Jetrader - July/August 2008 - 22

Inflation and the Upside Case for Aircraft Investors By Steven T. Gaal, Managing Director & COO, SkyWorks Capital, LLC T $100,000 $10,000 $1,000 $100 $10 $1 he past four decades in the U.S. are looking uncannily similar to each of the four decades that preceded them from economic, social and political perspectives. In the 1930s and 1970s, the U.S. experienced depression/recession and maximum aversion to risk. The 1940’s and 1980’s marked turning points as the U.S. and its allies claimed victories over the “hot” and “cold” wars. The ensuing psychology was fueled in the 1950s and 1990s by economic expansion against a backdrop of global peace. These periods also saw rising levels of consumerism and increasing ﬁnancial leverage across most sectors of the economy. The 1960s and 2000s then marked turning points in psychology and economic momentum, with the Cuban Missile Crisis and Vietnam conﬂict then, and the 9/11 attacks and the Iraq conﬂict more recently, each indicating an increasingly unstable world. Exhibit 1 illustrates the similarities in U.S. equity market performance during these prior two 40-year periods (or super-cycles). In light of the foregoing observations, the distress seen in the ﬁnancial markets since mid 2007 can be viewed as a “popping” of the risk tolerance bubble that originated in the 1980s. This was fueled by a psychological environment that supported unrealistic extrapolations of economic momentum and rising asset values by market participants. The ensuing backlash has swung the appetite for risk in the opposite direction, making it reasonably probable that history will continue to repeat its 40-year pattern with the U.S. entering a period of slower economic growth last seen in the 1970s. As discussed below, that period was also marked by accelerating inﬂation, which represents a positive dynamic for aircraft as an investment class. Exhibit 1: Dow Jones Industrial Average over 40-Year Cycles Performance of the Dow Jones Industrial Average 40 Year Cycles (1928 - 1968; 1968 - 2008) The Resurgence of Inﬂation and Implications for Aircraft Investors In a previous Jetrader article (February 2007), we argued that the inﬂexibility of the aircraft supply chain makes demand for air travel (and, by implication, the global economy) a key determinant of shorter-term cycles in aircraft valuations. Record energy prices are now an added layer of complexity to the aircraft valuation puzzle, as sustained high fuel prices (crude was hovering at nearly $120/bbl at the time this article was written), all else equal, are likely to support demand for newer efﬁcient aircraft at the expense of certain older types. Witness the recent actions of most of the U.S. majors to up 10.2% p.a. (1983 - Present) up 0.1% p.a. (1968 - 1982) up 8.3% p.a. (1943-1967) down 4.5% p.a. (1928-1942) April 1928 - April 1968 April 1968 - April 2008 22 The ofﬁcial publication of the International Society of Transport Aircraft Trading

Jetrader - July/August 2008

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