Aircraft Leasing and Financing

Tools for Success in International Aircraft Acquisition and Management

Vitaly Guzhva, Sunder Raghavan, Damon J. D’Agostino, Damon J. D'Agostino, Vitaly S. Guzhva

• Publisher: Elsevier
• Year: 2018
• eBook ISBN: 9780128152867
• Topic: Technology & Engineering
• Subtopic: Sociology
• Index: Technology & Engineering

Aircraft Financing and Leasing: Tools for Success in Aircraft Acquisition and Management provides researchers, industry professionals and students with a thorough overview of the skills necessary for navigating this dynamic field. The book details the industry's foundational concepts, including aviation law and regulation, airline credit analysis, maintenance reserves, insurance, transaction cost modeling, risk management tools, such as fuel hedging, and the art of lease negotiations. Different types of aircraft are explored, highlighting their purposes, as well as when and why airline operators choose specific models over others.In addition, the book also covers important factors, such as maintenance reserve development, modeling financial returns for leased aircraft, and appraising aircraft values. Most chapters feature detailed case studies, applying concepts to actual industry circumstances. Users will find this an ideal resource for practitioners or as an outstanding reference for senior undergraduate and graduate students.- Presents the foundations of aircraft leasing and financing, including aviation law and regulation, airline credit analysis, maintenance reserves, insurance, transaction cost modeling, and more- Provides an overview of the different types of aircraft, their purposes, and when and why operators choose specific models over others- Offers a blend of academic and professional views, making it suitable for both student and practitioner- Serves as an aircraft finance and leasing reference for those starting their careers, as well as for legal, investment, and other professionals

Chapter 1

Overview of the Aircraft-Leasing Industry and Market Environment

Abstract

This introductory chapter provides an overview of the airline industry, global and regional markets for commercial aircraft, and discusses the history and current state of the aircraft-leasing industry. We present the historical data and forecasts for revenue passenger miles, load factors, demand for commercial aircraft, and funding sources compiled from a variety of industry sources. We also include brief introduction to major topics discussed in the following chapters of the book.

Keywords

Airline industry; airline leasing industry; regional markets; revenue passenger miles; load factor

Chapter Outline

• State of the Airline Industry 2
• The Market for Commercial Aircraft 4
  • Forecast 5
  • Aircraft Financing 6
  • Aircraft-Leasing Industry 8
• Regional Markets 10
  • North America 11
  • South America 11
  • Europe 12
  • Asia and Southwest Pacific 13
  • Africa and the Middle East 13
• Current State of Aircraft Financing and Leasing Industry 14
• Topics Discussed in the Book 15
  • Fleet Planning 15
  • Principles of Aircraft Leasing Versus Ownership 16
  • Aviation Legal and Regulatory Framework 16
  • Aviation Insurance 16
  • Aircraft Funding—Debt, Equity, and the Capital Markets 16
  • Airline Credit Analysis 17
  • Leasing Portfolio Management and Risk Management 17
  • Principles of Maintenance Reserve Development and Management 17
  • Transaction Cost Modeling 18
  • Lease Agreement and Negotiation 18
  • Aircraft Valuation and Appraisals 18
  • Taxation and Considerations for Cross-Border Transactions 19
  • Engine Leasing 19
• References 19

State of the Airline Industry

Out of all the alternatives to travel, air transportation is one of the fastest and one of the most expensive ones. What we call the airline industry today can be traced back to 1925 when the Air Mail Act in the United States facilitated the development of commercial air transportation by allowing the postmaster to contract private airlines to deliver mail. The Air Commerce Act in 1926 provided the Secretary of Commerce with the power to establish airways, license pilots, certify aircraft, and issue and enforce air traffic regulations. The Civil Aeronautics Act of 1938 created the Civil Aeronautics Board, the regulatory body that among other functions was charged with determining airline routes and regulating passenger airfares. However, the two most significant events that led to the airline industry as we know it today were the development of the Boeing 707, the first widely produced commercial aircraft powered by a jet engine, in 1957 and the Airline Deregulation Act of 1978. Jet-powered aircraft became the primary mode of long-distance travel in the world. The deregulation started the era of innovation and free-market competition in the airline industry and made airline travel affordable.

While air transportation used to be accessible only to wealthy individuals after deregulation, more airlines joined the competition putting downward pressure on airfares. The low-cost business model, pioneered by Southwest Airlines, made air travel even less expensive. Middle class became the driving force of the industry. Economic growth in developing nations in Asia, the Middle East, and South America resulted in the emergence of the middle class, which propelled the global air transportation industry even further. Also, the air service liberalization, such as “open-skies” agreements increased competition, improved incentives for airline efficiency, and provided substantial benefits to consumers.

With a growing world population and historically low oil prices in recent years, the demand for air travel is increasing exponentially. As presented in Fig. 1.1, the number of airline passengers increased eightfold from 1980 to 2017 and almost doubled from 2007 to 2017 exceeding 4 billion passengers per year.

Figure 1.1 Total number of airline passengers. Compiled by authors using ICAO Data+.

One common statistic that is used in the airline industry is revenue passenger miles (RPMs) (or kilometers). For airlines, it is important to know how many revenue passengers they carried for a mile or kilometer, because each of those passengers generates revenue. This measure combines the distance flown by aircraft, their capacity, and load factor. As presented in Fig. 1.2, measuring global airline industry performance using RPMs also demonstrates a tremendous growth in the last 10 years with RPMs in 2017 more than double their 2007 levels. Fig. 1.3 shows that this growth in RPMs was not only fueled by just increased capacity but also by higher utilization of airline fleets globally. From 1980 to 2017, the airline average annual load factor went from about 60% to more than 80%.

Figure 1.2 Global annual RPMs. RPM, Revenue passenger miles. Compiled by authors using the Airline Monitor data.

Figure 1.3 Global airlines load factor. Compiled by authors using the Airline Monitor data.

Today, after decades of low (or negative) profitability, the airline industry is performing well. Airlines have learned how to control costs and capacity, optimize their networks, minimize distribution costs, generate significant amounts of ancillary revenues, and efficiently finance their fleets. For example, in baggage fees alone, American Airlines collected almost $1.2 billion in 2017, which was the highest amount among the US airlines. Delta Air Lines and United Airlines were in the second the third place with $900 and $800 million, respectively. The International Air Transport Association estimates $38.4 billion of net profit for the global airline industry (IATA, 2017).

The growth and success of the airline industry has translated into robust demand for commercial aircraft. Fig. 1.4 presents the total dollar value of aircraft delivered by major commercial aircraft manufacturers from 1958 to 2017. The graph shows an exponential increase after 1980 with the dollar value of deliveries reaching $110 billion in 2015.

Figure 1.4 Annual value of aircraft delivered. Compiled by authors using the Airline Monitor data.

The Market for Commercial Aircraft

According to the Airline Monitor, as of December 2017, there were more than 28,307 aircraft delivered globally (Fig. 1.5). Boeing still has the major share with almost 50% of the world fleet (including the remaining McDonnell Douglas aircraft). A relative newcomer, Airbus is not too far behind manufacturing...

Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright
• About the Authors
• Acknowledgments
• Foreword
• Foreword
• Chapter 1. Overview of the Aircraft-Leasing Industry and Market Environment
• Chapter 2. Principles of Aircraft Selection
• Chapter 3. Principles of Aircraft Leasing Versus Ownership
• Chapter 4. Aviation Legal and Regulatory Framework
• Chapter 5. Aviation Insurance and the Impact on Risk Management
• Chapter 6. Aircraft Funding—Debt, Equity, and the Capital Markets
• Chapter 7. Airline Credit Analysis
• Chapter 8. Leasing Portfolio Management and Risk Management
• Chapter 9. Principles of Maintenance Reserve Development and Management
• Chapter 10. Transaction Cost Modeling
• Chapter 11. Lease Agreement and Negotiation
• Chapter 12. Aircraft Valuation and Appraisal
• Chapter 13. Taxation and Considerations for Cross-Border Transactions
• Chapter 14. Engine Leasing
• Index