 1,437 6,196 1,559 244,011 26.5
Source: Flight Fleets Analyzer and Ascend Values data, January 2017

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 35


FINANCE LEASING OUTLOOK

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-

36 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


FINANCE & LEASING OUTLOOK

Discussions on ways of resolving that situa-

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

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 37


FINANCE & LEASING OUTLOOK

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

38 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


FINANCE & LEASING OUTLOOK

invest in aircraft debt. The bank closed its sec-

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.

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 39


2016
8th A nn u al
FINANCE & LEASING MERGERS

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.

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 41


FINANCE & LEASING MERGERS

The shifting management of leased eets


Netherlands
UK 2011 eet 432

15 % 2011 eet 262


2016 eet 224
2016 eet 1,247
187 %

Japan
Ireland
2011 eet 178

63 % 2011 eet 1,193


2016 eet 1,942 29 %
2016 eet 230

China

USA
129 % 2011 eet 436
2016 eet 997

18 % 2011 eet 5,333


2016 eet 4,359
UAE
2011 eet 84
Hong Kong

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

42 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


FINANCE & LEASING MERGERS

longer-established platforms, particularly as He challenged assumptions that the lessor

Avi8 Air Capital


their portfolios start to reach middle age. would require scale to be successful.
Not all consolidation is happening at the big When I was growing and managing other
end of the spectrum, however. Nordic Aviation large portfolios in the past, people always said
Capital last year moved to consolidate the scale was vital. In fact, an investment bank
regional leasing market with its acquisitions of once told me that a lessor needed to be sized
Jetscape Aviation and Aldus Aviation. at around $12 billion upwards to achieve
As well as M&A, 2016 also featured a number economies of scale, he said. In my experi-
of portfolio transactions. AerCap and GECAS in ence that wasnt the case. What mattered was
particular took advantage of the strong trading how many aircraft you could place, how
conditions to sell off packages of aircraft. This many deals you were doing. If an airline
included a 45-unit sale by GECAS to Avolon, needs an aircraft now, what matters is that
announced before the CIT takeover. you can do that jet for them today not the
That transaction followed the closing of fact you already have 15 on lease to them.
Macquarie AirFinances acquisition in March Joint-venture platforms continue to emerge in
of the Skyn portfolio from AWAS. Only 83 of If an airline needs an various forms too, often teaming investors new
99 aircraft eventually transferred to the Mac- aircraft now, what matters to the industry with experienced players. Hong
quarie Bank-owned unit. Kong conglomerate Chow Tai Fook Enterprises
Further portfolio deals are also still in the
is that you can do that jet has invested in two platforms: Goshawk and
mix. At the end of 2016, Singapore-based les- for them today Bauhinia Aviation Capital, a new joint venture
sor Avation disclosed that it had received an RAY SISSON with Aviation Capital Group.
unsolicited expression of interest from a third Executive chairman, AVi8 Air Capital Another force resisting the consolidation
party to acquire 22 ATR turboprops in its port- move is the re-emergence of airline-related
folio, but no deal has yet been conrmed. lessors such as AirAsias Asia Aviation Capi-
In November, speakers at the Airline Eco- turn could lead to some investors looking to tal, Lion Groups Transportation Partners and
nomics Growth Frontiers conference in exit from aircraft leasing. Norwegians Arctic Aviation Assets.
Hong Kong shared views on what would I think if there is an adjustment in the mar- All three lessors have access to large order-
drive consolidation of the leasing industry ket and some sense of a downturn, a lot of books of competitively priced aircraft from
in the longer term. leasing companies protability will drop off their parent airlines, and have been showing a
at that point, he said. willingness to deal with third-party carriers.
NATURAL TREND In China, a proliferation of small lessors has In a consolidating industry, it is actually
I think there will be an amount of consolida- driven up competition in the sale-and-lease- adding more competition, so from an airline
tion in the industry, and I think that is a natural back market, hitting yields. Some observers perspective, we are actually helping the air-
trend as the industry gets bigger and bigger, feel a number of Chinese lessors have written lines, said Asia Aviation Capital chief nan-
said David Power, chief executive of Orix Avia- marginal deals and thus could be under some cial ofcer Simon Perkins in November.
tion, a lessor based in Ireland. nancial pressure in coming years, especially Transportation Partners has been less
Similarly, Investec Aviation Finance co- as they deal with the challenges of remarketing aggressive in the market, with only three air-
head Alok Wadhawan said consolidation was mid-life aircraft as they come off lease. craft leased outside of operators afliated
a sign that the industry is maturing. Nonetheless, Bank of Communications with its parent company Lion Group.
Asia Aviation Capital chief executive Financial Leasing executive director Gao Sixi- Nonetheless, sources tell FlightGlobal
Stephane Daillencourt, a former GECAS exec- ang saw no compelling case for consolidation that Transportation Partners is considering
utive, agreed that the industry was consolidat- among Chinese lessors. broadening its focus by acquiring aircraft
ing, but noted that the current environment I would say in China, in the next ve or 10 from other lessors.
did not have many catalysing factors to drive years, I dont think there will be a huge con- Asia Aviation Capital has put forward
a rapid urry of mergers and acquisitions. solidation, he said at the November confer- major growth plans to become a full-service
The direction is clear: there will be consoli- ence. The reason is that all of the Chinese lessor, but is also in the process of being sold
dation. But the timing is not clear, he said. lessors are backed by the big banks. by AirAsia. There are indications that a num-
Daillencourt pointed out that, unlike other That would largely prevent the emergence ber of the prospective bidders have come
industries, leasing did not offer many econo- any time soon of a white knight lessor that from outside the industry, such as Asia-based
mies of scale. Instead, other factors are likely could act as a consolidator. pension funds and insurers.
to drive consolidation. Ping An Leasing managing director Huang On a smaller scale, Canadas Chorus Avia-
I think the main driver is on the nancing Zhang agreed, pointing out that for many les- tion has started to play in the regional aircraft
side. You cant compete unless you have sors, their parents are too big and too strong. leasing market.
cheap cost of funds and cheap aircraft you can For all the recent M&A activity, new play- Even with aircraft leasing starting to con-
buy, Daillencourt said. ers continue to emerge in the leasing space. solidate at the top, the continuing emergence
Standard Chartered executive director of Notably, former AWAS chief Ray Sisson of new players is keeping the market competi-
aviation nance Andy Beer posited that a teamed up with Eastern Air Lines founder Ed tive. One thing seems certain: the market is as
liquidity-based downturn could affect fund- Wegel to launch a new Ireland-based lessor, different from seven years ago as it will look
ing costs and therefore protability, which in AVi8 Air Capital, in November. in 2024.

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 43


FINANCE & LEASING SECURITISATION

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.

44 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


A young portfolio and long lease term res-
onates well with investors, says a second A young portfolio
investment banker. Theres a perceived risk
with ageing assets.
and long lease term
For instance, BBIRD-2016-1 and LAFL- resonates well with
2016-1 have considerably younger asset pro- investors
les than the mid- to end-of-life portfolios
issued by Apollo, AerGen, Castlelake or ACG.
This also means the investor pools are differ-
ent for the deals. lion for the rst 42 months and decreasing over
BBIRD-2016-1 had over 110 institutional time per a predetermined schedule.
investors evaluating the transaction in the KBRA says the additional liquidity miti-
data room, and 60 different investors put in gates the risk of the shorter remaining lease
bids, says Air Leases head of strategic plan- term in MRLN-2016-1 if the market for older
ning Ryan McKenna. BBIRD-2016-1 more A320s and 737s should fall out.
than doubled the number of bidders for any
post-crisis aircraft ABS. TIGHTER SPREADS
Apollo and Castlelake have become regular Despite the small investor base compared
issuers of ABS paper, looking to the capital with other securitised asset classes, spreads
markets to renance mid-life or older equip- appeared to tighten for aircraft ABS through-
ment. Castlelake wishes to become a program- out 2016.
matic issuer in this market. For the most part, deals that closed before
BillyPix

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.

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 45


FINANCE & LEASING INSURANCE

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

46 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


Lo Scalzo/AGF/REX/Shutterstock
Despite accidents such as this DHL freighter crash in August, the cost of incurred losses has been trending downwards since 2014

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

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 47


ANALYSIS ENVIRONMENT

RICHARD EVANS & JUDITH SCHRTER LONDON

CORSIAs struggle to offset doubts


ICAO called last years agreement on emissions aviations Paris moment, but amid ever-increasing trafc, the resulting
scheme looks vulnerable to questions about its ability to make a meaningful difference to airlines and the environment

CAOs Carbon Offsetting and ally less than todays gure.


I Reduction Scheme (CORSIA)
may have a straightforward
CORSIA requires all aviation
operators to offset their emissions
goal, but working out what it increase post-2020. That means
means for airlines and the envi- for each additional tonne of CO2
ronment raises signicant ques- emissions, one offset (a specic
tions and highlights potential CO2 certicate) has to be handed
shortcomings. in. That generally results from
The scheme, announced on 6 emission reduction projects
October, covers CO2 emissions where for each tonne of CO2
from international passenger and emission reduced or avoided, the
cargo ights and is targeted to project owner receives one offset.
achieve carbon-neutral growth These offsets are then tradable

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

48 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


Countries in CORSIA voluntary phase (2016 ASKs)

Canada

which are eligible to be used. United States


China South
Korea
Japan
For the Californian cap-and- Qatar
trade programme, offset rules Mexico
Thailand Marshall Islands
Guatemala Burkina Faso Israel
were set differently. The offset Costa Rica United Arab
Emirates
Malaysia
limit is currently set to 8% of Kenya Singapore Indonesia Papua New
Guinea
yearly emissions. Offset projects
Zambia
are mainly generated from Ozone
Depleting Substance Destruction Australia
and Forestry projects based in the
USA. Total demand for offsets New Zealand

since the start of the programme


1-2 ASKs (000bn) 0.5-1 ASKs (000bn) 0.2-0.5 ASKs (000bn) 0.1-0.2 ASKs (000bn) 0-0.1 ASKs (000bn)
has been 13.1 million, but this is
expected to increase to around
20-25 million per year by 2020. since 2004, although this has tant to dene the environmental 2.2%. However, these percentages
Developing carbon markets, slowed to 1.25% since 2011. and price impact of the new assume full coverage. As CORSIA
such as the Chinese National Car- With many new and re-engined scheme. In particular, the price only covers incremental emissions
bon market and South Korean aircraft entering service in the range for offsets will be dened by post-2020, it will only impact the
ETS, have chosen a similar route next ve years, FlightGlobal the eligibility rules. Development cost of that additional capacity.
to California, focusing on offsets expects future growth in fuel use prices for offsets currently range
generated nationally. This leads to of around 4% per year. This between $1 and $20 per tonne of SMALLER IMPACT
very local demand and supply. implies that fuel use in 2020 will emission reduction. Therefore, in 2026, offsets would
Another source of demand for be around 380 billion litres, and Cheap projects, such as large only need to be handed in for
offsets has been the voluntary by 2026 fuel demand would renewable energy projects, are around 20% of ights, thus the
market. Individuals offsetting increase to 482 billion litres. CO2 often seen as lower-quality offsets average cost impact is reduced to
their ight emissions and compa- emissions would accordingly as they do not depend on the 0.4-0.6% of total airline industry
nies promoting carbon neutral increase from 956 million tonnes income from the sale. Higher-qual- costs. These costs will also only
products have increased demand to 1,209 million tonnes in 2026. ity offset projects usually demon- impact around 40% of the total
for voluntary offsets. This market With the current cover ratio of strate co-benets for communities ASKs own globally.
is fragmented, causing a wide 39% of emissions, this would lead in developing countries. Examples The cost impact for the airline
spread of prices. to a total offset demand of 335 mil- include cooking stove projects in industry is still difcult to predict,
lion in the rst two voluntary Africa. Such projects are more as it depends on which types of
SLOW DEMAND phases (see top table). The demand complicated to implement and are offsets are allowable within COR-
Looking at offset demand over would come only step by step, but therefore more expensive. SIA, and the amount of supply. At
time shows that the EU ETS has will still have a signicant impact Between the two extremes, the current average voluntary
played the main role in offset on the offset market. ICAO has a range of options on market price of $3.80 per tonne of
demand over several years. How- The higher demand for offsets how to dene its eligibility crite- CO2, the impact is negligible. With
ever, demand has dropped dra- in CORSIA is good news for offset ria. For aviation, this decision will the inclusion of aviation from
matically, with newer schemes developers around the world. decide the impact of CORSIA on 2020, demand for offsets will
only slowly picking up. Most of them have been struggling operating costs. The offset cost increase, and is likely to result in
It is important to note that offsets with the drop in demand from the will be directly linked to the fuel some price increase for the allow-
are not interchangeable, meaning EU and the subsequent fall in off- cost. When oil was over $100/ able schemes. At an indicative
that EU ETS offsets cannot be used set prices, in particular for offsets USgal in 2014, it was the largest cost of $20 per tonne, the burden
for compliance in California and generated by the CDM. cost for most carriers, representing on the airline industry is less than
vice versa. Generally, CORSIA is However, in its current agree- 31.6% of total expenses. The halv- 1% of additional costs by 2026.
expected to support either the ment, ICAO has not yet dened ing of oil prices since then has This conclusion is perhaps a
CDM or other standards currently which credits will be eligible to be seen a decline to around 20%. double-edged sword. The airline
used in the voluntary market. used for CORSIA. The decision on Based on the carbon intensity of industry will be able to point to
Despite its relatively low cover- the quality of offsets will be impor- kerosene, a $20 offset price per progress towards carbon-neutral
age in the rst years, CORSIA can tonne of CO2 would result in an growth, but critics will be able to
change the demand structure for increase of around $8 per barrel of say there has been no measurable
offsets signicantly post-2020.
IATA says the worlds airlines
39% kerosene. Based on todays airline
cost breakdown, this would
impact on trafc growth rates.

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

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 49


ANALYSIS MARKET OUTLOOK

Downside risks must be managed


While there are still grounds for optimism over industry health in 2017, some key trends will require close attention

CHRIS TARRY neutral capacity growth is in the


CTAIRA
order of 3-4% at an industry level,
compared with an expected capac-
ity increase of some 5.6% for the
year to September 2017, according
to the latest data from Diio, a
FlightGlobal company.
Somewhat worrying, but
he holiday period at the unsurprising, is that real labour

T end of each year provides


a time for reection and
productivity continues to dete-
riorate at an industry level.

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.

50 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


MORE ONLINE
For more market indicators,
including expanded trafc,
DATA ANALYSIS FLIGHTGLOBAL capacity, fuel and share price
data, download our digital

Key industry indicators


Note: AEA has been disbanded. European gures will not be updated until further notice
Airline Market Outlook
in Flight Dashboards
Reports section

Trafc growth trend US majors (A4A members) passenger statistics: November


Region Passenger trafc RPK Capacity Load factors Freight FTK*
20
million change change percent change million change

15 Domestic USA 54,692 3.8% 2.9% 85.1% 0.7 1,497 -2.7%


Growth rates (%)

North Atlantic 6,373 -7.9% -7.0% 74.2% -0.7 782 4.4%

10 Latin America 7,848 -2.1% -6.2% 81.1% 3.4 198 3.9%


Trans Pacic 6,864 17.0% 16.9% 78.2% 0.1 966 9.9%
5 All international 21,085 1.4% -0.1% 78.0% 1.1 1,946 7.0%
Total month 75,778 3.1% 2.0% 83.0% 0.9 3,443 2.6%
0 Year-to-date 889,832 2.9% 3.3% 83.3% -0.3 31,808 1.3%
Note: Freight gures are for October as November data n/a
Source: Airlines for America
-5
Apr May Jun Jul Aug Sep Oct Nov
Asia-Pacic airlines (AAPA members) international trafc
Month Passenger trafc RPK Capacity Load factors Freight FTK
Capacity growth trend
million change change percent change million change
20
Sep 87,437 7.6% 6.7% 77.9% 0.6 5,593 5.3%
Oct 88,159 4.9% 5.0% 77.0% -0.1 6,027 7.1%
15
Nov 84,741 6.2% 5.1% 77.4% 0.8 6,106 5.3%
Growth rates (%)

Year-to-date 970,503 6.6% 6.4% 78.5% 0.1 60,140 1.2%


10 Source: Association of Asia Pacic Airlines.

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

-5 Total Intra-LatAm* 16,499 4.8% 1.2% 80.8% 2.8 138 -4.2%


Apr May Jun Jul Aug Sep Oct Nov Total Other International 7,713 4.7% 0.3% 83.9% 3.5 291 -0.5%
Total system 24,212 4.8% 0.9% 81.8% 3.0 428 -1.7%
Freight growth trend Year-to-date 266,978 3.7% 1.8% 81.3% 1.5 4,176 -4.4%
Source: ALTA Note: *Domestic and International ights.
10

5 Arab airlines (AACO members): November*


Growth rates (%)

Passenger trafc RPK Capacity Load factors


0
million change change per cent change
Intra Arab world (incl. domestic) 5,297 15.7% 14.2% 51.0% 0.7
-5
With other regions 38,950 8.2% 10.3% 60.4% -1.2
Total month 44,247 9.0% 10.8% 59.1% -1.0
-10
Year-to-date 533,435 9.5% 12.1% 64.2% -1.5
-20 Source: Arab Air Carriers Organisation Note: *Estimates
-15
Apr May Jun Jul Aug Sep Oct Nov

Jet kerosene spot prices: world average


A4A AEA AAPA AACO ALTA Month Fuel price Change over period Month Fuel price Change over period

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%

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 51


ANALYSIS MARKET OUTLOOK

GRAPHIC BY PAUL RIGNALL

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

Focus on: Asia-Pacic

There are nearly 11,000 Africa Excluding domestic


more scheduled seats services, the greatest
between Asia-Pacic country-pair seats in-
ica
and Vancouver in Janu- er crease in Asia-Pacic
ary 2017 compared Am is between South
rth

with 2016. This follows Korea and Japan, with


No

recently launched ser- more than 65,000 ad-


vices by Chinese carri- ditional weekly seats.
ers Beijing Capital Air- South Korean low-cost

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

Second only to Gulf


giant Emirates, Air India
Express has added
more than 25,000 week-
La

ly seats between Asia- 59.9bn ASKs/wk


tin

9.5% YoY
Am

Pacic and the Middle


er

East when comparing ca


i

January 2017 with 2016.


Weekly capacity ASK
Top destinations for Air
Region Millions Change
Indias low-cost subsidi-
Europe Intra-region 44,186 9%
arys seat growth are
North America 5,255 13%
Dubai, Sharjah, Dam-
Europe 5,229 5%
mam and Abu Dhabi, all
Middle East 4,735 13%
with at least 2,000 addi-
Africa 368 5%
tional seats per week.
Latin America 79 13%

North America Europe Latin America Middle East Africa

Africa Africa Africa Africa Africa

ica ica ica ica ica


er er er er er
Am Am Am Am Am
rth

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

Europe Europe Europe Europe Europe

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

52 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


FORUM FEEDBACK

Clarity amid blurred lines


Traditional categorisation of airline business models is increasingly outdated, says Robert
Sinclair-Barnes, strategic marketing director, Airline IT at Amadeus. In order to succeed as
carriers adopt a hybrid approach and unique strategies, wise investment is crucial

There was a time tinue to prioritise investment in tech-

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

ightglobal.com/airlines January-February 2017 | Flight Airline Business | 53


COMMENT

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

54 | Flight Airline Business | January-February 2017 ightglobal.com/airlines


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