14th Annual

Airfinance Conference

MIDDLE EAST 3rd – 5th October 2016

Post Conference Report

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14th Annual Middle East Airfinance Conference 3rd – 5th October 2016

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14th Annual Middle East Airfinance Conference 3rd – 5th October 2016

Post Conference Report: 14th Annual Middle East Airfinance Conference

Financiers, airlines, lessors and appraisers descended on the Jumeriah Beach Hotel for the 14th Middle East Airfinance Conference earlier this month, to discuss the latest trends and developments in the region. Over the two days, panellists covered a variety of subjects, ranging from where the new pockets of investment coming into the market from to the aviation finance opportunities in a post-sanctions Iran.

The first day of the conference started with four airline presentations from Air Arabia, Jazeera Airways, Pegasus Airlines and Emirates Airline, before an airline panel. One of the key takeaways from the presentations was that Middle Eastern carriers are still enjoying strong profits, but they are not enjoying the low oil price as much as much as some of their foreign counterparts.

Gulf economies are heavily dependent on commodities such as oil, so much so that when oil prices are low – being $50 a barrel at time of writing – the economies often suffer as a result.

Less local liquidity

The low price of oil also presents a problem for some of the local banks, which have been going through a retrenchment. Speaking on a new funds in the region panel, Marc Bourgade, Chief Executive Officer of Stellwagen Finance said: “Because of the drop in oil price, we have seen a slight reduction in the liquidity in the Middle East or maybe a pricing readjustment. It’s still available because we closed some Emirates transactions recently with local liquidity.”

Bourgade highlighted that liquidity has been available from the rest of the world for Middle Eastern airlines, citing a recent deal with AFC and Spanish and Asian banks for Emirates Airline widebody financing.

“So money is available on the debt side. On the equity side, it’s also available, because we often

see equity fighting against each other to win transactions and drive lease rates down,” he said.Anas Bennani, Chief Executive Officer of Palma Capital, felt less optimistic about local liquidity being widely available to airlines in the Middle East.

He said: “I think Marc is being optimistic about liquidity. We saw a shaking on the equity and debt side because of public spending. It’s now just a matter of yield. Less liquidity and less appetite on the equity.”

The A380’s remarketing potential

80% of the total backlog of widebody aircraft is going to the big three Gulf carriers Emirates, Etihad and Qatar Airways, according to IBA’s

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14th Annual Middle East Airfinance Conference 3rd – 5th October 2016

AerData. Being a region that is saturated with widebody aircraft, one of the Middle East’s biggest concerns is the A380’s secondary market potential.

The number of used Airbus A380 aircraft that are due to come into the market over the coming years is likely to exceed the demand for them, Steven Udvar-Hazy, chairman of Air Lease (ALC) said on a lessor’s panel. He said: “It’s [the A380] going to be very challenging. It’s not like the 747, which had a cargo conversion programme that absorbed a lot of 747-200 and 747-400s. The A380 is not really suited for cargo operation.” He added that it “will be interesting” to see what happens to the Singapore A380s that begin coming off lease next year and before adding that ALC is replacing six MAS A380s with six A350-900s.

“I think the supply the used A380 will probably exceed demand,” he said. “I wouldn’t put it in the same category as a 777 for remarketing potential. There is a larger customer base of 777 and A330 operators.”

Phil Seymour, CEO of IBA, who was speaking on another panel at the conference, thinks that larger carriers with more established in-house maintenance departments are more likely to want to acquire a used A380.

Seymour said: “Willie Walsh didn’t push back totally when he was asked the question: “would you be interested in used A380s?’. He’s a clever guy, even if he wasn’t interested, he would say he would be, to try and getting better pricing.”

“It’s a strange situation when a new start up, with very little resources internally is probably saying ‘we need to buy new because we don’t have the in-house capability’ and then financial strong carriers like IAG and Delta can say ‘well we can bring in a used Singapore Airlines A380’ and actually reconfigure that. Even if we spent $50 million, I could reconfigure it for $70 million and make it worth its while.”

Seymour also called for the original equipment manufacturers (OEMs), especially the engine OEMs, to show more support for widebodies in the secondary market.

Also on the panel, Mark Lapidus, CEO of Amedeo was less critical of the widebody jet. “In terms of secondary market. We have to be a little bit patient to let that play out.”

He added that he had been working with Malaysia Airlines to place its A380s. “The first A380 from Emirates doesn’t come off lease until 2021. Emirates is pretty clear in what they say in terms of how they’ll be the market maker for that aircraft.”

Opportunities in Iran

Perhaps the most discussed topic in the region right now is Iran and its potential as an aviation market now that the UN sanctions have been lifted. Following the licensing approval from the US Office of Foreign Assets Control (OFAC) on September 21 to sell 17 Airbus and 80 Boeing aircraft into Iran, financiers and airlines gathered together on the second day of the conference to discuss financing opportunities in Iran for these aircraft and the obstacles financiers may have to overcome if they wish to do business in the region.

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14th Annual Middle East Airfinance Conference 3rd – 5th October 2016

Iran Aseman Airlines, who spoke on the panel announced that it is looking to lease narrowbody and regional aircraft. Mohammed Gorji, the airline’s VP of fleet planning has said: “At the moment, we fly Airbus A320s, Boeing 737-400s, Fokker 100s, ATR72s and 727s. The Aseman backbone is designed to fly domestic routes. Based on that, we are looking to replace our Fokker 100s with a new 100-seater aircraft. We also want to acquire some 737-800s and A320s to assist some regional destinations of our neighbouring countries.”

Iran Aseman flies to 36 airports in Iran. Gorji adds that the airline still needs to go through successful negotiations with Rolls Royce before the British manufacturer can provide it with engines for its grounded aircraft.

Gorji adds: “Subject to what ACMI and dry lease

deals are on offer, we would prefer first to be sure about the aircraft performance in Iran – I’m talking about the aircraft that have never flown in Iran, like Bombardier, Embraer, Mitsubishi. The other aircraft are flying in Iran and everyone knows them. Before we accept aircraft, we have to be sure that aircraft engine performance and operating system will meet our requirements.”He added that Iran Aseman would prefer to wet lease aircraft before dry leasing them. After this, he wants to go on to purchase aircraft, but acknowledges that this is still likely to take some time. “We have been working with some OEMs and have signed some letters of intent (LOI) and we hope they can get the OFAC license and proceed to the next stage.”

Also speaking on the panel, Firoz Tarapore, Chief Executive Officer of lessor Dubai Aerospace Enterprise commented on wet leasing aircraft

to Iran. He said: “There are a few wet lease operators who would be happy to do that and I’m pleased to hear that it will be much less complicated on the wet lease side.

“We’ve heard that there might be a hurdle or two to go through on the wet leasing side. Wet leases will provide a temporary solution but it can’t be Iran needs to become a full-functional aviation industry.”

Zafar Asghar, senior aviation finance and leasing attorney at Kaye Scholer, said: “They certainly have the option of wet leasing aircraft. Arguably that’s not subject to OFAC considering they’re not transferring technology overseas, but I can’t imagine that’s the first option Iran would want.

‘The only AirFinance event that remains solely focussed on the Middle East!’ Polis Polycarpou, Senior Vice President, Head of Information & Strategic Marketing (Aviation), DVB SE

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14th Annual Middle East Airfinance Conference 3rd – 5th October 2016

‘A great mix of airlines, investors, OEMs and lawyers that make it unmissable.’ Phil Seymour, President and Chief Operating Officer, IBA-UK

281Registered Delegates

78Airlines Represented

25One-to-one meetings

Airline 28%

Lessor 19%

Financier 18%

Service Provider 11%

Law Firm 9%

Manufacturer 8%

Investor 4%

ECA 1%

OEM 1%

Rating Agency 1%

Middle East Airfinance Conference by the numbers

Political instabilities in the region

Another key theme of the conference was political instability in the region and what it means for the Middle Eastern carriers. Tamer Yuzuak, Vice President, Finance and Strategic Planning at Istanbul-based Pegasus Airlines, responding to a question from Airfinance Journal, said: “There have been a couple of incidents like the rating decrease of Turkey that have affected us financially, but on the operational side we have been affected more. In long-term, Turkey’s potential is recognised and we don’t see too much of a significant effect on us.“Is there a reflection in our cost of funding? Yes, for the time being.”

Yuzuak also highlighted that due to the high liquidity in the market, Pegasus can also explore other options of financing that bring down funding costs. Yuzuak’s case shows that liquidity is still available for Middle Eastern airlines, but at a higher cost if it is sourced from local banks or if there is any political risk involved.

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14th Annual Middle East Airfinance Conference 3rd – 5th October 2016

‘It is an excellent opportunity to learn about the industry in the region and networking.’ Maryam Bin Fares, Senior Manager Treasury Dealing, Etihad Airways

‘Where you can meet a wide range of delegates from manufacturers, to lessors, financiers and airlines.’ Amir Yadghar, V.P, Infrastructure Development & Sustainability, QIDCO

‘Very well organised and encourages networking.’ Donald Hubbard, Chief Financial Officer, Jazeera Airways Group

UPCOMING EVENTS

14th Annual Middle East Airfinance Conference 3rd – 5th October 2016

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respect of any error or omission that may have occurred.

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