ISTAT Jetrader - Summer 2020 - 13

Jetrader: You have seen the air finance market develop over the last 30-plus
years. What is the main difference between 1990 and 2020?
NH: In 1990, aircraft financing was a highly specialized and exotic undertaking,
with few competitors, high inflation and attractive tax benefits. Today, the market
is hyper-competitive with numerous players around the world. You can't win today
without tons of data, sharp tools and efficient processes.
Jetrader: You have always been a strong believer in mathematical modelling
of aircraft portfolio/value risk. Do you still believe in this approach?
NH: You need a method to the madness. Collect and mine the data, analyze it, and
use it to calculate risk and reward. The HP-12Cs or Excel spreadsheets will give you
an IRR, but it assumes everything goes according to plan. No default and hitting an
aircraft value at maturity spot to your booked residual. Use the speed of your PC to
calculate zillions of possible outcomes, all calibrated to your data, and look at the
IRR (or NPV) as a probability distribution rather than a static number. This will give
you meaningful metrics for reward and risk and help you make better decisions.
Nobody could have predicted the coronavirus outbreak, but that outcome would
have been among the many scenarios you accounted for. A model will never replace
experience, insight and sound business judgement, but it can be a useful tool to run
your business in a more coherent and efficient way.
Jetrader: There used to be basically three tiers of airlines to provide debt or
lease financing. As an aircraft aged, it moved to the lower tiers: the first tier
being the major airlines, and so on. How many tiers are there today, and how
would you describe them?
NH: As an aircraft ages, it will be less about understanding the performance and
more about understanding maintenance condition and planning the maintenance
events. An increasing proportion of the variation in value will derive from the
maintenance condition. It used to be that top-tier airlines took the new aircraft and
then they trickled down the chain as deregulation took off in the late 1970s, and
many startups came along that couldn't afford the new kit. That is not true any
longer. Top-tier airlines have the capability to maintain older aircraft and deploy
them optimally. But, it may well be that
lessors need to specialize in the phase
of the aircraft. Tier 1 orders from the
OEM and places on a first lease; Tier
2 buys from Tier 1 and handles lease
return and second lease placement; and
Tier 3 handles end of life and part-out.
It is hard to be the best at everything.
Some tried the cradle-to-grave concept,
but I don't think it worked out so well.

be more expensive. This will be the
deepest down cycle so far in the jet
age, and the upturn will be slow and
gradual. Many airlines and lessors
will go through restructuring either
in bankruptcy or outside, and some
without a viable business model will
liquidate. I pity those who make it
through by piling on debt or deferrals;
they will face fierce competition
from the restructured ones. The
oldest, oddest and biggest planes
will be retired early, and the order
backlog will suffer. Production rates
will be cut. But people want to
travel, and aircraft will be back in
demand and the capacity balance
restored. I am not sure that aircraft
that avoided the graveyard will be
impaired permanently.
Jetrader: Some industry observers
suggest that large twin aisles are
less suitable for operating lessors
or asset-based financiers. Residual
values of this category have often
disappointed. Do you agree? Why?
NH: There are two things: Cyclicality
and reconfiguration costs. You can
cram a lot of pax into a big plane
when the market is hot, but in
downturns, they are hard to fill. So,

A model will never replace experience,
insight and sound business judgement, but it can be a
useful tool to run your business in a more coherent
and efficient way.

Jetrader: Under the current COVID-19
crisis, we expect increasing pressure on aircraft values. Which aircraft do
you see recovering their values once the crisis is over, and which will be
permanently impaired?
NH: This hurricane will hurt airlines and lessors first and foremost - anybody
with leverage. Even when the pandemic is behind us, the return to normality will
take time. There will be fear and reluctance to fly, restrictions around boarding
procedures and border crossings. Disposable income will be dented both for
individuals and corporations. Some people will get used to "Zooming" or "Skyping"
or "Teaming." The price of risk is shooting up, so leasing or financing aircraft will

you get hit hard in a down market,
and then the cost of reconfiguring
the widebody aircraft and its
interior for the next operator can
be prohibitive. On top of this, new
narrowbodies are getting great
range, displacing widebodies with
superior economics and attractive
point-to-point routes.
Jetrader

* SUMMER 2020 * 1 3
ISTAT Jetrader - Summer 2020

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