United strategy impresses; Blackbird ABS sets new records

Eleanor Steed
By Eleanor Steed November 16, 2016 17:27

United strategy impresses; Blackbird ABS sets new records

United Airlines is moving to protect its market share from the ultra-low-cost carriers (ULCCs) with the further segmentation of the cabin with the introduction of a basic economy product. This will involve no carry-on luggage in overhead bins, no seat choice and boarding last. This basic option serves to enhance the existing economy offering. United’s Basic Economy product will be on sale in early 2017 for travel in the second quarter next year.

This is a very welcome development from United for all shareholders. The United brand will carry the change through and brand, make no mistake, is king in the aviation market at the moment.

United shares are starting to look undervalued. Analysts agree. Following United’s Investor Day yesterday, JPMorgan and Cowen & Company have praised the moves by the airline for increased segmentation of the cabin as well as plans to defer up to 61 737 aircraft.

JPMorgan analysts Jamie Baker, Nishant Mani, Mark Streeter and Jonathan D. Rau, stated that they are “particularly impressed with United’s planned implementation of Basic Economy, which we believe raises the bar previously established by Delta. Coupled with ongoing RASM recovery and the unexpected about-face from one of the sector’s staunchest, long-term detractors, we view Big Four equities as potentially capable of continuing their recent market outperformance into year-end and beyond.” They add that the move by United “raises the bar for cabin segmentation” set by Delta and effectively has pushed up corporate fares since reducing same-day flexibility and eliminating overhead access, forces flyers to check their roller-boards and increasing the time spent in airports, which “only further diminish the value proposition of this fare category for business travelers.”

Cowen & Co analysts praised the change in management attitude at the airline. “United will no longer react to changes in the market but will be an aggressive competitor” since the team also discussed at the investor day “how they will defend their turf if they to”. Cowen also praises the network changes United plans to implement that focus on improving the US domestic market. “United’s strategy in the domestic market will focus on up-gauging aircraft and de-emphasizing their regional operation. United will attempt to improve connectivity which, in turn, should improve profitability of their hubs,” says the report.

Speaking at the investor day, Andrew Levy, Executive Vice President & Chief Financial Officer, confirmed United’s plan to rationalise its narrowbody fleet plan. United is converting its original order for 65 737-700 aircraft into four 737-800s, which will be delivered during the second half of next year, and has converted the remaining 61 to 737MAX aircraft with a delivery date to be determined.

United estimates the changes will reduce its capital expenditure by $1.6bBn. The airline also plans to purchase 24 E175s rather than leasing them via a CPA with Republic. Although this shift in its regional aircraft strategy will increase capex by $550million, the change in the CPA will drive approximately $100million in cost savings for the company. Aircraft acquisitions will be funded 50-75% funded with new debt given the airline’s historically attractive EETC borrowing rates sub 3%.

United states that it is continuing to review and refine its fleet strategy, with plans to upguage aircraft on domestic routes and to refurbish existing aircraft to improve product and extend the life of their aircraft. United will retire its 747 fleet of 20 aircraft by the third quarter of 2018 and is considering plans to add used aircraft opportunities beyond the 11 used Airbus aircraft due for delivery in 2016 and 2017.

United is deferring and flipping aircraft, as are many prudent airlines, and this is a symptom of passenger growth not keeping up with aircraft deliveries. This must not be confused with a slowing or reversal of passenger growth. This factor, coupled with the fact that low oil prices mean the economics of older aircraft are far superior over the medium term, means that we should not worry about any aircraft deferrals on the main, but we should all be keeping an eye on load factors. Load factors are falling across THY, Etihad and Emirates and a host of other airlines that are growing fleets at the fastest rate. These are the fleets that we would expect to be hit first by any real global slowdown (although THY is hit by domestic troubles more than anything else). It is best to watch the traditional bulwarks of IAG, Delta, American, Cathay Pacific, Qantas, Air France-KLM & Lufthansa for any signs of a real global slowdown. There is no point watching the LCCs as by then you have most likely already lost your shirt!

United was deemed long ago as the most interesting airline for 2017 and as such is the main keynote speaker at Airline Economics Growth Frontiers Dublin 2017, and no one at the airline can speak to lessors and financiers better than Gerry Laderman. Make sure you are at AE Dublin 2017 to hear from “the king of the EETC” and our friend Gerry at AE Dublin on Monday 16th January 2017. Book today as we are close to closing delegate bookings due to unprecedented demand.

Meanwhile, Blackbird Capital has closed its $800m aircraft ABS notes to refinance existing warehouse debt, breaking a ream of records along the way.

Blackbird Capital I LLC (Blackbird) has announced that Blackbird Capital Aircraft Lease Securitization Limited 2016-1 (BBIRD Cayman) and Blackbird Capital Aircraft Lease Securitization US LLC 2016-1 (BBIRD USA) have closed an $800million fixed rate notes offering, comprised of US$200million of 2.487% Series AA Fixed Rate Notes (Series AA Notes), US$540,000,000 of 4.213% Series A Fixed Rate Notes (Series A Notes) and US$60million of 5.682% Series B Fixed Rate Notes. The Issuers also offered subordinated notes comprised of Fixed Rate Series R-1, R-2, R-3 and D Notes and a Series E Note representing the equity interest in BBIRD Cayman, each of which were purchased by an affiliate of Blackbird. The subordinated notes offer regulated investors, with sensitivity to risk-based capital, a more efficient means of accessing equity-like investments in this asset class.

The Series AA Notes, Series A Notes and Series B Notes were rated AA, A and BBB, respectively, by S&P and by Kroll. The notes are backed by a portfolio of 19 aircraft which will be acquired by the Issuers. The aircraft comprise a mix of narrowbody and widebody jet aircraft that, as of September 30, 2016, had an average age of 3.28 years and were leased or expected to be leased to 16 lessees based in 13 countries. Air Lease Corporation and its Irish affiliate, ALC Aircraft Limited, will act as servicers for the aircraft.

Proceeds from the issuance will be used by the issuers to refinance the existing warehouse loans and/or acquire the aircraft. Napier Park, through third party funds it manages, and Air Lease Corporation, are retaining their equity stakes in the joint venture.

“The Air Lease team continues to innovate and has created a model for the next generation of ABS issuance for the aircraft leasing sector with a simplified structure that has strong credit protections and appeals to a broad group of investors. This transaction has set a new benchmark for post financial crisis aircraft ABS issuances, including the first AA tranche of rated securities, the lowest blended cost of funds through the BBB class, the largest number of investors to place bids, the largest number of investors to get allocated bonds, and the shortest period to execute a transaction in only 6 weeks,” said Ryan McKenna, Head of Strategic Planning of Air Lease Corporation.

“We are very pleased with this ground-breaking issuance, the success of the investment to-date, and more broadly, our partnership with Air Lease Corporation,” said Manu S. Rana, Partner at Napier Park. “Thanks to our partnership, and as evidenced by the pricing of this issuance, Blackbird has assembled an attractive portfolio of leased commercial aircraft, further demonstrating Napier Park’s ability to work with leading operating partners to originate and manage differentiated investment opportunities with attractive risk-adjusted returns for our investors.”

BofA Merrill Lynch, BNP Paribas and Mizuho Securities acted as joint lead structuring agents and joint lead bookrunners of the transaction. Citigroup also acted as a joint lead bookrunner. Credit Suisse, Fifth Third Securities, MUFG and Société Générale acted as co-managers.

Hughes Hubbard & Reed advised Blackbird and the issuers, and Milbank, Tweed, Hadley & McCloy acted as counsel to the joint lead structuring agents.

Amedeo has been mandated by Etihad to finance two A380s delivering in March and May 2017. The equity is being placed as part of an equity raise by Amedeo Air Four Plus in the UK institutional investor market. The equity process is expected to be completed by mid-December 2016. The aircraft acquisition will be funded through a combination of equity (expected to be GBP130m in total) and debt financing arrangements (US$230m per aircraft). More detail of this deal will appear in the forthcoming issue of Airline Economics.

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Eleanor Steed
By Eleanor Steed November 16, 2016 17:27