asset management and remarketing
TRANSCRIPT
mba morten beyer & agnew
School of Aircraft Finance – Page 1
Asset Management & Remarketing
R.F. [email protected] & COOSchool of Intl. Aviation FinanceApril 23, 2004
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Overview
• Assessment of exposure• Selection of re-marketing
services provider• On-going management of
exposure
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Assessment of Exposure
• What is it?– Aircraft– Engine– Debt/Equity– Other
• What are your rights?– Senior/Junior– Equity Holder
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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
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Overview
• Assessment of exposure• Selection of re-marketing
services provider• On-going management of
exposure
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Plan of Action
Aircraft Sales and Leasing Program
Course of Action Marketing Execution Closing
Asset Management
Closing Remarketing Operating Lease Return
Ancillary Technical Support
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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
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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
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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
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• 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
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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
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Overview
• Assessment of exposure• Selection of re-marketing
services provider• On-going management of
exposure
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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.
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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?
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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.
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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.
The New York School of International Aviation Finance
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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
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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.
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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
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.
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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
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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
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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
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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.
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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
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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
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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
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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.
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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.
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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
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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
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.
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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
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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
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Difficulties that might arise during the
remarketing process:
Reconfiguration costs
Re-registration rules & regulations
Certification requirements
Environmental standards
Operator expertise
Legal obstacles
Political circumstances
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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.
The New York School of International Aviation Finance
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Thank You