Jetrader - Winter 2017 - 31

GB: Then looking after where market
rates are today, does that give you
any concern?
DS: Absolutely. It gives me lots of concern. One of the reasons I was attracted
to HNA as an owner is because we had a
joint vision of becoming the single-largest
purchaser of aircraft in the world market
through a combination of our needs as
a lessor.
In simple terms, we now negotiate with
the OEMs with one voice. There's a dedicated specialist team of Avolon executives
and the group executives negotiating with
Boeing and Airbus, GE, Rolls, etc.
We are negotiating in much larger scale
and with and with a much more strategic
perspective. The manufacturers are - I
wouldn't say getting comfortable with
that dynamic because obviously it creates
pricing tension - but they are beginning
to strategically appreciate the influence
and power that we will have as a buying
as a buying group in the global market. I
expect Avolon to, with its group parentage, be the single largest purchaser of
airplanes, therefore getting the best price
in the market and positioning ourselves
well for growth.
But I would say currently the lease
rates that lessors are garnering for new
equipment - delivery next year and year
after year - after are probably below
where we expected them to be because
of competition.
GB: Do we still believe in cyclicality?
Because if there continues to be this
bow wave of capital coming in, how
is that going to shake out, and where
is the exit point going to be, and is
distress going to come at some point
in the future?
DS: I fundamentally believe that the
industry is cyclical and will remain cyclical.
What changes every cycle is the turn -
the peak and the trough, the intensity of
each one, the time period between both -
and as we look out over the next two to
three years, I can't see anything that's
going to take the gloss off the current
healthy state of the industry. It's all about
supply demand at the airline side. The area
that I've been nervous about for some time
and continue to be is, I think there are too

All players in this industry are reliant on
the capital markets, one way or the other.
I think distress or a breakdown in those
markets like we saw in '07-'08 is the single
biggest threat to fund the CapEx that
the airlines require.
many airplanes being produced, but at the
same time I'm sort of dumbfounded every
year that airlines still have the capacity
to take them.
Again, there's stresses, I think, with
a small "s," around the widebody space
over the next couple of years, maybe too
many 787s, maybe too many unsold A350s.
The A330neo has gone from being quite
a challenged scenario six or nine months
ago - and I was publicly stating that -
to a scenario where we have no airplanes
left before, I think, 2020. That's been
quite a sea change, and I think the reason for that is that Airbus is now selling
the aircraft and Rolls-Royce is dynamically behind trying to support the sales
of the airplane.
Interest rates are on the way up, though.
The dollar was strengthening, and now it's
kind of weakening again so that's good
for our emerging airline clients. Oil was
going up, but it's kind of coming back down
again, so that's good. So it seems to be
that we've had headwinds and tailwinds on
a week-by-week or month-by-month basis.
Typically, what happens in this scenario,
if you look back over 50 years, is that you
have some kind of a shock event, which,
God forbid, doesn't occur.
GB: Given your relationship with your
owner, HNA, being Chinese does that
give you a competitive advantage in
this market?
DS: The answer to that is it's a doubleedged sword. One positive is we're part of
the Hainan Group, and today I think it's
about 25 airlines they operate in China. We,
through that network of sister companies,
have a unique perspective into that market.
However, we deal with them on an arm'slength basis because we're a part of a public
company, Bohai Capital.

In summary, we don't get any special
treatment; we don't get any sweetheart
deals because we're part of the group.
Certainly Avolon can bring the best of East
and West, but we are unique in terms of
our knowledge base of how the airlines are
actually operating and what their demand
is for airplanes.
GB: What do you think poses the greatest
threat to this industry at this point in
time and rolling forward over the next
five or ten years?
DS: All players in this industry are reliant on the capital markets, one way or
the other. I think distress or a breakdown
in those markets like we saw in '07-'08
is the single biggest threat to fund the
CapEx that the airlines require - and I
don't know what it is for next year, but I
think this year it's in this sort of $131-135
billion range. These are very, very big
numbers. That's the risk that I would be
concerned most about, and unfortunately
it's the risk we can't control.
GB: But that risk also represents a significant opportunity if you're well capitalized and you've got a strong parent.
So I would assume that you'd be looking
at that as managing what you have but
be looking for a position that you can
take advantage of.
DS: Yeah, if you can, but if you're looking at a systemic or systematic breakdown, then everyone's in trouble. If
you're looking at what I would call market stresses, you want to be opportunistic in those scenarios to the extent that
you can be. I think the metric that we
will continue to run the business to is
that very conservative debt-equity ratio,
because that gives you a lot of downside protection.
Jetrader * Winter 2017 31

Jetrader - Winter 2017

Table of Contents for the Digital Edition of Jetrader - Winter 2017