Aircraft Ownership: paradigm shift or more of the same?

Transcript

Alex Cruz:This panel is incredible in many respects, and I know that you know about some of them, not everyone, but Lynn is just getting started with her own project after many, many, many successful years with major brands in the leasing industry. I know that you've been answering questions from potential investors, and we're going to try to answer some of those questions. If there If there is someone that is in a selling mode, that's you. So I can't wait for that. Martin, you've been with airBaltic now for quite a long time. We all admire you for all the decisions that you've done on aircraft. And we— well, I think there's a lot of airlines that are jealous, in fact.

Robert Martin:I hope.

Alex Cruz:That you have this fleet, amazing, amazing fleet. And of course, Robert, you have incredible experience across the world, particularly in Asia. We're going to talk a little bit about Asia. With BOC Aviation and an incredible portfolio already of aircraft all around the world. So let's think a little bit about 2 angles. The angle is what's happened until now, and then later on, let's talk about what we think might happen in the future. So we don't have to replicate all the stories that we already know about what's happened over the last 2 years. But what we do know is that words like debt and difficult refleeting decisions and retirements. All has— all of these have been relevant topics for most airlines. From your perspective, and I'm going to start with you, Robert, what has really happened in terms of those difficult decisions over the last 2 years? What have you witnessed and how have you specifically in your position dealt with them?

Robert Martin:Again, thanks to CAPA for allowing us to come and speak here today and Alex for chairing the panel. He's been nice the start of it. So in March 2020, so bear in mind that's only 2 years ago, we were in the US and we had seen what was coming in China. And from our perspective sitting in Singapore, our feeling was this wasn't just going to stay in Asia. COVID was going to be a much bigger issue. So we went to go and see our largest clients around the world and said, Look, we're ready, we're prepared, we can help you with balance sheet during the period and particularly the initial part of the problem before governments and capital markets start coming back again. So what we did was actually we did $7 billion of purchase and leasebacks in a 3-month period between March 2020 and June 2020 with deliveries then spread over the next couple of years. And this was a way to help our customers who basically had deliveries coming that they wanted to make sure they still took delivery of because they still had needs from their fleet, and at the same time effectively give them 100% financing so they weren't putting much-needed operating cash into the aircraft. Now, as time went on, we knew as well there'll be a number of customers would need assistance. So I would say for us there were 2 phases. of the downturn. The first phase was go out and use our balance sheet to help our customers, and the second then was working with customers to work out what type of deferrals they may need to help them get through the problems. Now, we saw then a significant difference between different parts of the world into how the airlines were helped by other people, and in particular governments and capital markets. So in North America, the governments were very supportive. They came with a number of schemes to help the airlines. The US capital markets opened up very rapidly and supported the airlines there. The same happened in China, and most— a lot of people don't realize that that happened in China at the same time. The Chinese domestic renminbi bond market was extremely active during that period. The problems were in markets where they didn't have sophisticated capital markets and where governments decided to put their priorities elsewhere and support more the health side rather than their airlines. And that's where we tended to find the airlines needed more assistance.

Alex Cruz:And from a practical point, Martin, you found yourself in the same position as the rest of the airlines pre-COVID. What was the aircraft— and you were also receiving new aircraft, or the tail end of your order. Did that complicate matters? How have you been able to make it through?

Martin Gauss:When it hit us, and at that time we thought it might be over by the end of 2020, so that was the first idea we had. So we had to take very drastic action as we were the only airline which had to stop flying completely, not knowing when we would come back. 62 days at the end it was. And then we did a plan to just ensure we can stay. We were lucky because we had issued a bond just in 2019, so we were okay. We turned to the leasing companies, said what could we do to go together forward, and we took a strategic decision 2 years ahead of what we wanted to do, and we stopped our turboprop fleet while we still today pay for them every month, the lease rates. They are all parked. But we stopped that 12 turboprop aircraft, wanted of course over the last 2 years to find a new home for them, but the leasing company always, which is under administration today, said, no, we don't like that sublessor. So we'll return them one day. We wrote off more than $100 million in that first year, a huge loss, but that was done. We also had 4 Boeings still aircraft where we accelerated. They were our own, we were selling them. I think at the right time because today that would be much more difficult. And our existing order of 50 Airbus A220s, we accelerated that one and we took in aircraft and still take in aircraft to have then a homogeneous A220 fleet. Now, 2 years later, that was a very good decision. That aircraft is very much liked and we are enjoying the benefits of it. If we look at the fuel prices, at the size of the aircraft, at the capability.

Lynn Guiney:Thank you.

Martin Gauss:So looking back, it was a very good decision. And looking forward, we receive another 7 aircraft this year, then another 10 until 2024, hopefully doing the IPO to repay our government's injection. And then I think we did the right thing at the time with the leasing, with the lessors we have. Some aircraft we have on the balance sheet, some of them are with leasing companies. We had a very good relation. So it worked very well and we never defaulted on anything and we will also not do that on any of the aircraft which you would think, okay, I can't use these turboprops anymore. The only way out not to pay for a fleet you're not using anymore would have been to go through bankruptcy, which was not an option, and therefore we are paying in full, not one cent discount from the lessors on that fleet, but also— at no time the willingness that we could sublease them. We're maintaining them to the highest spec. They're relatively new aircraft and they're all lined up. I can see it from my office and I will celebrate the day when they will be returned.

Alex Cruz:It must have been a fascinating experience as it has been for everybody. Now, Lynn, you have been taking the impact of COVID at Avalon.

Lynn Guiney:Indeed.

Alex Cruz:I guess my question to you would be, you've been exposed to many different airlines, as Robert has. Those that have been smarter, what have— what are the questions that the smarter airlines have asked you during these desperate times?

Lynn Guiney:Oh my goodness, you know, because it's going to make some of them sound really good and then others sound—

Alex Cruz:Well, I'm not asking for you to name names, but The constituents is very, very—

Lynn Guiney:When it's a good story, you can name the name, Alex. I think if I take Rohit and Jazeera, I was only talking about him yesterday, he immediately looked for a 9-month restructuring, which none of the lessors wanted to give. We were talking about 3-month moratoriums and you can pay back. If you look back with 20/20 vision, you know, was the right thing to do. That was very challenging for us to try and consider at that time because when it happened, nobody thought it was going to last 2 years. I mean, actually, I remember distinctly I was there having a burger in Burger King. It's not very glamorous, but at Domodedovo Airport, you know, looking at in February 2020. So Domodedovo is the the airport just south of Moscow. We just signed a deal with S7 for placement from our skyline. We were looking at the Chinese wearing masks. It was still February. I think, are you going to wear a mask? Do you think these things will come in? Seriously, Alex, we just had no visibility of the seismic impact of COVID at that point in time. Of course, I haven't been back to Russia since, and God knows when I'm going to get back to Russia now at this stage. But it just shows you how things have changed. So in terms of who was clever, some people were clever in that they asked for restructurings that were a little bit longer than the 3 months, because otherwise, you know, they just had to come back, come back, come back to the table. But frankly, others, they weren't lucky— they weren't clever, they were lucky because their sovereigns stepped in in a way that many people felt was probably unfair, you know, and effectively we didn't see as many bankruptcies as we should have done in a normal market situation. And so I obviously hosted the airline panel in ISTAT back in September— sorry, yeah, at the beginning of October last year, and it was the same story, you know, the sovereign bailouts. And of course IAG and what's happened there between Air Europa and Iberia has been very interesting. And we've seen SEPI in Spain. I have to always intrinsically link you to Spain, Alex. But we've seen SEPI step up and people have to get comfortable with this sector very quickly. So at times it wasn't airlines being clever, it was the fact that they were just getting bailed out, frankly. And as lessors, we rapidly came up the learning curve in terms of making sure that we exhausted every option that the airline had with its own state supports before leaning on us. And of course, making sure, you know, in other airlines' cases, to answer your question, the— you'd get a quid pro quo where you might be able to place another aircraft in, in there. We did that with, you know, Corendon in, in southern Turkey, which was really clever as well. So you give them relief in a different way. So it was a mixed I mean, it's hard. The one thing that did hurt, and you haven't touched on it, and Robert, I'm sure you went through it as well, were the Chapter 11s. You know, the— that's where that really hurt. I sat on the restructuring, the C-level team at Avalon, and therefore I had a global view of every restructuring that was happening across the globe. And that's really where you lose control in those Chapter 11 situations, and you you really, as a lessor, take a bath, and they were painful, no question. You know, in my own region, it was Norwegian initially, but then there was a whole host of others, and that really causes pain for lessors. Everything else we can work with, but, you know, when your aircraft's rejected, that's it.

Alex Cruz:I need to balance the fact that there's 2 airline guys and 2 lessors. I think it's quite balanced between us. As the leader of a large legacy airline, It was quite humbling to be told by the head of state that there was not going to be any support of any sort, I have to tell you. So I am jealous. I remain jealous among— but not too much because we needed to get back to our own work. Now, let's discuss something and get it out of the way as quickly as possible. Martin, you're not based in South America. You're not based in Africa or in Canada. You're based on the border.

Martin Gauss:Yes.

Alex Cruz:Of conflict.

Martin Gauss:2, Belarus and Russia.

Alex Cruz:That's right. But let's just say at the moment, there's quite a big focus on this. From your perspective, and certainly I think we were all interested, how do you see this conflict? How does it affect airBaltic? Obviously, because of this panel, before I ask the other 2, do you see any implications from a fleet perspective, procurement, lessor, industry?

Martin Gauss:We haven't seen this, and from the perspective of the media, the Baltic States are seen on TV all the time where the NATO goes now, and if you are not there, you would think this is a difficult territory. It's not. It's the same NATO than the other states, and it's well protected, and I think people feel also safe there. Yet, it is the border. We are not flying over that border anymore. But if I look at Ukraine, where we actually— I gave an interview in the evening to say, how do we evaluate the security risk? On CNN, I said how we do it. It was at 11 at night, and we had 2 departures in the morning, but we had taken several measures, all the measures you can take to not lose the aircraft there. And then in the morning at 4 o'clock, Alice woke me up and said airspace is closed. So we changed, we kept the aircraft there, we went into the crisis mode, we got into touch with the— because there were passengers, we evacuated our staff, the passengers were evacuated still at that time, and the aircraft were there. And I think all airlines, especially now, but we were doing this before, are looking at that situation. And airspaces are normally, when they're closed, that's it, you're circumnavigating. All of that has a huge impact and the businesses need to adjust. Anko said it earlier, right? There's a lot of impact to us in Europe. There's also an impact to airBaltic. We're not getting the revenues anymore from the Russian flying, from the Ukraine flying, but we have already offset that by doing more, especially in the summer to the west. We have put some aircraft in wet lease out. We are adjusting to it, but to be there as an airline at the border, I think long-term we will just have to live with higher cost, higher flight times around it. On the leasing, it hasn't changed anything. So we have successfully placed aircraft, did sale and leaseback, and we just this week started a new RFP for the next tranche of aircraft coming next year. And so far, they were all oversubscribed. So we are still positive. We haven't heard that there's a different risk qualification being in a NATO state.

Alex Cruz:And Robert, is the Ukraine-Russian conflict immaterial to your portfolio, or is China a bigger deal in your portfolio?

Robert Martin:Okay, well, maybe let me just talk about— just follow on from what Martin said, because I think we're going to see some presently unforeseen impact of what is going on in Russia and Ukraine. That people can't see today, but unfortunately is going to arrive on your desk in the form of your insurance renewal cost later this year. As you know, most airlines, most leasing companies will renew our insurance on an annual basis, and I think the speed at which the insurers decide to cancel their insurance, particularly The secondary insurance in Russia. So what happens in Russia is the Russian airlines all do their primary insurance through their primary market. Just to give you an idea, that has a credit rating about B- at the moment, but then it's all reinsured in the international markets, maybe through the Lloyd's market in London and other international markets, but at the moment very concentrated on Europe. Um, because of the EU sanctions, a lot of the insurers moved to cancel that secondary insurance very rapidly, um, and not only for those airlines who operate in Russia, but initially for those who operated to Russia as well. Now the second part has been resolved, um, but then for people like ourselves as leasing companies, we carry contingent insurance as a backstop in case the primary insurance fails in some way. And what we think will happen, because there are going to be huge claims on these insurances this year for confiscation or theft if the aircraft aren't given back, this will then have a knock-on effect to insurance costs. Because what insurers do is once they have a loss, they make it back from charging all of us all over again the following year and for many years to come. And so I think this is one of the unforeseen circumstances that is going to hit us later this year that people can't see. And I'm hearing some horrendous numbers for some of the near-term insurance renewals that are due, that were due at the end of March and at the end of April. We fortunately don't go until January next year, so we have a learning period before we get there. So that's just one of the things I think as an industry we've got to watch. It may force us all to do a complete rethinking of how the aviation business does insurance in the future, and having it too much concentrated on one single market is not healthy. And whilst we heard from our airline colleagues this morning, from Tim and Tony, how much the airline market has evolved through all the problems over the years, the insurance market really has not evolved in the in the same way, and it needs to. Now, just getting to our own exposure. So about 10 minutes ago, we just announced our quarterly operational stats. I can talk about them at this. Our total exposure to Russia is 2.5% of our total assets as of 31st March. So as a leasing company, you always want to be globally diversified, and this is a very good example of that, that you want to contain your exposure to any one individual market. And so basically we've done that. We've already taken out some of our managed aircraft. We've taken out— one of our aircraft seems to have taken on a life of its own on LinkedIn where we took a 747-8 freighter out and we've now flown that to the US and we will continue to gradually take the other aircraft out. But the only way to do this is by negotiation. There is no magic wand here. You have to deal with your customers. And I feel sorry for our Russian customers in this way because they've been put in this situation not because of something they've done, but because of something the sovereign has done. And so obviously this is very difficult discussions for them to have, but we will work our way through this just like everyone else will in the leasing industry, and gradually it will get resolved. And whatever doesn't get resolved will end up in an insurance claim.

Alex Cruz:Very, very interesting, the angle of insurance. Natalie, you've been selling to investors and all of a sudden, whoops, something happens in the middle. What are you telling people? Why should I invest in a leasing company? My God. In regards to this particular topic of—

Lynn Guiney:Yeah, just with the focus on Ukraine, Russia. Well, first of all, I think that, you know, the experience of the e-notes and ABS transactions you know, is, is interesting for investors where they've literally been wiped out. You know, some of the ABSs have had quite heavy Russian exposure. So I think there's a feeling or sentiment within the investor community that they don't want to be stuffies. Now, that doesn't mean that the ABS product doesn't work. It absolutely does work. But for the E-note investors, it's a risky place to be for sure. And so we got that message a good few times. I think To Robert's point, you need to be in control of your exposure and what you're doing, and that's why it makes it interesting for corporate equity to come in and support a new leasing startup. And they feel then that they can understand the shape and the governance and that you're putting on the portfolio, and you're accountable to them. And obviously having the right people and the right team, which is is what we're putting on the table. There are some funds, I'm just thinking to answer for Ukraine, Russia specifically, there was one fund that we spoke to who said, we're, you know, US real estate, too many black swans, you know, like, oh my God, I just want to do residential real estate, or, you know, corporate real estate. And then there were others who said, you know, okay, there's been 2 black swan events and And I think the point that Robert didn't raise was the treatment of Cape Town and how that might impact, you know, other jurisdictions and how they behaved. Even during the repossession of some aircraft from Russia, we saw some authorities allow the aircraft to fly back. And that's, that's a real issue, you know, because these countries have ratified Cape Town, so they're flying in the face of what they've ratified. I think that has to play out, and I think as lessors, we do need to focus on jurisdictional risk. But in the main, a lot of the investors see this as, okay, 2 black swan events doesn't mean there's the 3rd black swan event. This is as bad as it gets unless we, you know, it escalates. And certainly, it wouldn't, you know, will it be contained? I mean, I don't have the looking, the prism through which we can see exactly what happens. You know, it's a dreadful situation. I think I'd like to just echo, you know, for our Ukrainian friends, I mean, they're living this. I've been in touch a lot with Sergei Grytsenko. I mean, he was just recovering from the plane that was shot out of the sky coming out of Iran a couple of years ago. So this is real, and these are people that we know and that we work with whose families have been, you know, really impacted. We have Irina, from Windrose down in Turkey with her family. Sergei's in Hungary, um, and, you know, they're just grappling to try and, and, and help back home. But equally, the Russian airlines did so well during the pandemic, um, and initially in my exploratory conversations with, um, banks, particularly on the lending side, we were asking how they felt about Russian lending risk. I, I just didn't see this one coming in this size, um, so it's, it's It's a very sad situation. I do think we need to keep our eyes on Victory Day in Russia, just having spent so many years in Russia. The 8th of May is a really key date for Putin and for Russia. That's my, I suppose, my hope in a way. I'm not an expert on this, but that they will work to announcing some kind of Russian victory for them.

Alex Cruz:I'm sure we'll continue the dialogue. Assume and hope that this conflict will be seen as short-lived, temporary, short-term. We all hope for that. Let's move on to something that is a little bit more structural, and I think that affects your business. It certainly affects the rest of the industry, and that is the current situation with supply issues and other issues with OEMs. When I look at the landscape, yes, it's Great for you, Martin, to have this nice supply of commitments from Airbus on the 220s. They seem quite safe in some respect, and you will continue to get them. But in reality, we see some 737 issues, we see some 787 issues. We're all waiting for the 777 announcement. Surely, Tim would have some more comments to make than the ones that he made a couple of weeks ago. There generally appears to be a very significant challenge across many OEMs, not just Boeing and Airbus, but from brakes to engines to everything. This has to have an impact. Robert, how is this impacting your own deal flow, your own financing? What are the impacts there, and how do you see that developing?

Robert Martin:Okay, so for us there's 2 sides. Bear in mind we're part of the— one of the top 4 banks in the world by size, part of a $4 trillion bank. So actually we have a very large supply chain financing business which is around $10 billion, just give you a feeling of magnitude. So we can feel through that part of the business what's going on before you get to the end OEM who delivers the aircraft to us, and it is very clear to us With the cutbacks that were made during COVID particularly to suppliers outside of the European area, basically where they cut back workers. Now they're trying to bring them back. They have 2 issues. One is getting the workers come back in the first place. Can they find them if they haven't gone off to do another job in another industry? But secondly is also inflation. Wage inflation is becoming an issue now all the way across the supply chain. And then you add to that the fact we also have price escalation in commodities too. The obvious ones, titanium. Titanium is needed by different players in the supply chain that end up in the airframe and of course end up in the engines as well. And people are concerned as to how much supply they have, how much longer they can, they keep producing. And it ranges from 6 months up to a couple of years. So all of the OEM stream is having to deal with that. And by the time then we get to the point of the aircraft coming down the production line, we're seeing sort of 2 to 3 months delay on your average narrowbody. And of course we haven't seen a 787. We're due to have taken 22 787s by August last year. We've seen 4 so far, and we hope they will start again sometime probably in late April, early May this year. And so what this has done is we lost about a couple of billion dollars of CapEx last year off the back of delays at manufacturers. We should have been somewhere around $4 billion, we're down at $2 billion. And so we can really feel the effect of that because that's planes aren't delivered, aren't producing revenue, and thus has reduced our revenue line for this year when they should have already been on the books. So, and we're also seeing issues as well where there's a lot of older workers at the 2 main manufacturers who are getting close to retirement before COVID who took terms and they won't be coming back into the workforce. So there's a lot of retraining having to be done as well. So we, we can feel all across the supply chains at the moment there's issues. And then you combine that with the idea they're going to try and push production upwards. This is also going to cause some challenges during this year and next year.

Alex Cruz:But in practical terms, let's say I'm on the market for a nice set of narrowbodies and widebodies starting 2, 3 years from now. Do you expect that all these factors you just mentioned will push prices significantly versus what we may have seen 5, 10 years ago?

Robert Martin:Well, most people remember will have caps in their contracts, so the escalation will build up to a point and then they'll be capped out. For those who don't have CAPAs, this is going to be a nasty shock. We could see inflation as high as 8% on certain pieces of equipment on the aircraft during this year. So we're definitely going to see a spike. We haven't seen a spike like this. The last time was 2001 to 2003. And so I think people have forgotten how much that can impact. Remember now, it's not just escalation in your aircraft price, it's also escalation all of your service contracts related to the aircraft where you may have flight hour agreements over the next 12 to 15 years. If people haven't capped their escalation in those, it's also going to be a nasty shock.

Alex Cruz:Some interesting clues there, by the way, for those of us airlines sitting here in terms of some of the things that we could do. Lynn, are you going to become a innovation Queen, or are you going to have some aircraft available for you to, to actually have access to as you start the new fund?

Lynn Guiney:Oh yeah, no, there's plenty of supply. I mean, we'll do a mix initially of some secondary origination where you, you can buy a seed portfolio from an existing lessor, but you won't make any alpha. I'm developing a whole new investor lexicon actually, Alex, but you won't make as much money on that. I mean, really, you're going to make your money through direct origination with the airlines, and there's a huge amount of supply there because the airlines' balance sheets are completely stretched.

Alex Cruz:Are you concerned about actual supply of new aircraft, for example?

Lynn Guiney:Well, there's plenty of aircraft out there, and we certainly see enough supply, but supply is going to be constrained. I mean, we're definitely— I don't think Airbus is going to be able to ramp up to the levels that it suggested. It only just came out now and said, you know, it's A350s, it's going to delay. I think it was going to 6, it's going to remain at 5 for the next 6 months. I think one thing that should be said just about the manufacturers, you know, and I was chatting with Alan Leakes, who's here, you know, from Virgin Atlantic last night. They had lots of supply chain issues before the pandemic. So we had even with Iberia, I had an A320neo neo going in there, and you know everything was delayed by a few months. There is particularly the A321 issues then in Hamburg were well documented. So there was a lot of supply chain issues. There were a lot of issues on the 787 already before we went in there. So certainly there, from my point of view, and what Solaire is going to build up—the name of the company is Solaire—I don't see an issue in terms of we don't cast the shadow that a bank of China Aviation does in a startup phase. So I think there's plenty of product for us in the high-growth markets to take advantage of. But one little story, if I may. I— you probably don't know this, but my brother-in-law is the head of Masco Corporation in the States, and they pretty much manufacture everything that you find inside a house. So Hansgrohe, Delta Faucets, Mary Latt, all of those things. And just speaking to him, these supply chain issues are real. The inflation is real. He's in the Rust Road in Midwest America, and it's very difficult. You've got massive amounts of household savings, massive amounts of demand irrespective of inflation, but you just can't get the supply chains to work.

Alex Cruz:There are no houses in the US. The housing market has shrunk.

Lynn Guiney:Yeah, absolutely. You know, it's incredible just listening to, you know, those stages of the supply chain. And, you know, at the end of the day, if we go back to raw material, the titanium is a— if you've ever worked, and I started my career in MRO, I was telling Andy this from Aviation Week last night, we all work on a just-in-time basis with, you know, SAP and whatever. And you'd be amazed, in an efficient hangar, you don't have a big warehouse with loads of parts sitting out the back. So, you know, the titanium is real. I mean, you can't just source up to 1,800 tonnes of titanium and find it somewhere else, you know. So that's, that's a real issue.

Alex Cruz:A premium for sure. Martin, a slightly different question to you from an airline. You're a pioneer in many respects because you're the biggest operator of the A220 and you have the most experience with that aircraft. You've been pushing boundaries little by little over the last few years. What is next? Is there an A220-600 or A220-300XLR? I mean, you're flying to Dubai today. That's an amazing route. What's in your mind in terms of development of that aircraft for you?

Martin Gauss:I think that aircraft is at the moment where it is. It will get a bit more efficient over time, as all aircraft get more efficient. But we flew the other day actually from Dubai back to Riga. We were supposed to land in Vilnius because we couldn't make it from the planning point of view back to Riga. Heavy, heavy wind and circumnavigating a big part. But then we made it. It was a 7 hours 51 flight on an A220. So that was a fully loaded flight. So the aircraft, I think, is at its limit. Any stretched version, very different comments from Airbus on it. Some people say it might come, but I think we're talking here about, what, 5, 10 years from now. I think the A220-300, that's the one you have now in that segment, which will be flying long range if you want to, as for us, or it can be a commuter. I think the A321XLR is the aircraft which is coming, and if we Listen to the lease companies, what they say, well, would you like to have in the future if you would do something else? I always say I don't do something else, but they still say, wouldn't you go for it? And then they say it's the A321XLR. I don't see the A220-300 being expanded in the next 10 years, because if you do it, then maybe you look at the A321XLR and you're better off with that one, which is there. But we're happy with what we have. So So it's very efficient, and what we see now, we have it for 5 and a half years, each year it gets better because that aircraft still matures very much, and it's very efficient when it flies long. On that flight, we were in constant contact with them, and then they just, with normal efficiencies, they made it all the way. So the aircraft was saving the fuel as it was flying. And coming back to the It's not a supply chain issue. There is an issue. We get our aircraft now more or less with a month, 2 months delay, and we get actually next year's aircraft. They just advised us, can we take it 6 months earlier so that even that happens? But that's the aircraft itself. That's fine. But don't talk about spare parts. Don't talk about our heavy maintenance, which we're doing. It's a nightmare. You, you— it's a nightmare to do a heavy maintenance check now. I think there are the issues because You do the C-check and on these aircraft, they're coming up now, brand new aircraft, but you're not getting the parts and you have something which is scheduled for 2, 3 weeks and then you are out 3 months on that aircraft as an airline and longer. So, and the biggest issue for us is spare parts, not the aircraft itself.

Alex Cruz:Once again, supply chain.

Martin Gauss:Supply chain, yeah. Or even worse than that, now we're building a very large hangar That's also a knock-on effect on all of what is happening now because we have so many aircraft, we need a larger hangar. So everything was ready, we're going to dig the hole, but the cost increase now because of inflation in the building industry is so high that the whole business case of long-term having the MRO and doing the maintenance and all of that has to be changed now because the increase in the building cost is so high that you need to revisit your initial business plan. That is, again, supply chain issues on raw material, which has nothing to do with us as an airline.

Alex Cruz:We only have a few minutes left, so let's dedicate them to try to come up with some useful conclusions. I told you I was going to ask you this question. I want to know what you leasing people, as we sometimes refer to you as the rich people in the industry, what you want from us.

Lynn Guiney:Is that all you say, Alex?

Alex Cruz:No, we say you're very nice people. Well, but I want to find out what you want from us. But Martin and I, we also need to tell you what we want from you. Can I start the discussion by telling you what I think would be ideal? When we started the pandemic, what became absolutely clear is that those that had a very high percentage of variable costs, They were going to be in less pain. That was absolutely clear. And we've seen the case with many. And those of us that at that time had a very high percentage of fixed costs were running these £20 million a day burn rates that I had to go through. So is it viable for me to expect that I will be able to have future relationships with lessors that are much more variable in nature, powered by the hour or otherwise? That is much more linked to how much I operate. I mean, certainly that would be one of the wishes that I would have. And I know there's been a few stressed situations that have led to those kinds of agreements, only temporarily. But how can we get you guys to help us with our variable versus fixed cost percentage? Martin, is that a fair question to ask?

Robert Martin:Yep.

Alex Cruz:Okay, so I don't know, how can you guys help us? And is this an area of that, that you think we might be able to progress over the coming years?

Robert Martin:Okay, well, should I go first? Yeah. So one of the things that we've been working a lot on during the downturn is seasonal leases. So if you listen to Anker this morning, he was talking about how he's confident about his summers, but he's not confident about his winters. So sometimes we'll tailor leases basically to fit the profile of their cash flows coming into the company. So that's some, that's one way in which we've become more flexible. We also were one of the pioneers of the floating rate lease. And basically floating rate leases probably made up a third of our portfolio back sort of 10 years ago, but it's gone completely out of favor and everyone now just wants fixed rate. Now bear in mind, interest rates are rising, and by the way, that's not the fault of the leasing companies, okay? That's some bloke in the US Treasury, okay? And whether we like it or not, all of us end up paying the base rate that comes out of US Treasury. We're going to see Fed funds rates go up maybe 8 times this year, so that will add 2% to the front end of the curve, and the back end of the curve has already moved up for 10-year money. So we think we're going to see a flatter yield curve by the end of the year. But as we get back to a more normal interest rate environment, and bear in mind we're coming out of the abnormal one of very low interest rates, that is not the norm in history, then basically I think there's opportunities as well to go back to look at floating rate leases again.

Alex Cruz:And, and Lynn, uh, is this, uh, is this, uh, something— how are you going to align? I know you're not selling to airlines, Yet, but soon you will be too. So how are you going to make us feel that—

Lynn Guiney:The love.

Alex Cruz:The love, and that the new fund is not just about a bunch of really experienced guys.

Lynn Guiney:No, that is really interesting about— we did a bunch of them in RBS as well, like we were back in the day. RBS is now SMBC. We did a ton of floating. I remember Air Europa used to only do floating rate leases. But that, that is actually interesting because when you think— because I lived through the whole Greenspan, you know, when the rates were going up all the time, and, you know, that's its own nightmare as well. But flexible, it depends if the lessor has an itch to scratch or has a problem on the aircraft as well. Like, you know, so it's a two-way street. So if— I think the summer high, winter low model has been been around for quite a while, and I think that's something that we've always accommodated. I was doing that with SunExpress back 15 years ago, so I think that is something that lessors can do very easily. But it's when lessors have, you know, this itch to scratch that you'll certainly— if it's an A330-300 or an A330-200, I think you'll find that lessors will accommodate flexible and variable solutions because they're very keen So I think if it's an A321neo, Alex, not a chance. Like, sorry.

Alex Cruz:No, I, I realized that, and, you know, a lot of people are getting A321neos, so there's no— not a whole lot of a chance to—

Lynn Guiney:Yeah, it's going to be tough for you, you know. I mean, on the board of WestJet, you go that way. Um, but yeah, no, um, some, some of them are just complete cash cows. There's just too much demand for them.

Alex Cruz:Martin, is there anything else that we should be asking lessors to help us with?

Martin Gauss:Not these 2 here. The other one, which is still where we are still paying every month the full lease rate and not using the asset, and they don't allow us to sublease it out. Maybe we would, but they are under administration. I understand it's bankers now who are dealing with it, and they just don't understand the business, and it's very painful. Soon it will be over. year, and then we're going to have a party redelivering the aircraft. First time that we're going to party redelivering an aircraft just because we stopped paying for an aircraft we don't use for 2 years. Then we did that though. But these 2 here, not at all. And our lessors, I have to say, we have, we have a very good asset. So we have a— if you have a good asset, you have a good relation with your lessors.

Alex Cruz:So given your incredible innovation that goes on at airBaltic from a consignment perspective, I thought you were going to say that you were going to Ask the lessors to do an NFT on an aircraft or something like that. That's a new way to fund it or something like that. In a couple of minutes, Robert and Lynn, what do you want from us? How can we work with you better? What exasperates you and frustrates you the most about us airlines, other than us trying to get a little bit more margin from you?

Robert Martin:From my perspective, it's very simple. The same refrain I've had for the last 10 years. We have to find a way to get more equity into this industry. And I think unless we do, we're going to keep having these issues every few years where we're, um, where effectively the lessor has gone to be the working capital provider that banks used to be. And the amount of bank unsecured financing now to airlines is now very low. I don't think that's going to change. So then we have to think, well, how else do we solve this problem? And my view is we need to get equity into the industry as a whole and make this industry attractive relative to other industries. And we all tend to talk inwards about our industry. But you've always got to remember investors have alternatives, and so when the times are right, I encourage airlines to get out there and raise equity.

Alex Cruz:Hear, hear. Lynn?

Lynn Guiney:I think that's a really fair point. I mean, you can't really trump that because I've been with the investors, you know, and they, you know, aviation is still quite a small asset class relative to other asset classes. They can put their money to work elsewhere, and if they just see it as incredibly high risk for not enough return, then we you just won't get a buildup in terms of equity. So, you know, I think the— you know how tough that is. I think, you know, I remember from you going to like Clickair to Vueling to BA and coming up against institutionalized systems within airlines. And I think that's the thing that causes me the most headaches. You know, you like dealing with flat, flexible nimble airlines. And if they have business models that have decades, in many cases, of constraints and processes, it's like, you know, the COVID regulations, you know, like you've only done one PCR test, then you need to do another, then you need to do another. And I think that kind of bureaucracy that we see in those work practices stifles growth. And everybody suffers. So, you know, I think for airlines there, and, and Willie, in fairness, did a tremendous job in IAG to, to get rid of a lot, a lot of that, but it's still a challenge, I think, with the legacy carriers.

Alex Cruz:I couldn't possibly comment on that, um, for sure. But okay, we have a couple of minutes left, so I'm going to do some rapid-fire questions. And, uh, tell me the first thing that comes to mind. Uh, 2019 versus '22 traffic. Where do you think we're going to end up globally, Robert? Percentage?

Robert Martin:80%.

Alex Cruz:80%. Martin? Yeah, also 80%. 80%.

Lynn Guiney:Yeah, I think that's fair. Sorry to just be—

Alex Cruz:No, no, that's just fine. Martin, how much rotation have you had in your senior executive team over the last couple of years of COVID In the last 5 years, zero.

Martin Gauss:My management team, 11 people, have not changed at all. We were— and we were every week in the office while everybody else was at home. So I'm very proud of that. I kept my whole team. Nobody left. And we took pay cuts and everything, and everybody is still here.

Alex Cruz:That is an incredible story. What about from, from your guys, Robert?

Robert Martin:Just one. We had our CFO, uh, packed, in fact retired, and he's been replaced. But other than that, no other changes.

Alex Cruz:And then you've been in Ovaline as well. Has been a tiny bit rotated?

Lynn Guiney:Yeah, absolutely. So I was going to say pass, because obviously there has been some change there. Obviously, John and Tom left as well. So yeah, there has been some change.

Alex Cruz:2 more questions. What is the single biggest issue that worries you the most of all the different issues as we come off recovery this year and next year? Maybe starting with you, Robert.

Robert Martin:The combination of oil prices and interest rates.

Alex Cruz:Okay, that's very fair. Martin?

Martin Gauss:The war. No peace in sight today, so that for me, because that has a huge knock-on effect on everything also.

Lynn Guiney:And obviously for me, investor appetite for the sector, you know, that's—

Alex Cruz:Which we need to fight together to support. Okay, last question. Where are you going on vacation this year, if you're going on vacation?

Robert Martin:3rd of May, New Zealand. It opens on the 1st, and we're going to be there like a shot.

Alex Cruz:Fantastic, Martin. Will you be able to go on vacation this year?

Martin Gauss:I will go to Buti. Nobody knows where that is. A very, very, a very, very tiny village in Tuscany. I'm in the oil business there, so in the olive oil business.

Alex Cruz:So, and I'm gonna go there. Lynn? Yeah, so I'm just boring.

Lynn Guiney:I'm going to La Bella Sicilia because my husband My husband is from Sicily and we have a house there, so I'm always in Sicily. So yeah, I can't wait. And we actually have olive trees in the garden and produced our own oil there a couple of years ago.

Alex Cruz:Well, thank you so much for your time and for your comments. I think it's been quite really interesting. Thank you to the panel. Thank you.

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