So what is going on as September comes to an end?

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By admin September 27, 2013 09:29

So what is going on as September comes to an end?

This week has been one of non-stop travel it seems and as a result this news service has not been up to scratch, and so as I get my feet back under the desk it is time to put that situation right.

Now I warned you all eleven weeks ago that the cashflow data retrieved by our contacts on Jet Airways showed the airline needed the Etihad deal to go through for urgent working capital, we warned all lessors to be warned. We then heard this week that Jet Airways is late paying a major lessor their dues. I choose not to name the lessor in question as in this market from the information I have, I would be naming virtually every other lessor on a monthly basis every time a rental payment was late and thus I currently run an opinion that we name names only when the rental is well overdue or indeed after two missed payments. I feel that in this case the lessor should retrieve assets from Jet Airways as information is clear that forward bookings for the next essential quarter have been decimated by the recent price increases across the Indian airline market. Please all asset managers beware. Of course the recent requests by Air India for leased aircraft have fallen on deaf ears, although I feel wary that the Chinese lessors will end-up controlling the Indian market if EU and US based lessors pullback completely and thus, given that it is backed by the government, Air India (the cause of much of the pain in the Indian sector) should, with strong agreements in place be considered by lessors that can take the hit if the very worst were to happen as an Indian market backstop if nothing else, but lessors with aircraft already in India should not consider additional risk, especially given the AirAisa India entry in a few months. Airlines flying into India on the other hand are a totally different matter – business is booming.

Also this week we had the Aviation Capital Group finance deal and also yesterday the Avolon Aerospace Leasing announcement that it had issued, through an SPV (Emerald Aviation Finance Limited), a US$636m deal of 210,000 Fixed Rate Asset Backed Notes (details below). Now as we know, the US Federal Reserve threw everyone a second wind last week and ensured that this quarter will see another round of cheaply-priced closings. BUT we must remember, as a friend pointed out to me yesterday, that although the coupons of the ACG deal are low at a 320bp spread, the spread given the company’s BBB- Fitch rating and BB+ bond rating from S&P was -100bp wide to Air Lease and -220bp (mean average) wide to the average 3yr spread in three high grade bond indexes checked (where the credit quality averages mid-to-high BBB) – Thanks to our friends for that information.

This goes to show that aircraft leasing is still not thought of as a safe bet by investors and that is because the only news coming out is news of default and woe most of the time. We here are guilty of that too, thus India has and remains a real pain in the backside for lessors and as mentioned here a significant double edged sword if Chinese lessors are winning to step into the Indian market en-mass.

Now we should not over-look the engine leasing market. Engine leasing is great business at the moment and it is booming with Willis Lease in a good position to consider a WEST III deal. WEST II of course was one of the deals of the year last year and word from the top at Willis Lease is that a WEST III could well be on the cards. Willis Lease looks on course to match 2012 performance as is Engine Lease Finance. MTU on the other hand is set to record good growth. But wait – the real story in the engine market is on the GE90, especially those 119s. Boeing loves to have a go at the Airbus A340 but from what we are seeing the 777 is not doing too well either right now as more and more GE90s come off wing. Figures we have seen suggest a step rise in GE90s being taken off wing for service, well out of the range set by the manufacturer. As a result GE has been taking back as many GE90s as it can to service aftermarket agreements. So can someone gain out of this? Yes – Emirates: Emirates is sitting on a huge GE90 pool, the largest in the world by far. Everyone has been saying for years that they do not need such a pool – Well it looks like they will, and it looks like GE will want to take back as many as it can lay its hands on. The residuals on the engines are starting to push up. Look out for this, Willis Lease, although it does not realise it, did well to get its hands on some GE90s not too long ago.

In airline news – It is time to look again at Avianca plans for the future: Chairman German Efromovich used 19% of his investment company’s (Synergy Aerospace Corp) common shares in Avianca as collateral for loans recently. Efromovich may yet have to turn to lessors again as his expansion plans are huge and this latest loan will still not go far in the scale of things. The rapid expansion at Avianca might yet prove to be just too great as the Latin American economy is far from rock solid. Future aircraft deliveries en-mass at this airline during a period of possible rising interest rates makes one worry for this airline. If anyone can pull it off it is Efromovich, but it is certain that leasing is the key for him. But the Avianca situation should cause lessors to pause for thought. Avianca’s preferred shares fell 0.8% today to 3,720 pesos – An 18% fall this year. The common shares aren’t publicly traded but the yield on the bonds has fallen 92 basis points, or 0.92 percentage point, to 7.71% since they were issued. Net debt is up at 2.8 times earnings, this is very high for Latin American airlines.

But the question this week is this: Will NAS throw its 787s back to Boeing? One thing is for sure Boeing staff needed flak jackets at their meeting this week and if Airbus can ensure the A350 is problem free then they will have made-up a great deal of ground. The performance of the NAS A340 is more reliable and thus at this time more profitable, especially given the economics involved with purchase price – In the short term you can run an A340 in the black under a low cost operation with less hassle than a 787 – Now who would have thought that possible 12 months ago? Maybe more low-cost, long-haul wannabes should try getting their hands on a cheap A340 and filling it with as many chairs as possible for a short-term gain while many other more expensive aircraft options spend more and more time on the ground. With Emirates breaking up some of its A340s and with its others on sale, parts and aircraft can be purchased as one in a good deal. The economics over a five-year period are reasonably impressive against a 787 over a five year period. One 787 customer recently comment that if they had 787s on order “I would be hoping that they were late on in the delivery list as those at the front are thus far a nightmare”. That comment I am sure has been relayed to Boeing more than once. Financiers and lessors would do well to have a think about delaying deliveries and moving back down the delivery list to have aircraft that might well be lighter and improved.

admin
By admin September 27, 2013 09:29
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