Asset Management and Remarketing

mba morten beyer & agnew

School of Aircraft Finance –

Asset Management & Remarketing

R.F. [email protected] & COOSchool of Intl. Aviation FinanceApril 23, 2004



Overview

• Assessment of exposure• Selection of re-marketing

services provider• On-going management of

exposure



Assessment of Exposure

• What is it?– Aircraft– Engine– Debt/Equity– Other

• What are your rights?– Senior/Junior– Equity Holder



Dealing with Asset

What is the Asset?

AircraftEnginesSpare PartsGates/Slots

Tangible vs.Intangible

Where is it?

In operationParked

Long TermShort Term

Jurisdiction

If aircraft, correct engine?

What is it doing?

OperationsLong haulDomestic

Market segment

Operating environment

Labor Issues

Condition

MaintenanceAirframeEngines

Return ConditionsChange, if any

How old is it?

The Operator

RetentionRejectionNew scheduleNew operationsEconomicsFleet Replacement

Rationalization

Assetvs.

Cash Flow



Overview



exposure



Plan of Action

Aircraft Sales and Leasing Program

Course of Action Marketing Execution Closing

Asset Management

Closing Remarketing Operating Lease Return

Ancillary Technical Support



RemarketingAircraft Sales and Leasing Action Plan

– Develop course of action based on ING’s financial requirements and market conditions

» Sale/ Lease» Marketing time horizon» Level of continuing involvement» Level of risk

– Marketing Execution» Analyze current existing worldwide fleet for potential upgrading or expansion

opportunities» Direct Mail campaign to all current/potential operators» Personal direct or voice contact with high potential operators – aircraft on order/

known in the market airlines» Advertise as appropriate – trade publications, distribution databases» Support potential customer aircraft analysis/requirements and alternative

comparison research» Assist in ancillary support as needed: financial, technical,spares, training, short-term

“CMI” support, etc.» Develop competitive pricing strategy and aggressive sale/lease terms and conditions» Develop benchmark for Operating Lease – analyze and develop airframe and engine

accrual content» Vet all prospective purchase/lease customers for financial and operational

stability/capabilities – Source and arrange credit enhancement, if required.» Work with manufacturers – aircraft/ engine» Liaise with Operating Lessors



RemarketingAircraft Sales and Leasing Action Plan

– Closing» Develop negotiating strategy» Develop term sheet» Open negotiations, draft term sheets» Liaise with legal counsel on contract development and negotiation» Attend and assist with closing and delivery» Deliver the aircraft, memorialize the delivery conditions



Asset Management

• Remarketing Period– Audit and receive the aircraft– Develop baseline component and condition

file– Arrange ferry and storage– Monitor asset– Advise on maintenance requirements and

obtain third-party bids– Show aircraft and provide oversight of asset

during buyer inspection– Arrange Interim Insurance



• Operating Lease• Monitor monthly usage• Accept lease payments• Monitor/ analyze/receive reserve

payments• Review operator requests for

maintenance• Monitor lease compliance• Corroborate and approve 3rd party

maintenance

Asset Management



Asset Management

• Return– Inspect for return compliance– Document for potential legal position– Capture necessary records – Locate and secure other assets not currently

attached to asset– Obtain appropriate permits, retain flight crew and

ferry aircraft– Store and oversee any maintenance performed on

assets



Overview



exposure



Asset Management

• Ancillary Technical Support• Inspect asset on a routine basis

(predicated on operator stability) for contract compliance, airworthiness, operator records security and supporting documentation.



Asset management & remarketing – Questions that will be addressed:

What is the asset life cycle ?

What are the phases of the asset life cycle?

How does asset management work?

What do you need to know about the industry?

What do you need to know about the operator?

What do you need to know about the asset?

What is the role of remarketing?



Delivery

Initial Inspection

Mid-Lease Inspection

Pre-Redelivery Inspection

Redelivery Inspection

Technical records audit

Monitoring of compliance with lease terms

End of lease / beginning of lease

The New York School of International Aviation Finance

Remarketing & Bridging

Monitoring of market and value fluctuations and trends

Asset management is the tool that guides the aircraft through the various stages of its life cycle.



OPERATING LEASE RISK

FINANCIALCOMMERCIAL TECHNICAL LEGAL POLITICAL

Asset management addresses the inherent risk mainly from the commercial & technical perspective of the lease.

The tool to implement is a lease monitoring program.



School of Aircraft Finance – The New York School of International Aviation Finance

Initial Phase of the asset life cycle:

The inspection and audit process should be performed based on an understanding of the economics involved for both parties to the lease.

The inspection and audit further establish a baseline that will apply to the asset throughout the term of the lease.

Delivery and initial inspection of the asset:

An initial assessment of the aircraft’s condition.

Establishes the true physical condition of the asset at the time of delivery.

Confirms the asset complies with all requirements and specification stipulated to in the lease agreement.

Verifies the quality of maintenance performed by the lessee.

Bridging: Carrier-specific

Jurisdiction



Technical records audit:

Technical status of the asset must be verifiable by complete, accurate and up-to-date documentation.

Establishes the level, type and frequency of required maintenance.

Confirms the existence of a complete maintenance and repair history.

Highlights financial exposure due to required maintenance such as C and D-Checks.

Provides assurances as to the ability for certification in major jurisdictions such as the U.S. and Europe.

Verifies the recording of flight hours, cycles, and time.

Confirms the status of Airworthiness Directives.



Delivery

Initial Inspection












The Lease Monitoring Program

Objectives: Maximize portfolio value

Ensure adherence to payment schedule

Minimize risk and exposure

Maintain the ability to remarket the asset

Protect asset value

Ensure compliance with lease terms

Reduce maintenance expenses

Process: Structured proactive cycle of commercial and technical management

Physical inspections of asset and records



The lease monitoring program provides flexibility throughout the asset’s life cycle by providing up-to-date and accurate information about the asset to the lessor.

This is accomplished by:

Mid-lease inspectionreview of current technical status

detailed physical inspection

compliance with maintenance requirements

Status of maintenance reserves - Have any draw downs been made?

- Were draw downs justified?

- Examine reserve invoices

Monitoring of market and value trends

Monitoring of lessee conduct

Detecting initial warning sign or trouble ahead



Major Cost Drivers for Airlines' Operating Expenses

Labor30%

Fuel15%

Aircraft Rent & Depreciation

11%

Other27%

Advertising1%

Communications2%

Food3%

Maintenance6%

Commissions5%

Insurance0%

Because aircraft related expenses are one of the major cost drivers for airlines, operators will attempt to take actions in this area during economically challenging periods.

Source: The Airline Monitor, February 2002



Especially during economic downturns, anticipate the operator’s actions.

Such actions may include: Seek bankruptcy protection

Seek governmental protection

Cannibalize the aircraft for parts

Lower maintenance standards

Renegotiate the terms of the lease

Renegotiate return conditions

Default on the payments

Return the asset

These actions can have a significant negative impact on the value of the asset.



Relationship between GDP and Narrowbody Historic Values

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

in p

erce

nt

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

Port

folio

val

ue in

US

$

2 per. Mov. Avg. (Changes in GDP for OECD Countries) 2 per. Mov. Avg. (NB Values in US $)

Recession & Gulf War

Beginning recession & Afghan War

Economic downturns have a direct impact on aircraft values, in this case a portfolio of older narrowbodies.

Source: OECD monthly statistics and MBA historic values



Source: The Airline Monitor, December 2002; Bureau of Economic Analysis, April 2003

Change in Real GDP versus Aircraft Orders / Deliveries

-

500

1,000

1,500

2,000

2,50019

70

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Airc

raft

Ord

ers

/ Del

iver

ies

-4

-2

0

2

4

6

8

Cha

nge

in G

DP

in P

erce

nt

Aircraft orders Aircraft deliveries Change in real GDP



Steep inclines in the number of total transactions after 9 - 11 were to a large degree driven by aircraft returns. Since April 2002, this trend has reversed itself, only to return in the latter part of 2002. Transactions, as well as return levels, have retreated to levelsrecorded prior to the terrorist acts.

Source: BACK AvSolutions - JetMart

Aircraft Returns vs. Total Transactions

-5.0%

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

Aug

-01

Sep-

01

Oct

-01

Nov

-01

Dec

-01

Jan-

02

Feb-

02

Mar

-02

Apr

-02

May

-02

Jun-

02

Jul-0

2

Aug

-02

Sep-

02

Oct

-02

Nov

-02

Dec

-02

Jan-

03

Feb-

03

Ret

urne

d A

ircra

ft in

Per

cent

ofT

otal

Tr

ansa

ctio

ns

0

50

100

150

200

250

Tota

l Num

ber o

f Tra

nsac

tions

Returned Aircraft Transactions

September 11



Change in Real GDP versus Airline Profits (Losses)

(12,000.0)

(10,000.0)

(8,000.0)

(6,000.0)

(4,000.0)

(2,000.0)

-

2,000.0

4,000.0

6,000.0

8,000.0

1970 1975 1980 1985 1990 1995 2000

Airl

ine

Prof

its (L

osse

s ) i

n bi

llion

s

-4

-2

0

2

4

6

8

Cha

nge

in G

DP

in P

erce

nt

Net Profits (Loss) Change in real GDP

Source: The Airline Monitor, February 2002; Bureau of Economic Analysis, April 2002

The key to a successful asset monitoring and remarketing program is to know and understand the market and its driving forces during the entire duration of the lease.



The end of the lease is marked by the return of the asset.

Final inspections during this phase improves the transition of the asset from one lease to the next without exposing the lessor to undue financial risk.

Pre-redelivery inspection:

Redelivery inspection:

Determine the asset’s ability to meet the lease redelivery and maintenance covenants.

Report potential for lessor’s financial exposure.

Asses AD sharing issues.

Determine reserve reconciliation.

Clarify redelivery conditions.

Complete audit of associated records.

Last inspection before physical exchange of asset.

Assure asset’s compliance with all rules and regulations.

Check all documents.



Actively managing the asset allows for smooth transitions from lease to lease and thus avoids idle time and the loss of rental income.

Remarketing a crucial phase in the asset’s life cycle.

Begins several months before the lease term expires.

Especially difficult phase during economic recession:

Demand for assets declines

Values become depressed

Number of stored aircraft increases



Delivery

Initial Inspection












Total Aircraft in Storage As a percentage of World Fleet

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Passenger AircraftFreighter AircraftTotal Aircraft in Storage



A remarketing campaign will be successful if:

Asset is in excellent condition

Market conditions are favorable

Refurbishment and maintenance expenses are minimal

Records are complete, up-to-date, and in good condition

Registration is possible in several key markets

Service provider has strong knowledge of the asset and the market

Goal: Minimize the time the asset is off-lease



Difficulties that might arise during the

remarketing process:

Reconfiguration costs

Re-registration rules & regulations

Certification requirements

Environmental standards

Operator expertise

Legal obstacles

Political circumstances



Conclusion

Importance of a solid understanding of the asset and the market forces.

Good relationship and communication between lessee and lessor vital.

Pro-actively manage the asset, especially during times of economic downturn.

Know the lessee and anticipate its actions.

Lessee actions and economic conditions directly impact asset value.

Asset management addresses commercial & technical risks.

A lease monitoring program guides the asset through the term of the lease.

Remarketing starts long before lease expiration date.

Successful remarketing campaign will minimize the off-lease time.




Thank You

Asset Management and Remarketing

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