Jetrader - Spring 2014 - 13

Chart 3: 2014 Aircraft Deliveries
by Class

advantage, especially considering that
along with easyJet, they have taken large
strides over the past 10 years in a low-cost
boom that has seen a market shift of passengers from British Airways short-haul.

Value Trends and the
Introduction of New Players
Despite aircraft values having some
associated volatility, particularly as they
enter the secondary and tertiary stages of
life, they are seen as predictable returns.
This has proved attractive with increased
issuance of JOLs and other Sovereign Wealth
Funds in China, Singapore and the Middle
East. It is the belief that there are potential
new investors that are investigating other
aircraft assets, notably the engines. The
engine value profile represents something
different to an aircraft value profile. Whilst
it is a different profile, they offer further
opportunities at a lower cost initially, and
by the end of the aircraft's life, make up
around 80 percent of the aircraft value.
Whilst the value curve can be driven by
maintenance and the life limited parts
(LLPs), cash reserves protect owners so that
returns are at equilibrium. There is definitely a push from Japanese investors to
understand this side of the market in more
detail. As this continues, there is likely to
be some new entrants, not only to aircraft
investment, but also to engine investment.
Such activity is likely to rise in the Middle
East through aircraft engines and component pools, identifying other ways in
which aviation finance can be effective.
With engines, some may argue that they
represent a better investment, particularly
as common and once-thriving aircraft will

Chart 4: 2014 Total Value of Aircraft Deliveries
by Class (US$ bn)

require support long past the initial batch
of aircraft retirements. Although retirements can be a turning point for many
reasons, it also offers numerous opportunities along the lines it has served before or
as a set of spare parts.
New investors will come to fruition-
of that there is no doubt-and, in turn,
airlines and those alike will continue to
exploit finance from these avenues. Take,
for example, recent and ongoing trends
by airlines such as British Airways who
are gaining access to U.S. dollar funding
through enhanced equipment trust certificates (EETCs) to finance their latest
batch of 787 aircraft. This method has
typically been witnessed by U.S. carriers,
but now non-U.S. carriers are taking their
opportunity-something that for the time
being will increase. Arguably, the most
recognizable trend is the presence of lessors and sale and leaseback arrangements.
Finance has often been less of a concern
for lessors as they frequently meet the
investment grade to gain access to the
capital markets at cheaper rates. For an
airline hoping to make an agreement with
a lessor, there are the obvious benefits as
the residual value risk lies with the lessor.
However, most importantly when securing
new aircraft, airlines can gain access to prebooked delivery slots. Take, for example,
the Doric Lease Corporation order for 20
A380s, where the aircraft have not yet been
assigned operators. It is almost certain that
there will be some end user within this
order, but likewise, there is the possibility
of some excess and for further end users to
take advantage of delivery slots. Aircraft
leasing through sale and leasebacks has

New investors will
come to fruition-
of that there is no
doubt-and, in turn,
airlines and those
alike will continue to
exploit finance from
these avenues.
been on the rise for many years, and this
is set to continue thanks to new market
entrants and the colossal deal involving
AerCap and ILFC, despite further orders not
being part of short-term strategic plans.
New entrant, and the fastest growing lessor, Hong Kong Aviation Capital (HKAC),
continues its future outlook with 60 orders
for the latest Airbus A320neo aircraft in
2013, whilst activity continues to spread
across many airlines through the acquisition of Allco, pre-delivery financing, and
sale and leaseback opportunities.

The Technology Factor
It is fair to say that the remainder of this
decade is crammed with aircraft production
and deliveries of the most modern types.
However, will this trend of developing new
technology to combat rising fuel costs hinder the secondary market and lease rates,
and how quickly will the next technological
enhancements happen?
Replenishment of technology is not
always the most advantageous for aircraft
owners, espec ially when considering typical
Continued on page 15
Jetrader * Spring 2014 13
Jetrader - Spring 2014

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