BOC Aviation IPO launch due Monday; US Ex-Im Bank remains hobbled; Afrexim give lifeline to Arik Air; and what airline profits mean to investors.

Dino D'Amore
By Dino D'Amore May 13, 2016 20:33

BOC Aviation IPO launch due Monday; US Ex-Im Bank remains hobbled; Afrexim give lifeline to Arik Air; and what airline profits mean to investors.

BOC Aviation’s $1.1bn initial public offering in Hong Kong launches on Monday and aircraft lessor has announced a single fixed price of HK$42 ($5.4) for its share issue rather than a price range. The offering values the company with a market capitalization of HK$29.148bn (US$3.756bn). The size of the Global Offering will be HK$8.745bn (US$1.127bn), and at HK$10.056bn (US$1.296bn) if the over-allotment option is exercised.

Full details of the global offering can be found here. This deal is sure to fly and the team is reported to be have been working tirelessly on roadshows.

On Capitol Hill, Senate Banking Committee Chairman Richard Shelby dismissed the US Export-Import Bank’s work as “all corporate welfare” as he told reporters that he isn’t ready to move forward the nomination of John Mark McWatters to serve on the Export-Import Bank’s board of directors. The senator declined to say when the committee might take up the nomination, as such US Ex-Im remains unable to support the industry fully. It might well be the intention of some senators on Capitol Hill to ween Boeing, GE and others off of Ex-Im Bank support gradually so that the argument of job dependency can be taken out of the Ex-Im debate, which would make killing the bank off a far easier task. As such we should be worried about this developing story as the longer this situation continues the more likely it is that there will be no full return of the US Ex-Im bank.

In Africa, the African Ex-Im Bank has stepped-in to support Arik Air in a move that could well save the airline. This is most welcome news indeed and the money should see Arik through this terrible period of fuel scarcity and FX adversity both of which are weighing on the airline heavily as report here previously in full. Also look out below for the Air Zimbabwe story as that airline starts to feel the pain from going to war with FastJet without unlimited government backing (yet).

In the Asia-Pacific (APAC) region, MAS has reported a modest first quarter profit, but the big story right now is the plight of Singapore Airlines (SIA) in its fight with the Middle East (ME) carriers. SIA reported yesterday a full-year profit of $S804 million (US$585m) for the financial year ended March 31, up 118.5% from the prior year primarily due to lower fuel costs and a strong performance by subsidiaries Scoot and Tigerair Singapore. In fact, the strong figures by Scoot and Tigerair Singapore were absorbed by significant weakness of SIA’s previously core routes of Australia and New Zealand where revenue fell by 8.6% to $S1.31 billion.

Emirates/Qantas and Jetstar are syphoning passengers away from SIA at quite a rate. SIA RPKs are down to 10.6c from 11.2c. As a result SIAs shares were hit hard falling the most in almost five years, down 1.8% in 2016 thus far. SIA then released a statement after the markets had closed saying that net income has risen more than fivefold to S$224.7 million for Q1 2016; this should equate to a net profit for Q1 2016 in the S$250m region.

SIA had it all but become too focused on the APAC region as the ME carriers were thinking globally. This has allowed the global SIA brand to fade just as Emirates was building its up. SIA is playing catch-up but it can still take-on the ME airlines if management take the brand global once again and let the subsidiaries mop-up in the APAC region.

The problem for SIA is that it is having to discount heavily as the ME airlines compete and it remains uncertain at this time if the A350 can give SIA the edge it needs to repair margins. This is a great test for the A350 to prove its worth in a highly competitive arena and the onus is on SIA to get its cabin layout correct to get those premium passengers back from Emirates.

It was also released yesterday that the SIA management team and its auditors at KPMG have decided that there is no need to take an impairment yet on SIA’s stake in Virgin Australia even though shares are trading below the purchase price by some margin since the announcement that the airline will report a loss for H2 2016. Last month, SIA increased its stake in Virgin Australia from 22.91% to 23.11%, leading to speculation that SIA might move for the ANZ shares currently up for sale. ANZ, advised by First NZ Capital and Credit Suisse, hopes to have the sales process completed by the end of June 2016, although the timing is poor given the political climate in Australia right now ahead of elections. At the moment the front runners for the ANZ stake are: China Southern, Hainan Airlines and Cathay Pacific. If SIA bids and is successful, it would trigger a bid for the remainder of Virgin Australia under current rules. Total SIA ownership of Virgin Australia might be a good thing for the Singaporean flag carrier in the long term.

Meanwhile, in the USA, it is of interest that JetBlue Airways’ shares took a pounding in trading yesterday, closing down 4.67% a 13-month low. This came as the carrier put out a statement saying that traffic for April was well down on the same month last year. Load factor fell to 84.1% from 85.7% year on year for April as capacity increases outstripped demand. This lead in turn to revenue per available seat mile falling 12.5%.

United Continental Holdings shares also took a knock, falling 4.41%. Other majors followed suit with American Airlines Group stock price down 4.66%, Delta Air Lines fell 2.91% and Southwest Airlines was down by 2.11%. This makes us consider investor sentiment in the civil aviation sector. Investors are currently very worried that all the aircraft on order will not be required with passenger numbers holding steady at a time when unit delivery growth rates in 2017-18 go through the roof. The underlying worries seem to be that as we are now in the seventh year of an upcycle in the commercial aerospace sector that this is usually about the time when everything starts to reverse. The truth is that with the delay in new aircraft deliveries and a resurgence of older aircraft in service due to low fuel prices, we are in a kind of lingering short-term transitional phase at the moment that does not seem to have an end to it in sight so long as oil remains low and new aircraft deliveries do not ramp-up significantly. But, even so, it is vital to consider the fact that the amount of aircraft in storage, especially A320 types, has reduced massively over the past year or so and in the narrow-body market at least the number of parked aircraft is at a low point given the number of new aircraft coming into service each month; we also have 747-400s pushed back into service as demand remains strong and fuel prices low.

If we take into account the problems in the world at this time with all of North Africa, Turkey, Ukraine and Russia suffering huge falls in tourist numbers along with major European cities such as Paris, the take-away is that the airline sector is robust and this will continue to underpin the commercial aviation leasing and manufacturing sectors during this period of transition. Investors have noted some of this argument and have turned their attentions instead to concentrate on the other constant – competition.

In the USA, despite large-scale consolidation investors continue to see the market as proliferated even though airlines have on the main, save for the Seattle war, been content to avoid each other. In some areas of the globe there is intense competition and, in the areas where governments see fit to support airlines, this competitive landscape continues to be totally distorted with India, Pakistan, South Africa, Zimbabwe, Russia and Malaysia being the number-one offenders in the globe at this time. Even in South East Asia it seems that the low-cost airlines can all make a profit with airlines increasingly seen to be moving aside for one another and sorting out pecking orders on certain routes much like the US airlines have done in the past.
It is in the aircraft leasing sector that we see the most overlap with 60-plus companies bidding on aircraft at any one time. It is in the aircraft leasing sector that consolidation needs to continue at pace if lessors are ever going to get out of a situation where the real winners every time are the airlines. It is true to argue that the balance has tipped a little too far on a fair few aircraft deals of late. Investors are arguing, almost unanimously, that in the here and now it might be a little more logical for lessors to grow their business, not through aircraft orders, but through acquisition until the market levels off again. Only in the regional leasing space, where NAC and GECAS have a virtual duopoly, are lessors safe to transact deals without having to go all out on every deal every time against a seemingly ever-growing bunch of crazies aiming to bag a deal at any cost.

Dino D'Amore
By Dino D'Amore May 13, 2016 20:33