ISTAT Jetrader - Autumn 2020 - 33

Aviation Pathology & Treatment:
Diagnosis of a Vicious Cycle
By Nils Hallerstrom, Former President, PK AirFinance

Description: Take a deeper look into various scenarios for how the COVID-19
cycle could impact traffic growth, the impact on airlines and aircraft values by
comparing to previous cycles, and why the cycle will eventually recover.
This presentation was recorded on 14 July 2020.

A

ppraisers have
a tough time
because their
appraisals
are used in
prospectuses
and memoranda
for securities, and they are used
for checking covenants in loan
agreements. They are used in checking
impairments on leases, and so on and
so forth. So, an appraiser cannot just
come up with a random number; they
have to have a very well underpinned
view. It's tough today, because there
are very few transactions that are
taking place for naked aircraft. So,
where do you get your data from?
The people who are trading, leasing
and financing aircraft need to have
some kind of view of the value of
airplanes and where the values may
head into the future. If you think of
values as what I can get for an aircraft
I own today and convert into cash next
week, it's going to be very difficult,
because the market is so frozen up now
that I think you should think about the
values more like what could I pay for an
aircraft today and expect to make an
adequate risk adjusted return over the
lifetime of that asset. I think you have to
think of values as the present value of
an income stream that you could derive
from that asset. This way, you don't
really need that liquidity right away.
First, let's start with the pathology,
the cause of the difficulties we are
facing right now in the COVID-19
pandemic. I'm not going to talk a lot

about the pandemic itself, because
I think you all have an overdose of
information about it. Suffice to say
that we have about 13 million cases
identified today worldwide, and the
infection rate per day is continuing to
rise. I don't know how this is going
to play out; it could be very bad, and
the infection rate could continue to go
up or it could taper off and it would
be a good scenario. Nobody knows.
I think that it's futile to try to make
predictions how the pandemic will
play out. Instead, I think we should
focus on mapping the process around
the pandemic and how it affects our

industry and try to model outcomes
based on various scenarios.
To help the structuring of our
thinking in terms of this pandemic, I
wanted to break down the pandemic
into four phases.
Phase One is the outbreak of the
virus, the pandemic and the contagion.
The reaction here is the mandatory
confinement and lockdown where the
purpose is to try to avoid overwhelming
the health care systems. Then we come
into Phase Two as the contagion peak
is behind us and there is a gradual
lifting of restrictions. That phase is
characterized by fear and reluctance.

Cause: Covid-19
GOOD

1

We should focus on mapping the process around
the pandemic and how it affects our industry and try to
model outcomes based on various scenarios.
Jetrader

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