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Overview of the Aircraft Leasing Industry

Laurence Vigeant-Langlois, PhD VP Portfolio Strategy & Acquisitions CIT Aerospace Presentation to the Air Transportation Systems Engineering class George Mason University April 2011

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Contents

CIT Overview

Operating Lessor Business Model


Fleet Planning Market Trends & Outlook

CIT Group Inc., 2011. All Rights Reserved.

CIT Overview

Bank Holding Company With Over 100 Years Commercial Lending Experience

Focused on Small Business and Middle Market Companies

Reorganized Capital Structure Provides Flexibility to Refine Business Model

$53 Billion in Assets and $8.7 Billion Market Capitalization

CIT Group Inc., 2011. All Rights Reserved.

Financial Solutions for Small Business and Middle Market Companies

Corporate Finance

Lending, leasing, advisory and other financial services to small and middle market companies

Portfolio Assets $10B

Trade Finance

Factoring, lending, receivables management and trade finance to companies in retail supply chain

Portfolio Assets $3B

Transportation Finance

Lending, leasing and advisory services to the transportation industry, principally aerospace and rail

Portfolio Assets $12B

Vendor Finance

Financing and leasing solutions to manufacturers and distributors around the globe

Portfolio Assets $6B

Portfolio assets include loans, operating leases and assets held for sale; data as of 9/30/2010 Excludes liquidating Consumer Segment with portfolio assets of $9B Excludes other assets and cash totaling $13B

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CIT Transportation Finance Structure


CIT Transportation Finance
$12.5 B Managed Assets
CIT Aerospace Commercial Airlines
$7.6BN Portfolio 322 Aircraft 120 Customers 58 Countries 77 new aircraft on order Primary offices in New York, Ft. Lauderdale, Dublin and Singapore

CIT Rail CIT Transportation Leveraged Finance


$432MM managed assets Aero & Defense: $357 MM to 21 Customers $3.8BN Managed Assets 112,880 Railcars 531 Locomotives ~500 Customers Located in Chicago, IL Lessees in US, Canada and Mexico Customers include railroads as well as shippers

Business Aircraft
$665MM Portfolio 273 Transactions 202 Customers

13 Countries
Products: Loans Leases Fractional Share Financing Customer base primarily corporate users Expanding scope internationally Strong manufacturer relationships

Marine: $71 MM to 7 customers


Industries covered include aerospace, defense, government services, homeland security, marine, rail. Products include senior debt, leases, junior debt and advisory Offices in New York, Connecticut, Los Angeles, Chicago.

Financial Institutions Group


Third Party Transactions Debt Sale Leaseback EETC Aircraft Sales

Note: All dollar values are preliminary at 9/30/2010 based on post FSA basis

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CIT Aerospace Portfolio

CIT Fleet
(301 Aircraft)
Airbus Narrow Body, 128

CIT Orderbook
(111 Aircraft)
CIT Orderbook

Boeing Narrow Body, 113

Narrow Body, 34

Airbus Narrow Airbus Body, 34

737NG, 48 737NG, 48

A330, 12 787, 10 A350, 7

Boeing Wide Body, 27

Airbus Wide Body, 33

A330, 12

787, 10

A350, 7

2010 Portfolio Activity


2011 Portfolio Activity


25 aircraft sold 22 new aircraft added 68 existing aircraft re-marketed

20 new aircraft delivering 3 sale-leaseback E190s 33 existing aircraft placed 38 new Boeing aircraft order Discussions with manufacturers for additional orders
6

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Commercial Air Market Position


$40,000 $35,873 $35,000 $30,764 $30,000

Publicly Traded Aircraft Lessors Fleet Age*


Lessor
GECAS ILFC CIT AerCap FLY Aircastle CIT has

Fleet
1,807 1,078 316 270 303 137

Value
($MM)

Age On Order
9.5 8.5 5.9 9.2 10.2 13.1 245 117 73 24 20 8

$25,000

$35,873 $30,764 $7,784 $6,450 $6,263 $3,101

$20,000

the youngest fleet amongst the publicly traded Lessors. 90% of the value of the CIT owned fleet is <10 years old compared to 74% of the world fleet value.
$6,450 $6,348 $6,263 $4,331 $4,227 $3,101

$15,000

$10,000 $7,784 $7,047

$5,000

$0

GECAS

ILFC

RBS

AerCap

BOC

FLY

ACG

AWAS

Aircastle

Source: Ascend Online as of 12/14/10 and CIT forecasted NI as of 12/31/10.

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CIT Aerospace Customers and Portfolio Distribution


120 Customers in 58 Countries Added 15 customers and 8 countries in 2010


US & Canada 13% Europe 31%

Offices in New York, Ft. Lauderdale, Dublin and Singapore

Asia/ Pacific 32%

Latin America 14%

Middle East/ Africa 10%

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CIT Aerospace Track Record


Proven Success

Over 40 years of aircraft finance experience A recognized leader in aircraft leasing and finance

Reliable Partner to Manufacturers

Despite recent turmoil, CIT Aerospace continued operating normally Took delivery of all our aircraft commitments

Diverse Operator Base

Ability and desire to do business with less-than-stellar airlines and jurisdictions Continue to add customers and countries

In-House Expertise

Marketing and technical experts with backgrounds that include: Airlines Manufacturers MROs

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Operating Lessor Business Model

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Operating Lessor Business Model (1/4)


Value Proposition

Financial participant with high industry knowledge & ability to leverage credit spread arbitrage opportunities Additional airframer distribution channel

Main Product
Operating lease of commercial airplanes buy, hold-and-lease, sell Dry lease Excludes insurance, crew, grounds staff, supporting equipment, maintenance Aircraft on airline operating certificate Configured with airline paint scheme, interior, avionics Transfers to lessee the right to use the property (without ownership risk) Treated as operating expense in Income Statement & does not affect Balance Sheet Revealed in footnotes of financial statements under US GAAP Vs. capital lease For which lessee assumes ownership benefits & risks Considered both an asset & liability on BS Lessee claims depreciation & deduct interest expense Recognizes expenses sooner than with equivalent operating lease

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Operating Lessor Business Model (2/4)


Activities

Business strategy Portfolio planning Risk management Financial planning Asset acquisitions Speculative purchases Secondary market purchases Airlines sale lease-back Financial institutions w/w.o. lease Marketing / re-marketing & lease negotiation MOU, lease, board approval Commercial, legal, technical terms Aircraft delivery / redelivery Engine selection Configuration management Inspections (& maintenance) for re-delivery

Asset management Maintenance reserve claims Record management Quiet enjoyment clause Asset sale Airlines Financial institutions Others

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Operating Lessor Business Model (3/4)


Customers & Transaction Partners

Airlines Top-tier Middle credits New entrants

Flag carriers LCCs Inclusive Tour

Financial institutions Banks Lessors Export credit agencies

Resources: in-house vs. outsourced

Business strategy Marketing New aircraft programs Technical & asset management Trading & financing Risk management Other: pricing, legal, accounting, insurance, tax, HR

Business Metrics

Volume ROE Asset utilization Defaults


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Revenue sources Rents Asset sales

Costs Asset purchases Cost of funds Maintenance & transitions Employees

Operating Lessor Business Model (4/4)


Market Segmentation

Two large players GECAS (GE) Second-tier lessors AerCap CIT

ILFC (AIG) ACG

AWAS

RBS

BOC AirCastle FLY

Others Smaller lessors

Non-traditional lessors

New entrants

Competitive Strategies

Fleet composition Aircraft age Fleet size Passenger vs. cargo configuration Aircraft models Delivery/re-delivery slots Commercial terms Maintenance reserves Rents Lease duration Risk management strategies Jurisdictions Exposure per operator Complementary (financial) products

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Value Proposition for Trade Partners


Airlines Pros
1.

Aircraft Manufacturers
1. 2.

Mitigation of customer resistance to new aircraft

Additional distribution platform Market seeding for new sales via lease of used aircraft Credit risk mitigation Slot offering when skyline is sold out Enhanced stability through biz cycle
Total Backlog as % of World Fleet 45% 40% 35% 30% 25% 20% 15% Lessor Backlog as % of World Fleet

2.
3.

No PDPs, which are hard to finance


No equity, minimizing cash outlay & preserving borrowing capacity or liquidity Reasonable cash flow (25 vs. 12 years)
3. 4. 5.

4.

5.

Enhanced flexibility to enter/exit from changes in technology & capacity needs (e.g., put option). Access to newer technology earlier
Elimination of asset value risk: residual & obsolescence For weaker credits, access to fleeting Usually more expensive Less maintenance flexibility
1.

6.

10% 5% 0% 1969 1974 1979 1984 1989 1994 1999 2004 2009

7.

Source: Ascend Online, as of 11/1/09

Cons

1. 2.

Possible lease vs. sale competition - if skyline is not sold-out - depending on sale reward structure

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Fleet Planning

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Desirable Airplane Features (Airlines)


Revenue
Matched to the mission schedule & routes Seat count, configuration & MTOW vs. range Utilization: reliability & turn-around times Marketable Attractive product: classes, seats, IFE, galleys, lavatories Newer aircraft Favorable to ancillary revenue generation

Cost

Fuel burn Cost per trip vs. cost per mile Ownership / financing Maintenance

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Desirable Asset Features (Investors)


Good Financials

ROE

Risk-Adjusted Rents Residual Values ROE


1st Lease

Lifecycle Costs

2nd Lease

3rd Lease

Low purchase price Low customization Little surprise (Ad, sB and stC) Economic vs. operational life (& obsolescence)

Asset Life

MSV

MSV

Sale

Re-marketable

Fungible # airplanes vs. # operators Customization vs. appeal Seats, Galleys, IFE, Paint Engines, Avionics Everything Else

Liquidity

Business cycle vs. depreciation Vintages vs. airplane retirements

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Business Strategy & Aircraft Purchasing

Corporate Objectives
Financial & Strategic Goals Risk Management Resource Allocation

Risk Management
Fleet Planning

Market Analysis
Trends World Fleet Supply-Demand Business Cycle

Buy

Hold & Lease

Sell
Competitive Analysis
Competitive Advantages Market Segmentation Supply & Price Pressures

Asset Acquisitions Portfolio Strategy


Acquisitions in 1y & 2y markets Returns vs. credit trade-offs Lease rates & terms Divestitutres

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Asset Acquisitions
Deal Pipeline Development

Develop pipeline of target aircraft, opportunities & portfolios Seek proposals & quotes from airframers & engine suppliers

Analysis & Internal Sale


Develop lifecycle valuation & financial modeling Develop & sell business case to management & executive teams

Due Diligence

Assert market demand


Assess configuration options, pricing & marketability impact Ascertain sale & product support Address relevant risks obsolescence, residual values, programmatic, product performance

Negotiation

Negotiate pricing, delivery slots, guarantees, warranties, etc. etc. etc. & close deal

Post-Acquisition Acitivities

Delivery, placements, contractual follow-ups

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Risk Management

Market Acceptance
Mission seat count/usable payload vs. range Manufacturers offerings and history Airbus /Boeing vs. Bombardier/Embraer vs. COMAC, etc. Total market volume a/p sold, operator count, geographical distribution Addressable market a/p-engine types, in-service count, creditworthiness, PMAed parts Airplane operating economics

Financial Return
Risk-adjusted ROE Achievable ROE vs. credit score (PD) trade-offs

Event

Portfolio Management
Buy
Competitive Landscape
Supply-demand in a/c & seats Substitute financial products Manufacturers? (slot availability) New financial players

Mx (shop visit costs, ABCs) Contract violations Defaults mx reserves

Hold & Lease

Sell
Geographical Diversity
Jurisdiction prohibitions, taxes Captive/niche markets

Residual Value

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Technical obsolescence & vintage effect (e.g., narrowbody replacement) Economic vs. operational life Impact of environmental and other regulations Price elasticity of demand considering business cycle effects

Fleet Lifecycle by Model

Fleet vs. Model Age

4000 3500 3000


Production Maturity Retirement

2500 2000 1500 1000 500 0 0 5 10 15 20 25 30 Model Age

737 (NG) 1998 A320 Family 1989 A320 1989 737 (CFMI) 1985 E-Jet 2005 A319 1997 MD-80 1981 CRJ Regional Jet 1993 777 1996 757 1983 767 1983 A330 1994 A340 1994 A321 1995 A310 1984 A318 2004

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Fleet Count

Balancing Creditworthiness & Returns Operator count counts!

25
D 737-800 C A320

Both

# Airplanes (# Operators) C D

World Fleet 2008 2500 (100) 3500 (180)


% Probability of Default

20

15

10 7.4 6.2 5 4.6

A320 Family vs 737NG - Operators


0

No. of operators 200


175 150 125 100 75 50
AIRBUS S.A.S. All rights reserved. Confidential and proprietary document.

Source: Airclaims June 07 Aircraft: In-service for airline use

Nearly 200 Operators!

Credit
Good
D

A320 D Family

C 737NG

73% of A320 market base created with lessors

25

Creditworthiness options 36 new operators since Jan. 2005 tied to number of operators

0 y1 y2 y3 2001 y4 y5 y6 y7 y8 y9 y10 1998 1999 2000 2002 2003 2004 2005 2006 2007
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y%

ROE

The A320 Family operator base continues to grow With big input from lessors

In-Service Fleet History vs. Aircraft Gauge

500

450 747 400 777 350

300 L-1011 250 A300

A340 DC-10

767 200 DC-8 150 727 DC-9 MD-80 737 CFM 100 737 JT8D A319 707 A310 757 737 NG A320 A330 A321

50 1950 1960 1970 1980 1990 2000

CRJ 2010

146 727 737 (NG) 737 (CFMI) 737 (JT8D) A320 717 MD-80 100 170 175 190 328JET 70 747 195 767 777 787 A300 A310 A330 A340 CRJ Regional Jet CRJ700 Regional Jet Caravelle A319 DC-10 614 Concorde DC-9 F.28 757 A321 707 DC-8 L-1011 TriStar MD-11 Mercure 880 990 One-Eleven Trident VC10 Comet A318

Max Seat Count

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Market Trends & Outlook

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Air Traffic & Aircraft Demand


Traffic demand returning to 2008 levels as global economy recovers

Airline profitability higher on controlled capacity growth and stable fuel prices
Air traffic forecast to continue historic trend at 3-5% annually Requirement seen for over 37,000 aircraft worth over $3 T over the next 20 years.

History

Forecast

Developing markets (e.g., China, India) exhibiting strongest growth


High fuel prices accelerating replacement demand for advanced technology aircraft
The World Commercial Aircraft Fleet Will More Than Double Over the Next 20 Years
50,000 40,000 Over 37,000 New Aircraft Required 2009 21,500 airplanes
6% 18% 15%

Source: ESG

2030 46,100 airplanes


3% 25% 15%

Standard narrow-body aircraft such as 737 & A320 in highest demand as low-cost carriers & route fragmentation proliferate in developing countries Longer-range, intermediate body aircraft (A330, 787, A350) showing strong demand as growth in intercontinental travel demand strengthens on growing global trade RJs & VLAs (e.g. A380) continue specialized roles Operating leasing has grown from 3% of world fleet in 1980 to 35% today; expected to rise to 50% in next decade

30,000
20,000 10,000

24,600 For Growth Replacement 12,800

57%

61%

Source: ESG

2009

2030

Regional Twin Aisle Single Aisle 747 and larger

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Operating Lease Market


Forbes/CIT survey (Jan 2011) confirms importance of Operating Leasing for airlines
World Fleet Ownership

Benefits to airlines include capital flexibility, fleet flexibility, and risk mitigation
Over the past 30 years the worlds airlines have leased, rather than purchased, a growing share of their fleets Leasing represents 38% of the world fleet vs. just 3% in 1980 Leased aircraft fleet is expected to rise above 50% by 2015
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1980

Owned Share 97%

3% 50%

Lessor Share of World Fleet

2015

Owned Share 50%*

Source: Ascend * Estimated

27

Financing of Airbus Deliveries (2003-2008)

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Market Trends - Leasing by Regions

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Market Trends Leasing by Operators

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Leasing a Growing & Fragmented Market

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Market Trends Growing Lessor Fleet

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Market Trends Growing Lessor Fleet Share

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Supply & Demand Modeling (Nov 2010 Update)


Downside risk of oversupply except if very strong traffic growth prevails.
450 400 350 300 18% 16% 14% 12%

Thousands

250 200 150 100 50 0

Equilibrium level for values

10% 8% 6% 4% 2% 0%

19 90 19 9 19 1 92 19 9 19 3 94 19 9 19 5 96 19 9 19 7 98 19 9 20 9 00 20 0 20 1 02 20 0 20 3 04 20 0 20 5 06 20 0 20 7 08 20 0 20 9 10 20 1 20 1 12 20 1 20 3 14 20 1 20 5 16 20 17

Seat Production

Seat Surplus

Seat Surplus %

Business Cycle Modeling


GDP Growth, Airline Profitability, Aircraft Orders?

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Business Cycle Modeling as Rent Factors


(1st Year of New Airplane Deliveries)

Rent Factors (%) vs. Airplane Delivery Year A321-200 A320 A319 737-700
Transition

1.1
Bull Market Contraction Bear Market Expansion

1 0.9 0.8 0.7 0.6


1

Rent Factors (%)

0.5
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Airplane Delivery Year

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Rent Factors vs. Year over Year GDP Growth

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

2006 2007 2008

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Managing Lease Terms through the Business Cycle

Rent Factor
Bull Market Contraction

Transition

Bear Market

Expansion

Time
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Business Cycle & Projection

Rent Factors (% ) vs. Airplane Delivery Year A321-200 A320 A319 737-700

Projection

1.1 1 0.9
Rent Factors (%)

0.8 0.7 0.6 0.5 1988

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1989 1990 1991 1992 1993 1994 1995

1996

1997

1998 1999 2000 2001 2002 2003

2004 2005

2006

2007 2008 2009 2010 2011 2012 2013 2014

2015 2016

2017 2018

2019 2020 2021 2022

Airplane Delivery Year

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2011 CIT/Forbes Global Aerospace Outlook


Scope: Survey of 136 airline executives around the world in November and December, 2010 Key Findings: 2008 - 09 recession forced many airlines to make tough decisions Grounded planes, pared fleets, consolidated routes, cut staff Airlines leaner, more efficient and feel competitively stronger Fuel costs remain the biggest challenge Hedging fuel to mitigate fuel price fluctuations View fuel efficient aircraft as a hedge Fleet executives want more fuel efficient aircraft But waiting to see what manufacturers offer and how they perform Airline industry consolidation will continue 80% of executives expect an increase in M&A activity over the next five years Emerging markets promise greatest opportunity for growth U.S. and European carriers dealing with recession Other regions (e.g. Asia/Pacific, Middle East) added planes, routes and seats Business travelers and ancillary charges are key components of future airline profitability Operating leasing is fundamental to fleet financing for many airlines Over half the respondents lease more than 50% of their fleets
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Industry Trends to Watch For


Airframer Momentum & Strategy

Airbus NEO pulling Boeing strategic customers Boeings play in re-engining vs. clean sheet design launch Embraers play

New Aircraft Technology


Composite material maintainability New engine technology CMC, Open Rotor

Markets

Shortening airplane lifecycles Historically duopolistic industry accepting more players - China

Financing

Export credit agency financing levels Cost of financing across products

Leasing

Success level of new entrants, publicly traded lessors

Consolidation

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Thank You!

CIT Transportation Finance 11 West 42nd Street, 12th Floor New York, NY 10036 t: 212.771.9634 c: 781.526.1308 Laurence.Vigeant-Langlois@cit.com www.cit.com Laurence Vigeant-Langlois, PhD VP Portfolio Strategy & Acquisitions

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