The Fundamentals of Aircraft Leasing, with Steven Udvar-Hazy and Robert Martin
Two leaders of the aircraft leasing business, Air Lease Corporation’s Executive Chairman of the Board, Steven Udvar-Hazy, and BOC Aviation’s Managing Director and Chief Executive Officer, Robert Martin, joined CAPA’s Low Cost Long Haul Global Summit in Seville earlier this month to give their perspectives on the outlook for the fast growing sector. In an absorbing session, when asked what they look for in an airline business model, Mr Udvar-Hazy said, “there are literally dozens of different factors that we consider when making these decisions”, including the credit structure, management talent and capital structure of the business, as well as the competitive landscape, network, long term strategy and break-even point.
Steven Udvar-HazyYou look at the credit, the management talent, experience, the capital structure, the competitive landscape and the network where they're going to utilize these assets. And we look at the long term strategy of the airline. We look at their length of time to breakeven. We look at what is the right aircraft. We look at literally dozens of different factors to make those decisions.
Robert MartinFirst of all, the business model of the airline. Do we think it works? Secondly, very importantly, do they have a management team who we think can execute the business strategy? The third thing then is cash flow. Particularly in relation to the seasonality of their business, allowing flexibility if they have some bumps in the road and the second part of that is where does that liquidity come from? We also look carefully at the liability structure of the airlines we deal with. And the fourth thing, which Steve already mentioned, is the competition. Whenever you get a new airline in particular come into market, there will be a competitive response and can they weather that competitive response.
Steven Udvar-HazyWell one of the key ingredients for lessor is to make sure that the aircraft that we invest in have a large customer base, a lot of airlines, so if there's anything that goes wrong we can easily redeploy that airplane. So our rule of thumb on single aisle aircraft is a minimum of 50 or 60 airline operators and on wide body aircraft at least 30 or 40 operators of that particular type or subtype. To have the liquidity, the re-marketability, the mobility of the asset on a global scale.
Robert MartinThe way we approach it is, there's two different decisions there. One is what type of aircraft do you want to invest in. Remember 80% of our aircraft come direct from the manufacturers so we've pretty much made those decisions before we've engaged with the airlines on a particular placement. And I agree with Steve, this is very much aircraft liquidity in terms of number of airlines operated but also the number of other investors who are willing to invest in it when we want to trade the aircraft with the lease attached which we will do at some point during its life.
When you look back at the industry over the last, let's go back to the year 2000, Colin mentions 300 airlines have gone down, actually it's 301. And that's since the year 2000, but you can segment those airlines very, very easily. For those with more than 20 planes, in other words, those who had critical mass, it's less than 10% of that number. The other 90% were all airlines who didn't get to a point of critical mass. This comes back to the point, you have to get critical mass for people to want to finance you, particularly in the bank markets. But, in addition that is what makes the network attractive to other airlines to invest in them if they hit a bump in the road.
Steven Udvar-HazyOne of the other things to consider for a low cost operator, particularly with the failures that we've seen over the last several years is that as they sell advanced tickets, advanced bookings, the credit card companies are now being much more conservative and they hold back those advanced sales. So when Ryanair sells a ticket, or easyJet sells a ticket, or IAG sells a ticket, or KLM sells a ticket, they have immediate access to those funds. If it's a small, low cost, young start up situation when the ticket is purchased, say two months before departure, the airline does not have access to that cash. It's going to be held back until the service is actually performed, or in some case, even for a number of days and weeks after the flight was operated.
So the airline operator is deprived of the cash liquidity from the ticket sales because if the tickets were purchased through a credit card those people don't want the liability that the airline will not be able to perform that service at a future point in time. This is a huge cash flow challenge for a lot of the new start-up operators both short haul and long haul.
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