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October 2010
Airlines' risk analysis, the essential tool kit? Shane Matthews
Head of Credit Risk, RBS Aviation Capital
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RBS Aviation Capital - today
Team
• 63 aviation professionals
• Global reach
Portfolio Overview
• Top 4 operating lessor
• 217 owned, 36 managed aircraft
• 95 new aircraft on order with Boeing & Airbus
• Over 60 airline customers in over 40 countries
Seattle
New York
London
Toulouse Shanghai
Hong KongSingapore
Dubai
Dublin (HQ)
7 analysts dedicated to airline credit & risk management
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Portfolio Risk Management
Asset RiskAnalysis
Credit RiskAnalysis
TransactionQuality
Analysis
A holistic “3-pillar” framework approach promotes…
– Pro-active anticipation of issues
– Early initiation of corrective action
– Reinforced by cross-functional ownership for risk mitigation
This leads to….
– Timely exit from several troubled airlines
– Limited exposure to bankruptcies / defaults
– High asset and credit portfolio quality
Strategy - Financial Services Approach to Risk Management
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How do we look at an airline?
Franchise/business Plan
Competitive environment
Regulatory environment
Track record
Financial performance (cost and revenue)
Financial forecasts (are they realistic)
Management – expertise, track record and lock in
Ownership
Fleet profile – is it fit for purpose
These all combine to form a risk profile
We take a sum of the parts approach
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How we look at an airline?
Low Cost Carrier
Full ServiceCarrier
Hub and Spoke Pt to Pt
Long Haul Short Haul
Future direction is more important than historic positioning
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Financial Ratios
Cashflow
Loan to value/investment to value
ROCE/RWA
Interest cover
Debt/ Equity (including off balance sheet debt)
Liquidity Ratios
Margins
Key Sensitivities – these are company specific
Shall we care how much the airline makes rather than can it service it obligations?
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Features of Asian Aviation Market
Large population base
Wide geographic spread with large bodies of water
Strong economic activity
High level of Government involvement
Growing personal wealth
Growing leisure market
Gradual deregulation
Fragmented Full Service market
Low LCC penetration
Booming demand for aircraft and aircraft financing in Asia
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Market Position
Low Cost Carrier
Full ServiceCarrier
Hub and Spoke Pt to Pt
Long Haul Short Haul
SIA
Cathay Pacific
Virgin Blue Tiger
AirAsia
Qantas
ANZ
PAL
MASJetstar
AirAsia X
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Servicing your obligations
Fixed Charge Coverage(EBITDAR/(I+R))
-2-10123456789
Cathay SIA AirAsia
Qantas AirChina
PAL Asiana CSA VirginBlue
Tiger Korean ANZ CEA MAS ANA
2010 2009 2008 2007
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Cash as %age of T/Over
0%
5%10%
15%20%
25%
30%35%
40%45%
50%
Tiger SIA ANZ Qantas Cathay AirAsia
MAS VirginBlue
ANA Korean CSA CAL AirChina
PAL CEA Asiana
2010 2009 2008 2007
Cash is King on a Rainy Day
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Sources of information
Site Visit
Due diligence calls
Competitor visits
Formal briefings for PLCs
Internet
News services
Wary of consumer websites – there is a natural bias
Constant process
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Ongoing Monitoring
Our job does not end once the credit application is approved
Banks do not like surprises so we therefore continue to monitor your performance
We have a policy of meeting each of customers at least once a year
We do a formal review of each of our clients annually
Ongoing monitoring does lend itself to speeder decisions
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Thank You
Q&A