BOC Aviation CEO Update – The Need To Understand Everything About Airlines From Their Business Model And Management Team Through To Liquidity And The Competitive Market

Transcript

Robert MartinSo, the first thing is whenever we deal with any carrier no matter what type they are, we look at the business model. And we look principally at four things. The first thing is that they have a business model that we believe works in the long term. Secondly, do they have a management team who can execute on that plan? The third thing is do they have enough liquidity available to themselves, either in the form of equity coming into the company, or support from a shareholder? And fourthly, the competitive environment. Do we think that they're going to survive long term? I'll just give you a flavor. There's roughly 800 airlines in the world in total,. There's been 301 failures since year 2000. Now most of those are airlines who are less than 20 aircraft, over 90% of them. And so critical mass of operation is very important for the survivability of any airline. But when you get into long haul, low cost, obviously we're getting into quite high value assets. And so, the ability to be able to tap into sources of liquidity for survivability, where there are bumps in the road is very important.

Well, it depends on how they've set the operation up. And it depends upon who the shareholders are, and the support they've got from those shareholders. If they've got deep pocketed shareholders that can help them through those bumps in the road, particularly in the early stages of startup, I think that's very important for them. In addition, you've got to look at their ability to be able to access the routes that they want to fly. And in the early stages in particular, try and stay away from the competition.

I'm not sure we call it perfect, is the first thing. What we've been seeing over the last three years is regionalized recessions. Where in particular countries due to a combination of factors you've seen things become difficult. And at the moment there are four things we're watching for. Firstly, obviously we have a higher fuel price environment. Secondly, we have a strong US dollar. The flip side of that, of course, being weak local currencies, particularly in some of the emerging markets. The third thing is high domestic interest rates in some of those emerging markets. There's a lot of carriers who will tap into the local banking system when they're sourcing their working capital. And the fourth thing is there's been some disruptions as well on the technology side, as new technology has been introduced to the industry, where people haven't been able to fly the schedules they're anticipating to fly over their high seasons. Which means there's a cumulative dampener on the cash flow.

Now, the first thing we'd say is, we track the seasonality of airlines very careful. And if you look at the market, the two weakest months for the Northern Hemisphere Airlines, where 80% of the airlines are, is basically November and February. With exception of Chinese speaking countries, where there's Chinese New Year and that tends to be made. So we tend to watch those periods very, very carefully. We also watch, in particular, the liability sides of the balance sheets. This is the crucial part. Airlines don't tend to fall over because of lack of revenue. They fall over because basically they can't meet their liabilities, either on the debt side of the business, or to suppliers. And so, we watch the cash flows very, very carefully, and we prepare ready so that if we see a carrier going particularly week, we watch out for some red flags. Potential situations could be where spare parts being taken off from one aircraft to support another aircraft. And where we see these red flags, then basically we will then put our technical guys on the ground to be ready, if necessary, to move into repossess. But generally, we'll work first of all with the carrier to see if we can work on the rehabilitation program.

Whether a short term deferral of some type will help them to bide them through to when the markets get stronger. But ultimately we have to be ready to move planes around in our history over the last 25 years, we've done that in about 35 cases. So when those aircraft to come back, we will have a plan as to where we're going to place them. And if you look at the situation with both Monarch, in addition with Air Berlin, we move the plains very quickly and place them elsewhere.

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