Jetrader - March/April 2010 - 16

And If I Am Pessimistic (Or Realistic?) The price of oil has started to move north again, and with yields still depressed and no strong sign of recovery in premium trafﬁc, this year should prove extremely challenging. Load factors remain artiﬁcially boosted by the industry discipline on capacity and the obvious sub-optimal aircraft utilization. Overall, the ﬁrst two quarters of 2010 can potentially bring signiﬁcant bad news. Will the ECAs and the banks keep their traditional sense of humour under all circumstances? ECAs are entities that traditionally pay the utmost attention to the quality of their portfolio. Their performance has been outstanding so far, but concentration—as opposed to diversiﬁcation—on a few names, continued poor performance of the industry and asset values that even on new aircraft show some weakening, may incentivize and/ or pressurize them further to implement increased restraints and heightened selectivity criteria. Capital markets are unpredictable. But in the case of most of U.S. legacy carriers, very few assets are left unencumbered for new deals. Meanwhile, investors have already started to adjust loanto-value ratios downward (in addition to already falling appraised asset values), forcing the airlines/lessors to invest more equity in their ﬁnancing while cash ﬂow from operations remains weak. Lessors have called on the ECAs in the recent past with success, and common sense tells us that, effectively, lessors can be viewed as a structural enhancer of an airline’s credit. But, the ECA-repayment proﬁle, which is accelerated compared to the average bank deal (or capital markets structures), is taking its toll on the cash available to lessors. What the precise consequences will be, given that we can expect more stress on lease portfolios and additional challenges to reﬁnance existing deals, is for the most part unknown but certainly represents a major threat. +49 6081 587 6081 www.mba.aero/valuations.html Conclusion: There Is No Conclusion! 2009 was not as bad as many feared, and the extra liquidity that came from ECAs and capital markets has just allowed some to build a cash buffer and ﬁnance their current delivery program. But, DVB believes that the fundamentals of the industry are still very challenging; the money that was borrowed still needs to be repaid out of operating cash ﬂows that remain dangerously unimpressive. 2010 should prove to be paradoxical; on one hand, we will probably see less volatility compared to the disastrous pre-Lehman turmoil, but on the other, there are now more uncertainties over the ability of the industry to weather the current crisis. Liquidity, which supported signiﬁcant CAPEX in 2009, can diminish. In such circumstances, reliance upon the ECAs to again assume the role of lender of last resort is a dangerous game. Ultimately, even if we remain cautiously optimistic with regards to the ﬁnancing of new deliveries scheduled for 2010, we must not ignore or forget the massive activity that is normally evident within the used aircraft market. In this vast segment, we can see a painful credit crunch resulting. We will witness many transactions that cannot be concluded due to the lack of ﬁnancing, including lessorportfolio deals. Directly or indirectly, this will have some noticeable consequence on the value of most asset classes. At worst, the weakest lessors will disappear as the weaker airlines also minimize or eventually cease operations. Whatever the case, be sure to fasten your seatbelt—there is still major turbulence ahead! for further details about any of our programs, please contact: Stefanie Jung sjung@mba.aero © 2010 mba all rights reserved 16 The 1 463515_Morten.indd ofﬁcial publication of the International Society of Transport Aircraft Trading 1/19/10 12:13:09 PM

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Jetrader - March/April 2010

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