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aircraft coming into the marketplace based on projected long-term growth in air travel. By way of contrast, a lower-barrier sector such as cargo vessel manufacturing has resulted in a situation of literally dozens of new shipyards competing for market share. This results in the potential for highly unpredictable and unjustifiable changes in supply such as the 25 percent increase in bulk carrier vessel capacity incurred in 2009.4 This increase was far in excess of long-term growth rates in demand and occurred at a time when the U.S. and Europe were in recession. SkyWorks’ proprietary analysis of aircraft trading values shows that trading prices are interdependent upon relative growth rates in supply and demand. Hence the aforementioned situation where supply growth is severely out of synch with underlying demand levels can result in extreme volatility for asset values.5 The duopolistic competitive situation of large aircraft manufacturing on the other hand should not generally result in supply increases that grossly exceed long-term growth in underlying demand. As such, the prohibitive barriers to entry in the commercial aircraft manufacturing sector are of benefit to the aircraft financier. This should outweigh any impact attributable to the generally weak state of finances for many commercial airlines provided that a lease or secured loan is conservatively structured. A further fundamental in support of aircraft finance relates to the intrinsic nature of commercial aircraft. In particular, commercial aircraft receive favorable tax advantages in many jurisdictions, and also have an embedded inflation hedge. The tax advantages are generally attributable to the fact that the economic life of a commercial aircraft typically spans two to three decades whereas it can often be depreciated for tax purposes in less than 10 years. This results in the opportunity for an owner of such an asset to receive a significant deferral in taxable income. Inflation protection arises from the fact that aircraft have significant inputs of raw materials and labor, each of which will customarily increase with general inflation. History has shown this effect with highly inflationary periods resulting in higher than average increases in both selling prices of new aircraft as well as residual values of used aircraft. Given that the state of the market is such that a lessor can generally use “uninflated”

residual value assumptions when calculating required rental rates, there is virtually a free inflation hedge currently embedded in this asset class. These two intrinsic fundamentals are very timely when considering that a number of the developed economies are pursuing extraordinarily aggressive monetary policies to avoid entering a deflationary spiral. At the same time, many of these nations are mounting unprecedented fiscal deficits. The monetary phenomenon that is underway is causing increasing concern about the specter of inflation being unleashed. Likewise, the current fiscal deficits that are being compounded by rising entitlements and decreasing tax receipts due to aging demographics portend substantial increases in marginal tax rates for the wealthy in the near future. A comparison of current times to recent U.S. economic history perhaps draws greatest parallel to the 1970s. That era represented a golden age for aircraft leasing, as inflation protection and tax shelter were highly valued investment attributes. Given the parallels to such period that may be forming we may even see the re-birth of a broad tax-based aircraft leasing market.

consistent profitability, the aircraft finance sector already made a shift from a creditbased market to an asset-based market during the previous downturn.7 The assetbased orientation for the aircraft finance sector has in turn resulted in relatively limited distress heretofore in the most recent downturn. Provided the economic recovery continues to gain strength, it is likely that market observers will look back and see that the aircraft finance sector performed notably well through a period of unprecedented economic and financial challenges. This favorable track record combined with the attractive fundamentals discussed hereunder portends a resilient aircraft finance market to come in the near future.

Though much uncertainty persists throughout the global economic and financial system including the potential for further increases in oil prices and the need for the aircraft manufacturers to carefully weigh production targets6, the current dynamics of the “new normal” favor the aircraft finance sector. Although the airline sector itself still has yet to establish broad and

Excluding loans guaranteed by export-credit agencies. 2 It should not be entirely surprising that the negative savings rate in the U.S. was unsustainable. 3 For example, the ability to use pilots interchangeably on aircraft that share a “common type rating.” 4 Source: SSY Consultancy & Research Ltd. 5 Aviation is of course subject to large short-term fluctuations in demand from time to time that will generally result in fluctuations of aircraft trading prices; however, it does not face large swings in supply that would further exacerbate asset price volatility. 6 Although few competitors in large aircraft manufacturing results in a rational supply environment, a counterpoint is that such manufacturers must be cautious in setting production rates as it is difficult to make large reductions in production output due to unique supply chain complexity. 7 This is evidenced by the fact that maximum terms for secured aircraft loans provided by commercial bank lenders have shortened to a maximum of 10-12 years on average.

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Jetrader - May/June 2010

Table of Contents for the Digital Edition of Jetrader - May/June 2010

Jetrader - May/June 2010
A Message from the President
Q&A: Steven F. Udvar-Hazy
ISTAT Shines in Orlando
The State of Aviation Finance
A Closer Look: Airbus A380
Cargo Conversion Candidate Aircraft
Emerging Entrants
Help Yourself
Bavarian Splendor
Flying Higher
Aircraft Appraisals
From the ISTAT Foundation Index
Jetrader - May/June 2010 - Jetrader - May/June 2010
Jetrader - May/June 2010 - Cover2
Jetrader - May/June 2010 - A Message from the President
Jetrader - May/June 2010 - 4
Jetrader - May/June 2010 - Contents
Jetrader - May/June 2010 - 6
Jetrader - May/June 2010 - Calendar/News
Jetrader - May/June 2010 - 8
Jetrader - May/June 2010 - Q&A: Steven F. Udvar-Hazy
Jetrader - May/June 2010 - 10
Jetrader - May/June 2010 - 11
Jetrader - May/June 2010 - ISTAT Shines in Orlando
Jetrader - May/June 2010 - 13
Jetrader - May/June 2010 - 14
Jetrader - May/June 2010 - 15
Jetrader - May/June 2010 - The State of Aviation Finance
Jetrader - May/June 2010 - 17
Jetrader - May/June 2010 - A Closer Look: Airbus A380
Jetrader - May/June 2010 - 19
Jetrader - May/June 2010 - Cargo Conversion Candidate Aircraft
Jetrader - May/June 2010 - 21
Jetrader - May/June 2010 - Emerging Entrants
Jetrader - May/June 2010 - 23
Jetrader - May/June 2010 - Help Yourself
Jetrader - May/June 2010 - Bavarian Splendor
Jetrader - May/June 2010 - Flying Higher
Jetrader - May/June 2010 - Aircraft Appraisals
Jetrader - May/June 2010 - 28
Jetrader - May/June 2010 - From the ISTAT Foundation
Jetrader - May/June 2010 - Index
Jetrader - May/June 2010 - Cover3
Jetrader - May/June 2010 - Cover4