December 2009.

Asia Pacific (incl. China) jet fleet will grow by 78.4% within ten years. (ASCEND)

Europe’s fleet size will grow by 47% within 10 years with the expansion focused mainly on Central European airlines and Russia.

North American jet fleet will grow by 4.7% within 10 years.

Middle East, Latin America and Caribbean, and Africa’s fleets will grow 71%, 60% & 20% respectively.

Market Share of jet fleet in 10 years: North America (30%), Europe (27%), Asia Pacific (27%), Africa, Middle East, South America combined (26%).

Low fares era is set to end as EasyJet and Ryanair change strategy to maximize returns for shareholders.

EasyJet and Ryanair plan to cut back rapid growth rates and capital spending and to pay out free cash flow to investors.

Ryanair will implement its new strategy when its current fleet acquisition program for 112 B737-800s ends in 2013.

EasyJet announced a similar strategy change early in 2009 after a boardroom bust-up between the airline’s founder, and management.

IATA airline review: Airline performance began to improve in Q3 2009, after a poor Q1 and Q2.

Downsizing: IATA says airlines are cutting jobs & reducing capacity in response to a fall in first- and business-class traffic even as the economy recovers.

Recession end? IATA says that a move out of recession and stronger economic growth boosted airfreight, and air travel in Q3 2009.

Losses for 2009: IATA estimates an $11B loss for 2009 due to a 4.1% decline in air transport demand.

Losses for 2010: Airline losses in 2010 will total $5.6B, 47% above the $3.8B forecast in September due to oil prices rises and price competition.

Losses by region in 2010: Europe $2.5B, N. America $2B, Asia-Pacific $700M, Middle East $30M, African $100M, L. America $100M profit. 

Traffic demand in 2010: IATA says traffic may grow by 4.5% 2010 as the industry rebounds from the recession. 

Fares:  IATA says passenger yields (average fares) are a continuing disaster after falling 12% 2009 and will remain depressed in 2010.

Cargo rates: IATA says cargo yields are down 15 % in 2009. 

Revenues: IATA says global airline revenue will rise by 4.9% to $478B in 2010, below the peak of $535B in 2008.

Costs in 2010: Airlie costs such non-fuel items may decline by 1.3% in 2010 vs. 2009.

Fuel costs: IATA estimated that jet fuel would represent 26 percent of operating costs in 2010, twice the share in 2001- 2002.

Fuel prices: IATA predicts that Brent crude oil will average $75 p/b in 2010, vs. $61 p/b in 2009.

IATA's reports do not include many profitable low cost such as Air Asia, EasyJet, Ryanair and Southwest.

IATA – Who? A trade association that represents 230 airlines that carry 93% of international traffic

Fees cost market share: Southwest says the no-fee policy helped increase its domestic market share by about 1% ($800M to $900M).

Standard & Poor's estimates cash levels at US nonfinancial companies listed on the NYSE, NASDAQ and AMEX increased 47% in 2009.

Cash for spending in 2010: S&P says the 3,729 U.S. nonfinancial public companies (excluding private companies) have $1.6T in cash up from $1.1T in 2008.

Cash ratios: S&P says the excess of cash flow over capital spending rose to 1.17 as of September 2009 vs. 0.88 a year earlier, the highest ratio in 50 years. (Wells Capital Management)

Cash build up: Large amounts of cash are on corporate balance sheets in Europe, China, India and Brazil says Beacon Trust.

Cash will be spent: Three reasons why: Each time cash flow exceeds capital spending big waves of spending followed.

Spending cash! Companies spend because they are more confident that sales growth will increase profitability and stock prices, and access to credit markets.

Spending cash! Target companies look cheap as acquisition targets for expansion.

Industrial capacity is declining as a proxy for the U.S. economy's capital base for only the third time in recorded economic history. (Joseph LaVorgna, Economist, Deutsche Bank).

Industrial capacity decline delays the plant and equipment upgrades needed to grow businesses.

Lag impact on capital spending:  Spare industrial capacity remains after a recession that the global economy used to produce more without expanding capacity.

Capital investment timing: Capital spending usually picks up after a recession and well before the economy is running at full capacity. (Deutsche Bank).

September 24, 2009

Airfreight demand in August fell by 9.6% vs. the year-ago figures and vs. an 11.3% drop in July.

Air Freight: IATA says volumes are improving but profits are being hit by rising costs.

IATA predicts a return to international airfreight growth for 2010 of 5.5% vs. 14.5% decline in 2009.

Airfreight demand is up 12% from its December 2008 low but is 16% below April 2008 levels when the fall in demand began.

Utilization: IATA says airlines have reduced daily aircraft utilization citing the B777 fleet where 2009 utilization fell by 2.7% to 11.1 hours per day

Utilization:  Lower utilization helps load factors, but spreads fixed asset costs over fewer flying hours pushing up unit costs.

United Airlines (UAL):  When United filed for bankruptcy protection in December 2002 with debts totaling $4B it, lessors paid a heavy price.

United Bankruptcy cost: Ch11 reorganization is costing banks & lessors $850M annual based on restructured leases and mortgages on approximately 450 aircraft.

United Bankruptcy cost: Ch11 reorganization is costing bondholders $1.7B in restructured municipal bond obligations.

United Bankruptcy cost: Is costing labor multibillions of dollars in restructured labor and pension agreements.

Bernstein Research expects aircraft delivered in 2009-10 to lead to excess capacity and more aircraft delivery deferrals.

Bernstein Research suggests Airbus and Boeing will deliver more aircraft than the market will need through 2012.

Bernstein Research reports that 12.3% (2,500 approx) of the passenger fleet is more than 20 years old and 30.2% is more than 15 years old. 

Source: Fitch-Rated U.S. Airlines.

September 2009. Fitch: U.S. airline industry remains fragile despite early indications of stabilization.

Fitch believes modest improvements in industry profit margins, cash flow and liquidity are more likely over the next year.

The U.S. airline industry operating environment remains fragile and highly sensitive to changes in air travel demand and the price of jet fuel, according to Fitch Ratings' Fall 2009 Airline Credit Navigator released September 24th 2009.

Following a period of extreme revenue pressure driven by the collapse in premium air travel demand over the past year, U.S. airlines enter the fall with growing expectations that still-tentative signs of stabilization in revenue trends over the last several weeks may pave the way for modest improvement in credit fundamentals and reduced bankruptcy risks moving into 2010.

"The strength of a global economic recovery and the pace of improvement in high-fare business travel demand will be the driving forces influencing airline credit quality through the winter," according to Fitch.

Fitch says that over the next economic cycle, sustained improvements in airline credit fundamentals will depend upon further progress toward industry consolidation, as this provides carriers with the best opportunity to generate pricing power.

Relative liquidity positions and capital market access remain the primary factors influencing Fitch's assessment of U.S. airline credit quality.

While recognizing the sensitivity of industry cash flow to the timing of a prospective revenue recovery, Fitch notes that it is important to note that all of the U.S. legacy carriers have seen their liquidity positions eroded materially as a result of almost two years of sustained operating pressure and constrained access to capital.

TEven if revenues continue their gradual firming trend through the period of seasonally weak demand extending into the winter, some airlines will face the risk that uncomfortably low cash balances in early 2010 will again force them to seek out emergency sources of capital.

FFitch expects tight credit market conditions and an absence of owned and unencumbered assets to limit the ability of large carriers to reliably raise capital at a time when heavy cash obligations, including debt maturities, pension funding and aircraft capital commitments, will continue to pressure liquidity.

Higher airline borrowing costs, persistently high leverage and chronically weak cash flow highlight the largely unsustainable nature of U.S. airline capital structures.

September 2009

Airbus is projecting that global air traffic will grow by up to 4% in 2010 and over 6% in 2011.

Boeing believes global air traffic will fall in 2009, grow by 4% in 2010, and grow 6% in 2011

August 2009

The world jet-powered civil aviation fleet consists of over 77,000 aircraft flying 77M hours annually.

1)Over 52,000 are business and general aviation (BGA) jet aircraft.

2)25,000 jet aircraft are in the air transport fleet

Nearly half of the fleet (37,000) aircraft is based in North America, 16,8000 jet aircraft are based in Europe, the Asia-Pacific regional has about 10,000 aircraft.

Worldwide more than 4,800 firms employ more than 480,000 people in the civil maintenance & repair supply chain. 

Nearly 4,200 firms employing more than 200,000 people in the USA are involved in supporting these aircraft providing maintenance and repair services through maintenance & repair organizations (MROs).

Spending in the global MRO market was estimated at $50Bn in 2008.

North America accounted for $19.4Bn of the MRO spending total.

The maintenance and repair market is divided into four market segments:

1)Airframe heavy maintenance

2)Engine overhaul

3)Component repair

4)Line maintenance

Cost structure

Labor cost account for 70% of every heavy maintenance check and 22% of the engine overhaul cost.

Material costs account for 20% of a heavy check and 60% of the engine overhaul cost.

Repair/specialty services costs account for the balance of the heavy maintenance and the engine overhaul costs.

Maintenance philosophy

1)Block maintenance concept

2)Progressive maintenance concept

3)On-condition maintenance concept

This overview is focused mainly on the block maintenance approach to overhaul.

Airframe heavy maintenance is broadly categorized as:

Air Transport Aircraft

C CheckEvery 2,500 to 3,000 flight hours, requiring 2,000 to 4,000 man hours

D CheckEvery 20,000 to 24,000 flight hours, requiring 10,000 to 50,000 man hours

Business & General Aviation Aircraft

Minor      Every 300 to 500 flight hours, requiring 4 to 15 man hours

Major      Every 3,000 to 5,000 flight hours, requiring 2,000 to 5,000 man hours

Engine overhaul is broadly categorized as follows:

Air Transport Aircraft

OverhaulEvery 4,500 to 25,000 flight hours, requiring 11,000 to 140,000 man hours

Hot Section Inspection (HSI) Every 1,000 to 3,000 flight hours, requiring 500 to 4,000 man hours

Business & General Aviation Aircraft

Hot Section Inspection (HSI)Every 1,000 to 3,000 flight hours, requiring 500 to 4,000 man hours

Overhaul      Every 3,500 to 7,000 flight hours, requiring 5,000 to 20,000 man hours

The component overhaul market is fragmented into the following market segments:

Wheels & Brakes

Avionics

Auxiliary Power Unit

Fuel Systems

Hydraulic Power

Flight Controls

Thrust Reversers

Landing Gear

Electrical

Other

The overhaul of wheels and brakes are generally the highest expense on most aircraft due to significant wear and tear and average about 20% of component repair cost.

Line maintenance covers three basic checks:

Transit Checks   Every flight cycle, requiring 1 to 5 man hours

Daily/Weekly ChecksEvery 24 to 36 hours and/or every 4 to 8 days requiring 5 to  30 man hours

A Checks      Every 350 to 700 flight hours requiring 50 to 250 man hours

July 30th 2009

IATA says the global airline industry carried 7.2% fewer passengers and 16.5% less cargo in peak-season June vs. June 2008. 

IATA sees no sign of an early economic recovery in what is for airlines a late cycle industry.

Summer 2009

Administration  had no legal authority

to auction airport slots

The Associated Press reported from Washington (October 2008) that U.S. aviation officials have no legal authority to auction takeoff and landing slots at New York City airports, a scheme the government devised to try to curb crippling traffic jams at major airports, congressional investigators said.

The legal opinion from the Government Accountability Office came amid a legal fight among airlines, airport operators and the Federal Aviation Administration over the U.S. Administration's plan to trim flight delays by auctioning off slots at New York City-area airports.

The opinion was  another blow to administration officials who had hoped to get their air traffic experiment off the ground before they leave office in January 2009.

"We conclude that FAA may not auction slots under its property disposition authority, user fee authority, or any other authority, and thus also may not retain or use proceeds of any such auctions," GAO general counsel Gary Kepplinger said in a letter to lawmakers who had sought the legal opinion.

The GAO's top lawyer concluded that for the first time in 40 years, the FAA claimed it may assign airspace as its "property," but the laws covering the FAA were never written to include such a definition of property.

Transportation Department spokesman Brian Turmail said the GAO was unfamiliar with aviation law, and had little time to study it before reaching its conclusion.

"Should Congress give the agency an opportunity to conduct a more thorough review, we are confident that GAO will better understand both the validity and the effectiveness of our approach," Turmail said in a statement.

A number of congressional lawmakers had requested the legal opinion as they tried to stop the FAA's limited tryout of a slot auction in the fall of 2008 at Newark Liberty International Airport.

"This once again shows that the DOT needs to put a stop to this ideological battle that would cause chaos at New York airports. The administration has tried to jam through a half-baked plan that can't even be implemented," said Sen. Charles Schumer (D-N.Y)., one of the agency's biggest critics.

Then Transportation Secretary Mary Peters proposed the auction plan after widespread complaints in 2007 about rampant flight delays across the country. The government claimed two out of three flights delayed 15 minutes or more were due to cascading backups beginning at one of the New York metropolitan area's three airports: Newark, Kennedy and LaGuardia.

Trying to fix the problem, the government imposed new limits on the airports and announced plans to auction off some takeoff and landing slots to control the crushing demand for time and space. By auctioning slots, the government reasoned, market forces will help restrain such demand and make the system operate more efficiently.

Opponents sued.

Airlines and airports contend the auction proposal will add new costs and make a mess of day-to-day airport operations.

The government pressed ahead with a trial effort at Newark to auction off just two slots, but an internal FAA agency told them to wait.

An agency order lifting that stay was issued after the GAO legal finding, meaning the agency could in theory proceed with its trial auction in Newark.

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Headline News was last updated: December 31, 2009

Service

Guide.

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Summer 2009

Can Asset Values Defy Crisis?

The questions swirling about the aircraft financial markets focus on the position of ALLCO, Babcock& Brown, CIT and ILFC. The unanswered questions include: (a) is ILFC well insulated from AIG risk (b) how much are CIT and ILFC worth and (c) do the lessors fund long or short!  Looking at the overall picture the answers are mixed!!

ILFC's 424B filings with the SEC indicate that the lessor's interest rates on debt increased from 3.85% in January 2008 to 8.4% by the start of 2009. The company expects to finance purchases of $17.6Bn covering 179 aircraft through to 2018. Third party valuations for ILFC range from a low of $2Bn to $5Bn and a high of $7Bn to $10Bn based on a portfolio of 974 aircraft.

Asset values:

Following on the heels of the mortgage crisis starting in ’06, the credit crisis in ’07 and the oil price/commodities crisis in ‘08  asset values globally have fallen 40% plus.  Can it be possible that aircraft assets are immune from this trend?

Babcock & Brown:

According to WSJ (Tuesday, September 16, 2008, B4) the Babcock & Brown restructuring "is effectively a partial liquidation involving asset sales, staff reductions and a winding back of the firm's businesses, real estate and operating leasing, areas it sees as core competencies". The stock was down 94% since the start of 2008.

 

Babcock & Brown has more than 200 aircraft under asset management contracts for investors!

COMMENT:

ILFC in the center of the AIG storm, Babcock& Brown and ALLCO are focused on restructuring, Lehman’s declared Chapter 11, and more than 20 airlines have gone out of business suggesting hard times ahead as the 2009 summer peak season winds down.