07. Aviation Industry and Aviation Financing in Emerging Markets by Martin Sutton Standard Chartered

8/16/2019 07. Aviation Industry and Aviation Financing in Emerging Markets by Martin Sutton Standard Chartered

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Aviation Industry and AviationFinancing in Emerging Markets

May 2011


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About Standard Chartered Bank

Global Network, Local Presence

Listed on both the London Stock Exchange andthe Hong Kong Stock Exchange

Top 25 companies in the FTSE-100 by marketcapitalisation

Over 1,700 branches and offices in over 70countries with 85,000 employees

We work seamlessly across borders and productgroups, giving you full access to the resources ofour bank

Unrivalled network, tailored solutions

Core strength in Asia, Africa and the Middle East

Over 150 years of on-the-ground experience in many of the world’s fasting growing economies

We deliver world-class, award-winning solutions built on innovative and comprehensive financial products


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SCB has an unbroken history of 90 years in theMiddle East: Oman (1968), Bahrain (1920), UAE

(1958), Qatar (1950), Lebanon (2000), Jordan

(1925) and Saudi Arabia (2011), and with over

150 years on the continent

One of the largest foreign bank networks in the

region

Retail presence in 6 countries (UAE, Oman,

Qatar, Bahrain, Jordan and Lebanon) and WB

Capabilities extended to include Egypt (1 rep

office, 2008), Iran (rep office, 1992) and Iraq (1

rep office).

Network of 29 branches, 170 ATMS

4,000 staff in the region with the highest

diversity within the Group (70 nationalities)

Standard Chartered Bank in Middle East

Commencedoperations in SaudiArabia in Feb-11

Lebanon

Jordan

Bahrain

Qatar

UAE

Oman


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SCB has a multi-product platform to offer financing solutions and meet the growing demand

for aircraft leasing and financing in its markets across Asia, Africa and the Middle East.

Acquired Pembroke in 2007, adding operating leasing to finance capability

We have dedicated and first class Aviation Finance professionals in Ireland, London,

Singapore and Hong Kong.

• In-house expertise includes remarketing, technical, legal, structured finance and leasemanagement

Owned fleet of 48 aircraft, management of 34 aircraft (excluding financing).

Aviation Finance Team

London

Singapore

Hong Kong

Dublin


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Operating

Lease

Debt

Solutions

Management

Services

1

2

3

Commercial jet aircraft

(passenger and freighter) Aircraft engines

Finance lease

Debt financing

Islamic financing solutions

Export credit financing

Aircraft finance advisory and

structuring services

Lease marketing and

management advisory

Aircraft sales, repossession and

technical advisory

Company administration services

Selected Awards

Africa Deal of the Year 2008

Ethiopian Airlines

Purchase and Operating Lease of 2 x B767-300ER

Middle East Deal of the Year 2008

Qatar Airways

USD500 million Finance Lease for three B777

Etihad Airways

USD102 million Senior Secured Commercial Loan

Facility for one A340-600

Asia Deal of the Year 2009 Air India

Bridge Financing for 7 x B777 and 3 x B737-800

Aircraft Equity Deal of the Year 2008

Acquisition of Pembroke By Standard Chartered

Aircraft Debt Deal of the Year, Middle East, 2010

Range of Products

Aircraft Finance Recent TransactionsCountry Deal of the Year (Qatar) 2009

Ijarah Deal of the Year 2009

Tiger Airways HoldingsLtd

Sole Debt Arranger

USD68 million

Pre-Delivery Payment

Financing Facility for six

A320-200

2010

Tiger Airways HoldingsLtd

Sole Arranger

USD80 million

COFACE Facility for

twoA320-200

2010

QALC

Sole Arranger, Structuring Bank, SWAP

provider.

USD200million

Finance Lease

for eight A320 family

2010

Air India

Lead Arranger

USD905 million

Bridge Financing Facility for

seven B777 and two B737-

800

2009

PDP Deal of the Year 2010 Tiger Airways

Multi currency Pre-delivery Financing

Aviation Finance – Product Range

Qatar Airways USD150m Islamic Facility

Loan Deal of the Year Middle East 2011

Qatar Aviation Lease Co.

USD650 million Revolving Credit Facility

Best Islamic Structured Financing Deal 2010

Qatar Airways USD150 million Islamic Facility


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20 yr traffic growth forecast of 5.3% pa driven by

long term global economic growth of 3.2% p.a,

Other Key drivers:

- Global trade and tourism

- deregulation of air travel markets,

- growth of low cost carriers

- Emerging economies

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R P K ' s ( t r i l l i o n s )

Demand for Air Travel

Demand for air traffic is closely linked with the global

economic cycles.

Air passenger demand (RPK’s) has grown at around 1.5

to 2.0 times the trend long-term growth rate in GDP.

Last cycle resulted in 2.5% decline in traffic (2009).

Strong recovery in 2010.

World GDP and Air Passenger Traffic (RPK*) Growth

Source: IMF, ICAO, IATA

*RPK – Revenue Passenger Kilometre – (a measure of passenger demand, representing each kilometre each passenger is carried)

World Airline Traffic Forecast (RPK’s)

Long-term Growth

2009-2029

Global GDP = 3.2% pa

Passenger traffic = 5.3% pa

(Cargo = 5.9% pa)

Growth 5.1% pa

Historical Forecast

Source: Airline Monitor, Boeing

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% g

r o w t h r a t e ( G D P )

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% g r o w t h r a t e ( R P K ' s )

GDP Growth RPK Growth


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5,000

10,000

15,000

20,000

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30,000

35,000

40,000

2009 2029

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10,000

15,000

20,000

25,000

30,000

35,000

2009 2029

Airbus’ projections of global aircraft demand (2009 – 2029) Boeing projections of global aircraft demand (2009 – 2029)

N u m b e r o f A i r c r a f t

25,850 newaircraft*

USD 3.2trillion

Single Aisle(69%)

Twin Aisle(24%)

Large Widebody(7%)

N u m b e r o f A i r c r a f t

* Airbus forecast excludes Regional Jets

Source: Airbus GMF 2010-2029 / SCB estimates Source: Boeing current market outlook 2010-2029

New deliveries by type (2009 – 2029) New deliveries by type (2009 – 2029)

Single Aisle(68%)

TwinAisle(23%)

Large Widebody(6%)

30,900 newaircraft

USD 3.6trillion

Long-term Global Demand for Aircraft

RegionalJet

(2%)


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0 500 1000 1500 2000

Europe- Mid East

N. Am - L. America

Latin America

N.America - Asia

Middle East - Asia

Europe - Asia

N. America - Europe

Domestic China

Europe

North America

Asia/Pacific

RPK's (billions)

Traffic growth (RPKs) by region

Source: IATA

Air traffic forecast by regional flow (2009-2029)

2009 Traffic Added traffic2009-2029

Source: Boeing, Airbus, Standard Chartered

Emerging markets are driving air traffic growth

-10%

-5%

0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010

Asia Middle East Latin America

Africa Europe N. America

RPK Growth 2009-2029

Emerging Markets + 6.1% p.a

Mature Regions + 3.7% p.a


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Aircraft Demand from Emerging markets

Number Value($million)

Asia/Pacific 10,320 $1,320

N. America 7,200 $700

Europe 7,190 $800

Middle East 2,340 $390

LatinAmerica

2,180 $210

CIS 960 $90

Africa 710 $80

TOTAL 30,900 $3,590

42%

57%

20%

22%31%

18%

21%

11%19% 13%

28%

17%7% 11%

32%

50%

1981 1991 2001 2010

N. America Europe Asia Other

Emerging Markets account for around60% of current order backlog

Mix of Backlog by Region in Different Cycle

Emerging Markets long termfinancing requirement of $2 trillion –

58% of total demand

New Aircraft Deliveries(2009-2029)

Source: Ascend On-line Source: Boeing GMF 2010


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Need for External Finance

Historic profitability is highly cyclical and rarely

exceeds 3%

Average annual net profit margin of 0.05% since1980

Net profit of $16Bn estimated for 2010 (a 2.9%margin).

Emerging markets net profit for 2010 of $9.8Bn(Asia $7.6Bn, Middle East $1.1Bn, L. America $1.0BN)

Source: Airline Monitor

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U S $ B i l l i o n s

Cash Flow

Capital Expenditure

External Capital Required

Generated cash flows only partially cover capital

expenditure needs (historically around 52% on average).

Airlines currently facing a financing shortfall –

opportunity for external financing.

Demand for external capital is forecast to increase.

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Global Airline Net Profit Margins (1980-2011F) Airline Industry Financing Requirement Forecast


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Traditional Sources

Commercial Banks

Capital Markets

Export Credit Agencies

Operating Lessors

Airlines – cash

Manufacturers

Primary Sources of Industry Financing

Developing Sources

Regional / Local Banks and Lessors

Islamic financing

Sovereign Wealth Funds

Pension Funds

Private Equity / Hedge Funds


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Financing Trends – Impact of Financial Crisis

Source: Boeing Capital Corporation (May 2011)

Boeing Aircraft Deliveries

• Demand dropped as airlines tried toreschedule deliveries

• Liquidity became restricted andexpensive

• Number of Banks exited the market• Capital markets limited

• Lessors remained active butinadequate access to debt funding

• Concern over “funding gap” for newdeliveries

• Heavy reliance on ECAs – doubling ofcapacity

• Manufacturer financing came back

Impact of Financial Crisis

• Total funding requirement (Airbus and Boeing) of $62Bnin 2010

• Forecast to increase to $77Bn this year


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Commercial Banks

• Evolution of Aircraft Banking

• The 60s-80s primarily US based banks – Chase, Citibank, Wells Fargo, NationsBank

• The 80s –dominated by Japanese banks – Sumitomo, Fuji Bank, IBJ

• The 90s to today – European banks – KfW, Calyon, Natixis, DVB, BNP

• Next Generation – eg. SCB, ICBC, Bank of China

• Impact of financial crisis

• Focus on existing customer base and better quality credits.

• A number of banks existed the market, reducing industry participants.

• Restrictions on market liquidity increased pricing.

• Increased support from Export Credit Agencies (ECAs) to fill funding gap.

• Current Market Trends

• Pricing remains high, lower LTVs, low interest rates, cost of liquidity.

• Expected higher cost of capital due to Basel III – will increase debt pricing.

• New sources of financing – Islamic Banks, regional banks in Asia / Middle East , rise of Chinesebanks into aviation market


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New entrants – Bank Financing

Regional Banks - Asia

Initially set up to provide finance for domestic airlines but moving to establisha global presence.

ICBC closed a SLB for two B777-200ERs with British Airways

China Development Bank provided $358m debt facility to AerCap for 4 x A330s

CCB participated in an islamic lease to finance two B777s for Emirates

ICBC provided debt for JOLs for three A321s with Lufthansa

Regional Banks – Middle East

Developing regional aircraft financing appetite and capability.

Al hilal Bank provided Islamic Finance Lease for A340 for Etihad.Noor Islamic Bank participated in Islamic lease to finance Emirates B777s.

Emirates Bank was lead arranger for DAE $800m loan and credit facility.

Arab Banking Corp. co-arranger for loan for Etihad A340s.


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Islamic Financing

• Islamic banks in Asia and the Middle East are an additional source of aircraftfinancing and increase the pool of liquidity available to the sector.

• Most common structure is the Ijara finance lease. This has been used by Emiratesand Qatar Airways.

• Standard Chartered arranged an Islamic financing for Qatar Airways in 2009. This

$160m deal for one B777-200LR combined an Ijara finance lease and a murabaha.Banks involved in the structure included Maybank & Bank Islam (Malaysia),Sumitomo Mitsui Banking Corporation, DBS (Singapore), Masraf al Rayan (Qatar)

• Emirates financed two A330-200 aircraft in 2003 using Islamic Operating Leases

• Some points to note:

• The longer tenor nature of aircraft financings (typically 10 to 12 years) can be aconstraint for some Islamic banks

• Documentation is more complex than conventional aircraft financings.

• Shariah scholars may have differing views on acceptable transaction structures


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Operating Leasing

• Effectively provides 100% financing. Available to weaker credits

• Sector continues to grow – accounts for c. 36% of global market.

• Increasingly Important source of financing for emerging market airlines.

• Lessor access to liquidity restricted post-crisis. Long-term debt still challenging formost lessors.

• Increase in use of ECAs for lessor deliveries.

• Increase in sale / leaseback transactions.

• New entrants backed by private equity bringing additional liquidity and competitionto the market.

• Growth of Chinese lessors


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4%

12%

21%

25%

33%36%

2%0%

5%

10%

15%

20%

25%

30%

35%

40%

1980 1985 1990 1995 2000 2005 2010

Operating Lease Evolution

Operating Leasing as % of Total World Jet Fleet

(In service aircraft)

6,709

5,335

3,452

2,221

1,009

234

88

(Number of operatinglease aircraft in service)

Finance

(39%)

Owned

(26%)

World Airline Passenger Jet Fleet (2010)Ownership Pattern

Leased(36%) Finance

(38%)

Owned(26%)

Operating lease proportion has tripled since 1990 and is

now a major component of the financing mix.

Source: Ascend Online

Source: Ascend Online, Pembroke estimates


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Growth of operating leasing in Emerging Markets

Airline operational fleet has grown rapidly in the last 15 years to over 6,000 aircraft

At the same time the proportion on operating lease has doubled to now be 40% of the totalfleet

Airline Passenger Jet Aircraft – Emerging Markets

1,488 aircraft

1990

1,866 aircraft

1995

2,787 aircraft

2000

3,780 aircraft

2005

4,433 aircraft

2010

6,341 aircraft

47 leased

284 leased

601 leased

892 leased

1,648 leased

2,521 leased

26%

1985

40% 37% 22% 15% 3%


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Leasing is established in all regions

Source: Ascend Online

Africa Asia

Europe

Latin AmericaMiddle East

N. America

Passenger Jet Aircraft on Operating Lease (May 2011)

33% 40% 35%

48% 28% 39%

48%

Australasia


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New entrants - Leasing

Emerging Market Lessors

Numerous leasing companies have been set up in China to provide

equipment leasing – ICBC, CDB Leasing and Minsheng.

BOCA and Hong Kong International Leasing already active.

Establishment of Free Trade Zones to support leasing/financing industry.

Chinese lessors primarily focused on domestic finance lease market butplans to expand internationally and development operating lease capability.

Private Equity

Air Lease Corporation: r aised $1.3Bn equity, $2.0Bn debt. Successful IPO.

Avolon: backed by Oak Hill. Raised $750m in equity in 2010 and a further

$250m in Q1 2011, over $1.5Bn in debt.

Jackson Square Aviation: backed by $500m in equity from Oaktree, $400m in

debt.

RPK Capital Partners backed by $600m from Carlyle Group.

HKA Capital: secured a portfolio of nearly $3.0bn in assets by completing its

acquisition of Allco Aviation


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Export Credit Agency Financing

• Guarantees / financing provided by US EX-IM and European ECAs (Coface, ECGD, Hermes).

EDC and BNDES in regional aircraft sector.

• Home Country rule excludes US and certain Europe Airlines (UK, France, Germany) fromaccessing ECA guarantees.

• ECA support increasingly important immediately post financial crisis.

• Accounted for around one-third of all aircraft deliveries in 2010 (approximately $23Bn) and upto 78% of all eligible deliveries.

• Around 65% of ECA transaction to airlines, 35% to lessors.

• Introduction of new Aircraft Sector Understanding (NASU) should lead to increased pricing andlower LTVs for airlines. This is likely to result in lower volumes after 2012 and a move backtowards more commercial debt.


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Capital Markets

• Corporate bond markets remain volatile but capacity available for good credits. Limited due toinvestment grade rating requirements.

• EETC markets open to aircraft financing but still primarily US based transactions.Approximately $1.7Bn raised in 2010 (vs. $4bn in 2009).

• Aircraft securitisations still limited.

• Equity / tax investors focusing on strong credits.

• JOL/JOLCO investors still active for the best credits

• KG market available

• Private equity funding returning for new leasing ventures


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Commercial

20%

ECAs

22%

Islamic

5%Bonds

10%

Op Lease

43%

Emirates Airlines Financing Example

Sources of Funding

$22 bn in last14 years

199 Aircraft onorder

Financing Structures

going forward

Exim /ECA guaranteedloans & Bonds

Operating Lease, inc.German KG market

EETCs / securitization

Commercial loans inc.Islamic structures

Bonds, Sukuks, PrivatePlacement

Source: Emirates Presentation – 8th Annual Middle East & Africa Airfinance Conference Sept 2010.

Diversity of Funding Sources is Key

07. Aviation Industry and Aviation Financing in Emerging Markets by Martin Sutton Standard Chartered

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