Airline Business Februarie 2013

5/26/2018 Airline Business Februarie 2013

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INTERVIEW

NAME

Coverlines onno more thanthree if possible

MONTH 201

INTERVIEW

NORM

LIU

KeepingGECAS

on top

CONTENTS Contents text CONTENTS Contents text CONTENTS Contents text

STRATEGY FOR AIRLINE BOARDROOMS WORLDWIDE flightglobal.com/ab

FINANCE Whats hot and whatsnot for funding fleets in 2013

LESSORS We rank industrystop players in our annual survey

STRATEGY How race forinvestors is intensifying

FEBRUARY 201


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CONTENTS

flightglobal.com/ab February 2013 |Airline Business |5

VOLUME 29 NUMBER 2

HOW TO CONTACT [email protected]

LONDON OFFICEPhone +44 (0)208 652 3842

e-mail: [email protected] Kingsley-JonesManaging editorGraham DunnContent editorAlex ThomasPublisherMark Pilling

SINGAPORE OFFICEPhone +65 6 780 4311Asia managing editorSiva Govindasamy

WASHINGTON OFFICEPhone +1 703 548 8052Americas managing editor Stephen Trimble

SUBSCRIPTION ENQUIRIESPhone +44 (0)1444 445454

NEW MONEY

page 23

TOUGH COMPETITORS

page 32

GAME CHANGE

page 36

AB INTERACTIVE

6 Nominate your CEO for the Airline Strategy Awards

BRIEFING

INTERNATIONAL

8 Boeings dream turns into a nightmare

9 Raiders regard Qantas with relishAMERICAS

10 Pinnacle is thrown a lifeline

EUROPE

12 More carriers join the search for investors

13 Europes low-cost carriers are on the march

ASIA

14 Regulator unmoved by Qantas distress call

15 India looks at capital gains

AFRICA

17 Respite for SAA, but woes mount

SPECIAL REPORT

FINANCE & LEASING24 Leasing space A graphic snapshot of the major

lessors

26 Fast learners How Chinas lease sector is buildingknow-how rapidly

32 Shift to the East The leasing market is seeing achange in its investment base

36 Shaping the game How new rules for export creditwill impact airlines

40 Finding the funds Record production means moredelivery finance

43 Lowering the risk Despite few losses in 2012,claims will still exceed $1 billion

FEATURES

FORUM

44 All points south of the borderExpansion at SanAntonio airport is being driven by Latin growth

FEEDBACK

47 Taking the American wayWhy Europe can learnlessons from how the USA drove down ATC costs

49 NDC: Myth vs Reality IATA believes airline retail is invital need of modernisation

REGULARS

50 Market outlookBuilding needs sound foundations

52 Executives on the move

COMMENT

54 Safety is no accident

COVER STORY

18 View from the topGECAS chief Norm Liu is undauntedby competitors advances in theoperating lease market and says thelessor will remain a leader through a$7 billion a year investment plan

Airline Businessis published monthly byReed Business Information. Reed Business Information Ltd 2013. ISSN 0268-7615.Printed in the UK by Polestar, Colchester.

Annual Subscription Rate: US$225/119Periodicals postage paid at Rahway, NJ. Postmaster sendchanges to Reed Business Information, c/o MercuryInternational Ltd, 365 Blair Road, Avenel, NJ 07001.

For a full listing of RBI magazines, visit reedbusiness.com

flightglobal.com/abINTERNATIONAL

BPA

FINDING FUNDS

page 40

TM

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UATP.COM [email protected]

Eliminate credit card fees

Self-funding programs

New revenue streams

Competitive market intelligence


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flightglobal.com/ab

NETWORK IN SAN ANTONIO

The Texan city of San Antonio

hostsAirline Businesss

premier airline and airport

route planning event,

Network USA, on 3-5 March.

The keynote speaker is Jose

Luis Garza, chief executive of

Mexican low-cost carrier

Interjet. The event brings

together airlines that serve

the US market as well as a

European, South American

and Middle Eastern carriers.

Register at:

networkusaforum.com

ASCEND ON THE WEB

Ascends analysts are hosting

a 60min webcast on

7 February for an interactive

discussion about the

immediate prospects for the

aviation industry, manufactur-

ers, airlines, the cargo market

and the financial sector.

Last year global passenger

traffic grew by more than 5%,

although yields did not follow

suit. However, demand fornew aircraft remains strong,

with $100 billion worth

forecast for delivery in 2013.

The analysts at Flightglobals

consultancy arm will examine

whether the markets can

break the snakes and

ladders cycle of one step

forward, one step back and

deliver a consistent trend of

progress and profit. The

webcast will be presented by

Ascends head of consultancy,

Eddy Pieniazek and his fellowanalysts. There will also be a

question and answer session.

Register to view the agenda

at: flightglobal.com/

AscendWebcast

AIRLINE BUSINESSINTERACTIVE

6 |Airline Business|February 2013

MULTI-MEDIA

FINANCE INTERACTIVE

Airline Business and avia-tion finance specialistDVB Bank have teamed up

for our third annual interactivespecial to scrutinise this market.Published in parallel with ourannual financing and leasing sur-vey in this months issue, the spe-cial report tackles the key issuesfacing the sector through an inter-active format.

Topics explored this yearinclude how the leasing sector isincreasing its proportion of theworld fleet, and the issue of air-liner economic lives. The airlines2013 financing requirements andthe likely changes in fundingsources are also examined.

Weve asked leading expertsand analysts in the sector for theirviews on these major issues.These include Nigel Taylor ofEADS and Boeings Kostya Zolo-

in interactive format, giving snap-shots of the largest lessors, fund-ing sources and financing fore-casts by region.

Download this years AirlineBusinessfinance interactive at:flightglobal.com/ifinance13

LINE UP YOUR LEADERS

Preparations are underwayfor this years Airline Strat-egy Awards and Airline

Business wants to hear if your

chief executive stands out as hav-ing shown strong leadership dur-ing what have been difficult timesfor the industry. Or perhaps yourairline is among those leading the

innovation in technology, mar-keting or the environment.

Judging is undertaken by anindependent panel of highly

respected industry professionalsthat includes analysts and formerchief executives. The annual Air-line Strategy Awards event willtake place in London on Sunday,

14 July in the stunning location ofLondons historic Lincolns Inn.

The event is invitation only,but a limited number of places

are reserved for purchase.See P42 of this issue for details.

To nominate your CEO and tofind out more about the event,visit: strategyawards.com

tusky; Bertrand Grabowski andBert van Leeuwen of DVB Bankand analysts Rob Morris and PaulSheridan from Flightglobals con-sultancy arm Ascend.

The online special also incor-porates a range of data presented

Worthy winners: the 2012 Airline Strategy Awards recognised last years top leaders

EVENTS

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flightglobal.com/ab8 |Airline Business|February 2013

BRIEFINGINTERNATIONAL

Boeing dream turns to nightmareMAX KINGSLEY-JONES LONDON

Airframer hit by worldwide 787 grounding as it finally gets back ahead of Airbus in sales and output stakes

JET AIRLINER DELIVERIES, ORDERS AND BACKLOG

2012 2011

Deliveries Net orders Backlog Deliveries Net orders

Airbus

A320ceo* 455 261 1,895 421 122

A320neo 0 478 1,734 0 1,226

A330 101 58 306 87 82

A340 2 0 0 0 -2

A350 0 27 582 0 -28

A380 30 9 165 26 19

TOTAL 588 833 4,682 534 1,419

Boeing

737NG 415 210 2,010 372 401

737 Max 0 914 1,064 0 150

747-8 31 1 67 9 -1

767 26 22 68 20 42

777 83 68 365 73 200

787 46 -12 799 3 13

TOTAL 601 1,203 4,373 477 805

GRAND TOTAL 1,189 2,036 9,055 1,011 2,224

NOTE: *A320 current engine option. Data includes corporate versions. SOURCE: Manufacturers

AIRBUS/BOEING DELIVERIES 1999 TO 2012

SOURCE: Manufacturers

200

300

400

500

600

700

1211100908070605040302010099

Boeing

No

ofaircraft

Airbus

See how Airbus and Boeings

airliner output should play out

this year in interactive format:

flightglobal.com/ifinance13

A

irlines operating the Boeing

787 face an uncertain timeafter the grounding of the world-wide fleet in the wake of the in-flight battery malfunction sufferedby an All Nippon Airways Dream-liner on 16 January.

The news has taken the shineoff confirmation that Boeing man-aged to out-sell and out-deliverAirbus in 2012. This is the firsttime the US airframer has man-aged to do the double over its rivalfor more than a decade (in netorder terms).

The 787 grounding was imple-mented progressively by aviationagencies in the days after theANA incident which resultedin an emergency landing andevacuation. It has affected 49 air-craft and eight operators in Africa,Asia, Europe, the Middle Eastand the USA and leaves theseearly customers having to organ-ise interim capacity as they awaitclarity on how long the disrup-tion to their 787 operations willlast (see below).

AIRBUS BEATEN

The 787 issues took the edge offwhat should have been a trium-phant time for Boeing, as Airbusrevealed its 2012 numbers, whichconfirmed its US rival was thelead airliner manufacturer in bothoutput and orders for the firsttime since 2000.

Overall, mainline airlinerdeliveries increased by 18% in

2012 to a record 1,189 aircraft

the second successive year air-liner production has exceededthe 1,000-unit mark.

Although Airbuss output rose10% in 2012 to a record 588deliveries, its US rival surpassedthe European airframers tally by13 aircraft. Boeings 601 deliver-ies represents its second-highestairliner output total ever, only 14units shy of the record 620 ship-ments it completed in 1999.

This high watermark in airlineroutput was set as Boeing inte-

grated the production of MD-80/90and MD-11 aircraft at the nowdefunct Long Beach plant in Cali-fornia shortly after the mergerwith McDonnell Douglas.

The combined mainline air-craft order tally was down on2011, at 2,036 aircraft. Airbussecured 833 net orders against1,203 for Boeing, which was play-ing catch-up after being soundlybeaten 12 months ago. The USairframer last headed Airbus innet orders in 2006 and 2007.

Airbus retains bragging rightsin the backlog stakes, with its4,682 orders representing a 52%market share. The two protago-nists total backlog has now bro-ken through the 9,000 mark,standing at 9,055 aircraft.

The US Federal Aviation

Administration order to suspend

Boeing 787 operations moves the

programme into uncharted territory

for a modern airliner as long as the

battery fire risk is unsolved.

The FAA order came in the wake

of the 16 January in-flight incident

suffered by an All Nippon Airways

787. ANA and fellow operator

Japan Airlines suspended 787 op-

erations the same day. An FAA di-

rective grounded United Airlines

six 787s and the other Dreamliner

operators halted flights as fellow

regulators followed suit. Those af-

fected include Air India, Ethiopian,

LAN, LOT, and Qatar Airways.

The FAA grounding remains until

Boeing demonstrates the lithium-

ion-polymer batteries are safe and

that there is no battery-ignited fire

risk. Boss Jim McNerney says all

Boeings resources are focused on

fixing the problem.

The safety concerns could make

it harder for 787 customers to get

financing, says Les Weal, head of

valuations for Flightglobals Ascend

consultancy. If you were asked to

finance one today, you may have to

pass on the opportunity, he says,

explaining that financiers have no

shortage of requests bearing less

risk than the 787.

Boeing may also need to restore

confidence in the 787s entire elec-

trical architecture. Electricity is

used to replace parasitic bleed-air

to power onboard systems and

cabin pressurisation as it delivers

a significant reduction in fuel burn.

But Boeing must now prove this is

not a technological step too far.

Safety grounding leaves 787 operators in limbo


9/56

flightglobal.com/ab February 2013 |Airline Business|9

Raiders regard Qantas with relishDAVID KNIBB SEATTLE

Plunge in share price attracts unwelcome attention, but a partial carve-out could be key to keeping asset strippers away

BRIEFINGINTERNATIONALRegulator unmovedby distress call

PAGE 14

Look back at our cover interview

with Qantas chief Alan Joyce

from the spring of 2010 at:

flightglobal.com/AlanJoyce

I

t comes as no surprise at Qantas

that an investor group wouldemerge such as the one includingformer senior executives GeoffDixon and Peter Gregg.

Analysts have been warningsince last June when the shareprice hit a record low, that thiscould attract opportunists keen towrest control from Alan Joyce, cur-rent Qantas chief executive, andsell off assets. An aversion to theEmirates tie-up and Qantass statusas one of the worlds few invest-ment-grade airlines may partly

explain the Dixon groups interest.But a share price that capitalisesQantas at only A$3 billion ($3.1billion) is bound to attract attentionfrom those who see a potentialprofit, regardless of whether theyare former company executives.

Holding company discountis the term economists use todescribe a publicly-traded com-panys share price when it fallsbelow the perceived value of thecompanys assets. Qantas sharesare trading in the A$1.50 range,up from a record low of A$0.97.But even A$1.50 per share timesthe number of outstanding sharesonly equals the airlines cashreserves. It recognises no valuefor anything else.

Dixon is well aware that theQantas frequent flyer program anda partial stake in Jetstar, the low-

Low point in Qantasshare price, which

has since recovered

A$0.97

cost brand of the Qantas group,

alone could fetch up to A$2 bil-lion before even looking at cashreserves or other assets. As JohnSingleton, one of Dixons invest-ment partners, commented tolocal media after the Qantas shareprice plunged: If you bought allits shares for a billion dollarstomorrow, youd have $3 billionin cash in that company. Cash. Itcost you $1 billion to buy $3 bil-lion is that a good deal or not?

It is not quite as good a dealnow, but still the spread between

share price and asset value isenough to draw the kind of atten-tion that Qantas managers wouldrather not have.

Peter-Jan Engelen, a professor offinancial economics at UtrechtUniversity, in the Netherlands,has studied holding company dis-counts. His expertise and publica-tions are on corporate finance,value creation and governance. Hepoints to several studies that showdiscounts for US companies in therange of 11-21%, around 15% in

the UK and 10% in Japan.What level of holding company

discount starts to attract the kindof attention Qantas is now receiv-ing? It depends, says Engelen, onthe investor appetite for corporatecontrol, the level of free float onthe shares, and how the acquirersassess the potential synergies andvalue of certain assets. It is diffi-cult to give a magic number, hesays, but anything above 20%seems like a natural candidate.

In other words, when the gapbetween share price and assetvalue exceeds 20%, watch out fora takeover bid. Or, as in the caseof Air Canada six years ago, thecompany itself may decide to sell

its own assets. Robert Milton wasintent on monetising Air Cana-das divisions, as he called it,partly to reduce the threat of atakeover and partly to rewardinvestors who had helped the air-line survive bankruptcy. Profes-sor Engelen agrees that a corpo-

rate restructuring can unlockand reveal the hidden value ofcertain business units.

In the case of Air Canada, thishappened. It sold its regional air-line, Jazz, its frequent flyer pro-gramme, maintenance base andmany other assets. Shareholdersdid very well, but others argue thesell-off permanently crippled theairline. Instead of fleet mainte-nance and repair at its own main-tenance base, for instance, afterthe sell-off, Air Canada had tonegotiate with a third party for thiswork, and pay a commercial ratethat included a profit margin.

Engelen acknowledges that thevalue of spin-offs is lower when

parent and subsidiary are in the

same industry. In same-industryholdings, synergies between dif-ferent divisions can be impor-tant. Losing those synergies maybe costly to the parent airline.

In such cases, says Engelen, apartial carve-out may be the bestsolution. The parent companyspins off a division (for instance,a frequent flyer programme)through an IPO, while retainingthe majority of the shares. As heexplains, this combines the bestof both worlds. On the one hand,

the division becomes a stand-alone company so its value-crea-tion is now transparent and alltransactions between the parentand the new company occur atarms length. On the other, themajority stake together with ade-quate agreements between bothcompanies safeguard future busi-ness relationships.

Aeromexico completed justsuch an arrangement in Decemberwhen it finished selling 49% of itsClub Premier loyalty programme

to Canadian partner Aimia.Arms length transactions

instead of synergies are obviouslya trade-off, but on balance, theymay help the parent airline if thatis what it takes to keep corporateraiders at bay. Whether Qantaswill resort to this as a defensivemove remains to be seen. Fornow, Joyce is touting the strategicvalue of keeping all of Qantastogether, and promising: We willnever be wreckers of this amazingcompany.

We will never bewreckers of this

amazing companyALAN JOYCE

Chief executive, Qantas

Open your FREE copy ofAirline Business Interactive magazine

in association with DVB Bank

INTERACTIVE MAGAZINE

Available from 28th January 2013 at www.flightglobal.comTHIS MONTH:

Finance Special

Available from 28th January at www.flightglobal.com/ifinance13


10/56

flightglobal.com/ab

cles motion to reject the pilotscollective bargaining contract fol-lowing an October hearing.

Pinnacle had in Decemberwarned that it would very like-ly have been wound down if itdid not reach a revised collectivebargaining agreement with theunion in a timely fashion, as itneeded to find cost savings im-mediately. The airline has beenseeking $76 million in annual

cost improvements from labour,$59.6 million of which wouldcome from the pilots.

It has not confirmed if it is stillworking with those targets afterrevising the fleet plan, but says:We achieved what was neededfor Pinnacle to emerge fromChapter 11.

Delta will be adding a new re-gional airline into its operationjust months after shutting downits 50-seat jet subsidiary Comairin late September.

LIQUIDITY BOOSTBut this scenario was the only re-alistic means for Pinnacle to con-tinue operating as a carrier. Theairline would probably not have


BRIEFINGAMERICAS

Read about US mainline

carriers fleet revamp plans at:flightglobal.com/

FleetsRevamp

KRISTIN MAJCHER WASHINGTON DC

US regional carrier set to emerge from Chapter 11 as a Delta subsidiary

IN BRIEF

P

innacle Airlines reached sev-

eral key restructuring mile-stones in the first weeks of 2013that will enable it to emerge frombankruptcy as a subsidiary ofDelta Air Lines.

The US regional carriers pi-lots, represented by the Air LinePilots Association, ratified a ten-tative collective bargaining agree-ment on 15 January after morethan nine months of talks follow-ing the airlines Chapter 11 bank-ruptcy protection filing.

This is a significant milestone

in our restructuring and repre-sents substantial progress that weexpect will allow us to success-fully emerge from bankruptcy,says Pinnacle chief executiveJohn Spanjers.

COURT APPROVALA bankruptcy judge acceptedthat plan the following day,along with restructuring agree-ments forged with Delta and Pin-nacles unsecured creditorscommittee. This gives the airline

the green light to become a Deltasubsidiary after submitting abusiness plan acceptable to bothcarriers by 15 February.

The restructuring agreementallows Delta to provide up to $30million in new funding to facili-tate Pinnacles exit from bank-ruptcy. In addition, the carrier isoffering up to $22 million inloans to satisfy terms within thenew collective bargaining agree-ment with pilots.

The latter funds support abridge agreement that willallow many of the Pinnacle pilotsto find jobs when the airlineemerges from bankruptcy underits new parent company. Deltahad earlier received court ap-proval to provide Pinnacle with$74.3 million in debtor-in-posses-sion financing.

Pinnacles 2,400 pilots werethe last employee group at the air-line to ratify a new collective bar-gaining agreement. The groupreached a tentative deal withmanagement in December, butonly after a judge denied Pinna-

Pinnacle thrown a lifelineAMERICAN DROPS JFKDOMINICAN FLIGHTSAmerican Airlines will end its

long-standing service between

New Yorks JFK airport andSanto Domingo in the

Dominican Republic this April,

after serving the route for 38

years. The Fort Worth-based

carrier began flights between

JFK and Santo Domingo in

1975. It is also closing its

JFK-Santiago services

launched in 2002. American

will continue to serve Santo

Domingo four times daily and

Santiago once daily from its

Miami hub. New York-based

low-cost carrier JetBlueAirways has been operating

the Santo Domingo route

since 2007 and to Santiago

since 2004.

AIRTRAN ADDS FRESHDOMINICAN SERVICESouthwest Airlines

subsidiary AirTran will begin

flights from Chicago Midway

to Montego Bay, in Jamaica,

and Punta Cana, in the

Dominican Republic. The

Montego Bay service will

launch in April, while AirTran

will begin operating

Chicago-Punta Cana from

the middle of May. Both

routes will be operated four

times weekly.

HAWAIIS ISLAND AIRSET FOR NEW OWNERThe owners of Honolulu-

based Island Air will sell the

airline to an undisclosed

customer, in a move aimed

at better placing it to

compete with dominant

player Hawaiian Airlines. The

deal is likely to be

completed by March, says

Michael Rodyniuk, executive

vice-president of Island Airs

parent company Gavarnie

Holding. Island Airs new

owner is a capital

management firm based on

the US mainland and has

some interests in aviation,

although the company does

not own an airline, he adds.

been able to operate past Febru-ary without the additional liquid-ity Delta provided, court docu-ments show.

Helane Becker, airline analystand director at Dahlman Rose,says Delta taking ownership ofthe airline was the only viable op-tion for Pinnacle to carry on as anairline. No investor group cameforward with another option,she says.Pinnacle had to revisit

its business plan after Deltas pi-lots ratified a contract in June thatallowed it to add 70 76-seat re-gional jets and to remove 218 50-seat regional jets.

The carrier originally intendedto restructure the companyaround 140 Bombardier CRJ200regional jets it operates for DeltaConnection, rather than its largerand more fuel efficient CRJ900sand Bombardier Q400 turbo-props. The latter type has sincebeen removed from the fleet.

After Delta announced its planto reduce the number of thosesmaller aircraft, Pinnacle movedto shrink its fleet to 81 CRJ900sand remove its entire CRJ200 fleetwithin the next two to three years.It will continue to operate 41CRJ900s under lease from Deltaand add 40 of the aircraft typethat the mainline carrier orderedin December from Bombardier.

Delta has taken on a new regional airline months after closing Comair

Annual labour costsavings originally

targeted by Pinnacle

$76m

Pinnacle


11/56

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BRIEFINGEUROPE

Airlines vie for limited investor poolGRAHAM DUNN LONDON ALEX THOMASPARIS

More European carriers join search to secure new partners as block on Alitalias local backers expires and TAP sale falls flat

Read more about the

challenges facing Europeancarriers in the year ahead:

flightglobal.com/Forecast13

T

he passing in January of a

lock-in preventing Italianinvestors from selling their stakein Alitalia has potentially broughtanother European airline intoplay, at a time when it is alreadydifficult to find enough suitors togo round.

European carriers Air Berlin,BMI and most recently VirginAtlantic have all been able toattract investors, Aer Lingusmanaged to find a partial inves-tor in Etihad while doing itsbest to withstand Ryanairs

interest and Cargolux foundand lost a shareholder in QatarAirways. But Spanair andMalevs failure to secure a sav-iour proved terminal.

Portugal ended 2012 back atthe drawing board, after failing toagree terms with the sole bidderfor TAP, Brazilian conglomerateSynergy Group. It is not alone inseeking an investor. Czech Air-lines has been put back on theblock by the Czech governmentand is currently courting Korean

Air and Qatar Airways; the Irishgovernment has long talked ofselling its remaining stake in AerLingus; and carriers that arerestructuring, such as Air Baltic,are ultimately hoping to attractfresh investment.

Peter Morris, chief economistat Flightglobals consultancy

ITALY DOMESTIC SHARE

Jan-13 Jan-08

Alitalia 41.3% 37.5%

Ryanair 24.2% 3.8%

Meridiana 11.5% 11.9%

EasyJet 10.0% 3.8%

Air One 9.9% 20.9%

ITALY-WESTERN EUROPE

SHARE

Jan-13 Jan-08

Alitalia 21.3% 26.6%

Ryanair 25.0% 15.0%

EasyJet 12.0% 5.8%

Meridiana Fly 5.1% 5.8%

Air One 4.1% 8.9%

NOTES: Air One was an independent carrierin 2008 and part of Alitalia in 2013SOURCE: Weekly ASK data from Innovata

De Juniac: No 2013 Alitalia move

Ascend, says there is a shortage of

investors for the number of Euro-pean airlines in the market, andsees the recent developments inPortugal as illustrating the cur-rent appetite for some of Europesfringe carriers.

SOLE BIDDER

Portugal secured several biddersfor airports company ANA,which operates 10 airports in thecountry, including Lisbon acontest ultimately won at the endof December by French construc-

tion and management specialistVinci in a deal reportedly worth

around $4 billion. By contrastSynergy was the only bidder in

the frame for TAP. It gives you anindication of where investors seethe opportunity, says Morris.

Europes big three carriers buyers of airlines in recent years are currently too preoccupiedwith getting their own houses inorder to do deals. InternationalAirlines Group will move to tidyup ownership of Vueling, on topof its purchase of BMI, but inNovember chief executive WillieWalsh said there was nothing elseon its agenda. Lufthansa chiefexecutive Christoph Franzappears not to share the enthusi-asm of his predecessor for buyingairlines: it has bought no airlinesince he took the helm, andindeed has sold BMI and droppedits Lufthansa Italia venture.

Neither does Air France-KLMlook to be in the position to buy atthe moment. The SkyTeam car-rier is already the largest share-holder in Alitalia, and havingattempted to take over the Italianairline in 2008, would seem thelead candidate should Alitaliasshareholders seek to sell. How-

ever, it has ruled out any move to

increase its stake this year.There are no open negotia-

tions as of today. Air France-KLMs resources are limited anddo not allow us to go ahead withsuch a deal, says Air Francechief executive Alexandre deJuniac, noting more immediatepriorities mean nothing is likelyto happen before 2014.

This has led to speculation thatEtihad could be a potential buyer.The United Arab Emirates flagcarrier has been linked to pretty

much every airline that is up forgrabs in part because in the past12 months it has bought stakes inAir Berlin, Aer Lingus, Air Sey-chelles and Virgin Australia. Eti-hads new co-operation with Ali-talias key SkyTeam partner, AirFrance-KLM, has added weight tothe speculation, but Etihad chiefexecutive James Hogan distanceshimself from such a move.

We havent had any discus-sions about equity in Alitalia,he says. Our strategy about

investment is very measured,he adds, emphasising the needfor demonstrable network bene-fits in any such deals. We arelooking at ways of improving ourrespective businesses, but whatwe are not going to do is takeover someones problems.

ITALIAN MARKET

Hogan, though, does point to thebenefits of its co-operation withAlitalia, one of the Gulf carriers41 codeshare partners. It [Alita-lia] is operating into Abu Dhabiand linking with us to SoutheastAsia and Australasia out ofRome, he notes. We operate intoMilan. The Italian market is thefourth largest market in Europe.Its an important market.

The speculation about Alita-lias ownership has been ignitedby the end of the lock-in for Alita-lias Italian shareholders. A groupof 21 Italian investors formed aconsortium which helped rescuethe carrier in 2008 andrelaunched it through a mergerwith Air One as a private com-

pany in January 2009. Thishelped de-politicise Alitalia asthe new owners revamped thebusiness through a major fleetrenewal that saw the last of itsBoeing MD-80s phased out inDecember. There is no indicationyet whether any of the investorsare looking to sell.

While the new Alitalia remainsloss-making, it has curbed losses

in what has been a pretty toughclimate as the global financial cri-sis was followed by problems forthe Italian economy. Net losses of$773 million and operating lossesof $530 million between 2009-11compare with net and operatinglosses of $2.7 billion and $2 bil-lion in its last four years in stateownership.

The market is there the bigquestion is who is best placed totake it, says Morris of the Ital-ian markets potential. He pointsto the strong growth in recentyears of low-cost carriers, whichhave taken advantage of thefragmented Italian market andlocal carriers difficulties (seetables). He says: [The short-haul market] is drifting away togroups like Ryanair and EasyJet,and the long-haul is driftingtowards Air France, feedingthrough Charles de Gaulle.

The market isthere in Italy, thebig question is

who is best placedto take it

Rex

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Ukraine. That process is ongoing

but it is very slow. It is not likeacting within the EU there is aprocess you need to go through,he says.

Aware that low-cost carriersfrom outside the region are eye-ing its market, Russias Aeroflothas also indicated possible inter-est in setting up a low-cost sub-sidiary, if favourable legislation ispassed in the country.

The airlines general manager,Vitaly Saveliev, describes a needfor several amendments to the air

code. He says: If they are made,well be able to establish an affili-ate low-cost operator. It may takeus from six months to a year.

He says changes in the law willbe required for airlines in Russiato sell cheap, non-refundabletickets, charge passengers forcarry-on luggage and to not pro-vide onboard food and drinks.

While limited progress is beingmade by low-cost carriers into theCIS and other neighbouring

states, Vradi shares OLearysopinion that large-scale expan-sion is unlikely to take place inthe near future.

Something that is pretty uni-versal wherever you are is thatpeople want low fares. The cus-tomer need is there, [but] I thinkthe efficiencies and regulationsare not necessarily there yet.

Im very optimistic from thatperspective that those countrieswill get there. Its hard to predictwhether this is a year from nowor 10 years from now, but its justa matter of time, he says.

February 2013 |Airline Business|13

BRIEFINGEUROPE

Budget carriers still on the marchALEX THOMAS &GRAHAM DUNN LONDON

Ryanairs first bases in North Africa and the arrival of EasyJet in Moscow show Europes low-cost operators reaching out

Shift of investment

in leasing market

PAGE 32

Chart the spread of budget

carriers in Europe with ourinteractive map at:

flightglobal.com/iLowCost12

W

estern European low-cost

carriers continue to pushbeyond the boundaries of theEuropean Union, stepping uptheir presence into neighbouringmarkets towards the south and tothe east.

Irish budget giant Ryanairsmove to launch its first bases inNorth Africa comes as UK low-cost operator EasyJet prepares forits breakthrough into Moscowthis Spring.

As Europes low-cost carriershave grown, they have slowly

been pushing out beyond theconfines of the EU where thesingle aviation market enablesthem to grow freely into neigh-bouring countries. EasyJet, forexample, already has destinationsincluding Amman in Jordan, TelAviv in Israel and the Egyptiandestinations of Hurghada, Luxorand Sharm El Sheikh.

NEW TERRITORIES

Much of the non-EU activity hasso far centred on Morocco. The

North African country was one ofthe first to strike an EU-wide airservices deal with the EuropeanCommission, an environmentenabling Europes budget carriersto expand.

Ryanair was already amongthose serving routes to Moroccoand is now taking this a step fur-ther by launching its first basesoutside Europe in the Moroccancities of Fez and Marrakech. Itwill base two aircraft at Marra-kech and one at Fez and islaunching a string of new routes.Ryanair, which also serves Agadirand Oujda in Morocco, will oper-ate 60 routes into the country fol-lowing the new moves.

One of the most eye-catchingmoves towards the east isEasyJets breakthrough in Russia,having last year won the race forslots to Moscow. It will serve theRussian capital from London Gat-wick and Manchester.

EasyJet was able to get a foot-hold in the Russian market afterthe re-allocation of British Mid-lands route rights. While carriers

Ryanairs Moroccanroutes following

new bases

60

OLeary: sees no rush on Russia

Vradi: just a matter of time

such as Germanwings and

Vueling also serve Moscow, itremains to be seen what furtheropportunities will be available forlow-cost carriers in Russia.

In October, Russian authoritiessaid they were looking at the pos-sibility of developing competi-tion in the countrys air transportmarket by allowing foreign low-cost carriers to fly domesticroutes. The countrys competitionbody was also looking at meas-ures to facilitate the creation ofdomestic budget carriers.

Ryanair chief executiveMichael OLeary, while acknowl-edging some interest in the Rus-sia market, remains cautious.Generally speaking we haventbeen too impressed with thederegulation plans, they gener-ally seem to require having a Rus-sian partner, he said last year.

Europe is the focus of ourgrowth, he stresses, but adds: Ithink there will be some expan-sion into, maybe not Russia, butformer [Soviet] republics such as

Ukraine and areas like that, asthey join the EUs Open Skies.

Russia, even if you get therewith a deregulated market, maydeliver some growth in year fiveto 10 [from now], but wont be afocus for our growth, he adds.

The developing economies inRussia and some other CIS coun-tries, together with the largelyuntapped budget sector, givesthese markets huge potential.

Those markets are very attrac-tive from the perspective of thecustomer profile available andfrom the perspective of theirunderserved nature, says thechief executive of central Euro-pean budget airline Wizz Air,Jzsef Vradi.

However, he says many coun-tries on Europes eastern periph-ery still apply a fairly closed

regulatory regime, basicallyfavouring the national airline sta-tus quo, protecting the marketfrom competition. Vradi notesaccess to these countries dependson the regulatory environmentwhich can be boiled down toaccess to routes, the capitalinvestment regime in the particu-lar country, some of the embed-ded inefficiencies in regulationslike strict labour rules.

Yet deregulation and the ECsefforts to expand its aviation areato neighbouring states meansWizz Air, which hopes to open aroute to Moscow soon, is amongthose low-cost carriers looking tomake inroads into the region.

Given that we have becomean increasingly mature business and we have proven ourselvesin various markets we havestarted accessing other marketsand routes that were unavailableto us before, says Vradi.

Wizz recently began flightsfrom Ukraine to Georgia andreceived bilateral designationsfrom Hungary to Russia and

IanEnness/Billypix.com

Billypix.com


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BRIEFINGASIA

Regulator unmoved by distress callDAVID KNIBB SEATTLE

Australian body tentatively approves Qantas-Emirates joint venture, but makes competition primary focus for decision

For more on the implications of

the tie-up, see our analysis at:flightglobal.com/

EmiratesQantas

W

arnings from Qantas chief

executive Alan Joyce aboutthe complete demise of Qantasoperations to Europe withoutan alliance with Emirates madelittle difference to the AustralianCompetition and Consumer Com-mission (ACCC) in its prelimi-nary approval of the alliance.

In its December decision, whichgrants anti-trust immunity to Qan-tas-Emirates if their venture isfinally approved in March, theACCC seems less concerned aboutQantas and more preoccupied

about the presence of enoughrivals to keep the alliance honest.

Qantas depicts its Emiratesdeal as an urgent strategic imper-ative. Without it, the Australiancarrier warns, its internationaloperations which lost $450 mil-lion this past financial year arein terminal decline.

There is no alternative for us, tomake Europe work, says Joyce.

Such claims are a variation onthe failing company doctrine,as it is called in anti-trust circles.

It applies when one of the partiesto a merger or acquisition is inimminent danger of failure. Asthe US Supreme Court explained,it is better if a company contin-ues to exist even as a party to amerger, than if it disappearsentirely from the market.

The failing company doctrineapplied explicitly to Boeingstakeover of McDonnell Douglaswhen the latter was near collapse.The doctrine extends to immu-nised joint ventures, which are ineffect operational mergers.

EUROPEAN DANGER

The warning by Qantas about itsfailing European operations takesthe doctrine one step further byconceding that Qantas itself facesno danger of collapse but itsEuropean routes do. Courts andregulators generally have treatedthis so-called failing divisionargument with skepticism becauseit attempts to extend an exceptioneven further, but US Departmentof Justice guidelines recognise itunder limited conditions.

In any event, the ACCC gives lit-tle weight to the argument. It con-cedes that Qantas, as an end-to-endcarrier, faces some disadvantages.The biggest, says the ACCC, are onthose long-haul routes whereQantas competes with MiddleEastern and Asian mid-point carri-ers. These disadvantages, it pre-

dicts, are most likely to affect

Qantas Sydney-London and Mel-bourne-London services.

The regulators so-called coun-ter-factual, where it compareswhat is likely to happen with andwithout the Emirates alliance, isthe only place it concedes anythingabout a Qantas weakness. Withoutthe alliance, the regulator predictsQantas is likely to continue to fly atleast one service per day to the UKand within Asia to continue tooperate on profitable routes.

As for the warning that Qantasmight retreat to a virtual net-work, the agency sees this asunlikely for regions other thanthe UK and Europe.

From these assumptions, the

ACCC concludes there is somepotential benefit from a Qantas-Emirates alliance that increasespassenger access to each carriersnetwork, raises some prospect ofnew routes and frequencies andprovides other benefits and effi-ciencies. It does not explicitlyweigh these advantages against a

possible Qantas retreat.In what is hardly a ringing

endorsement, the ACCC con-cludes: The extent of public ben-efit conferred by each sourceindividually is likely to be small,and in some cases may be negligi-ble. However, viewed in aggregatethe alliance is likely to confermaterial, although not substan-tial, public benefits.

At no point does the regulatorsuggest it is important to keep anAustralian airline on the Aus-tralia-UK Kangaroo route. Interms of airline nationality, itsanalysis is neutral. Taking theACCC at its word, it seems toregard keeping Qantas in the mar-ket via an Emirates alliance asoffering small, although not sub-stantial, public benefits.

This decision underscores howmuch the ACCCs emphasis is onprotecting competition not a par-ticular competitor. This is espe-cially clear in its analysis of theAustralia-UK route, where theconcentrated effect of a Qantas-Emirates alliance is highest. Com-

bined, the two carriers control

almost 50% of this route. Thenext-largest player, Singapore Air-lines, moves only 12% of the traf-fic. The balance is split between atleast 10 other airlines. Qantas-Emirates overshadows all others.

The ACCC might have carvedout the Australia-UK market fromits approval. But in this market itsees a large number of establishedcarriers, notably Singapore Air-lines, Etihad Airways and CathayPacific, plus the growing presenceof Qatar Airways and the Chinese

airlines. None controls much mar-ket share, but all have the abilityand incentive to expand opera-tions in response to the alliance.

REDUCING RIVALS

Only in the Australia-New Zea-land market does it voice any con-cern, because the Air New Zea-land-Virgin Australia alliance isthe only significant rival. AsACCC director Rod Sims explains:Our concern was that with Qan-tas and Emirates combining, there

would be just two players.It is always a concern, he says,

when three goes to two. Hence,the agency imposed conditions toensure no loss of capacity. Its deci-sion illustrates how competitionregulators focus more on overallcompetition than on warningsabout who might fail.

This may mean Australian sen-ator Nick Xenophon cannotexpect a positive response fromthe ACCC to his call for the Com-mission to review its decision.

Xenophon, in an opinion piecefor an Australian newspaper, saysthe ACCC should have probed fur-ther into Qantas claims that itsinternational division has been indecline. He warns if the ACCCdoes not look further into the mat-ter, it could lead to an applicationfor judicial review which couldpotentially delay the implementa-tion of the joint venture.

The doctrineconcedes that

Qantas itself facesno danger of

collapse

No importance was attached to having an Australian airline on UK routes

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and this is where a familiarentrepreneurial figure couldreturn to the market.

GR Gopinath started the low-cost airline phenomenon in Indiawith Air Deccan, which subse-quently merged with Kingfisherin 2008. And he has been in dis-cussions with investors to launcha new airline once his non-com-pete clause with Kingfisherexpires in late January.

We have been talking for the

last two months since the gov-ernment changed its policy.After that, a few peopleapproached us, he says, refer-ring to the move in September toallow foreign airlines to hold upto 49% of an Indian carrier.

Gopinath declines to namepossible investors he has heldtalks with but there are indica-tions one partner may be AirAsia,as it has shown an interest inestablishing operations in Indiain recent months. Plans for theairline will be finalised in thecoming months, he adds, withoperations to begin in 2014. Gopi-nath says he sees a vacuum in thelow-fare end of the Indian marketas airlines have not been growingnew routes. India needs a newlow-cost airline to stimulate themarket and open up new routes,rather than just cannibalisingexisting airlines, he says.


BRIEFING ASIA

India looks at capital gainsSIVA GOVINDASAMY SINGAPORE GRAHAM DUNN AMSTERDAM

Jet Airways and Kingfisher court Etihad after easing in foreign ownership limit

How Chinese lessors

are learning quickly

PAGE 26

Read more about the

grounding of Kingfisher at:flightglobal.com/

KingfisherWoes

IN BRIEF

AIR INDIA BACK IN

THE FRAME AT STAR

Air India and Star Alliance

have restarted discussions,

an indication that the carriermay be making headway in

joining the group. There has

been high-level contact

between the two

organisations recently, say

sources close to the

discussions. This is after

talks were stopped for more

than a year, when Air India

suspended the carriers

integration with the alliance

in August 2011 since it did

not meet the minimum

membership conditions.Star would only say the

integration of Air India

remains on hold, and that

India remains an important

market in the alliances

long-term strategy.

AIR CHINA EYES

FLIGHTS TO HOUSTON

Air China has applied for

authority to fly between

Beijing and Houston

Intercontinental with the US

DoT. The Chinese flag carrier

would operate four-times

weekly from July, according to

a regulatory filing. The flights

would connect with Star

Alliance partner United

Airlines hub at Houston

Intercontinental and

complement Air Chinas

existing US flights.

LION IN TALKS ON

LARGE AIRBUS ORDER

Lion Air is in talks with Airbus

over a substantial order for

narrowbody aircraft, a move

that could break Boeings

dominance in the Indonesian

market. The Indonesian

low-cost carrier is close to a

decision on whether it will

order the re-engined Airbus

A320neo family, say sources

familiar with the discussions.

If it goes through, this could

be a substantial order that

might even match Lions

2012 order for more than

200 Boeing 737s.

Uncertainty continues to swirl

around the future of Indianfull-service carriers KingfisherAirlines and Jet Airways as talkswith potential investors continue.

Kingfisher, which wasgrounded in October, has sub-mitted a plan to Indias Directo-rate General of Civil Aviation(DGCA) on how it intends torestart operations. Even thoughits scheduled carrier licenceexpired on 31 December, the air-line says its parent, the UBGroup, will provide the funding

needed for its recovery plan.The DGCA has asked for cer-

tain no-objection letters whichare in the process of being pro-cured. A few additional ques-

tions have been raised whichwill be answered to the regula-tors satisfaction, says the air-line. It adds expiry of its licenceis no cause for concern as theregulations permit a renewalwithin two years of expiry.

Local media subsequentlycited a letter from Kingfisherchairman Vijay Mallya to staffsaying it was hoping to resumeflights by the summer season,initially with seven aircraft.

The carrier confirmed it hasbeen in talks with Gulf carrier Eti-

had Airways about a possible

equity investment, but industrysources suggest the latter is morelikely to go with Jet Airways, withwhich it is also negotiating with.

Jet confirms the negotiationscommenced recently in linewith liberalised policies whichenable foreign investment in theshares of Indian carriers. It saysdetails will be provided only aftera finalisation of any deal.

In December, sources said astake of 24% was in play but thenegotiations do not only centre

on investment but also a compre-hensive marketing and opera-tions deal that could potentiallylead the airlines to begin jointservices across their interna-tional network.

Etihad chief executive JamesHogan, speaking at a press con-ference in Amsterdam, con-firmed its interest but says a dealis not certain. India is on ourdoorstep. We are examining thenew foreign direct investmentlegislation. We are in due dili-

gence. But as with any potentialdeal, it is not done until your duediligence is done, says Hogan.

Etihad has a strong presencein the Indian market and Hogansees an opportunity for furtherdevelopment. We fly into awhole range of secondary cities[in India] and that will grow. Theability between India and AbuDhabi to create an air bridge is asattractive to us as it is the peoplewe are talking to, he says

It is the Indian domestic mar-ket, however, that continues tohave the highest growth potential

The new cap forforeign ownership of

Indian airlines

49%

Indian carriers like Jet Airways are hoping to benefit from rule changes

Boein

g

Mallya: eyeing Kingfisher return


16/56

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THE 2013AIR TRANSPORTIT SUMMIT19-20 JUNE 2013BRUSSELS

THE IT INDUSTRY EVENT OF THE YEAR


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BRIEFINGAFRICA

Respite for SAA, but woes mountALEX THOMAS LONDON

African carrier remains operational after loan covers short-term expenses, but managerial instability hinders restructuring

The impact of changing

export credit rules

PAGE 36

See our recent analysis on how

FastJet aims to drive low-costcarrier growth in Africa at:

flightglobal.com/AfricaLCC

H

aving secured emergency

funding in early January to payfor fuel costs and prevent a possi-ble grounding of its fleet, SouthAfrican Airways has seen off themost immediate threat to its sur-vival prospects. But the need forthe loan demonstrates the extent ofthe airlines predicament.

Underlying liquidity issues sur-faced in October when the airlineposted an operating loss of 1.3 bil-lion rand ($147 million) for the2011-2012 fiscal year. It then re-ceived a R5 billion guarantee from

the South African government toease access to financial markets.

A turnaround strategy was de-veloped in October as a conditionof the guarantee, but its imple-mentation was thrown into disar-ray by management instabilityfollowing the sudden departureof chief executive Siza Mzimela,who resigned shortly after theguarantee was announced.

Nick Fadugba, chief executiveof consultancy African Aviation

Services believes the short-termloan may only be heading off the

inevitable unless serious reformsare implemented. An analysis ofSAAs annual profit and loss ac-counts and balance sheet showsthat the airline has been techni-cally insolvent for several years;hence the need for repeated bail-outs by the government, he says.

While he says the guaranteewas essential to cover the short-term costs of SAA, maintain itsoperations, and avoid damagingits business and brand, Fadugba

believes the South African gov-ernment is extremely reluctant

to keep writing large cheques.Fadugba says in order to secure

the airlines future the govern-ment must seek new investorsand reduce its shareholding. Hesays that cutting costs is of criticalimportance to SAAs survival,which means addressing thetaboo subject of reducing theworkforce. In addition, Fadugbasays, the airline must finalise itsaircraft fleet and route networkstrategy and improve its skills in

forming what he describes as

win-win partnerships, espe-cially in Africa.

Yet for all this to happen, Fa-dugba says, SAA must first re-solve its leadership issues. Act-ing chief executive Vuyisile Konahas worked hard to stabilise thecarrier but in the interest ofgood corporate governance, asubstantive chief executive needsto be appointed immediately sothat work can begin in earnest onimplementing the turnaroundplan, he says.

If SAA requires a model towhich it can aspire, Fadugba saysit need look no further than fel-low African Star Alliance mem-ber Ethiopian Airlines, which is100% government-owned, re-ceives no state subsidies and yetis very profitable.

While a number of Africancarriers have withdrawn

routes to Europe in the face oftough competition from Europe-an carriers, West African start-upGambia Bird aims to reverse thetrend by expanding its own fledg-ling network to the continent.

The Gambian flag carrier,which launched services in Octo-ber, says it will launch a route toScandinavia in the summer andis also likely to increase frequen-cies on its two existing Europeanconnections to Barcelona andLondon Gatwick.

For more on SAA read our

interview from 2012 with former

boss Siza Mzimela:

flightglobal.com/Mzimela

Gambia Bird to expand fledgling European networkMARTIN RIVERS BANJUL

Chief commercial officer KarstenBalke says the airline is also in talkswith airports in Holland, Italy andcountries close to Germany andcovering French catchment areas.He says that from May, the airlineexpects to sell tickets to anotherEuropean destination but adds: Iexpect to have a Scandinavian des-tination announced first.

Gambia Bird is also preparing toincrease the frequency of its once-weekly flight to Barcelona andtwice-weekly service to LondonGatwick airport one of whichconnects via Freetown in SierraLeone following higher-than-ex-pected load factors on the routes.

We want to increase frequen-cies to London Gatwick by at leastadding a third flight, says Balke.Noting that the UK CAA hasawarded Gambia Bird up to sixslots in the British capital, he saysthe third frequency depends on

fifth-freedom traffic rights out ofFreetown, while a possible fourthflight depends on negotiationswith tour operators in the UK.

MARKET SHARE

Barcelona will benefit from a sec-ond weekly flight, effective 31March, as Gambia Bird defendsmarket share ahead of Vuelingsupcoming entry to Banjul.

When Spanair pulled out ofthe market there was a big gapleft, says Balke. Some routes[between Spain and the west Af-rican sub-region] have been un-derserved for quite some time,and now itll be good to see howthe markets react.

He says that although the flagcarriers regional links should bol-ster demand among inbound pas-sengers, Gambia Bird is nonethe-less exercising caution before goinghead-to-head with Europes larger

carriers. France is very interesting,but we have strong competition,he concedes. Starting a new routein Germany is not what we want.

Turning to potential future part-nerships, Balke says Gambia Birdhas held talks with four Europeancarriers since its launch. He iden-tifies 90% stakeholder Germaniaas one of the parties saying thetwo airlines will start codesharingout of Gatwick in May but de-clines to identify the others.

Currently operating two wet-leased Airbus A319s from Germa-nia, Gambia Bird will considerleasing one of Germanias upcom-ing pair of A321s due to arrivein April and May 2014 if suffi-cient demand materialises.The Gambian flag

carrier will launch aroute to Scandinavia

in the summer

SAA posted an operating loss of $147 million for the last fiscal year

Airbus


18/56


INTERVIEWNORM LIU

VIEW

FROMTHE TOPGECAS chief Norm Liu is undaunted by competitorsadvances in the operating lease market and says the lessorwill remain a leader through a $7 billion a year investment.

And some advice? Never fall in love with the planes

REPORT

LAURA MUELLER

LONDON

PHOTOGRAPHY

TOM CAMPBELL


19/56


In financial circles, General Electric isoften referred to as an economic bell-wether as it is a company closelyobserved for details about the macroeconomy because of its involvement in

multiple industries. GE has also come tomean get everything in reference to its

ability to go into key sectors, achieve a lead-ing position and, amazingly, stay there.

The US industrial groups aircraft financ-ing unit, GE Capital Aviation Services, is noexception. It is the worlds largest aircraft les-sor and lender any way you measure it: reve-nues, net income, fleet value and size. It alsoserves as a litmus test to determine the healthof the aviation industry.

However, to maintain its top ranking,GECAS must consistently strike the rightbalance between growing its fleet of morethan 1,700 owned and managed aircraft,while maintaining strong financial disci-

pline and risk management. And it is facingincreasing challenges from new entrants,particularly from Asia, which want to playin the space and profit from airlines increas-ing reliance on operating leases in exchangefor flexibility and leaner balance sheets.

LEASING MARKET

Airbus forecasts at least a third of the 28,200airliner deliveries during the next 20 yearswill be delivered via operating lessors. Butthis could be higher, as lessors are also activein taking over delivery slots via purchase-leaseback deals. And tighter European bank

funding and less subsidised export credit fi-nancing is also helping conditions for leas-ing, although new sources of Asian and capi-tal markets funds are rapidly developing.

We expect the operating leasing marketto grow to 40% from 35% now, says NormLiu, GECAS president and chief executive,from his London office. Some will say thegrowth is more, but there are many airlinesemphasising more ownership, especially inthe emerging markets.

GECAS is investing about $7 billion ayear in new aircraft orders, sale and lease-back transactions or debt financings, butwith caution. Given our nearly $50 billionbook and our level of depreciation, amorti-sation and asset sales, we are still growing,says Liu. But the days of double-digitgrowth are gone, given our scale. Its more ofa single-digit world now. And there is onlyso much sensible business out there. Still,we are a market leader doing close to $7 bil-lion a year.

A key driver for GECAS and other lessorsin the operating lease market is a shift in fi-nancial power towards the emerging mar-kets, particularly Asia.

Aviation is focused to a major degree onthe emerging global consumer who wants to


20/56


INTERVIEWNORM LIU

tour the world, says Liu. Think about itthere are one billion people in the mature de-veloped world, but six billion in the emergingmarkets. No, not all of them are going to boardplanes to travel, but every year that demo-graphic changes.

However, this growing market has not goneunnoticed. Asian financiers have also mademajor advances in the operating leasing mar-ket, particularly in the past 12 months.

In December, American InternationalGroup inked a deal to sell up to a 90% stake in

International Lease Finance, the worlds sec-ond-largest lessor by fleet size, to a consortiumof Chinese investors.

ILFC, which employs 560 people, is theworlds second largest lessor behind GECASwith a fleet of 1,000 aircraft. The investorgroup of New China Trust, China Aviation In-dustrial Fund and P3 Investments has agreedto acquire 80.1% of ILFC for $4.23 billion,with an option to buy a further 9.9% stake.

That deal follows the sale of Jackson SquareAviation (JSA) for 100 billion yen ($1.27 billion)in October to Mitsubishi UFJ Lease & Finance.JSA has a fleet of 76 aircraft in service worth

more than $4 billion, according to the lessor.But it was the sale of RBS Aviation Capital

to Sumitomo Mitsui for $7.3 billion in January2012 that proved Asia was serious about en-tering the leasing sector, paving the way forfuture deals. The business employs 69 peopleand owns 206 aircraft, with commitments topurchase a further 87 by 2015.

Lessors and interested investorsknow changes in bank and exportcredit regulations are also fuellingan increase in demand for operat-ing leases.

Export credit agency (ECA) financing ratesare being reset this year as the 2011 AircraftSector Understanding (ASU) comes into fulleffect. The new ASU terms are tougher tomake ECA support less appealing financiallyto airlines and lessors which are able to bor-row in the commercial debt markets.

Upfront fees on export credit loans underthe 2007 ASU range from 4% to 7.5%, de-pending on the credit rating of the customer.Under the revised ASU, even the most credit-worthy will pay 7.72% upfront and the lowestinvestment grade carrier will pay 14.74%.When the fees are spread over a 12-year loanterm, the impact is mitigated. But net-net thepricing is still less subsidised than before.

More costly commercial debt financing is alsoexpected under the Basel III accord, which al-though recently relaxed, must be fully imple-mented by 2019. Under the regulation, globalbanks will need to comply with higher capitalrequirements leading to a rise in bank fundingcosts that will be passed on to the airlines.

Nevertheless, Liu remains undeterred byany advances by GECASs competitors in theoperating lease market. Its a bit of dj vu howmoney comes and goes in and out of our sector.Ive seen this over many years, and I feel confi-

dent we will retain a leading position, he says.If we are around $50 billion, the next guy isapproaching $30 billion, you then have othersin the $5-10 billion range playing to be numberthree. If they play to be number one in a shorttime, they are likely to make some mistakes asthis game isnt as easy as it appears.

Liu says that GECASs history in the avia-tion market as well as its financial resourcesare the major competitive advantages the les-sor holds over its competitors.

Weve been around for decades and ourparent has been making jet engines since the1940s, he says. So weve got deep domain

expertise and a long-standing commitment tothe aviation sector.

We also have low overhead costs atGECAS as we spread them over $50 billionversus, say, $5 billion. And, most importantly,we have top-tier funding that far outpacesmost of the competition.

Proof of this is the ease in which GECAScan tap the financial markets, which are in-creasingly more selective towards top-creditcompanies. In December, parent companyGeneral Electric Capital issued fixed- andfloating-rate notes totalling $1.7 billion, se-cured by 137 aircraft on lease to US airlines.

The financing includes $1 billion in three-year, fixed-rate notes, which carry a 1% cou-pon; a $300 million three-year, floating-ratetranche at Libor plus 60 basis points; and $400million in fixed-rate seven-year notes, whichcarry a 2.1% coupon pricing levels that harkback to the pre-crisis days of cheap liquidity.

And with experience under its belt, havingweathered plenty of aviation cycles, Liu saysthe GECAS team has learned how to run atighter business.

In the past you would grow earnings bysimply growing assets. Today, we have tosweat the balance sheet more. We need tobook new assets that are accretive to the busi-ness return on investment by playing the

GECAS AT A GLANCE

Fleet value $34.1bn

Fleet (aircraft) 1,742

Orders (aircraft) 285

Lessees 258

Proportion of fleet leased 97.0%

Gross revenue 2011* $5.3bn

Net income 2011* $1.15bn

AB 2012 ranking (fleet value) 1

AB 2012 ranking (fleet size) 1*Figures from GECAS 2011 annual resultsFleet/value data: Flightglobal Ascend Online database

BROADER HORIZONS

While GECAS may be well positioned given its

parentage, funding, global locations and

overhead cost advantages, the leasing

companys boss still feels there is more his

business can do.

I would like GECAS to do more

consultative selling in the future, says Norm

Liu. We now own a leading aviation

consulting firm that can help airlines andgovernments with airport infrastructure and

route and network planning.

And I do want to form new investor

partnerships to extend our PK Airfinance

product range and provide syndication and

debt advisory services.

GECAS bought London-based aviation

consultancy AviaSolutions in 2007 and

previously acquired PK Airfinance, which

offers asset-backed commercial debt

financing, from Frances Crdit Lyonnais

now Crdit Agricole Corporate and Investment

Banking in 2000.


21/56

DAY IN THE LIFE HEAD

Day in the life bold, Day in the life main text

February 2013 |Airline Business|21flightglobal.com/ab

tomers. We still have impairments, but theyare at reasonable levels given our scale andbecause of our capabilities and conservativebook and pricing policies, says Liu.

To maintain the lessors growth, experienceagain plays a crucial role, adds Liu. The key isthat we have learned some lessons when order-ing aircraft or doing sale/leasebacks. In the past,we probably overbought certain types and weshould have sold more, but we have learned.The good thing is these changes in aircraft aretypically evolutionary, not revolutionary.

And we are especially mindful of last-of-line aircraft. You might get competitive pric-ing but, over the long-term, unless you tradeaircraft out, they could be marginal invest-ments depending upon the cycle in the futureand the technology curve. Never fall in lovewith the planes.

GECAS applied these hard-learned lessonsduring its recent ordering spree, most ofwhich occurred at the Farnborough air showin July, where the emphasis was clearly on thelatest-technology aircraft. The lessor makes ita policy to order aircraft powered by enginesbuilt by GE or its affiliates and tends to avoid

those where such an option is not offered.Among the Farnborough deals were orders

for the new re-engined narrowbodies fromAirbus and Boeing 60 A320neos and 75 737Max 8s all powered by CFM Internationalsnew Leap engine, as well as 25 more 737NGs.

GECAS has a book-end strategy of order-ing more widebodies, such as the AirbusA330 and Boeing 777, as well as regional jetsand turboprops from Embraer and ATR. Wehave ordered over 55 units of these book-endtypes in recent years, Liu says.

Weve been conservative on the 737-800swith fewer in 2017 than 2015. Also, we wentfor a low unit count. But we had to order be-cause we placed out our previous orders andwe also needed to beef up our on-going inven-tory, Liu adds.

GECASs current narrowbody order book iscommitted up to 2015 and, according to Liu,the next batch of 737-800s deliver 2015-17while Max deliveries start in 2018.

In todays world, the competitive bar isbeing raised constantly, says Liv. My job isto make sure GECAS is the one raising the barversus someone else.

cycle and volatility, we need more asset ve-locity or selling of assets for capital apprecia-tion and fleet management, and we need tomanage the mature assets well.

Ultimately, better funding and overheadcosts, plus broad capabilities, mean more op-tions for GECASs customers, he says.

With mature aircraft for example, we havecradle-to-grave capabilities for customers. Wehave secondary homes with charter, low-utili-sation, scheduled and pioneering market car-riers. We can convert planes to freighters or

can part-out the airframes through our partsdistribution business and use the engines inour engine leasing business, he says.

GECAS is a top player in engine leasinghaving developed this part of its businessfrom a small platform, Curtis Power, in 1999.A used airframe parts player, The MemphisGroup, was acquired in 2006.

Also, GECAS can offer custom-ers asset-based financing as abank would through its PKAirfinance subsidiary a toolincreasingly important for cus-

tomers because of the pullback in aviationlending by the European banks following the2008 financial crisis and more expensiveexport credit funding.

In December 2012, PK Airfinance and DVBBank arranged the senior debt refinancing of a16-aircraft portfolio for Dubai Aerospace En-terprise. The portfolio consists largely of Air-bus A320s and Boeing 737s.

Liu also argues that airlines increasinglywant local service and not fly-ins throughits extensive network of 25 global offices.Our large scale can afford this type of pres-ence, he says. Liu credits this as key toGECASs leading presence in greater China,where it has more than 190 aircraft committedin the region. We are also the clear marketleader in the Middle East, Africa and the CISregions too, and weve opened offices inGhana, South Africa and next Kenya, so weare well ahead of the field.

However, even with economies of scale,deep financial pockets and experience,GECAS is not immune to fleet impairmentcharges. Its pre-tax impairments were $250million in 2011 or about 50 basis points onassets. But despite these charges, the net in-come generated was $1.15 billion. Just threeaircraft were grounded during the third quar-ter of 2012 as they transitioned between cus-

More on GECASs plans and a video inter viewwith its chief executive Norm Liu at:

flightglobal.com/Liu

GLOBAL THINKER

Thinking on a global scale is not a new

concept for Norm Liu. His international

outlook comes, in part, from his family

heritage. His parents emigrated to the USA

from Shanghai during the 1949 civil war. His

wife Jai is from South Korean capital Seoul,

while his two daughters are fluent in Korean

and can speak some Chinese.

Liu went on to become a graduate of Yale

University and later received an MBA from

Harvard. His first job after college was selling

powerplants for Westinghouse in Taiwan and

South Korea.

Even in his spare time, Liu enjoys investing

in the international stock markets and

residential properties in Asia.

These hobbies have worked out pretty

well, plus they help me understand local

business conditions even more when I meet

with airline customers, he says.

A 26-year GE veteran, Liu has also been

involved in big-ticket leasing and project

finance, was vice president of business

development at GE Capital headquarters, and

was briefly managing director of its

investment bank Kidder, Peabody and served

on its management committee.

Liu has been with GECAS for 16 years,

three as chief executive and 13 as executive

vice-president of commercial operations.

I enjoy seeing young carriers grow,

especially in the fast changing emerging

markets, he says.

Many jobs are created and new places are

opening up like Myanmar, where we recently

leased two Embraer jets to the flag carrier,

Myanmar Airways.


22/56

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23/56

China is set to invest even greater sums in its aviationsector in 2013, while the countrys lessors are quicklydeveloping their fleets and expertise. In tandem with thisyears leasing survey, these issues and more are explored

in our 2013 interactive special report on finance:flightglobal.com/ifinance13

SPECIAL REPORT

FINANCE & LEASING

flightglobal.com/airlines February 2013 |Airline Business|23

24 Leasing space A graphic snapshot of themajor lessors

26 Fast learners How Chinas lease sector isbuilding know-how rapidly

32 Shift to the East The leasing market isseeing a change in its investment base

36 Shaping the game How new rules forexport credit will impact airlines

40 Finding the fundsRecord productionmeans more delivery finance

43 Lowering the riskDespite few losses in2012, claims will still exceed $1 billion

CONTENTS

All our special reports

are available online atflightglobal.com/

airlines

RexFeatures


24/56

flightglobal.com/ab

HIGHRISERS

Steven Udvar-Hazys

Air Leasemarches on andless than three years after

launch, a fleet portfolio of151valued at $5.6 billion puts it among

the top 10 largest lessors in theworld. Other rapid risers in 2012include Avolon, which grew its

fleet value by 61%to$3.4billion, and Doricwhich

grew by35%to$4 billion

FINANCE & LEASINGSNAPSHOT


LEASING SPACEGE Capital Aviation Services remains head and shoulders above its rivals by fleet

value and size, but there has been no shortage of activity from the chasing packduring the past 12 months in developing their portfolios and a shift in ownership

TOPFLIGHT

GECAShas kept itsimpressive lead in the

leasing stakes. While itsportfolio by fleet value droppedslightly in 2012 to $34.1 billion,there was a sharper decline at itsnearest rival International LeaseFinance. Continued growth during

the past 12 months has movedBBAMup to make it thethird-largest

lessor

1,635Lessors firm backlog as at the end of 2012,led by GECAS with 285 aircraft, followed byAir Lease with 244, and ILFC with 225

32%Aircraft lessors shares representalmost a third of the total globalfleet and 42% of the Airbus and

Boeing narrowbody market


25/56

REGIONALSHIFT

Aircraft lessors hold a20%share of the narrowbodyaircraft backlog, and 12%of

widebody orders. The latter is

downon the 18% share lessorsheld five years ago. However, thebiggest movement during that

period is in regional jets. Lessorsaccount for more than afifthof

the fleet backlog today,compared with only

3% in 2008


GECAS $34.1bn-1.4%

Aviation Capital Group $5.6bn16.7%

Air Lease $5.6bn59.7%

SMBC Aviation Capital $5.9bn-11.6%

AWAS $6.1bn18.6%

CIT Aerospace $7.2bn-4.2%

BOC Aviation $7.3bn7.9%

AerCap $7.7bn-8.8%

BBAM $.8.7bn9.8%

ILFC $26.1bn-6.0%

TOP 10 LESSORS BY FLEET VALUE

EASTERN

PROMISEChina AircraftLeasing Company, which

acquired 36 Airbus A320slast year, aims to build itsportfolio to 100 aircraft by2015, another sign of thegrowing development of

the leasing sectorin China

flightglobal.com/ab

$181bnThe total fleet value of the top 50 aircraft lessorsfleet portfolios in 2012, marking an increase of 6%over the previous yearBIG

DEALSA busy year for

acquisitions in the sector wascapped in December when

Chinese investors agreed to buy a90%stake in ILFCfrom AIG. It marks a

further shift to the east in the financesector after Japanese acquisitions earlierin the year. In October,Mitsubishi UFJ

Lease & Financeacquired fast-growingJackson Square AviationafterSumitomo Mitsuicompleted its

purchase ofRBS AviationCapital at the start of

last year

Ma

xKingsley-Jones/Flightglobal,Airbus,

BillyPix


26/56

flightglobal.com/ab

FINANCE & LEASINGCHINA


FASTLEARNERS

Although Chinas lessors have demonstrated inexperience onoccasions, they are building their know-how rapidly and will

soon become serious competitors for the rest of the industry

REPORT

SCOTT HAMILTON

SEATTLE

RexFeatures

The creation and growth of aircraftleasing companies in China isviewed with mixed feelings out-side the country. On the onehand, Airbus and Boeing are

happy to see this liquidity enter the market ata time when demand for finance is growingand banks still tend to be stingy. On the otherhand, western lessors and others view theemerging players as inexperienced, some-times naive, and capable of making decisionsthat can hurt the western leasing market andeven aircraft values.

No western lessors wish to be quoted byname because of the political sensitivities ofChinese face and the potential for harmingtheir own business relationships. But thecandour expressed when cloaked in anonym-ity makes it clear these competitors are notparticularly happy, but they are philosophi-cal. ICBC will be around and they are goingto learn some lessons the hard way, says oneUS-based lessor about a new, leading Chineselessor. They will take some planes back inthe same way we did from Eastern and PanAm in the 1980s and 1990s.

Return conditions and bankruptcy protec-tions written into leases were often ambigu-ous and court rulings left lessors on the hookfor much more than they had thought. Leaseswritten by the new Chinese lessors fall shortof the protections in western documents.

The impact has been small so far becausethe Chinese lessors have few leases outsidetheir homeland. But some western lessors arestill concerned. The aircraft affected aremainly Airbuses because the company hasbeen particularly aggressive in placing orderswith Chinese lessors and because there is an


27/56

flightglobal.com/ab

have ordered aircraft have turned round anddone deals below where the market is. Thenthere are the conditions of the deal.

The western lessor continues: Its not likeits a totally out-of-control situation. Its more

on the edges, perhaps 10% on the rates. Theyare definitely leaving money on the table.

The lessor observes that the new Chineseentrants are, in a sense, following the exam-ple of other new entrants. You always havethe most inexperienced guy who sets the rate.You may not know for 10 years if the rate istoo low until you see whether the residualvalue is wrong.

Although Chinese lessor inexperience hasadversely affected some A320 leases and con-tracts, its impact on leasing has been fairlysmall globally. However, the US lessor warnsagainst complacency: Essentially, you have agovernment mandate to learn the business andthey will do so, in some cases, the hard way.You have a combination of low funding costsand low criteria. They will become formidablecompetitors over time. You have to learn tocompete with them. You ignore them at your


A320 assembly line in Tianjin, which wasestablished to serve home-market airlines. Buta few Chinese lessors are conducting businessin the West, and it is these transactions that arecausing discontent.

Chinese lessors have a healthy orderbookfor the A320, not surprising considering the

assembly plant in Tianjin. Although leaserates are taking a hit because of the newentrants, western lessors have long com-plained about A320 lease rates.

CIT Aerospace has placed large orders forthe A320ceo and the Neo. Its president, TonyDiaz, assesses the A320 market like this:Ultimately, it is supply and demand. Itsbeen a few circumstances that have cometogether, even going back to when Boeing hada strike [in 2008] when 60-70 737NGs didntget built. If there were an additional 60-70NGs in the market, it would be a differentsupply and demand. He adds that even

without the strike, Boeing builds fewer air-craft than Airbus, and that adds up.

Some large bankruptcies have involvedAirbus operators, pushing A320s on to themarket, says Diaz. Five or six years ago, therewas a bit of a glut to Boeing and rates weresoft, he points out. Its a little bit of a cycle.

Diaz adds: There is a distinction at Boeingbetween the Classic and the NG. There aremore A320s out there. There is a big differ-ence between the early and current vintages,so there is a perception that there are more ofthem out there.

HOME FAVOURITESThere are 10 active lessors in mainland China,plus BOC Aviation (BOCA) of Singapore, aWestern lessor acquired by the Bank of China.BOCA is wholly owned by BOC and occasion-ally has to bow to home-market pressures,such as by ordering the Comac C919, but 80%of its funding comes from western sources andits management is steeped in western person-nel and business experience. In December,China Inc announced plans to buy 80.1% ofInternational Lease Finance with an option tobuy a further 9.9%.

In addition to these 10 active lessors anumber of new Chinese leasing companiesare looking to enter the business and arebeing monitored by Aviation Capital Group,which leases aircraft into China.

What has riled some western lessors is thatnot only are the lease rates offered by the Chi-nese below what they would like to see but,more importantly, contracts offered by Chi-nese lessors in the West fail to give the assetadequate protection. They say return condi-tions are poorly written and maintenance pro-visions are not up to western standards, whichhave been a long time in the making. Theyare new to the business and they are learning,says a US-based lessor. BOC Aviation is assharp as anyone. The newest entrants that

peril. They are not going to go away. You haveto learn to compete with them, and we are.

China took another major step to becominga global influence with an announcement inDecember that China Inc will acquire 80.1%

of mega-lessor International Lease FinanceThe buyers are China Trust, China AviationIndustrial Fund and P3 Investments. ChinaLife Insurance and ICBC Investment Holdingsare in line to take a further 9.9%.

ILFC parent AIG will retain 10% as a pas-sive investor when all tranches are taken up.ILFC will continue to be managed from itsLos Angeles headquarters, just as BOCAretained its Singapore head office after theBank of China bought the company, but ICBCcan be expected to benefit from ILFCs exper-tise. It may be that ILFC will eventually orderthe Comac C919, joining GECASs smallorder from the West. Chinese lessors make upmore than half the orders and commitmentsfor the C919, accounting for 200 of the 380announced as of December.

Another US lessor believes Chinas pur-chase of ILFC will eventually hinder its agil-ity. Like the first lessor, this one requestedanonymity to avoid offending the Chinesebecause it, too, does business in the country.Will they make it a difficult process toapprove a deal? the lessor asks. Thatremains to be seen.

This lessor, which competed with Singa-pore Aircraft Leasing Enterprise (SALE)before and after it was bought by Bank ofChina and renamed BOC Aviation, observes:

A SNAPSHOT OF CHINAS LEASING COMPANIES

ManagerIn

serviceOn

orderNotes

ABC Financial Leasing 2 45 Major shareholder Agriculture Bank of China

AVIC International Leasing 26 1 Focus on Chinese-built aircraft

BoCom Leasing 24 30 Major shareholder Bank of Communications

CCB Financial Leasing 2 50 Major s/holders China Construction Bank/Bank of AmericaCDB Leasing 90 13 Major shareholder China Development Bank

Changjiang Leasing 48 Focused on serving major shareholder HNA Group

China Aircraft Leasing 16 56

China Natl Foreign Trade Lsg 0

China Universal Leasing 0

CMB Financial Leasing 6 Major shareholder China Merchants Bank

Dragon Aviation Leasing 17 1 Major shareholder China Aviation Supplies

Haurong Leasing 0

Hebei Leasing 0

Hong Kong Aviation Capital 73 Investors include HNA

ICBC Leasing 76 49 Major shareholder Chinese bank ICBC

Jiangsu Leasing N/A

Minsheng Leasing N/A Start-up, business plan under review

Shanghai Electric Leasing N/A

Shenzhen Financial Leasing N/A AKA CDB Leasing

Xinjian Great Wall Leasing 0

Yangtze River Leasing N/A Major shareholder HNA Group

NOTES: N/A denotes figures not available. Table excludes BOC Aviation and ILFC which have major Chinese shareholders.Fleet data source: Flightglobal Ascend Online database

You always have themost inexperienced guy

who sets the rate. Youmay not know for 10 year

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