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INTERVIEW

NAME
Coverlines on
no more than
three if possible
MONTH 2012
INTERVIEW
NORM
LIU
Keeping
GECAS
on top
CONTENTS Contents text CONTENTS Contents text CONTENTS Contents text
STRATEGY FOR AIRLINE BOARDROOMS WORLDWIDE ightglobal.com/ab
FINANCE Whats hot and whats
not for funding fleets in 2013
LESSORS We rank industrys
top players in our annual survey
STRATEGY How race for
investors is intensifying
FEBRUARY 2013
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CONTENTS
fightglobal.com/ab February 2013
|
Airline Business
|
5
VOLUME 29 NUMBER 2
HOW TO CONTACT US
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e-mail: airline.business@fightglobal.com
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SUBSCRIPTION ENQUIRIES
Phone +44 (0)1444 445454
NEW MONEY
page 23
TOUGH COMPETITORS
page 32
GAME CHANGE
page 36
AB INTERACTIVE
6 Nominate your CEO for the Airline Strategy Awards
BRIEFING
INTERNATIONAL
8 Boeings dream turns into a nightmare
9 Raiders regard Qantas with relish
AMERICAS
10 Pinnacle is thrown a lifeline
EUROPE
12 More carriers join the search for investors
13 Europes low-cost carriers are on the march
ASIA
14 Regulator unmoved by Qantas distress call
15 India looks at capital gains
AFRICA
17 Respite for SAA, but woes mount
SPECIAL REPORT
FINANCE & LEASING
24 Leasing space A graphic snapshot of the major
lessors
26 Fast learners How Chinas lease sector is building
know-how rapidly
32 Shift to the East The leasing market is seeing a
change in its investment base
36 Shaping the game How new rules for export credit
will impact airlines
40 Finding the funds Record production means more
delivery fnance
43 Lowering the risk Despite few losses in 2012,
claims will still exceed $1 billion
FEATURES
FORUM
44 All points south of the border Expansion at San
Antonio airport is being driven by Latin growth
FEEDBACK
47 Taking the American way Why Europe can learn
lessons from how the USA drove down ATC costs
49 NDC: Myth vs Reality IATA believes airline retail is in
vital need of modernisation
REGULARS
50 Market outlook Building needs sound foundations
52 Executives on the move
COMMENT
54 Safety is no accident
COVER STORY
18 View from the top
GECAS chief Norm Liu is undaunted
by competitors advances in the
operating lease market and says the
lessor will remain a leader through a
$7 billion a year investment plan
Airline Business is published monthly by
Reed Business Information.
Reed Business Information Ltd 2013. ISSN 0268-7615.
Printed in the UK by Polestar, Colchester.
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ightglobal.com/ab
INTERNATIONAL
BPA
FINDING FUNDS
page 40
TM
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UATP.COM marketing@uatp.com
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Self-funding programs
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Competitive market intelligence
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fightglobal.com/ab
NETWORK IN SAN ANTONIO
The Texan city of San Antonio
hosts Airline Businesss
premier airline and airport
route planning event,
Network USA, on 3-5 March.
The keynote speaker is Jose
Luis Garza, chief executive of
Mexican low-cost carrier
Interjet. The event brings
together airlines that serve
the US market as well as a
European, South American
and Middle Eastern carriers.
Register at:
networkusaforum.com
ASCEND ON THE WEB
Ascends analysts are hosting
a 60min webcast on
7 February for an interactive
discussion about the
immediate prospects for the
aviation industry, manufactur-
ers, airlines, the cargo market
and the fnancial sector.
Last year global passenger
traffc grew by more than 5%,
although yields did not follow
suit. However, demand for
new aircraft remains strong,
with $100 billion worth
forecast for delivery in 2013.
The analysts at Flightglobals
consultancy arm will examine
whether the markets can
break the snakes and
ladders cycle of one step
forward, one step back and
deliver a consistent trend of
progress and proft. The
webcast will be presented by
Ascends head of consultancy,
Eddy Pieniazek and his fellow
analysts. There will also be a
question and answer session.
Register to view the agenda
at: ightglobal.com/
AscendWebcast
AIRLINE BUSINESS INTERACTIVE
6
|
Airline Business
|
February 2013
MULTI-MEDIA
FINANCE INTERACTIVE
A
irline Business and avia-
tion nance specialist
DVB Bank have teamed up
for our third annual interactive
special to scrutinise this market.
Published in parallel with our
annual nancing and leasing sur-
vey in this months issue, the spe-
cial report tackles the key issues
facing the sector through an inter-
active format.
Topics explored this year
include how the leasing sector is
increasing its proportion of the
world eet, and the issue of air-
liner economic lives. The airlines
2013 nancing requirements and
the likely changes in funding
sources are also examined.
Weve asked leading experts
and analysts in the sector for their
views on these major issues.
These include Nigel Taylor of
EADS and Boeings Kostya Zolo-
in interactive format, giving snap-
shots of the largest lessors, fund-
ing sources and nancing fore-
casts by region.
Download this years Airline
Business nance interactive at:
ightglobal.com/inance13
LINE UP YOUR LEADERS
P
reparations are underway
for this years Airline Strat-
egy Awards and Airline
Business wants to hear if your
chief executive stands out as hav-
ing shown strong leadership dur-
ing what have been difcult times
for the industry. Or perhaps your
airline is among those leading the
innovation in technology, mar-
keting or the environment.
Judging is undertaken by an
independent panel of highly
respected industry professionals
that includes analysts and former
chief executives. The annual Air-
line Strategy Awards event will
take place in London on Sunday,
14 July in the stunning location of
Londons historic Lincolns Inn.
The event is invitation only,
but a limited number of places
are reserved for purchase.
See P42 of this issue for details.
To nominate your CEO and to
nd out more about the event,
visit: strategyawards.com
tusky; Bertrand Grabowski and
Bert van Leeuwen of DVB Bank
and analysts Rob Morris and Paul
Sheridan from Flightglobals con-
sultancy arm Ascend.
The online special also incor-
porates a range of data presented
Worthy winners: the 2012 Airline Strategy Awards recognised last years top leaders
EVENTS
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fightglobal.com/ab 8
|
Airline Business
|
February 2013
BRIEFING INTERNATIONAL
Boeing dream turns to nightmare
MAX KINGSLEY-JONES LONDON
Airframer hit by worldwide 787 grounding as it fnally gets back ahead of Airbus in sales and output stakes
JET AIRLINER DELIVERIES, ORDERS AND BACKLOG
2012 2011
Deliveries Net orders Backlog Deliveries Net orders
Airbus
A320ceo* 455 261 1,895 421 122
A320neo 0 478 1,734 0 1,226
A330 101 58 306 87 82
A340 2 0 0 0 -2
A350 0 27 582 0 -28
A380 30 9 165 26 19
TOTAL 588 833 4,682 534 1,419
Boeing
737NG 415 210 2,010 372 401
737 Max 0 914 1,064 0 150
747-8 31 1 67 9 -1
767 26 22 68 20 42
777 83 68 365 73 200
787 46 -12 799 3 13
TOTAL 601 1,203 4,373 477 805
GRAND TOTAL 1,189 2,036 9,055 1,011 2,224
NOTE:
*
A320 current engine option. Data includes corporate versions. SOURCE: Manufacturers
AIRBUS/BOEING DELIVERIES 1999 TO 2012
SOURCE: Manufacturers
200
300
400
500
600
700
12 11 10 09 08 07 06 05 04 03 02 01 00 99
Boeing
N
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Airbus
See how Airbus and Boeings
airliner output should play out
this year in interactive format:
ightglobal.com/inance13
A
irlines operating the Boeing
787 face an uncertain time
after the grounding of the world-
wide eet in the wake of the in-
ight battery malfunction suffered
by an All Nippon Airways Dream-
liner on 16 January.
The news has taken the shine
off conrmation that Boeing man-
aged to out-sell and out-deliver
Airbus in 2012. This is the rst
time the US airframer has man-
aged to do the double over its rival
for more than a decade (in net
order terms).
The 787 grounding was imple-
mented progressively by aviation
agencies in the days after the
ANA incident which resulted
in an emergency landing and
evacuation. It has affected 49 air-
craft and eight operators in Africa,
Asia, Europe, the Middle East
and the USA and leaves these
early customers having to organ-
ise interim capacity as they await
clarity on how long the disrup-
tion to their 787 operations will
last (see below).
AIRBUS BEATEN
The 787 issues took the edge off
what should have been a trium-
phant time for Boeing, as Airbus
revealed its 2012 numbers, which
conrmed its US rival was the
lead airliner manufacturer in both
output and orders for the rst
time since 2000.
Overall, mainline airliner
deliveries increased by 18% in
2012 to a record 1,189 aircraft
the second successive year air-
liner production has exceeded
the 1,000-unit mark.
Although Airbuss output rose
10% in 2012 to a record 588
deliveries, its US rival surpassed
the European airframers tally by
13 aircraft. Boeings 601 deliver-
ies represents its second-highest
airliner output total ever, only 14
units shy of the record 620 ship-
ments it completed in 1999.
This high watermark in airliner
output was set as Boeing inte-
grated the production of MD-80/90
and MD-11 aircraft at the now
defunct Long Beach plant in Cali-
fornia shortly after the merger
with McDonnell Douglas.
The combined mainline air-
craft order tally was down on
2011, at 2,036 aircraft. Airbus
secured 833 net orders against
1,203 for Boeing, which was play-
ing catch-up after being soundly
beaten 12 months ago. The US
airframer last headed Airbus in
net orders in 2006 and 2007.
Airbus retains bragging rights
in the backlog stakes, with its
4,682 orders representing a 52%
market share. The two protago-
nists total backlog has now bro-
ken through the 9,000 mark,
standing at 9,055 aircraft.
The US Federal Aviation
Administration order to suspend
Boeing 787 operations moves the
programme into uncharted territory
for a modern airliner as long as the
battery fre risk is unsolved.
The FAA order came in the wake
of the 16 January in-fight incident
suffered by an All Nippon Airways
787. ANA and fellow operator
Japan Airlines suspended 787 op-
erations the same day. An FAA di-
rective grounded United Airlines
six 787s and the other Dreamliner
operators halted fights as fellow
regulators followed suit. Those af-
fected include Air India, Ethiopian,
LAN, LOT, and Qatar Airways.
The FAA grounding remains until
Boeing demonstrates the lithium-
ion-polymer batteries are safe and
that there is no battery-ignited fre
risk. Boss Jim McNerney says all
Boeings resources are focused on
fxing the problem.
The safety concerns could make
it harder for 787 customers to get
fnancing, says Les Weal, head of
valuations for Flightglobals Ascend
consultancy. If you were asked to
fnance one today, you may have to
pass on the opportunity, he says,
explaining that fnanciers have no
shortage of requests bearing less
risk than the 787.
Boeing may also need to restore
confdence in the 787s entire elec-
trical architecture. Electricity is
used to replace parasitic bleed-air
to power onboard systems and
cabin pressurisation as it delivers
a signifcant reduction in fuel burn.
But Boeing must now prove this is
not a technological step too far.
Safety grounding leaves 787 operators in limbo
ABU_250113_008-009 8 18/1/13 16:01:18
fightglobal.com/ab February 2013
|
Airline Business
|
9
Raiders regard Qantas with relish
DAVID KNIBB SEATTLE
Plunge in share price attracts unwelcome attention, but a partial carve-out could be key to keeping asset strippers away
BRIEFING INTERNATIONAL
Regulator unmoved
by distress call
PAGE 14
Look back at our cover interview
with Qantas chief Alan Joyce
from the spring of 2010 at:
ightglobal.com/AlanJoyce
I
t comes as no surprise at Qantas
that an investor group would
emerge such as the one including
former senior executives Geoff
Dixon and Peter Gregg.
Analysts have been warning
since last June when the share
price hit a record low, that this
could attract opportunists keen to
wrest control from Alan Joyce, cur-
rent Qantas chief executive, and
sell off assets. An aversion to the
Emirates tie-up and Qantass status
as one of the worlds few invest-
ment-grade airlines may partly
explain the Dixon groups interest.
But a share price that capitalises
Qantas at only A$3 billion ($3.1
billion) is bound to attract attention
from those who see a potential
prot, regardless of whether they
are former company executives.
Holding company discount
is the term economists use to
describe a publicly-traded com-
panys share price when it falls
below the perceived value of the
companys assets. Qantas shares
are trading in the A$1.50 range,
up from a record low of A$0.97.
But even A$1.50 per share times
the number of outstanding shares
only equals the airlines cash
reserves. It recognises no value
for anything else.
Dixon is well aware that the
Qantas frequent yer program and
a partial stake in Jetstar, the low-
Low point in Qantas
share price, which
has since recovered
A$0.97
cost brand of the Qantas group,
alone could fetch up to A$2 bil-
lion before even looking at cash
reserves or other assets. As John
Singleton, one of Dixons invest-
ment partners, commented to
local media after the Qantas share
price plunged: If you bought all
its shares for a billion dollars
tomorrow, youd have $3 billion
in cash in that company. Cash. It
cost you $1 billion to buy $3 bil-
lion is that a good deal or not?
It is not quite as good a deal
now, but still the spread between
share price and asset value is
enough to draw the kind of atten-
tion that Qantas managers would
rather not have.
Peter-Jan Engelen, a professor of
nancial economics at Utrecht
University, in the Netherlands,
has studied holding company dis-
counts. His expertise and publica-
tions are on corporate nance,
value creation and governance. He
points to several studies that show
discounts for US companies in the
range of 11-21%, around 15% in
the UK and 10% in Japan.
What level of holding company
discount starts to attract the kind
of attention Qantas is now receiv-
ing? It depends, says Engelen, on
the investor appetite for corporate
control, the level of free oat on
the shares, and how the acquirers
assess the potential synergies and
value of certain assets. It is dif-
cult to give a magic number, he
says, but anything above 20%
seems like a natural candidate.
In other words, when the gap
between share price and asset
value exceeds 20%, watch out for
a takeover bid. Or, as in the case
of Air Canada six years ago, the
company itself may decide to sell
its own assets. Robert Milton was
intent on monetising Air Cana-
das divisions, as he called it,
partly to reduce the threat of a
takeover and partly to reward
investors who had helped the air-
line survive bankruptcy. Profes-
sor Engelen agrees that a corpo-
rate restructuring can unlock
and reveal the hidden value of
certain business units.
In the case of Air Canada, this
happened. It sold its regional air-
line, Jazz, its frequent yer pro-
gramme, maintenance base and
many other assets. Shareholders
did very well, but others argue the
sell-off permanently crippled the
airline. Instead of eet mainte-
nance and repair at its own main-
tenance base, for instance, after
the sell-off, Air Canada had to
negotiate with a third party for this
work, and pay a commercial rate
that included a prot margin.
Engelen acknowledges that the
value of spin-offs is lower when
parent and subsidiary are in the
same industry. In same-industry
holdings, synergies between dif-
ferent divisions can be impor-
tant. Losing those synergies may
be costly to the parent airline.
In such cases, says Engelen, a
partial carve-out may be the best
solution. The parent company
spins off a division (for instance,
a frequent yer programme)
through an IPO, while retaining
the majority of the shares. As he
explains, this combines the best
of both worlds. On the one hand,
the division becomes a stand-
alone company so its value-crea-
tion is now transparent and all
transactions between the parent
and the new company occur at
arms length. On the other, the
majority stake together with ade-
quate agreements between both
companies safeguard future busi-
ness relationships.
Aeromexico completed just
such an arrangement in December
when it nished selling 49% of its
Club Premier loyalty programme
to Canadian partner Aimia.
Arms length transactions
instead of synergies are obviously
a trade-off, but on balance, they
may help the parent airline if that
is what it takes to keep corporate
raiders at bay. Whether Qantas
will resort to this as a defensive
move remains to be seen. For
now, Joyce is touting the strategic
value of keeping all of Qantas
together, and promising: We will
never be wreckers of this amazing
company.
We will never be
wreckers of this
amazing company
ALAN JOYCE
Chief executive, Qantas
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INTERACTIVE MAGAZINE
Available from 28th January 2013 at www.ightglobal.com
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Available from 28th January at www.ightglobal.com/inance13
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fightglobal.com/ab
cles motion to reject the pilots
collective bargaining contract fol-
lowing an October hearing.
Pinnacle had in December
warned that it would very like-
ly have been wound down if it
did not reach a revised collective
bargaining agreement with the
union in a timely fashion, as it
needed to nd cost savings im-
mediately. The airline has been
seeking $76 million in annual
cost improvements from labour,
$59.6 million of which would
come from the pilots.
It has not conrmed if it is still
working with those targets after
revising the eet plan, but says:
We achieved what was needed
for Pinnacle to emerge from
Chapter 11.
Delta will be adding a new re-
gional airline into its operation
just months after shutting down
its 50-seat jet subsidiary Comair
in late September.
LIQUIDITY BOOST
But this scenario was the only re-
alistic means for Pinnacle to con-
tinue operating as a carrier. The
airline would probably not have
10
|
Airline Business
|
February 2013
BRIEFING AMERICAS
Read about US mainline
carriers feet revamp plans at:
ightglobal.com/
FleetsRevamp
KRISTIN MAJCHER WASHINGTON DC
US regional carrier set to emerge from Chapter 11 as a Delta subsidiary
IN BRIEF
P
innacle Airlines reached sev-
eral key restructuring mile-
stones in the rst weeks of 2013
that will enable it to emerge from
bankruptcy as a subsidiary of
Delta Air Lines.
The US regional carriers pi-
lots, represented by the Air Line
Pilots Association, ratied a ten-
tative collective bargaining agree-
ment on 15 January after more
than nine months of talks follow-
ing the airlines Chapter 11 bank-
ruptcy protection ling.
This is a signicant milestone
in our restructuring and repre-
sents substantial progress that we
expect will allow us to success-
fully emerge from bankruptcy,
says Pinnacle chief executive
John Spanjers.
COURT APPROVAL
A bankruptcy judge accepted
that plan the following day,
along with restructuring agree-
ments forged with Delta and Pin-
nacles unsecured creditors
committee. This gives the airline
the green light to become a Delta
subsidiary after submitting a
business plan acceptable to both
carriers by 15 February.
The restructuring agreement
allows Delta to provide up to $30
million in new funding to facili-
tate Pinnacles exit from bank-
ruptcy. In addition, the carrier is
offering up to $22 million in
loans to satisfy terms within the
new collective bargaining agree-
ment with pilots.
The latter funds support a
bridge agreement that will
allow many of the Pinnacle pilots
to nd jobs when the airline
emerges from bankruptcy under
its new parent company. Delta
had earlier received court ap-
proval to provide Pinnacle with
$74.3 million in debtor-in-posses-
sion nancing.
Pinnacles 2,400 pilots were
the last employee group at the air-
line to ratify a new collective bar-
gaining agreement. The group
reached a tentative deal with
management in December, but
only after a judge denied Pinna-
Pinnacle thrown a lifeline
AMERICAN DROPS JFK
DOMINICAN FLIGHTS
American Airlines will end its
long-standing service between
New Yorks JFK airport and
Santo Domingo in the
Dominican Republic this April,
after serving the route for 38
years. The Fort Worth-based
carrier began fights between
JFK and Santo Domingo in
1975. It is also closing its
JFK-Santiago services
launched in 2002. American
will continue to serve Santo
Domingo four times daily and
Santiago once daily from its
Miami hub. New York-based
low-cost carrier JetBlue
Airways has been operating
the Santo Domingo route
since 2007 and to Santiago
since 2004.
AIRTRAN ADDS FRESH
DOMINICAN SERVICE
Southwest Airlines
subsidiary AirTran will begin
fights from Chicago Midway
to Montego Bay, in Jamaica,
and Punta Cana, in the
Dominican Republic. The
Montego Bay service will
launch in April, while AirTran
will begin operating
Chicago-Punta Cana from
the middle of May. Both
routes will be operated four
times weekly.
HAWAIIS ISLAND AIR
SET FOR NEW OWNER
The owners of Honolulu-
based Island Air will sell the
airline to an undisclosed
customer, in a move aimed
at better placing it to
compete with dominant
player Hawaiian Airlines. The
deal is likely to be
completed by March, says
Michael Rodyniuk, executive
vice-president of Island Airs
parent company Gavarnie
Holding. Island Airs new
owner is a capital
management frm based on
the US mainland and has
some interests in aviation,
although the company does
not own an airline, he adds.
been able to operate past Febru-
ary without the additional liquid-
ity Delta provided, court docu-
ments show.
Helane Becker, airline analyst
and director at Dahlman Rose,
says Delta taking ownership of
the airline was the only viable op-
tion for Pinnacle to carry on as an
airline. No investor group came
forward with another option,
she says. Pinnacle had to revisit
its business plan after Deltas pi-
lots ratied a contract in June that
allowed it to add 70 76-seat re-
gional jets and to remove 218 50-
seat regional jets.
The carrier originally intended
to restructure the company
around 140 Bombardier CRJ200
regional jets it operates for Delta
Connection, rather than its larger
and more fuel efcient CRJ900s
and Bombardier Q400 turbo-
props. The latter type has since
been removed from the eet.
After Delta announced its plan
to reduce the number of those
smaller aircraft, Pinnacle moved
to shrink its eet to 81 CRJ900s
and remove its entire CRJ200 eet
within the next two to three years.
It will continue to operate 41
CRJ900s under lease from Delta
and add 40 of the aircraft type
that the mainline carrier ordered
in December from Bombardier.
Delta has taken on a new regional airline months after closing Comair
Annual labour cost
savings originally
targeted by Pinnacle
$76m
P
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ABU_250113_010 10 18/1/13 14:01:25
Aroports de Montral has operational efciency covered.
Thats because we understand the importance of
innovation and adapting to new trends. Through
improvements in infrastructure and technology,
were able to provide solutions that help create
the ultimate traveller experience.
In fact, our self-service kiosks make checking in
quick and easy, and our state-of-the-art self-service
baggage drop-off system offers increased convenience
and security. This means travellers have more free time
to enjoy themselves at any one of our 90 restaurants
and boutiques.
Whats more, weve installed eco-friendly smart shades
in airport jetties, and our commitment to improving our
infrastructure can be seen through our recent expansion
project that will result in the addition of six new
international gates for wide-body aircraft. Simply put,
we innovate so that you can operate smoothly.
Smart innovations. Smooth operations.
ADM13112_OperationAd_AirlineBusiness_197mmx267mm_E_v2.indd 1 1/3/13 10:25:29 AM
ABU_250113_011 11 17/1/13 11:24:52
fightglobal.com/ab 12
|
Airline Business
|
February 2013
BRIEFING EUROPE
Airlines vie for limited investor pool
GRAHAM DUNN LONDON ALEX THOMAS PARIS
More European carriers join search to secure new partners as block on Alitalias local backers expires and TAP sale falls fat
Read more about the
challenges facing European
carriers in the year ahead:
ightglobal.com/Forecast13
T
he passing in January of a
lock-in preventing Italian
investors from selling their stake
in Alitalia has potentially brought
another European airline into
play, at a time when it is already
difcult to nd enough suitors to
go round.
European carriers Air Berlin,
BMI and most recently Virgin
Atlantic have all been able to
attract investors, Aer Lingus
managed to nd a partial inves-
tor in Etihad while doing its
best to withstand Ryanairs
interest and Cargolux found
and lost a shareholder in Qatar
Airways. But Spanair and
Malevs failure to secure a sav-
iour proved terminal.
Portugal ended 2012 back at
the drawing board, after failing to
agree terms with the sole bidder
for TAP, Brazilian conglomerate
Synergy Group. It is not alone in
seeking an investor. Czech Air-
lines has been put back on the
block by the Czech government
and is currently courting Korean
Air and Qatar Airways; the Irish
government has long talked of
selling its remaining stake in Aer
Lingus; and carriers that are
restructuring, such as Air Baltic,
are ultimately hoping to attract
fresh investment.
Peter Morris, chief economist
at Flightglobals consultancy
ITALY DOMESTIC SHARE
Jan-13 Jan-08
Alitalia 41.3% 37.5%
Ryanair 24.2% 3.8%
Meridiana 11.5% 11.9%
EasyJet 10.0% 3.8%
Air One 9.9% 20.9%
ITALY-WESTERN EUROPE
SHARE
Jan-13 Jan-08
Alitalia 21.3% 26.6%
Ryanair 25.0% 15.0%
EasyJet 12.0% 5.8%
Meridiana Fly 5.1% 5.8%
Air One 4.1% 8.9%
NOTES: Air One was an independent carrier
in 2008 and part of Alitalia in 2013
SOURCE: Weekly ASK data from Innovata
De Juniac: No 2013 Alitalia move
Ascend, says there is a shortage of
investors for the number of Euro-
pean airlines in the market, and
sees the recent developments in
Portugal as illustrating the cur-
rent appetite for some of Europes
fringe carriers.
SOLE BIDDER
Portugal secured several bidders
for airports company ANA,
which operates 10 airports in the
country, including Lisbon a
contest ultimately won at the end
of December by French construc-
tion and management specialist
Vinci in a deal reportedly worth
around $4 billion. By contrast
Synergy was the only bidder in
the frame for TAP. It gives you an
indication of where investors see
the opportunity, says Morris.
Europes big three carriers
buyers of airlines in recent years
are currently too preoccupied
with getting their own houses in
order to do deals. International
Airlines Group will move to tidy
up ownership of Vueling, on top
of its purchase of BMI, but in
November chief executive Willie
Walsh said there was nothing else
on its agenda. Lufthansa chief
executive Christoph Franz
appears not to share the enthusi-
asm of his predecessor for buying
airlines: it has bought no airline
since he took the helm, and
indeed has sold BMI and dropped
its Lufthansa Italia venture.
Neither does Air France-KLM
look to be in the position to buy at
the moment. The SkyTeam car-
rier is already the largest share-
holder in Alitalia, and having
attempted to take over the Italian
airline in 2008, would seem the
lead candidate should Alitalias
shareholders seek to sell. How-
ever, it has ruled out any move to
increase its stake this year.
There are no open negotia-
tions as of today. Air France-
KLMs resources are limited and
do not allow us to go ahead with
such a deal, says Air France
chief executive Alexandre de
Juniac, noting more immediate
priorities mean nothing is likely
to happen before 2014.
This has led to speculation that
Etihad could be a potential buyer.
The United Arab Emirates ag
carrier has been linked to pretty
much every airline that is up for
grabs in part because in the past
12 months it has bought stakes in
Air Berlin, Aer Lingus, Air Sey-
chelles and Virgin Australia. Eti-
hads new co-operation with Ali-
talias key SkyTeam partner, Air
France-KLM, has added weight to
the speculation, but Etihad chief
executive James Hogan distances
himself from such a move.
We havent had any discus-
sions about equity in Alitalia,
he says. Our strategy about
investment is very measured,
he adds, emphasising the need
for demonstrable network bene-
ts in any such deals. We are
looking at ways of improving our
respective businesses, but what
we are not going to do is take
over someones problems.
ITALIAN MARKET
Hogan, though, does point to the
benets of its co-operation with
Alitalia, one of the Gulf carriers
41 codeshare partners. It [Alita-
lia] is operating into Abu Dhabi
and linking with us to Southeast
Asia and Australasia out of
Rome, he notes. We operate into
Milan. The Italian market is the
fourth largest market in Europe.
Its an important market.
The speculation about Alita-
lias ownership has been ignited
by the end of the lock-in for Alita-
lias Italian shareholders. A group
of 21 Italian investors formed a
consortium which helped rescue
the carrier in 2008 and
relaunched it through a merger
with Air One as a private com-
pany in January 2009. This
helped de-politicise Alitalia as
the new owners revamped the
business through a major eet
renewal that saw the last of its
Boeing MD-80s phased out in
December. There is no indication
yet whether any of the investors
are looking to sell.
While the new Alitalia remains
loss-making, it has curbed losses
in what has been a pretty tough
climate as the global nancial cri-
sis was followed by problems for
the Italian economy. Net losses of
$773 million and operating losses
of $530 million between 2009-11
compare with net and operating
losses of $2.7 billion and $2 bil-
lion in its last four years in state
ownership.
The market is there the big
question is who is best placed to
take it, says Morris of the Ital-
ian markets potential. He points
to the strong growth in recent
years of low-cost carriers, which
have taken advantage of the
fragmented Italian market and
local carriers difculties (see
tables). He says: [The short-
haul market] is drifting away to
groups like Ryanair and EasyJet,
and the long-haul is drifting
towards Air France, feeding
through Charles de Gaulle.
The market is
there in Italy, the
big question is
who is best placed
to take it
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Ukraine. That process is ongoing
but it is very slow. It is not like
acting within the EU there is a
process you need to go through,
he says.
Aware that low-cost carriers
from outside the region are eye-
ing its market, Russias Aeroot
has also indicated possible inter-
est in setting up a low-cost sub-
sidiary, if favourable legislation is
passed in the country.
The airlines general manager,
Vitaly Saveliev, describes a need
for several amendments to the air
code. He says: If they are made,
well be able to establish an afli-
ate low-cost operator. It may take
us from six months to a year.
He says changes in the law will
be required for airlines in Russia
to sell cheap, non-refundable
tickets, charge passengers for
carry-on luggage and to not pro-
vide onboard food and drinks.
While limited progress is being
made by low-cost carriers into the
CIS and other neighbouring
states, Vradi shares OLearys
opinion that large-scale expan-
sion is unlikely to take place in
the near future.
Something that is pretty uni-
versal wherever you are is that
people want low fares. The cus-
tomer need is there, [but] I think
the efciencies and regulations
are not necessarily there yet.
Im very optimistic from that
perspective that those countries
will get there. Its hard to predict
whether this is a year from now
or 10 years from now, but its just
a matter of time, he says.
February 2013
|
Airline Business
|
13
BRIEFING EUROPE
Budget carriers still on the march
ALEX THOMAS & GRAHAM DUNN LONDON
Ryanairs frst bases in North Africa and the arrival of EasyJet in Moscow show Europes low-cost operators reaching out
Shift of investment
in leasing market
PAGE 32
Chart the spread of budget
carriers in Europe with our
interactive map at:
ightglobal.com/iLowCost12
W
estern European low-cost
carriers continue to push
beyond the boundaries of the
European Union, stepping up
their presence into neighbouring
markets towards the south and to
the east.
Irish budget giant Ryanairs
move to launch its rst bases in
North Africa comes as UK low-
cost operator EasyJet prepares for
its breakthrough into Moscow
this Spring.
As Europes low-cost carriers
have grown, they have slowly
been pushing out beyond the
connes of the EU where the
single aviation market enables
them to grow freely into neigh-
bouring countries. EasyJet, for
example, already has destinations
including Amman in Jordan, Tel
Aviv in Israel and the Egyptian
destinations of Hurghada, Luxor
and Sharm El Sheikh.
NEW TERRITORIES
Much of the non-EU activity has
so far centred on Morocco. The
North African country was one of
the rst to strike an EU-wide air
services deal with the European
Commission, an environment
enabling Europes budget carriers
to expand.
Ryanair was already among
those serving routes to Morocco
and is now taking this a step fur-
ther by launching its rst bases
outside Europe in the Moroccan
cities of Fez and Marrakech. It
will base two aircraft at Marra-
kech and one at Fez and is
launching a string of new routes.
Ryanair, which also serves Agadir
and Oujda in Morocco, will oper-
ate 60 routes into the country fol-
lowing the new moves.
One of the most eye-catching
moves towards the east is
EasyJets breakthrough in Russia,
having last year won the race for
slots to Moscow. It will serve the
Russian capital from London Gat-
wick and Manchester.
EasyJet was able to get a foot-
hold in the Russian market after
the re-allocation of British Mid-
lands route rights. While carriers
Ryanairs Moroccan
routes following
new bases
60
OLeary: sees no rush on Russia
Vradi: just a matter of time
such as Germanwings and
Vueling also serve Moscow, it
remains to be seen what further
opportunities will be available for
low-cost carriers in Russia.
In October, Russian authorities
said they were looking at the pos-
sibility of developing competi-
tion in the countrys air transport
market by allowing foreign low-
cost carriers to y domestic
routes. The countrys competition
body was also looking at meas-
ures to facilitate the creation of
domestic budget carriers.
Ryanair chief executive
Michael OLeary, while acknowl-
edging some interest in the Rus-
sia market, remains cautious.
Generally speaking we havent
been too impressed with the
deregulation plans, they gener-
ally seem to require having a Rus-
sian partner, he said last year.
Europe is the focus of our
growth, he stresses, but adds: I
think there will be some expan-
sion into, maybe not Russia, but
former [Soviet] republics such as
Ukraine and areas like that, as
they join the EUs Open Skies.
Russia, even if you get there
with a deregulated market, may
deliver some growth in year ve
to 10 [from now], but wont be a
focus for our growth, he adds.
The developing economies in
Russia and some other CIS coun-
tries, together with the largely
untapped budget sector, gives
these markets huge potential.
Those markets are very attrac-
tive from the perspective of the
customer prole available and
from the perspective of their
underserved nature, says the
chief executive of central Euro-
pean budget airline Wizz Air,
Jzsef Vradi.
However, he says many coun-
tries on Europes eastern periph-
ery still apply a fairly closed
regulatory regime, basically
favouring the national airline sta-
tus quo, protecting the market
from competition. Vradi notes
access to these countries depends
on the regulatory environment
which can be boiled down to
access to routes, the capital
investment regime in the particu-
lar country, some of the embed-
ded inefciencies in regulations
like strict labour rules.
Yet deregulation and the ECs
efforts to expand its aviation area
to neighbouring states means
Wizz Air, which hopes to open a
route to Moscow soon, is among
those low-cost carriers looking to
make inroads into the region.
Given that we have become
an increasingly mature business
and we have proven ourselves
in various markets we have
started accessing other markets
and routes that were unavailable
to us before, says Vradi.
Wizz recently began ights
from Ukraine to Georgia and
received bilateral designations
from Hungary to Russia and
I
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B
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p
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c
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B
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p
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.
c
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ABU_250113_012-013 13 18/1/13 15:59:50
fightglobal.com/ab 14
|
Airline Business
|
February 2013
BRIEFING ASIA
Regulator unmoved by distress call
DAVID KNIBB SEATTLE
Australian body tentatively approves Qantas-Emirates joint venture, but makes competition primary focus for decision
For more on the implications of
the tie-up, see our analysis at:
ightglobal.com/
EmiratesQantas
W
arnings from Qantas chief
executive Alan Joyce about
the complete demise of Qantas
operations to Europe without
an alliance with Emirates made
little difference to the Australian
Competition and Consumer Com-
mission (ACCC) in its prelimi-
nary approval of the alliance.
In its December decision, which
grants anti-trust immunity to Qan-
tas-Emirates if their venture is
nally approved in March, the
ACCC seems less concerned about
Qantas and more preoccupied
about the presence of enough
rivals to keep the alliance honest.
Qantas depicts its Emirates
deal as an urgent strategic imper-
ative. Without it, the Australian
carrier warns, its international
operations which lost $450 mil-
lion this past nancial year are
in terminal decline.
There is no alternative for us, to
make Europe work, says Joyce.
Such claims are a variation on
the failing company doctrine,
as it is called in anti-trust circles.
It applies when one of the parties
to a merger or acquisition is in
imminent danger of failure. As
the US Supreme Court explained,
it is better if a company contin-
ues to exist even as a party to a
merger, than if it disappears
entirely from the market.
The failing company doctrine
applied explicitly to Boeings
takeover of McDonnell Douglas
when the latter was near collapse.
The doctrine extends to immu-
nised joint ventures, which are in
effect operational mergers.
EUROPEAN DANGER
The warning by Qantas about its
failing European operations takes
the doctrine one step further by
conceding that Qantas itself faces
no danger of collapse but its
European routes do. Courts and
regulators generally have treated
this so-called failing division
argument with skepticism because
it attempts to extend an exception
even further, but US Department
of Justice guidelines recognise it
under limited conditions.
In any event, the ACCC gives lit-
tle weight to the argument. It con-
cedes that Qantas, as an end-to-end
carrier, faces some disadvantages.
The biggest, says the ACCC, are on
those long-haul routes where
Qantas competes with Middle
Eastern and Asian mid-point carri-
ers. These disadvantages, it pre-
dicts, are most likely to affect
Qantas Sydney-London and Mel-
bourne-London services.
The regulators so-called coun-
ter-factual, where it compares
what is likely to happen with and
without the Emirates alliance, is
the only place it concedes anything
about a Qantas weakness. Without
the alliance, the regulator predicts
Qantas is likely to continue to y at
least one service per day to the UK
and within Asia to continue to
operate on protable routes.
As for the warning that Qantas
might retreat to a virtual net-
work, the agency sees this as
unlikely for regions other than
the UK and Europe.
From these assumptions, the
ACCC concludes there is some
potential benet from a Qantas-
Emirates alliance that increases
passenger access to each carriers
network, raises some prospect of
new routes and frequencies and
provides other benets and ef-
ciencies. It does not explicitly
weigh these advantages against a
possible Qantas retreat.
In what is hardly a ringing
endorsement, the ACCC con-
cludes: The extent of public ben-
et conferred by each source
individually is likely to be small,
and in some cases may be negligi-
ble. However, viewed in aggregate
the alliance is likely to confer
material, although not substan-
tial, public benets.
At no point does the regulator
suggest it is important to keep an
Australian airline on the Aus-
tralia-UK Kangaroo route. In
terms of airline nationality, its
analysis is neutral. Taking the
ACCC at its word, it seems to
regard keeping Qantas in the mar-
ket via an Emirates alliance as
offering small, although not sub-
stantial, public benets.
This decision underscores how
much the ACCCs emphasis is on
protecting competition not a par-
ticular competitor. This is espe-
cially clear in its analysis of the
Australia-UK route, where the
concentrated effect of a Qantas-
Emirates alliance is highest. Com-
bined, the two carriers control
almost 50% of this route. The
next-largest player, Singapore Air-
lines, moves only 12% of the traf-
c. The balance is split between at
least 10 other airlines. Qantas-
Emirates overshadows all others.
The ACCC might have carved
out the Australia-UK market from
its approval. But in this market it
sees a large number of established
carriers, notably Singapore Air-
lines, Etihad Airways and Cathay
Pacic, plus the growing presence
of Qatar Airways and the Chinese
airlines. None controls much mar-
ket share, but all have the ability
and incentive to expand opera-
tions in response to the alliance.
REDUCING RIVALS
Only in the Australia-New Zea-
land market does it voice any con-
cern, because the Air New Zea-
land-Virgin Australia alliance is
the only signicant rival. As
ACCC director Rod Sims explains:
Our concern was that with Qan-
tas and Emirates combining, there
would be just two players.
It is always a concern, he says,
when three goes to two. Hence,
the agency imposed conditions to
ensure no loss of capacity. Its deci-
sion illustrates how competition
regulators focus more on overall
competition than on warnings
about who might fail.
This may mean Australian sen-
ator Nick Xenophon cannot
expect a positive response from
the ACCC to his call for the Com-
mission to review its decision.
Xenophon, in an opinion piece
for an Australian newspaper, says
the ACCC should have probed fur-
ther into Qantas claims that its
international division has been in
decline. He warns if the ACCC
does not look further into the mat-
ter, it could lead to an application
for judicial review which could
potentially delay the implementa-
tion of the joint venture.
The doctrine
concedes that
Qantas itself faces
no danger of
collapse
No importance was attached to having an Australian airline on UK routes
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and this is where a familiar
entrepreneurial gure could
return to the market.
GR Gopinath started the low-
cost airline phenomenon in India
with Air Deccan, which subse-
quently merged with Kingsher
in 2008. And he has been in dis-
cussions with investors to launch
a new airline once his non-com-
pete clause with Kingsher
expires in late January.
We have been talking for the
last two months since the gov-
ernment changed its policy.
After that, a few people
approached us, he says, refer-
ring to the move in September to
allow foreign airlines to hold up
to 49% of an Indian carrier.
Gopinath declines to name
possible investors he has held
talks with but there are indica-
tions one partner may be AirAsia,
as it has shown an interest in
establishing operations in India
in recent months. Plans for the
airline will be nalised in the
coming months, he adds, with
operations to begin in 2014. Gopi-
nath says he sees a vacuum in the
low-fare end of the Indian market
as airlines have not been growing
new routes. India needs a new
low-cost airline to stimulate the
market and open up new routes,
rather than just cannibalising
existing airlines, he says.
February 2013
|
Airline Business
|
15
BRIEFING ASIA
India looks at capital gains
SIVA GOVINDASAMY SINGAPORE GRAHAM DUNN AMSTERDAM
Jet Airways and Kingfsher court Etihad after easing in foreign ownership limit
How Chinese lessors
are learning quickly
PAGE 26
Read more about the
grounding of Kingfsher at:
ightglobal.com/
KingsherWoes
IN BRIEF
AIR INDIA BACK IN
THE FRAME AT STAR
Air India and Star Alliance
have restarted discussions,
an indication that the carrier
may be making headway in
joining the group. There has
been high-level contact
between the two
organisations recently, say
sources close to the
discussions. This is after
talks were stopped for more
than a year, when Air India
suspended the carriers
integration with the alliance
in August 2011 since it did
not meet the minimum
membership conditions.
Star would only say the
integration of Air India
remains on hold, and that
India remains an important
market in the alliances
long-term strategy.
AIR CHINA EYES
FLIGHTS TO HOUSTON
Air China has applied for
authority to fy between
Beijing and Houston
Intercontinental with the US
DoT. The Chinese fag carrier
would operate four-times
weekly from July, according to
a regulatory fling. The fights
would connect with Star
Alliance partner United
Airlines hub at Houston
Intercontinental and
complement Air Chinas
existing US fights.
LION IN TALKS ON
LARGE AIRBUS ORDER
Lion Air is in talks with Airbus
over a substantial order for
narrowbody aircraft, a move
that could break Boeings
dominance in the Indonesian
market. The Indonesian
low-cost carrier is close to a
decision on whether it will
order the re-engined Airbus
A320neo family, say sources
familiar with the discussions.
If it goes through, this could
be a substantial order that
might even match Lions
2012 order for more than
200 Boeing 737s.
U
ncertainty continues to swirl
around the future of Indian
full-service carriers Kingsher
Airlines and Jet Airways as talks
with potential investors continue.
Kingsher, which was
grounded in October, has sub-
mitted a plan to Indias Directo-
rate General of Civil Aviation
(DGCA) on how it intends to
restart operations. Even though
its scheduled carrier licence
expired on 31 December, the air-
line says its parent, the UB
Group, will provide the funding
needed for its recovery plan.
The DGCA has asked for cer-
tain no-objection letters which
are in the process of being pro-
cured. A few additional ques-
tions have been raised which
will be answered to the regula-
tors satisfaction, says the air-
line. It adds expiry of its licence
is no cause for concern as the
regulations permit a renewal
within two years of expiry.
Local media subsequently
cited a letter from Kingsher
chairman Vijay Mallya to staff
saying it was hoping to resume
ights by the summer season,
initially with seven aircraft.
The carrier conrmed it has
been in talks with Gulf carrier Eti-
had Airways about a possible
equity investment, but industry
sources suggest the latter is more
likely to go with Jet Airways, with
which it is also negotiating with.
Jet conrms the negotiations
commenced recently in line
with liberalised policies which
enable foreign investment in the
shares of Indian carriers. It says
details will be provided only after
a nalisation of any deal.
In December, sources said a
stake of 24% was in play but the
negotiations do not only centre
on investment but also a compre-
hensive marketing and opera-
tions deal that could potentially
lead the airlines to begin joint
services across their interna-
tional network.
Etihad chief executive James
Hogan, speaking at a press con-
ference in Amsterdam, con-
rmed its interest but says a deal
is not certain. India is on our
doorstep. We are examining the
new foreign direct investment
legislation. We are in due dili-
gence. But as with any potential
deal, it is not done until your due
diligence is done, says Hogan.
Etihad has a strong presence
in the Indian market and Hogan
sees an opportunity for further
development. We y into a
whole range of secondary cities
[in India] and that will grow. The
ability between India and Abu
Dhabi to create an air bridge is as
attractive to us as it is the people
we are talking to, he says
It is the Indian domestic mar-
ket, however, that continues to
have the highest growth potential
The new cap for
foreign ownership of
Indian airlines
49%
Indian carriers like Jet Airways are hoping to benet from rule changes
B
o
e
in
g
Mallya: eyeing Kingfisher return
ABU_250113_014-015 15 18/1/13 14:14:11
Co-hosted by
THE 2013
AIR TRANSPORT
IT SUMMIT
19-20 JUNE 2013
BRUSSELS
THE IT INDUSTRY EVENT OF THE YEAR
ABU_250113_016 16 17/1/13 11:25:59
fightglobal.com/ab February 2013
|
Airline Business
|
17
BRIEFING AFRICA
Respite for SAA, but woes mount
ALEX THOMAS LONDON
African carrier remains operational after loan covers short-term expenses, but managerial instability hinders restructuring
The impact of changing
export credit rules
PAGE 36
See our recent analysis on how
FastJet aims to drive low-cost
carrier growth in Africa at:
ightglobal.com/AfricaLCC
H
aving secured emergency
funding in early January to pay
for fuel costs and prevent a possi-
ble grounding of its eet, South
African Airways has seen off the
most immediate threat to its sur-
vival prospects. But the need for
the loan demonstrates the extent of
the airlines predicament.
Underlying liquidity issues sur-
faced in October when the airline
posted an operating loss of 1.3 bil-
lion rand ($147 million) for the
2011-2012 scal year. It then re-
ceived a R5 billion guarantee from
the South African government to
ease access to nancial markets.
A turnaround strategy was de-
veloped in October as a condition
of the guarantee, but its imple-
mentation was thrown into disar-
ray by management instability
following the sudden departure
of chief executive Siza Mzimela,
who resigned shortly after the
guarantee was announced.
Nick Fadugba, chief executive
of consultancy African Aviation
Services believes the short-term
loan may only be heading off the
inevitable unless serious reforms
are implemented. An analysis of
SAAs annual prot and loss ac-
counts and balance sheet shows
that the airline has been techni-
cally insolvent for several years;
hence the need for repeated bail-
outs by the government, he says.
While he says the guarantee
was essential to cover the short-
term costs of SAA, maintain its
operations, and avoid damaging
its business and brand, Fadugba
believes the South African gov-
ernment is extremely reluctant
to keep writing large cheques.
Fadugba says in order to secure
the airlines future the govern-
ment must seek new investors
and reduce its shareholding. He
says that cutting costs is of critical
importance to SAAs survival,
which means addressing the
taboo subject of reducing the
workforce. In addition, Fadugba
says, the airline must nalise its
aircraft eet and route network
strategy and improve its skills in
forming what he describes as
win-win partnerships, espe-
cially in Africa.
Yet for all this to happen, Fa-
dugba says, SAA must rst re-
solve its leadership issues. Act-
ing chief executive Vuyisile Kona
has worked hard to stabilise the
carrier but in the interest of
good corporate governance, a
substantive chief executive needs
to be appointed immediately so
that work can begin in earnest on
implementing the turnaround
plan, he says.
If SAA requires a model to
which it can aspire, Fadugba says
it need look no further than fel-
low African Star Alliance mem-
ber Ethiopian Airlines, which is
100% government-owned, re-
ceives no state subsidies and yet
is very protable.
W
hile a number of African
carriers have withdrawn
routes to Europe in the face of
tough competition from Europe-
an carriers, West African start-up
Gambia Bird aims to reverse the
trend by expanding its own edg-
ling network to the continent.
The Gambian ag carrier,
which launched services in Octo-
ber, says it will launch a route to
Scandinavia in the summer and
is also likely to increase frequen-
cies on its two existing European
connections to Barcelona and
London Gatwick.
For more on SAA read our
interview from 2012 with former
boss Siza Mzimela:
ightglobal.com/Mzimela
Gambia Bird to expand fedgling European network
MARTIN RIVERS BANJUL
Chief commercial ofcer Karsten
Balke says the airline is also in talks
with airports in Holland, Italy and
countries close to Germany and
covering French catchment areas.
He says that from May, the airline
expects to sell tickets to another
European destination but adds: I
expect to have a Scandinavian des-
tination announced rst.
Gambia Bird is also preparing to
increase the frequency of its once-
weekly ight to Barcelona and
twice-weekly service to London
Gatwick airport one of which
connects via Freetown in Sierra
Leone following higher-than-ex-
pected load factors on the routes.
We want to increase frequen-
cies to London Gatwick by at least
adding a third ight, says Balke.
Noting that the UK CAA has
awarded Gambia Bird up to six
slots in the British capital, he says
the third frequency depends on
fth-freedom trafc rights out of
Freetown, while a possible fourth
ight depends on negotiations
with tour operators in the UK.
MARKET SHARE
Barcelona will benet from a sec-
ond weekly ight, effective 31
March, as Gambia Bird defends
market share ahead of Vuelings
upcoming entry to Banjul.
When Spanair pulled out of
the market there was a big gap
left, says Balke. Some routes
[between Spain and the west Af-
rican sub-region] have been un-
derserved for quite some time,
and now itll be good to see how
the markets react.
He says that although the ag
carriers regional links should bol-
ster demand among inbound pas-
sengers, Gambia Bird is nonethe-
less exercising caution before going
head-to-head with Europes larger
carriers. France is very interesting,
but we have strong competition,
he concedes. Starting a new route
in Germany is not what we want.
Turning to potential future part-
nerships, Balke says Gambia Bird
has held talks with four European
carriers since its launch. He iden-
ties 90% stakeholder Germania
as one of the parties saying the
two airlines will start codesharing
out of Gatwick in May but de-
clines to identify the others.
Currently operating two wet-
leased Airbus A319s from Germa-
nia, Gambia Bird will consider
leasing one of Germanias upcom-
ing pair of A321s due to arrive
in April and May 2014 if suf-
cient demand materialises.
The Gambian ag
carrier will launch a
route to Scandinavia
in the summer
SAA posted an operating loss of $147 million for the last scal year
A
ir
b
u
s
ABU_250113_017 17 18/1/13 16:00:40
18
|
Airline Business
|
February 2013
INTERVIEW NORM LIU
VIEW
FROM
THE TOP
GECAS chief Norm Liu is undaunted by competitors
advances in the operating lease market and says the lessor
will remain a leader through a $7 billion a year investment.
And some advice? Never fall in love with the planes
REPORT
LAURA MUELLER
LONDON
PHOTOGRAPHY
TOM CAMPBELL
ABU_250113_018-021 18 18/1/13 16:35:20
February 2013
|
Airline Business
|
19
I
n nancial circles, General Electric is
often referred to as an economic bell-
wether as it is a company closely
observed for details about the macro
economy because of its involvement in
multiple industries. GE has also come to
mean get everything in reference to its
ability to go into key sectors, achieve a lead-
ing position and, amazingly, stay there.
The US industrial groups aircraft nanc-
ing unit, GE Capital Aviation Services, is no
exception. It is the worlds largest aircraft les-
sor and lender any way you measure it: reve-
nues, net income, eet value and size. It also
serves as a litmus test to determine the health
of the aviation industry.
However, to maintain its top ranking,
GECAS must consistently strike the right
balance between growing its eet of more
than 1,700 owned and managed aircraft,
while maintaining strong nancial disci-
pline and risk management. And it is facing
increasing challenges from new entrants,
particularly from Asia, which want to play
in the space and prot from airlines increas-
ing reliance on operating leases in exchange
for exibility and leaner balance sheets.
LEASING MARKET
Airbus forecasts at least a third of the 28,200
airliner deliveries during the next 20 years
will be delivered via operating lessors. But
this could be higher, as lessors are also active
in taking over delivery slots via purchase-
leaseback deals. And tighter European bank
funding and less subsidised export credit -
nancing is also helping conditions for leas-
ing, although new sources of Asian and capi-
tal markets funds are rapidly developing.
We expect the operating leasing market
to grow to 40% from 35% now, says Norm
Liu, GECAS president and chief executive,
from his London ofce. Some will say the
growth is more, but there are many airlines
emphasising more ownership, especially in
the emerging markets.
GECAS is investing about $7 billion a
year in new aircraft orders, sale and lease-
back transactions or debt nancings, but
with caution. Given our nearly $50 billion
book and our level of depreciation, amorti-
sation and asset sales, we are still growing,
says Liu. But the days of double-digit
growth are gone, given our scale. Its more of
a single-digit world now. And there is only
so much sensible business out there. Still,
we are a market leader doing close to $7 bil-
lion a year.
A key driver for GECAS and other lessors
in the operating lease market is a shift in -
nancial power towards the emerging mar-
kets, particularly Asia.
Aviation is focused to a major degree on
the emerging global consumer who wants to
ABU_250113_018-021 19 18/1/13 16:35:23
fightglobal.com/ab 20
|
Airline Business
|
February 2013
INTERVIEW NORM LIU
tour the world, says Liu. Think about it
there are one billion people in the mature de-
veloped world, but six billion in the emerging
markets. No, not all of them are going to board
planes to travel, but every year that demo-
graphic changes.
However, this growing market has not gone
unnoticed. Asian nanciers have also made
major advances in the operating leasing mar-
ket, particularly in the past 12 months.
In December, American International
Group inked a deal to sell up to a 90% stake in
International Lease Finance, the worlds sec-
ond-largest lessor by eet size, to a consortium
of Chinese investors.
ILFC, which employs 560 people, is the
worlds second largest lessor behind GECAS
with a eet of 1,000 aircraft. The investor
group of New China Trust, China Aviation In-
dustrial Fund and P3 Investments has agreed
to acquire 80.1% of ILFC for $4.23 billion,
with an option to buy a further 9.9% stake.
That deal follows the sale of Jackson Square
Aviation (JSA) for 100 billion yen ($1.27 billion)
in October to Mitsubishi UFJ Lease & Finance.
JSA has a eet of 76 aircraft in service worth
more than $4 billion, according to the lessor.
But it was the sale of RBS Aviation Capital
to Sumitomo Mitsui for $7.3 billion in January
2012 that proved Asia was serious about en-
tering the leasing sector, paving the way for
future deals. The business employs 69 people
and owns 206 aircraft, with commitments to
purchase a further 87 by 2015.
L
essors and interested investors
know changes in bank and export
credit regulations are also fuelling
an increase in demand for operat-
ing leases.
Export credit agency (ECA) nancing rates
are being reset this year as the 2011 Aircraft
Sector Understanding (ASU) comes into full
effect. The new ASU terms are tougher to
make ECA support less appealing nancially
to airlines and lessors which are able to bor-
row in the commercial debt markets.
Upfront fees on export credit loans under
the 2007 ASU range from 4% to 7.5%, de-
pending on the credit rating of the customer.
Under the revised ASU, even the most credit-
worthy will pay 7.72% upfront and the lowest
investment grade carrier will pay 14.74%.
When the fees are spread over a 12-year loan
term, the impact is mitigated. But net-net the
pricing is still less subsidised than before.
More costly commercial debt nancing is also
expected under the Basel III accord, which al-
though recently relaxed, must be fully imple-
mented by 2019. Under the regulation, global
banks will need to comply with higher capital
requirements leading to a rise in bank funding
costs that will be passed on to the airlines.
Nevertheless, Liu remains undeterred by
any advances by GECASs competitors in the
operating lease market. Its a bit of dj vu how
money comes and goes in and out of our sector.
Ive seen this over many years, and I feel con-
dent we will retain a leading position, he says.
If we are around $50 billion, the next guy is
approaching $30 billion, you then have others
in the $5-10 billion range playing to be number
three. If they play to be number one in a short
time, they are likely to make some mistakes as
this game isnt as easy as it appears.
Liu says that GECASs history in the avia-
tion market as well as its nancial resources
are the major competitive advantages the les-
sor holds over its competitors.
Weve been around for decades and our
parent has been making jet engines since the
1940s, he says. So weve got deep domain
expertise and a long-standing commitment to
the aviation sector.
We also have low overhead costs at
GECAS as we spread them over $50 billion
versus, say, $5 billion. And, most importantly,
we have top-tier funding that far outpaces
most of the competition.
Proof of this is the ease in which GECAS
can tap the nancial markets, which are in-
creasingly more selective towards top-credit
companies. In December, parent company
General Electric Capital issued xed- and
oating-rate notes totalling $1.7 billion, se-
cured by 137 aircraft on lease to US airlines.
The nancing includes $1 billion in three-
year, xed-rate notes, which carry a 1% cou-
pon; a $300 million three-year, oating-rate
tranche at Libor plus 60 basis points; and $400
million in xed-rate seven-year notes, which
carry a 2.1% coupon pricing levels that hark
back to the pre-crisis days of cheap liquidity.
And with experience under its belt, having
weathered plenty of aviation cycles, Liu says
the GECAS team has learned how to run a
tighter business.
In the past you would grow earnings by
simply growing assets. Today, we have to
sweat the balance sheet more. We need to
book new assets that are accretive to the busi-
ness return on investment by playing the
GECAS AT A GLANCE
Fleet value $34.1bn
Fleet (aircraft) 1,742
Orders (aircraft) 285
Lessees 258
Proportion of feet leased 97.0%
Gross revenue 2011
*
$5.3bn
Net income 2011
*
$1.15bn
AB 2012 ranking (feet value) 1
AB 2012 ranking (feet size) 1
*
Figures from GECAS 2011 annual results
Fleet/value data: Flightglobal Ascend Online database
BROADER HORIZONS
While GECAS may be well positioned given its
parentage, funding, global locations and
overhead cost advantages, the leasing
companys boss still feels there is more his
business can do.
I would like GECAS to do more
consultative selling in the future, says Norm
Liu. We now own a leading aviation
consulting frm that can help airlines and
governments with airport infrastructure and
route and network planning.
And I do want to form new investor
partnerships to extend our PK Airfnance
product range and provide syndication and
debt advisory services.
GECAS bought London-based aviation
consultancy AviaSolutions in 2007 and
previously acquired PK Airfnance, which
offers asset-backed commercial debt
fnancing, from Frances Crdit Lyonnais
now Crdit Agricole Corporate and Investment
Banking in 2000.
ABU_250113_018-021 20 18/1/13 16:35:25
DAY IN THE LIFE HEAD
Day in the life bold, Day in the life main text
February 2013
|
Airline Business
|
21 fightglobal.com/ab
tomers. We still have impairments, but they
are at reasonable levels given our scale and
because of our capabilities and conservative
book and pricing policies, says Liu.
To maintain the lessors growth, experience
again plays a crucial role, adds Liu. The key is
that we have learned some lessons when order-
ing aircraft or doing sale/leasebacks. In the past,
we probably overbought certain types and we
should have sold more, but we have learned.
The good thing is these changes in aircraft are
typically evolutionary, not revolutionary.
And we are especially mindful of last-of-
line aircraft. You might get competitive pric-
ing but, over the long-term, unless you trade
aircraft out, they could be marginal invest-
ments depending upon the cycle in the future
and the technology curve. Never fall in love
with the planes.
GECAS applied these hard-learned lessons
during its recent ordering spree, most of
which occurred at the Farnborough air show
in July, where the emphasis was clearly on the
latest-technology aircraft. The lessor makes it
a policy to order aircraft powered by engines
built by GE or its afliates and tends to avoid
those where such an option is not offered.
Among the Farnborough deals were orders
for the new re-engined narrowbodies from
Airbus and Boeing 60 A320neos and 75 737
Max 8s all powered by CFM Internationals
new Leap engine, as well as 25 more 737NGs.
GECAS has a book-end strategy of order-
ing more widebodies, such as the Airbus
A330 and Boeing 777, as well as regional jets
and turboprops from Embraer and ATR. We
have ordered over 55 units of these book-end
types in recent years, Liu says.
Weve been conservative on the 737-800s
with fewer in 2017 than 2015. Also, we went
for a low unit count. But we had to order be-
cause we placed out our previous orders and
we also needed to beef up our on-going inven-
tory, Liu adds.
GECASs current narrowbody order book is
committed up to 2015 and, according to Liu,
the next batch of 737-800s deliver 2015-17
while Max deliveries start in 2018.
In todays world, the competitive bar is
being raised constantly, says Liv. My job is
to make sure GECAS is the one raising the bar
versus someone else.
cycle and volatility, we need more asset ve-
locity or selling of assets for capital apprecia-
tion and eet management, and we need to
manage the mature assets well.
Ultimately, better funding and overhead
costs, plus broad capabilities, mean more op-
tions for GECASs customers, he says.
With mature aircraft for example, we have
cradle-to-grave capabilities for customers. We
have secondary homes with charter, low-utili-
sation, scheduled and pioneering market car-
riers. We can convert planes to freighters or
can part-out the airframes through our parts
distribution business and use the engines in
our engine leasing business, he says.
GECAS is a top player in engine leasing
having developed this part of its business
from a small platform, Curtis Power, in 1999.
A used airframe parts player, The Memphis
Group, was acquired in 2006.
A
lso, GECAS can offer custom-
ers asset-based nancing as a
bank would through its PK
Air nance subsidiary a tool
increasingly important for cus-
tomers because of the pullback in aviation
lending by the European banks following the
2008 nancial crisis and more expensive
export credit funding.
In December 2012, PK Airnance and DVB
Bank arranged the senior debt renancing of a
16-aircraft portfolio for Dubai Aerospace En-
terprise. The portfolio consists largely of Air-
bus A320s and Boeing 737s.
Liu also argues that airlines increasingly
want local service and not y-ins through
its extensive network of 25 global ofces.
Our large scale can afford this type of pres-
ence, he says. Liu credits this as key to
GECASs leading presence in greater China,
where it has more than 190 aircraft committed
in the region. We are also the clear market
leader in the Middle East, Africa and the CIS
regions too, and weve opened ofces in
Ghana, South Africa and next Kenya, so we
are well ahead of the eld.
However, even with economies of scale,
deep nancial pockets and experience,
GECAS is not immune to eet impairment
charges. Its pre-tax impairments were $250
million in 2011 or about 50 basis points on
assets. But despite these charges, the net in-
come generated was $1.15 billion. Just three
aircraft were grounded during the third quar-
ter of 2012 as they transitioned between cus-
More on GECASs plans and a video interview
with its chief executive Norm Liu at:
ightglobal.com/Liu
GLOBAL THINKER
Thinking on a global scale is not a new
concept for Norm Liu. His international
outlook comes, in part, from his family
heritage. His parents emigrated to the USA
from Shanghai during the 1949 civil war. His
wife Jai is from South Korean capital Seoul,
while his two daughters are fuent in Korean
and can speak some Chinese.
Liu went on to become a graduate of Yale
University and later received an MBA from
Harvard. His frst job after college was selling
powerplants for Westinghouse in Taiwan and
South Korea.
Even in his spare time, Liu enjoys investing
in the international stock markets and
residential properties in Asia.
These hobbies have worked out pretty
well, plus they help me understand local
business conditions even more when I meet
with airline customers, he says.
A 26-year GE veteran, Liu has also been
involved in big-ticket leasing and project
fnance, was vice president of business
development at GE Capital headquarters, and
was briefy managing director of its
investment bank Kidder, Peabody and served
on its management committee.
Liu has been with GECAS for 16 years,
three as chief executive and 13 as executive
vice-president of commercial operations.
I enjoy seeing young carriers grow,
especially in the fast changing emerging
markets, he says.
Many jobs are created and new places are
opening up like Myanmar, where we recently
leased two Embraer jets to the fag carrier,
Myanmar Airways.
ABU_250113_018-021 21 18/1/13 16:35:28
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& Onboard Services
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Register your interest to attend at
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ABU_250113_022 22 17/1/13 11:27:15
China is set to invest even greater sums in its aviation
sector in 2013, while the countrys lessors are quickly
developing their eets and expertise. In tandem with this
years leasing survey, these issues and more are explored
in our 2013 interactive special report on nance:
ightglobal.com/inance13
SPECIAL REPORT
FINANCE & LEASING
fightglobal.com/airlines
February 2013
|
Airline Business
|
23
24 Leasing space A graphic snapshot of the
major lessors
26 Fast learners How Chinas lease sector is
building know-how rapidly
32 Shift to the East The leasing market is
seeing a change in its investment base
36 Shaping the game How new rules for
export credit will impact airlines
40 Finding the funds Record production
means more delivery fnance
43 Lowering the risk Despite few losses in
2012, claims will still exceed $1 billion
CONTENTS
All our special reports
are available online at
ightglobal.com/
airlines
R
e
x

F
e
a
t
u
r
e
s
ABU_250113_023 23 18/1/13 14:44:59
fightglobal.com/ab
HIGH
RISERS
Steven Udvar-Hazys
Air Lease marches on and
less than three years after
launch, a feet portfolio of 151
valued at $5.6 billion puts it among
the top 10 largest lessors in the
world. Other rapid risers in 2012
include Avolon, which grew its
feet value by 61% to $3.4
billion, and Doric which
grew by 35% to
$4 billion
FINANCE & LEASING SNAPSHOT
24
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Airline Business
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February 2013
LEASING SPACE
GE Capital Aviation Services remains head and shoulders above its rivals by eet
value and size, but there has been no shortage of activity from the chasing pack
during the past 12 months in developing their portfolios and a shift in ownership
TOP
FLIGHT
GECAS has kept its
impressive lead in the
leasing stakes. While its
portfolio by feet value dropped
slightly in 2012 to $34.1 billion,
there was a sharper decline at its
nearest rival International Lease
Finance. Continued growth during
the past 12 months has moved
BBAM up to make it the
third-largest
lessor
1,635
Lessors frm backlog as at the end of 2012,
led by GECAS with 285 aircraft, followed by
Air Lease with 244, and ILFC with 225
32%
Aircraft lessors shares represent
almost a third of the total global
feet and 42% of the Airbus and
Boeing narrowbody market
ABU_250113_024-025 24 18/1/13 14:35:23
REGIONAL
SHIFT
Aircraft lessors hold a
20% share of the narrowbody
aircraft backlog, and 12% of
widebody orders. The latter is
down on the 18% share lessors
held fve years ago. However, the
biggest movement during that
period is in regional jets. Lessors
account for more than a fth of
the feet backlog today,
compared with only
3% in 2008
February 2013
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Airline Business
|
25
GECAS $34.1bn -1.4%
Aviation Capital Group $5.6bn 16.7%
Air Lease $5.6bn 59.7%
SMBC Aviation Capital $5.9bn -11.6%
AWAS $6.1bn 18.6%
CIT Aerospace $7.2bn -4.2%
BOC Aviation $7.3bn 7.9%
AerCap $7.7bn -8.8%
BBAM $.8.7bn 9.8%
ILFC $26.1bn -6.0%
TOP 10 LESSORS BY FLEET VALUE
EASTERN
PROMISE
China Aircraft
Leasing Company, which
acquired 36 Airbus A320s
last year, aims to build its
portfolio to 100 aircraft by
2015, another sign of the
growing development of
the leasing sector
in China
fightglobal.com/ab
$181bn
The total feet value of the top 50 aircraft lessors
feet portfolios in 2012, marking an increase of 6%
over the previous year
BIG
DEALS
A busy year for
acquisitions in the sector was
capped in December when
Chinese investors agreed to buy a
90% stake in ILFC from AIG. It marks a
further shift to the east in the fnance
sector after Japanese acquisitions earlier
in the year. In October, Mitsubishi UFJ
Lease & Finance acquired fast-growing
Jackson Square Aviation after
Sumitomo Mitsui completed its
purchase of RBS Aviation
Capital at the start of
last year
M
a
x

K
in
g
s
le
y
-J
o
n
e
s
/
F
lig
h
t
g
lo
b
a
l,
A
ir
b
u
s
,
B
illy
P
ix
ABU_250113_024-025 25 18/1/13 14:35:26
fightglobal.com/ab
FINANCE & LEASING CHINA
26
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Airline Business
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February 2013
FAST
LEARNERS
Although Chinas lessors have demonstrated inexperience on
occasions, they are building their know-how rapidly and will
soon become serious competitors for the rest of the industry
REPORT
SCOTT HAMILTON
SEATTLE
R
e
x

F
e
a
t
u
r
e
s
T
he creation and growth of aircraft
leasing companies in China is
viewed with mixed feelings out-
side the country. On the one
hand, Airbus and Boeing are
happy to see this liquidity enter the market at
a time when demand for nance is growing
and banks still tend to be stingy. On the other
hand, western lessors and others view the
emerging players as inexperienced, some-
times naive, and capable of making decisions
that can hurt the western leasing market and
even aircraft values.
No western lessors wish to be quoted by
name because of the political sensitivities of
Chinese face and the potential for harming
their own business relationships. But the
candour expressed when cloaked in anonym-
ity makes it clear these competitors are not
particularly happy, but they are philosophi-
cal. ICBC will be around and they are going
to learn some lessons the hard way, says one
US-based lessor about a new, leading Chinese
lessor. They will take some planes back in
the same way we did from Eastern and Pan
Am in the 1980s and 1990s.
Return conditions and bankruptcy protec-
tions written into leases were often ambigu-
ous and court rulings left lessors on the hook
for much more than they had thought. Leases
written by the new Chinese lessors fall short
of the protections in western documents.
The impact has been small so far because
the Chinese lessors have few leases outside
their homeland. But some western lessors are
still concerned. The aircraft affected are
mainly Airbuses because the company has
been particularly aggressive in placing orders
with Chinese lessors and because there is an
ABU_250113_026-028 26 18/1/13 14:33:34
fightglobal.com/ab
have ordered aircraft have turned round and
done deals below where the market is. Then
there are the conditions of the deal.
The western lessor continues: Its not like
its a totally out-of-control situation. Its more
on the edges, perhaps 10% on the rates. They
are denitely leaving money on the table.
The lessor observes that the new Chinese
entrants are, in a sense, following the exam-
ple of other new entrants. You always have
the most inexperienced guy who sets the rate.
You may not know for 10 years if the rate is
too low until you see whether the residual
value is wrong.
Although Chinese lessor inexperience has
adversely affected some A320 leases and con-
tracts, its impact on leasing has been fairly
small globally. However, the US lessor warns
against complacency: Essentially, you have a
government mandate to learn the business and
they will do so, in some cases, the hard way.
You have a combination of low funding costs
and low criteria. They will become formidable
competitors over time. You have to learn to
compete with them. You ignore them at your
February 2013
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Airline Business
|
27
A320 assembly line in Tianjin, which was
established to serve home-market airlines. But
a few Chinese lessors are conducting business
in the West, and it is these transactions that are
causing discontent.
Chinese lessors have a healthy orderbook
for the A320, not surprising considering the
assembly plant in Tianjin. Although lease
rates are taking a hit because of the new
entrants, western lessors have long com-
plained about A320 lease rates.
CIT Aerospace has placed large orders for
the A320ceo and the Neo. Its president, Tony
Diaz, assesses the A320 market like this:
Ultimately, it is supply and demand. Its
been a few circumstances that have come
together, even going back to when Boeing had
a strike [in 2008] when 60-70 737NGs didnt
get built. If there were an additional 60-70
NGs in the market, it would be a different
supply and demand. He adds that even
without the strike, Boeing builds fewer air-
craft than Airbus, and that adds up.
Some large bankruptcies have involved
Airbus operators, pushing A320s on to the
market, says Diaz. Five or six years ago, there
was a bit of a glut to Boeing and rates were
soft, he points out. Its a little bit of a cycle.
Diaz adds: There is a distinction at Boeing
between the Classic and the NG. There are
more A320s out there. There is a big differ-
ence between the early and current vintages,
so there is a perception that there are more of
them out there.
HOME FAVOURITES
There are 10 active lessors in mainland China,
plus BOC Aviation (BOCA) of Singapore, a
Western lessor acquired by the Bank of China.
BOCA is wholly owned by BOC and occasion-
ally has to bow to home-market pressures,
such as by ordering the Comac C919, but 80%
of its funding comes from western sources and
its management is steeped in western person-
nel and business experience. In December,
China Inc announced plans to buy 80.1% of
International Lease Finance with an option to
buy a further 9.9%.
In addition to these 10 active lessors a
number of new Chinese leasing companies
are looking to enter the business and are
being monitored by Aviation Capital Group,
which leases aircraft into China.
What has riled some western lessors is that
not only are the lease rates offered by the Chi-
nese below what they would like to see but,
more importantly, contracts offered by Chi-
nese lessors in the West fail to give the asset
adequate protection. They say return condi-
tions are poorly written and maintenance pro-
visions are not up to western standards, which
have been a long time in the making. They
are new to the business and they are learning,
says a US-based lessor. BOC Aviation is as
sharp as anyone. The newest entrants that
peril. They are not going to go away. You have
to learn to compete with them, and we are.
China took another major step to becoming
a global inuence with an announcement in
December that China Inc will acquire 80.1%
of mega-lessor International Lease Finance
The buyers are China Trust, China Aviation
Industrial Fund and P3 Investments. China
Life Insurance and ICBC Investment Holdings
are in line to take a further 9.9%.
ILFC parent AIG will retain 10% as a pas-
sive investor when all tranches are taken up.
ILFC will continue to be managed from its
Los Angeles headquarters, just as BOCA
retained its Singapore head ofce after the
Bank of China bought the company, but ICBC
can be expected to benet from ILFCs exper-
tise. It may be that ILFC will eventually order
the Comac C919, joining GECASs small
order from the West. Chinese lessors make up
more than half the orders and commitments
for the C919, accounting for 200 of the 380
announced as of December.
Another US lessor believes Chinas pur-
chase of ILFC will eventually hinder its agil-
ity. Like the rst lessor, this one requested
anonymity to avoid offending the Chinese
because it, too, does business in the country.
Will they make it a difcult process to
approve a deal? the lessor asks. That
remains to be seen.
This lessor, which competed with Singa-
pore Aircraft Leasing Enterprise (SALE)
before and after it was bought by Bank of
China and renamed BOC Aviation, observes:
A SNAPSHOT OF CHINAS LEASING COMPANIES
Manager
In
service
On
order
Notes
ABC Financial Leasing 2 45 Major shareholder Agriculture Bank of China
AVIC International Leasing 26 1 Focus on Chinese-built aircraft
BoCom Leasing 24 30 Major shareholder Bank of Communications
CCB Financial Leasing 2 50 Major s/holders China Construction Bank/Bank of America
CDB Leasing 90 13 Major shareholder China Development Bank
Changjiang Leasing 48 Focused on serving major shareholder HNA Group
China Aircraft Leasing 16 56
China Natl Foreign Trade Lsg 0
China Universal Leasing 0
CMB Financial Leasing 6 Major shareholder China Merchants Bank
Dragon Aviation Leasing 17 1 Major shareholder China Aviation Supplies
Haurong Leasing 0
Hebei Leasing 0
Hong Kong Aviation Capital 73 Investors include HNA
ICBC Leasing 76 49 Major shareholder Chinese bank ICBC
Jiangsu Leasing N/A
Minsheng Leasing N/A Start-up, business plan under review
Shanghai Electric Leasing N/A
Shenzhen Financial Leasing N/A AKA CDB Leasing
Xinjian Great Wall Leasing 0
Yangtze River Leasing N/A Major shareholder HNA Group
NOTES: N/A denotes fgures not available. Table excludes BOC Aviation and ILFC which have major Chinese shareholders.
Fleet data source: Flightglobal Ascend Online database
You always have the
most inexperienced guy
who sets the rate. You
may not know for 10 years
if the rate is too low
ABU_250113_026-028 27 18/1/13 14:33:36
fightglobal.com/ab 28
|
Airline Business
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February 2013
CIT Aerospace was one of the frst companies
to order the Airbus A350, including the -800
model. The future of the -800 has been the
subject of much speculation. Airbus has been
actively shifting customers from the -800 to
the -900. CIT had fve -800s on order and all
have been swapped.
CIT Aerospace president Tony Diaz says
four of the fve aircraft had been placed with
airlines, all of which wanted the -900.
That was a simple decision, he adds. I
think what you are really seeing with Airbus on
the 350 programme is that they have tried to
de-risk it by building just the -900 early on.
Diaz expects Airbus to build all three
models, but says in the near term says, I
think they are trying to simplify the production
and avoid further delays.
Airbus declined to comment. Previously,
John Leahy, chief operating offcer -
customers, said Airbus was encouraging
switches to the -900 because that model was
more proftable than the -800 and would be
available sooner.
They are taking steps to de-risk
production by concentrating on the -900,
Diaz adds. I think they have this under
control. They have had their share of delays,
but until they start fying the aircraft, you dont
know if there will be issues [like Boeing had
with the 787]. We think they will eventually
build the -800.
In December Tom Williams, Airbus
vice-president of programmes, said the -800s
entry into service was still planned for 2016
and there had been no programme review.
FINANCE & LEASING CHINA
maintained one of the highest returns on
equity in the industry while also getting
investment-grade credit ratings from Stand-
ard and Poors and Fitch. Bank of China has
been very supportive and the acquisition of
SALE has been a success for both parties.
The second lessor believes ILFC faces a
more daunting challenge in integrating with
its new Chinese owners: You have three or
four different companies buying ILFC. I dont
know how much autonomy they will give
ILFC. The Chinese will become much more
formidable competitors. They will learn from
[ILFC] but this is China Inc buying ILFC and
how much will they let the management run
ILFC remains to be seen. By nature, China
becomes much more hidebound.
This lessor says China is buying compa-
nies that bring scale and scope to leasing and
these new lessors will have cheap money.
In 2013, the global leasing community is
expected to self-fund about 5% of Boeings
deliveries, according to an analysis by Boeing
Capital with a larger percentage nanced by
lessors through other liquidity.
Boeing Capital did not have a breakdown
of the money expected to come from Chinas
leasing community.
worth it in the long term. In December 2008
to February 2009, at the bottom of the cycle,
we bought $2.5 billion of good purchase-
leasebacks in three months with the full
backing of the shareholder, who had commit-
ted both debt and equity to support our coun-
tercyclical growth.
Over the last six years, we have tripled
the size of the company to $9 billion and
SALE is more cumbersome. Chief executive
Robert Martin has to go to Beijing every six
weeks and talk with 25 people. They are lim-
ited as to what they can and cannot do.
Martin replies: The comment is ve years
old. Remember, we have now been owned by
BOC for six years [in December]. At the start
in 2007, it is true that we spent a lot of time
educating the new shareholder, but it was
Read about the leasing industrys personalities
including Robert Martin of BOC Aviation at:
ightglobal.com/inance13
SWITCHING A350-800S TO 900S
R
e
x

F
e
a
t
u
r
e
s
Airbus has a Chinese A320 assembly line
and has been aggressively securing orders
for the twinjet from local leasing companies
ABU_250113_026-028 28 18/1/13 14:33:40
FINANCE & LEASING SURVEY
fightglobal.com/ab February 2013
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Airline Business
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29
DATA COMPILED BY NIGEL FISHER, STEVE PHIPPS & MIKE REED FLIGHTGLOBAL DATA RESEARCH TEAM
TOP 50 LEASING SURVEY
Our annual review of the lessors (P29-35) provides a snapshot of the global feet that they
own and manage, compiled from Flightglobals Ascend Online database as of December 2012
REGIONAL JETS: LEASED FLEET
Manufacturer Type Value ($m) Fleet Av. value ($m)
Bombardier CRJ 1,030 285 3.6
CRJ700/900/1000 956 75 12.7
SUBTOTAL 1,986 360 5.5
Embraer E-170/175 1,440 80 18.0
E-190/195 5,128 205 25.0
ERJ-145 family 1,199 189 6.3
SUBTOTAL 7,766 474 16.4
BAe Systems BAe 146/Avro RJ 234 76 3.1
Fokker Fokker F28/70/100 189 60 3.2
Others 279 34 8.2
REGIONAL SET GRAND TOTAL 10,454 1,004 10.4
NOTES: Embraer data includes Harbin Chinese production; Others includes Antonov An-148;
Fairchild/Dornier 328Jet; Sukhoi Superjet 100; Mainline total covers Airbus and Boeing only.
*
BBAM excludes FLY Leasing, whose portfolio is managed by BBM.
SOURCE: Returns to annual leasing survey and Flightglobals Ascend Online database. Survey
data covers all frms with an active operating lease business and a substantial investment in
feet and is not restricted to top 50 aircraft lessors as previously published.
NARROWBODY LESSORS BY FLEET VALUE
Rank Company Value ($m) Fleet Change
1 GECAS 20,716 1,102 -21
2 ILFC 13,902 756 +6
3 BBAM
*
6,450 297 -1
4 SMBC Aviation Capital 5,647 218 -12
5 Aviation Capital Group 5,362 259 +25
6 AerCap 5,161 246 -31
7 CIT Aerospace 4,994 217 -1
8 BOC Aviation 4,660 166 +14
9 AWAS 4,106 192 +24
10 Avolon Aerospace Leasing 2,690 76 +28
WIDEBODY LESSORS BY FLEET VALUE
Rank Company Value ($m) Fleet Change
1 ILFC 12,222 277 -4
2 GECAS 9,504 194 +7
3 Doric 3,867 27 +6
4 BOC Aviation 2,461 27 +2
5 AerCap 2,442 44 +2
6 Aircastle Advisor 2,380 60 +6
7 Air Lease 2,203 28 +11
8 BBAM
*
2,126 33 +4
9 AWAS 2,018 50 -3
10 CIT Aerospace 1,938 39 +0
REGIONAL AIRCRAFT LESSORS BY FLEET SIZE
Rank Company Value ($m) Fleet Jets Tprops Change
1 GECAS 3,876 446 418 28 -3
2 Nordic Aviation Capital 1,442 162 5 157 +25
3 Falko 280 105 69 36 -28
4 Avmax Aircraft Leasing 327 99 32 67 +14
5 Saab Aircraft Leasing 98 59 0 59 -34
6 ECC Leasing 368 54 53 1 +17
7 JetFleet Management 107 40 7 33 -1
8 Air Lease 1,008 38 30 8 +24
9 Jetscape 806 37 35 2 +4
10 Erik Thun AB 163 33 1 32 +1
MAINLINE AIRCRAFT: LEASED FLEET
Manufacturer/category Type Value ($m) Fleet Av. value ($m)
Airbus narrowbody A318 331 23 14.4
A319 9,903 637 15.5
A320 38,285 1,632 23.5
A321 7,872 300 26.2
AIRBUS NARROWBODY TOTAL 56,390 2,592 21.8
Airbus widebody A300 356 32 11.1
A310 115 21 5.5
A330 23,279 395 58.9
A340 2,568 100 25.7
A380 3,047 18 169.3
AIRBUS WIDEBODY TOTAL 29,365 566 51.9
AIRBUS TOTAL 85,756 3,158 27.2
Boeing narrowbody 717 1,049 128 8.2
727 16 24 0.7
737 CFM 2,549 756 3.4
737 JT8D 13 59 0.2
737 NG 49,809 1,841 27.1
757 2,994 293 10.2
DC-8 43 28 1.5
DC-9 1 6 0.1
MD-80 293 177 1.7
MD-90 60 12 5.0
BOEING NARROWBODY TOTAL 56,827 3,324 17.1
Boeing widebody 747 5,592 167 33.5
767 5,407 334 16.2
777 24,193 271 89.3
787 105 1 105.0
DC-10 5 7 0.7
MD-11 681 41 16.6
BOEING WIDEBODY TOTAL 35,983 821 43.8
BOEING TOTAL 92,809 4,145 22.4
MAINLINE AIRCRAFT GRAND TOTAL 178,565 7,303 24.5
TURBOPROPS: LEASED FLEET
Manufacturer Type Value ($m) Fleet Av. value ($m)
ATR ATR 42 254 64 4.0
ATR 72 1,704 152 11.2
SUBTOTAL 1,958 216 9.1
BAe Systems ATP/ Jetstream 31/41 79 54 1.5
Bombardier Twin Otter/Dash 8 1,778 219 8.1
Embraer EMB-120 17 13 1.3
Fokker 50 84 48 1.7
Saab 340/ 2000 275 133 2.1
Others 173 68 2.5
TOTAL 4,364 751 5.8
MAINLINE/REGIONAL GRAND TOTAL 193,383 9,058 21.3
NOTES: Others include Aircraft Industries (Let) 410, Antonov An-12/An-26/An-140, AVIC XAC
MA60, Fairchild/Dornier 228/328, Harbin Y-12, Hawker Beech 1900 and Lockheed Hercules
ABU_250113_029 29 18/1/13 16:39:24
There are some very good reasons why the A380 is leading the
very large jet market.
Having been designed for 21st century growth, it carries 30%
more passengers while burning signicantly less fuel per seat
than the 747-8.
The A380s performance is unbeatable in its class, offering the
most modern technology with 25% advanced composite
materials. It flies further, needs shorter runways and climbs
faster, all while being an aircraft awarded for its quietness.
In the wide-body market, the A380 has by far the lowest seat-
mile costs and advanced y-by-wire technology with renowned
commonality across all Airbus types.
It also offers passengers 21st century comfort. The cabin is the
quietest and most spacious in the sky, with more oorspace for
wide aisles and wider seats, even in economy.
Passengers will opt for the A380 when given the choice. For
airlines this means increasing market share and more revenue.
Its no surprise that the A380 has an 86% share of the very large
passenger aircraft market.
It takes an A380 to compete with an A380.
JET
It seems that the 747 has had its day. The latest version, the
747-8, is the 48th derivative of a 1969 certicated aircraft and still
produced without the latest full y-by-wire technologies common
to all modern aircraft.
For airlines this means limited cockpit commonality with other
wide-bodies.
The 747-8 has no choice of engines. Its constrained performance
means it produces more noise, has significantly less range, a
higher approach speed and needs longer runways for both
take-off and landing.
The fuselage is based on 1960s comfort standards, with only
17 inch wide seats and narrow aisles. It is enough to make a
passenger twist and shout!
The 747-8. Based on a 1960s design. A true case of jet lag!
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56536_011AIRBUS_AirlineBus_Jan.indd 1 __TFG Prepress__ 12/12/2012 14:55
ABU_250113_030-031 30 17/1/13 11:28:56
There are some very good reasons why the A380 is leading the
very large jet market.
Having been designed for 21st century growth, it carries 30%
more passengers while burning signicantly less fuel per seat
than the 747-8.
The A380s performance is unbeatable in its class, offering the
most modern technology with 25% advanced composite
materials. It flies further, needs shorter runways and climbs
faster, all while being an aircraft awarded for its quietness.
In the wide-body market, the A380 has by far the lowest seat-
mile costs and advanced y-by-wire technology with renowned
commonality across all Airbus types.
It also offers passengers 21st century comfort. The cabin is the
quietest and most spacious in the sky, with more oorspace for
wide aisles and wider seats, even in economy.
Passengers will opt for the A380 when given the choice. For
airlines this means increasing market share and more revenue.
Its no surprise that the A380 has an 86% share of the very large
passenger aircraft market.
It takes an A380 to compete with an A380.
JET
It seems that the 747 has had its day. The latest version, the
747-8, is the 48th derivative of a 1969 certicated aircraft and still
produced without the latest full y-by-wire technologies common
to all modern aircraft.
For airlines this means limited cockpit commonality with other
wide-bodies.
The 747-8 has no choice of engines. Its constrained performance
means it produces more noise, has significantly less range, a
higher approach speed and needs longer runways for both
take-off and landing.
The fuselage is based on 1960s comfort standards, with only
17 inch wide seats and narrow aisles. It is enough to make a
passenger twist and shout!
The 747-8. Based on a 1960s design. A true case of jet lag!
T
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e

7
4
7

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LAG
56536_011AIRBUS_AirlineBus_Jan.indd 1 __TFG Prepress__ 12/12/2012 14:55
ABU_250113_030-031 31 17/1/13 11:29:17
fightglobal.com/ab
FINANCE & LEASING LESSORS
32
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Airline Business
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February 2013
SHIFT TO
THE EAST
Chinese investors move to buy up to 90% of
ILFC is the latest in a string of trades, reecting a
changing investment base for aircraft lessors and
the growing prominence of Asian nance
REPORT
LAURA MUELLER
LONDON
A
s airlines opt for operating
leases to reduce the debt bur-
den on their balance sheets,
buyers, particularly out of Asia,
hope to realise healthy prots.
Rapid growth in the demand for leased
aircraft among Asian airlines points to the
further expansion of Asian investor interest
in leasing, Fitch Ratings says in a recent
report on lessors.
This is backed by Boeings 2012 Current
Market Outlook, which indicates the Asia-
Pacic region will represent 35% of all com-
mercial aircraft deliveries through 2031.
We expect changing ownership structures
to drive more investment, both through
acquisitions and organic growth, as Asian
carriers look for new sources of nancing to
support rapid eet growth in the coming
years, says Fitch.
No doubt the purchase of International
Lease Finance, the second biggest aircraft
lessor in the world, by a consortium of Chi-
R
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x

F
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a
t
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s
ABU_250113_032-035 32 18/1/13 16:40:52
fightglobal.com/ab February 2013
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33
DEFINITIONS: Ranking: The survey is based on the Top 50 companies with a substantial operating lease business ranked by the
value of their owned and/or managed feets at the end of December 2012. Change: The change fgures are based on feets/values
supplied by Flightglobals Ascend Online Fleets and Values databases for December 2012 and 2011. Operating lessors: Lessors
are defned as those with an active operating lease business and a substantial investment in feet. Companies that are solely or
predominantly fnanciers have been excluded. Fleets & values: The survey represents a snapshot of feets, including stored aircraft,
with fair market generic values supplied by Ascend. Note the composition of feets is constantly changing.
nese investors will give China instant mass
in the market. ILFC accounts for 14% of the
worlds leased eet, according to Flightglo-
bals Ascend Online database.
And just as importantly, a local lessor
could provide Chinese airframer Comac with
the necessary platform to eventually market
its C919 indigenous single-aisle airliner.
ILFC was founded in 1973, so the lessor is
able to provide its buyers with valuable mar-
ket experience, which is just as crucial as
deep pockets in the leasing industry.
The Chinese would gain the best in class
knowledge through the purchase, says a
leasing source.
ILFC also presents a much-needed invest-
ment opportunity for Chinese investors,
which have pent-up cash piles padded with
US dollars.
REFINANCING WITH EASE
A nancier notes that after the purchase of
ILFC, the buyers can easily renance a
good portion of the portfolio and improve
their economics almost immediately.
For parent company American Interna-
tional Group (AIG), the deal allows the insur-
ance giant to nally ofoad a non-core asset,
which has been incurring ongoing, serious
impairment charges since 2009.
In the third quarter, ILFC wrote down $98
million related to its eet, on top of another
$30 million in the second quarter. In addi-
tion, the lessor incurred eet-related charges
of $1.7 billion, $1.6 billion and $51 million
in 2011, 2010 and 2009, respectively, accord-
ing to a regulatory ling with the Securities
and Exchange Commission.
In addition, proceeds from the sale will
help AIG to pay down its $182 billion bailout
from the US government after the 2008 nan-
cial crisis.
AIG had planned to divest ILFC in an ini-
tial public offering. However, those plans
dried up once the Chinese group showed
interest, so it is safe to say the agreed sale
price is probably the best deal AIG could get.
The insurer plans to sell up to a 90% stake
in ILFC to the investor group in a transaction
that values the lessor at about $5.28 billion.
ILFC employs 560 people and manages 1,000
aircraft. It holds orders for 225 units.
The investor group of New China Trust,
China Aviation Industrial Fund and P3
Investments has agreed to acquire 80.1% of
TOP 50 LESSORS BY FLEET VALUE 2012
Rank Total eet value Total Average value Managed only
2012 (2011) Company $m Change eet $m Change $m Share
1 (1) GECAS 34,096 -1.4% 1,742 19.6 -0.7% 1,162 3.4%
2 (2) ILFC 26,123 -6.0% 1,033 25.3 -6.2% 946 3.6%
3 (4) BBAM 8,622 9.8% 332 26.0 8.2% 7,602 88.2%
4 (3) AerCap 7,707 -8.8% 297 25.9 0.2% 1,937 25.1%
5 (6) BOC Aviation 7,276 7.9% 198 36.7 -2.4% 702 9.6%
6 (5) CIT Aerospace 7,179 -4.2% 268 26.8 -6.0% 68 0.9%
7 (8) AWAS 6,131 18.6% 244 25.1 8.9% 116 1.9%
8 (7) SMBC Aviation Capital 5,913 -11.6% 232 25.5 -6.3% 0 0.0%
9 (12) Air Lease 5,618 59.7% 151 37.2 2.6% 0 0.0%
10 (9) Aviation Capital Group 5,582 16.7% 270 20.7 5.9% 170 3.0%
11 (13) Doric 4,046 35.6% 35 115.6 4.6% 4,046 100.0%
12 (14) CDB Leasing 3,795 32.1% 91 41.7 1.6% 0 0.0%
13 (10) Aircastle Advisor 3,769 1.1% 158 23.9 -10.4% 55 1.4%
14 (16) MC Aviation Partners 3,529 25.0% 110 32.1 -1.1% 788 22.3%
15 (23) Avolon Aerospace Leasing 3,414 61.3% 89 38.4 -5.8% 0 0.0%
16 (18) Pembroke Group 3,395 33.8% 97 35.0 3.4% 145 4.3%
17 (11) Macquarie AirFinance 3,179 -12.2% 149 21.3 -8.1% 350 11.0%
18 (17) ICBC Leasing 3,174 21.5% 82 38.7 -6.7% 124 3.9%
19 (21) Jackson Square Aviation 2,762 25.2% 65 42.5 -11.4% 0 0.0%
20 (15) Sumisho Acft Asset Mgt 2,621 -8.5% 86 30.5 -5.3% 989 37.8%
21 (25) DAE Capital 2,528 23.1% 51 49.6 13.5% 0 0.0%
22 (22) Hong Kong Avn Capital 2,301 4.6% 73 31.5 -2.6% 1,688 73.4%
23 (27) Guggenheim Avn Partners 2,278 29.4% 66 34.5 0.0% 0 0.0%
24 (28) ORIX Aviation 2,232 56.4% 120 18.6 14.7% 323 14.5%
25 (19) Boeing Capital 2,135 -11.0% 236 9.0 -8.7% 185 8.6%
26 (24) Amentum Capital 2,067 -1.6% 45 45.9 -3.8% 2,067 100.0%
27 (20) FLY Leasing 2,024 -8.4% 110 18.4 -9.2% 0 0.0%
28 (26) ALAFCO 1,566 -18.8% 51 30.7 -4.4% 0 0.0%
29 (31) Nordic Aviation Capital 1,478 46.4% 174 8.5 26.2% 0 0.0%
30 (82) Changjiang Leasing 1,156 668.6% 50 23.1 -23.1% 0 0.0%
31 (30) Lease Corporation Int'l 970 -7.8% 12 80.9 -0.1% 970 100.0%
32 (29) SkyWorks Leasing 962 -21.8% 84 11.5 -8.8% 962 100.0%
33 (43) Santos Dumont Acft Mgmt 961 87.7% 25 38.5 20.1% 0 0.0%
34 (46) VEB-Leasing JSC 867 82.2% 41 21.1 -2.2% 0 0.0%
35 (34) Jetscape 853 8.7% 43 19.8 6.2% 325 38.1%
36 (58) Novus Aviation 786 157.8% 17 46.2 127.5% 515 65.6%
37 (33) Aircraft Leasing & Mgmt 738 -7.4% 35 21.1 11.1% 738 100.0%
38 (35) Investec Global Acft Fund 676 2.0% 19 35.6 -8.8% 172 25.5%
39 (32) Penerbangan Malaysia 666 -24.0% 37 18.0 -13.7% 0 0.0%
40 (37) Cargo Aircraft Mgmt 645 3.2% 75 8.6 6.0% 13 2.0%
41 (56) China Aircraft Leasing 607 94.6% 16 37.9 21.7% 0 0.0%
42 (48) AVIC International Leasing 587 35.6% 33 17.8 2.7% 6 0.9%
43 (38) Banc of America Leasing 540 -12.1% 36 15.0 0.1% 17 3.1%
44 (40) Dragon Aviation Leasing 537 -8.8% 17 31.6 -8.8% 0 0.0%
45 (36) Volito Avn Services 509 -18.7% 36 14.1 8.3% 0 0.0%
46 (39) GOAL 502 -15.9% 33 15.2 4.5% 0 0.0%
47 (116) BoCom Leasing 499 1248.4% 15 33.3 79.8% 0 0.0%
48 (41) VTB-Leasing 494 -14.5% 39 12.7 -16.7% 297 60.3%
49 (45) Aircraft Purchase Fleet 463 -4.0% 16 28.9 -10.0% 0 0.0%
50 (54) Aldus Aviation 457 41.8% 21 21.7 8.0% 0 0.0%
TOTAL 181,015 6.1% 7,355 24.6 1.0% 27,477 15.2%
Notes: Fleet value based on Ascend estimates 2012. FLY Leasing aircraft managed by BBAM, but not included in BBAM fgures to
avoid double counting. 2011 rankings reworked due to new historical data for two lessors. RBS Aviation Capital acquired by SMBC.
China would gain the
best in class knowledge
through the purchase of
ILFC by a consortium of
Chinese investors
ABU_250113_032-035 33 18/1/13 16:40:53
fightglobal.com/ab 34
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Airline Business
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February 2013
FINANCE & LEASING LESSORS
ILFC for $4.23 billion, with an option to buy
an additional 9.9% stake.
However, AIG had a book value for ILFC of
$7.9 billion at the end of the third quarter.
The insurance giant said it will record a non-
operating loss of $4.4 billion on the sale,
including a charge for tax-related items.
OUT WITH THE OLD
The potential sale of ILFC follows two other
lessor purchases last year to Japanese buyers,
involving smaller aircraft eets. Emboldened
by the strong yen and solid cash reserves,
these banks acquired a solid slice out of the
aircraft leasing sector.
In October 2012, Mitsubishi UFJ Lease &
Finance acquired Jackson Square Aviation
(JSA) for about Y100 billion ($1.17 billion).
The Japanese team beat bids from China
Development Bank and Hong Kong Aviation
Capital (HKAC), which were also looking to
beef up their Asian leasing presence.
JSA has a eet of 76 aircraft in service val-
ued in excess of $4 billion, the lessor says.
The eet originated through sale-and-lease-
back transactions, according to JSA.
Sources indicate that the purchase of JSA
could be linked to growth plans the Japanese
nancier has for its Dublin-based MUL Avia-
tion Capital subsidiary, which was estab-
lished in January with the aim of growing a
portfolio of narrowbody aircraft.
Mitsubishi UFJ is Japans largest nancial
group and the worlds second-largest bank
holding company with about $1.7 trillion in
deposits as of March 2011. It has a four-aircraft
portfolio, according to Ascends database.
JSAs primary shareholder, Oaktree Capital
Management, a Los Angeles-based private
equity fund, mandated Deutsche Bank to
manage the sale of its major shareholding in
the lessor. The sale is compatible with the
Oaktree Capitals business strategy of selling
rather than maintaining its investments in
aircraft lessors.
In 2007, Oaktree Capital sold its interest in
operating lessor Pegasus Aviation Finance to
Terra Firma for $5.2 billion.
The JSA transaction follows the long-antic-
ipated sale of RBS Aviation Capital to Sumi-
tomo Mitsui in January 2012 for $7.3 billion.
The business employs 69 people and owns
206 aircraft and has commitments to pur-
chase a further 87 by 2015.
The Tokyo-based group fended off bids
from China Development Bank and Wells
Fargo in order to secure a home for its lofty
yen reserves and to counter slowing growth
in the Japanese market.
Previously, in 2010, HKAC, a consortium
that includes HNA Group and Bravia Capital
Partners, completed the acquisition of Allco
Aviation and 68 aircraft from Australia-based
Allco Finance Group after the nancier went
into receivership. HKAC has committed
nancial support from Chinese banks includ-
ing the Agricultural Bank of China and China
Development Bank. Financial terms of the
transaction were not disclosed.
But it was the Bank of Chinas purchase of
Singapore-based BOC Aviation (previously
Singapore Aircraft Leasing Enterprise) for
$965 million that kick-started this wave of
Asian investors in 2006. At that time, the les-
sor owned a eet of 63 aircraft and managed
another 14 units. Now, the lessor has a port-
folio of 203 owned and managed aircraft.
END OF THE WAVE
This show of banking money in the leasing
market differs from the wave of private equity
investors apparent during the past couple of
years. It also signals the emergence of longer-
term investment in the leasing sector.
According to Fitch, acquisitions of lessors
by larger banks create certain benets in
terms of lower funding costs, consistent sin-
gle-shareholder strategy and cross-selling
opportunities with the parent company.
The combination of airlines increasing
reliance on operating leases globally, along
with the expected growth in air travel, also
makes aircraft lessors an attractive acquisi-
tion target for nancial institutions, the rating
agency indicates. Fitch expects to see further
consolidation activity in the sector, especially
among those lessors that are owned by pri-
vate-equity sponsors.
Private equity investors are realising the
15-20% return is no longer possible, so these
funds are looking at other assets more
closely, says a nancier.
This has led to the migration of investors
into leasing which are willing to settle for an
8-10% return and match long-term liabilities
with long-term investments.
Last August private equity rm Fortress
Investment Group ended its investment in
operating lessor Aircastle through the latters
9.25 million common shares offering. The
LEASING COMPANY YEAR-END JET ORDER BACKLOG AND SHARE OF GLOBAL TOTAL
2008 2009 2010 2011 2012
Units Share Units Share Units Share Units Share Units Share
Narrowbody 952 20% 949 21% 1,057 23% 1,195 20% 1,180 20%
Widebody 453 18% 405 17% 321 13% 296 12% 266 12%
Regional 25 3% 13 3% 26 5% 85 19% 67 21%
TOTAL 1,430 18% 1,367 18% 1,404 19% 1,576 18% 1,513 18%
Notes: Figures based on Flightglobals Ascend Online database for years to end December. Share = share of total order backlog in units
Ontario Teachers Pension Plan purchased
6.2 million common shares of Aircastle,
while undisclosed investors assumed the
remaining amount. Aircastle repurchased 2.5
million common shares from Fortress Invest-
ment in a separate transaction at a cost of
$28.5 million.
In the same month, AerCap repurchased
an additional $120 million in common shares
from Cerberus Capital Management, reducing
the private equity rms holding to 10% of
outstanding ordinary shares. The lessor,
which is heavily backed by private equity
money, disclosed in a market announcement
last year that its board of directors decided to
explore a range of strategic alternatives to
enhance shareholder value, including contin-
ued execution of operating strategies, further
share repurchases, aircraft portfolio sales, or
a sale or merger of the company.
Operating lessor AWAS has also seen a
change in its investor base. Last year, Canada
Pension Plan Investment Board provided
$266 million to help bankroll expansion at
the lessor, increasing its stake in AWAS to
25% from 16%. Private equity rm Terra
Firma owns 60% of AWAS and co-investors
own the remaining 15%.
In October 2011, Irish aviation rm Avolon
diversied its investor base by securing an
equity investment of $300 million from the
Government of Singapore Investment Corpo-
ration, a sovereign wealth fund.
The change in investor base is a recent
occurrence, considering private equity and
hedge fund backing for operating lessors was
the norm just years before.
When JSA was formed in March 2010, the
lessor secured a $500 million equity commit-
ment exclusively from investment funds
managed by Oaktree Capital.
In the same year, Avolon was launched
with $1.4 billion in equity and debt backing
from the private equity rms of Cinven, CVC
Capital Partners, Oak Hill Capital Partners as
well as bank partners DVB and UBS.
Industry godfather Steve Udvar-Hazys
venture, Air Lease, which came to market in
early 2010, secured $1.3 billion in equity
capital and approximately $2 billion of com-
mitted debt nancing.
Fitch expects to see
further consolidation
activity, especially among
lessors owned by
private-equity sponsors
Read more about aircraft fnancing in 2013
in our interactive fnance special:
ightglobal.com/iFinance13
ABU_250113_032-035 34 18/1/13 16:40:53
February 2013
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Airline Business
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35 fightglobal.com/ab
TOP 50 LESSORS BY FLEET SIZE 2012
Rank Total eet Fleet by type Value
2012 (2011) Company number Change units +/- Wide Narrow RJ/Tprop Fleet ($m) Rank Average ($m)
1 (1) GECAS 1,742 -0.7% -13 194 1,102 446 34,096 1 19.6
2 (2) ILFC 1,033 0.2% +2 277 756 26,123 2 25.3
3 (3) BBAM 332 1.5% +5 33 297 2 8,622 3 26.0
4 (4) AerCap 297 -8.9% -29 44 246 7 7,707 4 25.9
5 (7) Aviation Capital Group 270 10.2% +25 11 259 5,582 10 20.7
6 (5) CIT Aerospace 268 1.9% +5 39 217 12 7,179 6 26.8
7 (9) AWAS 244 8.9% +20 50 192 2 6,131 7 25.1
8 (8) Boeing Capital 236 -2.5% -6 18 209 9 2,135 25 9.0
9 (6) SMBC Aviation Capital 232 -5.7% -14 2 218 12 5,913 8 25.5
10 (10) BOC Aviation 198 10.6% +19 27 166 5 7,276 5 36.7
11 (12) Nordic Aviation Capital 174 16.0% +24 12 162 1,478 29 8.5
12 (13) Aircastle Advisor 158 12.9% +18 60 96 2 3,769 13 23.9
13 (17) Air Lease 151 55.7% +54 28 85 38 5,618 9 37.2
14 (11) Macquarie AirFinance 149 -4.5% -7 12 133 4 3,179 17 21.3
15 (15) ORIX Aviation 120 36.4% +32 17 100 3 2,232 24 18.6
16 (20) MC Aviation Partners 110 26.4% +23 28 82 3,529 14 32.1
16 (16) FLY Leasing 110 0.9% +1 6 104 2,024 27 18.4
18 (14) Falko 105 -16.7% -21 105 280 64 2.7
19 (22) Avmax Aircraft Leasing 99 19.3% +16 99 327 61 3.3
20 (24) Pembroke Group 97 29.3% +22 15 82 3,395 16 35.0
21 (28) CDB Leasing 91 30.0% +21 23 49 19 3,795 12 41.7
22 (29) Avolon Aerospace Leasing 89 71.2% +37 7 76 6 3,414 15 38.4
23 (21) Sumisho Aircraft Asset Mgt 86 -3.4% -3 6 77 3 2,621 20 30.5
24 (18) SkyWorks Leasing 84 -14.3% -14 17 46 21 962 32 11.5
25 (26) ICBC Leasing 82 30.2% +19 22 53 7 3,174 18 38.7
26 (23) Cargo Aircraft Management 75 -2.6% -2 44 31 645 40 8.6
27 (27) Hong Kong Aviation Capital 73 7.4% +5 17 50 6 2,301 22 31.5
28 (33) Guggenheim Aviation Partners 66 29.4% +15 33 33 2,278 23 34.5
28 (25) Sky Holding 66 -8.3% -6 12 54 408 56 6.2
30 (34) Jackson Square Aviation 65 41.3% +19 6 59 2,762 19 42.5
30 (19) Saab Aircraft Leasing 59 -46.8% -52 59 98 85 1.7
32 (40) AerSale 54 42.1% +16 18 36 430 52 8.0
32 (48) ECC Leasing 54 50.0% +18 54 368 58 6.8
34 (32) Apollo Aviation Group 52 10.6% +5 16 33 3 427 53 8.2
35 (36) DAE Capital 51 8.5% +4 20 31 2,528 21 49.6
35 (30) ALAFCO 51 -15.0% -9 4 47 1,566 28 30.7
37 (38) Changjiang Leasing 50 8.7% +4 32 18 1,156 30 23.1
38 (63) GA Telesis 48 92.0% +23 15 21 12 387 57 8.1
39 (31) Aergo Capital 47 4.4% +2 44 3 97 86 2.1
40 (37) Amentum Capital 45 2.3% +1 14 26 5 2,067 26 45.9
41 (42) Jetscape 43 2.4% +1 6 37 853 35 19.8
42 (71) VEB-Leasing JSC 41 86.4% +19 19 12 10 867 34 21.1
43 (45) JetFleet Management 40 5.3% +2 40 107 84 2.7
43 (39) World Star Aviation 40 -11.1% -5 2 38 92 89 2.3
45 (47) VTB-Leasing 39 2.6% +1 14 23 2 494 49 12.7
46 (43) Penerbangan Malaysia 37 -11.9% -5 20 17 666 39 18.0
47 (44) Banc of America Leasing 36 -12.2% -5 8 20 8 540 43 15.0
47 (35) Volito Avn Services 36 -25.0% -12 36 509 45 14.1
47 (50) Ilyushin Finance 36 9.1% +3 7 20 9 62 101 1.7
50 (57) Doric 35 29.6% +8 27 8 4,046 11 115.6
TOTAL 7,796 3.8% +286 1,232 5,334 1,230 176,316 22.6
NOTES: Figures based on feet data from Flightglobals Ascend Online database for December 2012. Total feet is owned and managed. 2011 data recalculated on basis of top 50 lessors by feet size,
and not top 50 lessors by feet value ranked by their feet size, as published previously. SMBC Aviation Capital was formerly RBS Aviation Capital
ABU_250113_032-035 35 18/1/13 16:40:54
fightglobal.com/ab
FINANCE & LEASING EXPORT CREDIT
36
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Airline Business
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February 2013
New rules for export credit have come into force, but
questions remain over the goal of pushing more airlines
towards commercial nancing or whether the new
agreement tackles every issue of concern
REPORT
DAVID KNIBB
SEATTLE
F
or more than a year we knew it
was coming but now the 2011 Air-
craft Sector Understanding (ASU)
has started to take effect, everyone
is still wondering how it will
change the most widely used form of aircraft
nance export credit and the potential
repercussions of these changes.
The new ASU replacing a 2007 agreement
comes at a time when traditional sources of
commercial nancing are stressed and airlines
and lessors are relying more on export credit
to nance new aircraft. The higher fees
expected under this ASU could bring a hefty
lift in nancing costs for many airlines, which
in turn raises questions about how these
changes may affect aircraft nancing and pur-
chase patterns over the longer term.
The 2011 ASU addresses most of the issues
that prompted its adoption by the Organisa-
tion for Economic Co-operation and Develop-
ment (OECD). Airlines in the USA and parts
of Europe which did not qualify for export
credit because of a so-called home market
or home country rule, complained loudly
that strong rivals such as Emirates were gain-
ing an unfair advantage many called it a
subsidy because those carriers were not in a
home country and so could access cheaper
export credit.
Another group led by Emirates, Etihad and
Ryanair responded that a better solution would
be to scrap the home country rule so export
credit was equally available to everyone. While
this debate raged, Airbus and Boeing worried
SHAPING
THE GAME
that manufacturers in Brazil, Canada, China,
Japan, and Russia were building or planning
larger aircraft, and the export credit for those
aircraft ought to be under the same rules as for
US and European-built aircraft.
Dean Gerber, partner at Chicago law rm
Vedder Price and chair of its global transpor-
tation nance team, has watched develop-
ments closely. He recalls the arguments
united rival manufacturers and pitted air-
lines and commercial banks against govern-
ments in a dispute over the role ECAs [export
credit agencies] play in supporting sales of
commercial aircraft.
The 2011 ASU applies to all new commer-
cial aircraft, except regional jets and turbo-
props, delivered since the turn of the year.
New regional aircraft come under the agree-
ment on 1 January 2014. It applies to new air-
craft from all manufacturers except those in
China and Russia, which are not OECD mem-
bers. Brazil is not an OECD member either
but has accepted the new ASU. Aside from
this difference in effective dates, the ASU
eliminates all distinctions between aircraft
type and sizes.
The new ASU raises the export credit pre-
mium for all buyers/borrowers, whether air-
line or lessor, but the rise is steeper for those
with a better credit rating. Higher-risk air-
lines will still pay more than they do now but
not as much proportionally, making export
credit less attractive to stronger airlines. As
Gerber explains, the accord attempts to
bring ECA nancings more in line with mar-
ket conditions. By including new aircraft
from Canada, Brazil, and Japan, Gerber says
the ASU will also minimise the support of
the ECAs as a factor in the choice by buyers/
borrowers among competing aircraft.
RISK RATINGS
The new ASU directs each export credit
agency to classify its buyers/borrowers into
one of eight risk categories, based on their
senior unsecured credit ratings. These rank-
ings, valid for up to 12 months, will be
recorded with the OECD Secretariat.
An airlines risk rating affects several
things, the main one being the amount of pre-
mium an ECA will charge for providing
export credit. Calculation of this premium is
complex, but it starts with an airlines risk
rating. Once the premium is calculated for a
given transaction, it is set. The customer may
pay it up front or during the life of its loan.
Questions remain about whether the pre-
mium itself may be nanced.
Export credit agencies will adjust their pre-
miums prospectively. They will set the new
premiums each February and adjust them
The approximate minimum
transaction premium for an
airline under the new ASU
8%
ABU_250113_036-039 36 18/1/13 16:12:50
fightglobal.com/ab February 2013
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Airline Business
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37
quarterly through surcharges. The purpose of
these adjustments is to keep premiums in
line with changing market conditions. As a
result, premiums may rise or fall but insiders
say they will not change as sharply as the
market itself. As one banker puts it, these
adjustments seek a balance between stability
on the one hand and keeping pace with the
market on the other.
Risk ratings affect other things as well.
ECAs may cover up to 85% of the net price
for higher risk airlines, but the cover for
stronger airlines is limited to 80%. This is
another feature, says Gerber, designed to
make ECA nancing less desirable for these
buyers/borrowers who can more readily
access commercial nancing.
Most observers predict such disincentives
will drive nancially strong airlines away
from export credit. This is precisely the
intended consequence, with the result, of
course, that it will leave the ECAs exposed to
higher risks.
However, the ASU drafters added require-
ments to reduce this risk. Export credit for
higher risk airlines comes with more strings
attached. These may include higher initial
security deposits, shorter repayment periods,
minimum lease payments for leased aircraft,
and higher maintenance reserves.
Regardless of risk rating, all transactions
must also be asset-backed, with protections
for the lender and ECA in the form of cross-
default and cross-collateralisation of all air-
craft and engines owned by the same buyer/
borrower, plus special creditor and guarantor
protections in the case of leased aircraft.
The ASU also uses a carrot-stick approach
to encourage nations to adopt the Convention
on International Interests in Mobile Equip-
ment and its related Aircraft Protocol, collec-
tively called the Cape Town Convention.
This carefully crafted law creates an interna-
tional registry of security interests in aircraft
and spells out creditor rights, thereby elimi-
nating much of the uncertainty about how
creditors might fare in a local jurisdiction
after an air carriers default or insolvency.
The airlines of any country that adopts the
Cape Town Convention, making it the law of
their own land, qualify for a discount of up to
10% on their export credit premium.
So far, 52 nations have adopted the Cape
Town Convention and several more, including
Australia and Canada, seem anxious to follow
suit. The so-called Cape Town discount no
doubt gives them an added incentive. Austral-
ias transport minister Anthony Albanese esti-
mates that adopting the convention will save
Australian airlines, which routinely use export
credit, $330,000 on a new ATR 72 turboprop
and $2.5 million on an Airbus A380.
LIKELY CHANGES
How much will these new rules add to the
cost of export credit? The 2011 ASU roughly
doubles premiums contained in the 2007
ASU, says Gerber. The minimum premium
for an investment-grade airline will rise from
about 4% of the transaction value to almost
8%. For lower-rated airlines, the new premi-
ums will be higher. Airlines in any country
which adopts the Cape Town Convention
will qualify for that discount.
EXPORT CREDIT
Higher-risk airlines will continue to rely on
export credit because they have nowhere else
to go, but stronger airlines with access to
commercial nancing may nd export credit
less attractive. This is the underlying goal of
the new ASU.
Predictions differ on the likely collateral
effects. Among the more optimistic are those
who foresee a boost to commercial lenders.
Until now, many lenders have shunned the
aircraft sector because of the lower rates
offered on ECA-backed loans. The recent
popularity of export credit, they claim, has
distorted the market. Higher interest rates, so
the theory goes, will attract more nanciers
into the sector. Some even predict such
increased competition between lenders will
bring commercial rates down.
The shorter-term view is less rosy. Com-
mercial liquidity is still limited for reasons
that have little to do with airlines. The more
pessimistic predictions are that this shortage
will compel continued reliance on export
credit, even by investment-grade airlines,
with the aircraft manufacturers themselves
stepping up with more support.
Experts debated the ASUs effect at a con-
ference of the International Society of Trans-
port Aircraft Trading in September. Kostya
R
e
x

F
e
a
t
u
r
e
s
ABU_250113_036-039 37 18/1/13 16:12:54
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ABU_250113_038 38 17/1/13 11:30:07
February 2013
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Airline Business
|
39 fightglobal.com/ab
Read industry reaction to the new ASU at the
recent ISTAT conference in Rome:
ightglobal.com/ASU
FINANCE & LEASING EXPORT CREDIT
Zolotusky, managing director of Boeing
Capital, predicted that because of higher
nancing costs, we will see more people
rent than buy aircraft.
Ray Sisson, president of operating lessor
AWAS, agrees but also thinks the new ASU
will cause carriers to defer orders for new
equipment, saying: It will drive more air-
lines to older aircraft.
We will soon see whether these new rules
cause the slump in aircraft nance some pre-
dict, but even the naysayers acknowledge air-
lines and lessors will eventually adapt to the
higher cost of aircraft nance, whether
through export credit or commercial loans,
because they have little choice.
One of the few options is the capital market,
which may be a viable choice for some. Fin-
nair, for instance, recently raised 120 million
($159 million) in an over-subscribed bond
issue, and AirAsia X is optimistic that in the
rst quarter of 2013 it will successfully raise
M$760 million ($250 million) from its initial
public offering. However, the capital markets
are still an option reserved for stronger airlines
under favourable conditions.
HOME COUNTRY RULE
The elephant in the room the new ASU does
not address is the home market or home coun-
try rule, which provoked the loudest argu-
ments preceding the agreement. This rule,
which withheld export credit from US and
some European carriers, tilted the system, they
claimed, in favour of rivals in other countries
who could and did take advantage of export
credit. But the OECD rejected the suggestion
from Emirates and its allies simply to change
or scrap the home country rule and settled
instead on higher export credit premiums.
One reason for the OECDs approach is that
the home country rule is hardly a rule in
the traditional sense, but rather an unwritten,
informal understanding between the USAs
Ex-Im bank and its counterpart export
credit agencies in the UK, France, Germany
and Spain that they will not offer export
credit to airlines in their own or each others
countries. Skirting around this rule may have
temporarily averted a showdown but the
unresolved issue of Canada and, by exten-
sion, Brazil and Japan, remains potent.
As Gerber explains: In the past, Canadas
primary aircraft manufacturer, Bombardier,
did not produce aircraft that directly com-
peted [with Airbus and Boeing]. Canada was
not subject to the Home Country rule, so
Ex-Im bank and the European ECAs routinely
covered aircraft purchases by Air Canada and
WestJet. But Bombardiers introduction of the
110/130-seat, twin-turbofan CSeries caused
Boeing and Airbus to question why the home
country rule should not extend to Canada.
With potential competitors from other coun-
tries such as Brazil, China and Russia on the
Export credit
agencies
(mainline jets)
$29bn
INDUSTRY DELIVERY FINANCING SOURCES: 2012-2013
Captial
markets
$10bn
Cash
$24bn
Tax equity
$2bn
Export credit
agencies
(regional jets)
$3bn
Commercial banks
$20bn
Lessors
(self-fund)
$7bn
Middle
East
1.2%
Asia-Pacifc
22.1%
North America
28.1%
Africa
1.1%
SOURCE: Boeing
2010
SHARE
Europe
39.1%
South
America
8.4%
$95bn
2012 total
Export credit
agencies
(mainline jets)
$24bn
Capital
markets
$14.5bn
Cash
$26bn
Tax equity
$2.5bn
Export credit
agencies
(regional jets)
$3bn
Commercial banks
$29bn
Lessors
(self-fund)
$5bn
Middle
East
1.2%
Asia-Pacifc
22.1%
North America
28.1%
Africa
1.1%
SOURCE: Boeing
2010
SHARE
Europe
39.1%
South
America
8.4%
$104bn
2013 forecast
verge of producing similar aircraft to the
CSeries, Gerber explains, Airbus and Boe-
ing were concerned that if Canada was not
bound by the home country rule, these other
countries would expect identical treatment.
CREDIT REPERCUSSIONS
The issue remains unresolved, prompting
Gerber to predict that if Canada offers export
credit on a CSeries order by a US or European
airline, there may be repercussions in the
form of matched home-country nancing by
the USA and/or the European ECAs. An Air
France ofcial already warns that it may test
the rule by applying for export credit on its
own orders. If the home country rule starts to
unravel, then Gerber foresees that the 2011
ASU, to put it mildly, may be open to fur-
ther negotiations.
The new ASU clearly has not solved all
problems. The immediate future of Ex-Im
bank has been secured with its re-authorisa-
tion, but by a sharply-divided Congress. This
new law directs the US treasury secretary to
negotiate with foreign counterparts on ways
to reduce export credit generally and, speci-
cally, on aircraft.
As late as November, Delta Air Lines was
complaining that Ex-Im banks cover on a
sale of Boeing 787s to LOT Polish Airlines
was an unnecessary subsidy. If such com-
plaints continue now the new ASU has taken
effect, or if the home country rule erupts into
a full-blown dispute, the 2011 ASU may
come under re well before its scheduled
review in 2015.
ABU_250113_036-039 39 18/1/13 16:12:55
fightglobal.com/ab
FINANCE & LEASING DELIVERIES
40
|
Airline Business
|
February 2013
MAX KINGSLEY-JONES LONDON
2013 DELIVERY VALUES BY CATEGORY AND REGION
Forecast for mainline and regional jet deliveries to airlines/lessors from Ascend Online database applying 2013
full-life base values
0
10
20
30
40
50
Region
Undisclosed
Africa Latin
America
Middle
East
North
America
Europe Asia Pacifc
Regional jet Narrowbody Widebody
$0.8bn
$45.3bn
$20.1bn
$14.7bn
$10.1bn
$5.7bn
$2.1bn
T
he major airframers are set to de-
liver almost $100 billion worth of
jet airliners in 2013 as production
rates in Airbus and Boeings
plants surpass the record output
of 1,190 units set last year.
According to projections based on data
from the Flightglobal Ascend Online data-
base, almost $96 billion worth of airliners will
be delivered by Airbus and Boeing in 2013
(applying 2013 full-life base values). A further
$3 billion worth of metal will be shipped by
Bombardier and Embraer.
We estimate that demand for nance is up
by 15% this year over 2012, says Flightglobal
Ascend senior aviation analyst Rob Morris.
Airbus will again be shaded by its US rival,
shipping $42 billion of assets, compared with
$53 billion from Seattle. Airbus will earn more
from single-aisles, delivering $24.7 billion
worth of A320 family aircraft against $22.6 bil-
lion worth of 737s. But Toulouse looks set to
be beaten fair and square in the more lucrative
widebody arena, delivering $17.7 billion
worth of A330s and A380s against an impres-
sive tally of $30.8 billion in 747s, 767s 777s
and 787s by Boeing.
Well over two-fths of the 2013 nancing
requirements will be from Asia-Pacic air-
lines, which will take $45 billion worth of
airliners. Thats 18% greater than last year,
Morris points out.
Europe accounts for around a fth ($20 bil-
lion) of the delivery nancing needs, while
North American carriers will need to nd al-
most $15 billion in airliner nancing this year.
Morris says that the North American gure is
around 40% greater than 2012.
Deliveries to Middle Eastern carriers will
account for around $10 billion this year.
Morris expects that export credit agency
(ECA) activity will be broadly the same as
2012: We estimate around $24.5 billion
worth of ECA nancings, despite the potential
increase in cost, he says.
Bank activity is set to increase signicantly,
with Asia Pacic driving much of that growth
due to its greater funding requirements.
Capital market activity is set to increase by
as much as 50%. This will be driven by the
increased value of deliveries to North Ameri-
can airlines, Morris says.
As for the assets, around 80% of deliveries
will be types Ascend classes as liquid, and
thus relatively easy to nance. Thats around
the same ratio as last year and on this basis we
expect nance will be found for the other
20%, as it was in 2012.
FINDING
THE FUNDS
Record production means that airlines delivery nance
requirements will increase by 15% this year to $100
billion, with banking activity likely to grow signicantly
ABU_250113_040-041 40 18/1/13 16:42:33
fightglobal.com/ab February 2013
|
Airline Business
|
41
A
ir
b
u
s
2013 NARROWBODY DELIVERIES
SOURCE: Ascend Online database applying 2013 full-life
base values
Middle East
North America
Europe
Asia Pacifc
Africa
Latin America
Region undisclosed
Region Undisclosed
Africa
Middle East
Latin America
North America
Europe
Asia Pacifc
$8.7bn
$3.8bn
$1.8bn
$0.9bn $0.4bn
$11.0bn
$20.7bn
Total value:
$47.3bn
2013 DELIVERY VALUES BY AIRFRAMER
Forecast for mainline and regional jet deliveries to airlines/
lessors from Ascend Online Fleets database
Airbus widebody
Airbus narrowbody
Boeing narrowbody
Bombardier regional jet
Boeing widebody
Embraer regional jet
Regional jet
Regional jet
Widebody
Narrowbody
Widebody
Narrowbody
Boeing total:
$53.4bn
Airbus total:
$42.4bn
$30.8bn
$22.6bn
$17.7bn
$24.7bn
737 Classic
A320neo

$0.9bn $2.2bn
2013 DELIVERY VALUES BY REGION
Forecast for mainline and regional jet deliveries to airlines/
lessors from Ascend Online database applying 2013
full-life base values
Middle East
North America
Europe
Asia Pacifc
Africa
Latin America
Region undisclosed
Region Undisclosed
Africa
Latin America
Middle East
North America
Europe
Asia Pacifc
$14.7bn
$10.1bn
$5.7bn
$2.1bn $0.8bn
$20.1bn
$45.3bn
ABU_250113_040-041 41 18/1/13 16:42:35
strategyawards.com
IN COLLABORATION WITH
Nominations are now open for the 2013 Airline Strategy Awards
Has your CEO demonstrated outstanding strategic thinking and leadership?

Has your airline incorporated innovative technology to win cust
Does your airline have a first class management team that is steering it successfully through the recession?
omer advantage?
Winners of each of the seven categories will be announced at a prestigious awards dinner on
Sunday 14 July at The Honourable Society of Lincolns Inn, London
View the categories and submit your nomination at: strategyawards.com
Nominate
Now
ORGANISED BY
ABstrat_041112_Nom.indd 1 15/01/2013 16:08
ABU_250113_042 42 17/1/13 11:31:11
fightglobal.com/ab
Paul Hayes is director of air safety and insurance
at Flightglobals consultancy and data arm Ascend
FINANCE & LEASING INSURANCE
February 2013
|
Airline Business
|
43
LOWERING
THE RISK
One of air travels safest years has been
excellent news for insurers. But despite the
relatively low number of losses, 2012 claims
will still exceed $1 billion
REPORT
PAUL HAYES
LONDON
O
ne of the best years on record for
airline safety means that 2012
has been a year of low levels for
incurred losses from air crashes.
There were no major catastro-
phes and the number of passenger fatalities
and expected cost were low, compared to
recent years.
Insurance rates and written premiums also
fell, but given the benign claims experience
in 2012 this was not unexpected, and pre-
mium income perhaps did not fall as far as it
might have.
Flightglobals consultancy arm Ascend cur-
rently estimates total incurred airline claims,
including those incurred but not reported for
2012, at just over $1 billion the lowest esti-
mate in more than 20 years. Ascends estimate
for net written premium in 2012, excluding
hull war and excess third party war, is $1.8
billion 10% down on 2011.
As in 2011, the low level of incurred loss in
2012 is very much a mixed blessing for insur-
ers, as although Ascend predicts that many
will have made money, there is real concern
that premium levels are now too low to be
-10
-5
0
5
10
15
Oct Sep Aug Jul Jun May Apr Mar
G
r
o
w
t
h

r
a
t
e
s

(
%
)
Trafc growth trend
ATA AEA AAPA ALTA
-10
-5
0
5
10
15
Oct Sep Aug Jul Jun May Apr Mar
G
r
o
w
t
h

r
a
t
e
s

(
%
)
Capacity growth trend
ATA AEA AAPA ALTA
0
1000
2000
3000
4000
5000
$

(
m
)
Airline hull and liability costs and premiums
Claims cost Written premium
2012
The amount of premium written in an underwriting year
and the cost of claims incurred in a calendar year are not
directly comparable. Excludes hull war and excess third
party war losses. SOURCE: Ascend
2000 1990
able to maintain the market in the longer term.
And, with a low level of losses in 2012, there
will be an expectation of further rate reduc-
tions in 2013.
Worldwide there were only 10 fatal acci-
dents where revenue passengers were killed
and, fortunately, most of these did not involve
a considerable loss of life. Only the Bhoja Air
and Dana Air crashes resulted in a large
number of fatalities. These two accidents
caused the death of 268 passengers almost
75% of the total of 362 revenue passenger
deaths during the year.
While 2012 was not the lowest number of
passenger fatalities in a year in 2004 only
344 revenue passengers were killed it was
still 10% better than 2011, and compared very
well to most other recent years.
Estimates of incurred passenger liability for
2012 are also low, currently at just $80 million.
This is very similar to estimates for 2011, which
are also very low. Passenger liability estimates
for these years are the lowest since 1986.
Estimates for incurred passenger liability in
2004 the year with the fewest passenger
fatalities are just over $200 million. The
annual average for the last decade (2000-
2009), even excluding liabilities incurred
from 9/11, is $510 million.
As with fatal accidents the number of air-
line total losses in 2012 was also low. So far
there are only 39 conrmed. This is the lowest
number of such losses over the last 20 years,
and is very likely to be the lowest since 1945.
LOSSES FALL
These airline total losses also involved only
relatively low-value aircraft. None of the air-
craft were valued at more than $30 million
and all bar one have hull values of less than
$10 million. Therefore, the current estimate
for the cost of airline total losses in 2012 is
only $105 million. This is the lowest gure
since 1984, and puts the 2012 gure far below
the $416 million annual average cost of total
losses for 2000-2009.
The number of major partial losses known so
far for 2012, 70, is far more typical, and will cost
an estimated $320 million well exceeding the
$253 million annual average for 2000-2009.
While 2012 was a quieter year and the
estimated cost of incurred losses for the year
is the lowest for many years looked at from
another angle, 2012 shows that, even in a
benign year, claims can still reach $1 billion.
It is difcult to imagine a year in which air-
line claims could come in at a lower number,
and with many aircraft hulls insured for $100-
300 million and some policies having limits
of $2.5 billion there is plenty of scope for a
considerably worse result.
One catastrophic loss could exceed the total
global premium for the year. This is well illus-
trated by insurance market host Lloyds realis-
tic disaster scenario addressing aviation,
RDS13 Aviation Collision, which is used to
test the corporations syndicates writing avia-
tion risks.
This reads: Assume a collision between
two aircraft over a major city anywhere in the
world, using the syndicates two highest air-
line exposures. Assume a total liability loss of
up to $4,000 million: comprising up to $2,000
million per airline and any balance up to
$1,000 million from a major product manu-
facturers product liability policy(ies) and/or
an air trafc control liability policy(ies),
where applicable.
The current estimate
for the cost of airline
total losses in 2012 is
only $105 million the
lowest since 1984
ABU_250113_043 43 18/1/13 14:37:49
fightglobal.com/ab 44
|
Airline Business
|
February 2013
largest with 17%, while Delta Air
Lines, at almost 11%, rounds out
the top three.
Mexico is the at the centre of
San Antonios growth. Miller says
the airport is now the 10th-largest
gateway from the USA to Mexico,
following a spurt of new ights in
the past year.
FORUM NETWORK
ALL POINTS SOUTH OF THE BORDER
EDWARD RUSSELL WASHINGTON DC
International growth, particularly in Mexico and the South America region, is key to driving the continued expansion
of San Antonio airport in Texas, which will host the Airline Business-organised Network USA 2013 event in March
S
an Antonio International
airport is on the re-
bound. Trafc is grow-
ing after a brief dip dur-
ing the recession, driven by
international service and the re-
gions growing economy.
The airport, which will host
the Airline Business-organised
Network USA 2013 event in
March, serves a metropolitan area
which totalled almost 2.2 million
people in 2011, a rise of more
than 28% since 2000, according
to the US census. This makes it
the third-largest city in Texas and
in the top 25 nationally.
San Antonio International is
growing alongside the metro re-
gion. During the rst nine months
of 2012, trafc increased nearly 1%
to 6.15 million passengers and,
says San Antonio city aviation di-
rector Frank Miller, is on track to
post year-on-year growth as well.
The airport is doing well, he
says. Its growing with its trafc
and, basically, in San Antonio
theyve always seemed to weath-
er the economy very well and I
think were seeing that with the
air service. The airport recorded
a near 2% increase in trafc to
about 8.2 million in 2011 the
last full year data is available for.
BREAKING RECORDS
New international ights are driv-
ing growth. International trafc
more than doubled to nearly
300,000 passengers during the
nine months to September, while
domestic trafc dropped 2% to
almost 5.9 million during the
same period. Even when com-
pared with full-year 2011 trafc,
the airport would break records
with a near 62% increase in inter-
national trafc.
Continued economic and
population growth in San Anto-
nio has contributed to new desti-
nations and keeping [and] adding
ights in existing markets, says
Southwest Airlines
share of passengers
at San Antonio
38%
Brach Crider, senior business
consultant of network planning at
Southwest Airlines. He adds that
the city is in the carriers top 25 in
terms of number of ights, and is
one of its original cocktail nap-
kin cities part of the original
route triangle devised by airline
founder Herb Kelleher to em-
phasise its importance to the Dal-
las-based low-cost airline.
Southwest is the largest carrier
at the airport, with more than
38% market share of its passen-
gers during the year ending 30
September, according to US De-
partment of Transportation data.
American Airlines is the second
Mexican budget carrier Inter-
jet began ights to Monterrey in
November, while Southwest sub-
sidiary AirTran Airways started
services to Cancun and Mexico
City in May. Interjet had earlier
launched services between San
Antonio and both Mexico City
and Toluca, which is an alterna-
tive airport for the Mexican capi-
tal, while another of the coun-
trys budget carriers VivaAerobus
began ights to Monterrey in No-
vember 2011.
San Antonio has always had a
very strong link with Mexico, says
Miller. As weve seen, [with] some
of the violence occurring down in
During the rst nine months of 2012, trafc at San Antonio increased to reach 6.15 million passengers
ABU_250113_044-045 44 18/1/13 16:33:21
February 2013
|
Airline Business
|
45 fightglobal.com/ab

Network USA is the annual Airline


Business route-planning event
Dates 3-5 March
Venue Hyatt Regency, San Antonio
Event organiser Airline Business
Event contact Anna Chamberlain-Webber
Tel +44 (0) 20 8652 4610
Email anna.chamberlain-webber@rbi.co.uk
Website networkusaforum.com
Mexico, weve seen a fairly strong
inux of Mexican nationals com-
ing into San Antonio. He explains
that this includes those ying
back and forth to see family, as
well as people who previously
drove but no longer feel comfort-
able doing so.
Crider says the demise of Mexi-
cana in 2010 made room for the
addition of AirTrans ights to
Mexico. With the cessation of
services by Mexicana, our view
was that the market became over-
priced and under-served, he says.
We have a terric customer base
in San Antonio, and the Mexico
City service helps us become more
relevant to those customers.
More ights south of the border
are likely. Mexican regional car-
rier Aeromar received approval
from the DoT to y between San
Antonio and Manzanillo, Saltillo
and San Luis Potosi.
While it has not set a launch
date, Aeromars vice-president of
network planning and corporate
development Fabricio Cojuc Wol-
fowitz says the carrier will add
ights to the USA in the second
quarter of 2013.
However, he would not speci-
fy whether they would be to San
Antonio. Miller says Guadalajara
is a destination the airport is ac-
tively targeting for air services.
DOMESTIC AMBITIONS
San Antonios local economy is
also driving growth at the airport.
Miller says the facilitys proximi-
ty to the Eagle Ford Shale oil play
and a strong military presence in
the region are both drivers of the
local economy.
Theyre looking at least 20 to
30 years of the oil operations
down there, he says about Eagle
Ford. He adds that the play con-
tributed about $25 billion in eco-
nomic output to the region in
2011. Oil and gas conglomerates
Tesoro and Valero Energy also
have their corporate headquarters
in the city.
Alaska Airlines, Southwest
and US Airways have added new
domestic ights in the past year.
Alaska launched daily ights to
Seattle in September, Southwest
to St Louis in August, and US
Airways to Philadelphia in June.
We have developed a list of
target cities, says Miller on ex-
panding air service to San Anto-
nio. Seattle was one of our target
cities but we still look at Boston,
Fort Lauderdale and Sacramento,
and down in Mexico, Guadalajara
is one of the cities we dont have
service to at this time.
If [airlines] can provide serv-
ice to a target city, they are eligi-
ble for a lot of incentive dollars,
Miller adds. Incentives include
marketing funds and reimburse-
ment of landing fees, he says.
American says it would con-
sider adding a ight to its Miami
hub from San Antonio, about
48km (30 miles) south of Fort
Lauderdale, once it begins ying
the Airbus A319.
The airline will receive its rst
of 130 A319s in the third quarter
of 2013, Flightglobals Ascend
Online database reveals.
MERGER IMPACT
Miller is unconcerned over the
impact on the airport of a possible
merger between American and
US Airways. He says San Anto-
nio weathered the mergers of
Delta and Northwest Airlines in
2008 and United Airlines and
Continental Airlines in 2010 well
in terms of capacity.
He expects a similar result
from any American-US Airways
combination. They are serving
different markets out of San An-
tonio, so they can certainly com-
plement one another, he says.
In the medium term, San Anto-
nio hopes to add ights to Central
and South America, as well as
Canada, says Miller. It is not ac-
tively seeking ights to Asia or
Europe as service would require
runway improvements, he says.
San Antonio is working to ac-
commodate rising trafc and new
international service. The airport
opened the new eight-gate termi-
nal B in November 2010, and is
now working on a $30 million
renovation and upgrade to termi-
nal A and a new consolidated
rental car facility.
We will work to bring the in-
terior of that terminal in line with
the newer building. One of the
things, from a customer service
standpoint, that we know needs
to be done is a consolidated rental
car facility, says Miller.
The upgrades to terminal A,
which opened in 1984, are slated
to be complete by March 2014,
and the airport is in the process
of selecting an architecture and
engineering company for the
$128 million rental car facility,
he says. The airport expects the
car facility to open in late 2016
or early 2017.
San Antonio is also upgrading
its aireld infrastructure. An ex-
tension of roughly 305m (1,000ft)
to runway 4/22 to 2,592m is
complete, and the airport is n-
ishing work to the parallel taxi-
way before the extension can
open to air trafc, says Miller.
When this work is done, the
airport will shift its focus to
repaving projects elsewhere on
the property.
Weve seen a fairly
strong inux of
Mexican nationals
into San Antonio
FRANK MILLER
Aviation director, San Antonio
San Antonio hopes
to add ights to
Central and South
America
ABU_250113_044-045 45 18/1/13 16:33:24
ABU_250113_046 46 17/1/13 11:36:18
FORUM FEEDBACK
February 2013
|
Airline Business
|
47 fightglobal.com/ab
TAKING THE AMERICAN WAY
Private competition in the provision of contract towers has helped drive down US air
traffc control costs and the opportunity is there for similar savings to be made in
Europe, says former CANSO chief executive Graham Lake
The market has
already shown in
parts of the world
there are sometimes
better alternatives
GRAHAM LAKE
Principal, Aviation Management
To read about how air
traffc control costs
are on the rise visit:
ightglobal.com/
ATCcosts
As 2012 drew to a close,
the US Ofce of the
Inspector General (OIG)
published an audit
report on privatised air trafc control
at airports. These contract towers are
providing services at smaller US air-
ports and are a small but signicant
piece of the US ATM system. The audit
highlights lessons learned, particularly
in the area of costs.
By contrast, last October, EU trans-
port commissioner Sim Kallas pub-
lished his own report on the progress
of the Single European Sky (SES). He
lambasted the poor progress of EU
states in delivering the SES objectives.
Kallas said air trafc control is still far
too expensive, and that we are still
hampered by a high level of delays.
Of course, it is easy to criticise any
programme that tries to harmonise
political, nancial and technical strat-
egy among the 27 EU states and their
neighbours, and SES is no different.
Despite these challenges, the European
ATM system does work well most of
the time. It is safe, delays are not as bad
as in the past, and charges are, thanks
to the EU performance scheme for air
navigation, improving.
Even so, there is no doubt more
needs to be done, especially when
comparing the relatively modest cost-
saving efforts of the ATM providers
against the swingeing cuts being made
by many of the worlds legacy airlines.
Kallas stressed that better progress
with SES is vital for air transport and
for society as a whole.
Members of ICAO met in Montreal
in November for their once-a-decade
gathering to agree at state level the glo-
bal strategy for ATM for the next 10
years and beyond. SES and NextGen
each play their part in this Global Air
Navigation Plan.
The EU political objective for SES is
to establish a framework within which
ATM capacity can treble while unit
costs are halved, and safety and envi-
Graham Lake is a principal at Aviation
Management and has spent his career in
aviation services and ATC, most recently
serving as director general of CANSO
ronmental performance are improved.
The target date set was 2020. After all,
said the politicians (and airlines), the
USA can apparently delver unit costs
about half of those in Europe, so the
latter should be able to reduce their to
a similar level.
The OIG audit report offers cause for
cautious optimism. ATM charges
accrue from both en-route and termi-
nal services. In Europe, the require-
ments of the EU performance scheme
will drive consolidation, harmonisa-
tion and related efciencies. But com-
petition for en-route service provision
is still a long way off.
In the terminal environment, which
deals with ATM on the ground and
around the airport, things are different.
In simple terms, it is the 10 minutes
ying at either end of the ight. This is
where true price and service competi-
tion in ATM is gathering pace. Here,
state-owned air navigation service pro-
viders are not always the providers of
choice. The market has already shown
in some parts of the world that there
are sometimes better alternatives.
The USA has used private contract
providers of ATM services for smaller
and low-activity airports for many
years. In 2012, this included 250 tow-
ers in 46 states and four overseas ter-
ritories. Three private contract com-
panies successfully compete in the
USA to full the needs of these air-
ports and communities.
The OIG audit report makes fasci-
nating reading. It concludes operating
costs at the smaller contract towers are
signicantly lower than comparable
FAA towers. How much less? Are you
sitting down? Contract towers in the
USA for the sample of 30 comparable
airports analysed cost just one-quarter
of their FAA counterparts, while pro-
viding cost-effective and safe air trafc
services - a saving of 75%. Put another
way, FAA towers are four times more
expensive than their private counter-
parts on a like-for-like basis.
The OIG audit helpfully provides
details of all contract and FAA towers
in the sample, stafng levels, costs and
trafc density metrics. It is clear that
contract towers employ signicantly
fewer staff at each site and pay lower
average rates than the FAA. The OIG
has concluded that saving ATM costs
is not rocket science.
So what are the opportunities for
adopting a contract tower policy in
Europe? Some EU members, notably
the UK, have an established procure-
ment structure and culture in which
airports competitively tender their air-
port ATM services. Sweden, Germany
and, more recently, Spain are starting
to follow suit.
The USA is able to enjoy theoretical
unit rates for ATM at near half the
European equivalent, yet still appar-
ently offer further signicant opportu-
nity for cost reduction.
Perhaps Kallas, in his
quest for progress,
should take note.
ABU_250113_047 47 18/1/13 17:22:28
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ABU_250113_048 48 17/1/13 11:37:15
FORUM FEEDBACK
February 2013
|
Airline Business
|
49 fightglobal.com/ab
NDC will be the
biggest enabler of
innovation in air
travel distribution
since the e-ticket
ALEKS POPOVICH
IATA senior vice-president
For more on the
impact of IATAs
New Distribution
Capability visit:
ightglobal.com/
IATAdistribution
NDC: MYTH VS REALITY
IATAs plans to shake up the airline retail world with its New Distribution Capability
has met with a mixed response, but the associations distribution and fnancial
services chief Aleks Popovich believes the sector is in vital need of modernisation
IATAs New Distribu-
tion Capability (NDC)
represents a unique
opportunity to modern-
ise air travel distribution towards a
unied customer-centric retail experi-
ence. Today there is a gap between the
travel shopping experience on an
airline website and the information
that is available through travel agen-
cies powered by global distribution
systems (GDSs).
Thus customers visiting an airline
website have more knowledge about
the various product offerings available;
and airlines are able to tailor their
offerings based on the customers prior
travel purchases.
This is not the case for the indirect
channel, where the travel offer is
assembled outside the airline by third-
party intermediaries. An airline that
offers some extra leg room or a special
meal option cannot entice the cus-
tomer with this added value because
the GDSs cannot present that informa-
tion effectively and attractively.
Further more, in most cases, the airline
knows nothing about the customer
until the reservation is made, making it
difcult to personalise the offer.
And that is where NDC comes in.
NDC is about building the technology
standards that will close the gap
between the modern retailing experi-
ence available at airline websites and
the legacy pre-internet model used by
indirect distributors of air travel.
By creating a common XML-based
standard that denes a format for how
airline products and services should
be displayed, NDC will enable a
dynamic, vibrant marketplace that is
not possible with todays closed pro-
prietary systems.
Look at the mobile phone business:
common technical standards enable
different phones to talk to one another.
Imagine how simpler global travel
would become if countries could agree
on a standard electrical wall socket.
The NDC foundation standard was
approved in October 2012. Now we are
working on XML standards to support
its implementation. There is an excite-
ment in the industry about this project.
Rightly so, NDC will be the biggest ena-
bler of innovation in air travel distribu-
tion since the e-ticket.
But there are some misconceptions
that need to be addressed. One of the
biggest is that travellers will have to
supply reams of personal information
to benet from the value offered by
NDC. This is not true. Yes, consumers
will benet by providing more data, but
they will not have to surrender their
privacy to compare fares or services
and amenities. In this regard, buying air
travel through NDC will be no different
than other shopping experiences:
Grocery/department stores provide
discounted offers to club members
Online merchants present offers
based on past experience/preferences
Airline websites make offers based
on frequent yer status, afnity credit
card and prior purchases
Another misconception is that it
will not be possible to compare fares
using NDC and that the intent is to cut
GDSs and travel agents out of the sys-
tem. Not so! There is a content aggre-
gator role in NDC, which is essential
to enable comparison shopping.
GDSs and travel agents are partici-
pating in the standard-setting process.
And given their industry knowledge
and know-how, GDSs and agents are
well-placed to take advantages of the
innovation NDC will make possible.
Additionally, NDC will help travel
agents add value to their clients by
allowing for comparisons of informa-
tion that is today only available on indi-
vidual websites. It will facilitate the
easy sale of ancillary products. And by
allowing the traveller to be identied
even when booking through a travel
agent, the airline has the opportunity to
add value to the traveller experience.
Change always brings challenges
and naysayers. IATA experienced
both when it led the transition to
e-tickets last decade. But no one
would argue that consumers are worse
off for not having to carry a paper
ticket or agents for not having to safe-
guard ticket stock. As an enabler of
innovation, NDC will bring change.
And the market will determine which
aspects of that change are valuable to
customers and offer business opportu-
nities to the value chain.
NDC will lead to a better informed
shopping environment for air travel
that will deliver value to passengers
and create business opportunities
across all aspects of the industry. And
building it on principles of transpar-
ent standards, openness to innova-
tion, fully informed consumer choices
and collaboration
across the value chain
will make for a better
tomorrow.
Aleks Popovich is IATAs senior vice president
industry distribution and fnancial services.
A graduate in mathematics, he joined the
association in 2005 after more than two
decades with British Airways
ABU_250113_049 49 18/1/13 17:20:33
ANALYSIS MARKET OUTLOOK
fightglobal.com/ab 50
|
Airline Business
|
February 2013
CHRIS TARRY
CTAIRA
ANALYSIS BY
FLIGHTGLOBAL
INSIGHT
Structural change is most likely to be the way in which most airlines can deliver fnancial improvement in 2013
Building needs sound foundations
PLANNED CAPACITY GROWTH BETWEEN REGIONS INNOVATA SCHEDULE DATA: FEBRUARY
Regions Region/ Weekly capacity ASK Weekly frequency Weekly seats offered
subregion Million Change Total Change no. Thousands Change
North America Total West Europe 7,560 -2.4% 4,385 -115 1,129 -2.3%
North America Total Asia 5,474 -1.1% 1,774 +31 528 0.2%
North America Caribbean 1,716 11.2% 5,222 +268 766 7.3%
Central 1,914 6.4% 6,256 +373 837 5.3%
South America 2,042 16.4% 1,773 +192 362 14.3%
Total Latin Am 5,671 11.3% 13,251 +833 1,965 7.6%
West Europe East Asia 3,860 5.5% 1,485 +91 434 5.5%
South East Asia 2,747 -5.8% 837 -78 283 -6.1%
South Asia 1,303 -9.6% 690 -54 195 -8.6%
Total Asia 7,910 -1.3% 3,012 -41 912 -1.5%
West Europe Latin America 4,442 2.9% 1,811 +36 534 2.6%
West Europe Middle East 3,944 12.8% 4,101 +338 982 13.7%
Asia Middle East 5,160 11.9% 5,723 +489 1,332 10.9%
TOTAL SELECTION 40,160 3.4% 34,057 +1,571 7,381 5.2%
WORLD 130,017 5.2% 574,180 +8,789 75,514 4.6%
NOTES: Data is based on schedules for February 4-10 2013 against February 6-12 2012 extracted from SRS Analyser. Figures refect airlines
operating non-stop unrestricted scheduled passenger services. East Asia = China, Hong Kong, Japan, the Koreas, Macau, Mongolia and Taiwan.
South Asia = Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. South East Asia = Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. Central America = Belize, Costa Rica, El Salvador, Guatemala, Honduras, Mexico,
Nicaragua and Panama. South America = All countries south of Central America. North America = Continental USA and Canada only. Middle East =
Bahrain, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen.
JET KEROSENE SPOT PRICES
Month Fuel price Change over period
/US gal 1 month 1 year
Jan 307.6 4.5% 17.9%
Feb 320.7 4.3% 11.7%
Mar 328.5 2.4% 3.6%
Apr 323.3 -1.6% -2.9%
May 300.5 -7.1% -3.2%
June 268.7 -10.6% -12.7%
July 287.4 7.0% -8.5%
Aug 315.1 9.7% 4.3%
Sep 321.7 2.1% 7.7%
Oct 314.5 -2.2% 5.1%
Nov 301.4 -4.2% -2.7%
Dec 300.0 -0.4% 1.9%
Av.12 307.5 1.5%
NOTES: Prices are world average = median
of Europe/Singapore cargo and US pipeline
spot prices in US/gallon.
SOURCE: ICIS
The forecast for
airline operating
prots in 2013
O
ver the next few weeks we
will have the results sea-
son for those airlines with
a December year-end. Results,
however, tell us only what has
happened rather than what is
about to happen and in this
respect we will be watching the
outlook statements and listening
to what is best described as the
mood music very closely.
The start of 2013 has seen some
strong performances in most key
stock markets and while these are
generally considered to be for-
ward looking, much momentum
has come from a switch away
from bonds and investors being
prepared to take more risks as the
economic outlook for most econ-
omies in 2013 will be less favour-
able than in 2012 although in
the eurozone there are a number
of examples where 2013 may
indeed be less worse and in at
least one case (Ireland) better.
Against this background it will
be of particular interest to look at
the revenue performance of not
just the airlines that are reporting,
but all companies. This is because
revenue provides the best indica-
tion of the impact of the economy
on the performance of a company
or an industry.
Within a region at a company
level (where the companies com-
pete) it will also show the impact
of competition and changes in
market share. Indeed, the greater
the degree of maturity and absence
of structural growth opportunities,
the closer the relationship be-
tween changes in GDP and a com-
pany or industrys revenue.
CONTROLLABLE COSTS
In the past it has often been the
case that, other than in the event
of dramatic movements in the
price of fuel, it is changes in reve-
nue that have the greatest impact
on airline performance through a
type of revenue pull or the re-
verse, rather than what might be
described as cost push. How-
ever, in what are now changed
circumstances it is also important
to consider the impact of what is
best described as structural cost
improvements and here the focus
is inevitably on what is happen-
ing to controllable costs.
If we examine the relationship
between nominal or money
value GDP, expressed in terms of
US dollars, and airline revenue
we can see an increase in the
share from 0.45% at the end of
the 1960s to reach 0.8% at the
start of the 1980s. Since then the
share of revenue has been within
a range of 0.8% and 1.02% (in
2000). Between 2000 and 2003
this percentage declined to 0.86%
and since then has tended to fol-
low the economy in that as the
economy weakens airline reve-
nue as a share of GDP tends to
contract and vice versa.
In this context the next peak
was 0.94% (2006) and the recent
low point was in 2009 at 0.82%.
In 2010, which was the recent
prot peak for the industry, there
was a recovery to 0.87% before
falling back in 2011 to 0.85%;
taking the IMFs forecasts for GDP
and IATAs for airline revenue for
2012 and 2013, this suggests a
share of 0.89% in both years.
Looking at GDP and airline
revenue growth rates from 2010,
actual and forecast increases are:
2010 9.1% (GDP) and 14.9%
(airline revenue); 2011 10.7%
and 9.2%; 2012 1.9% and 6.6%;
and 2013 4.0% and 3.4%.
Operating prot was $17 bil-
lion in 2011 and is forecast to be
$13.6 billion and $17 billion re-
spectively in 2012 and 2013,
which, if anything, highlights the
impact of the cost changes on the
prot performance.
PRODUCTION MODELS
Although the share of airline rev-
enue expressed as a percentage of
GDP has recovered from the 2009
low, a return to previous peak lev-
els in the near or medium term
looks unlikely. This adds further
weight to the view that structural
change, in terms of cost or com-
petitive position, for the most part
will hold the key to improve-
ment. It is not, however, a zero
sum game and those who take the
opportunity will clearly strength-
en their position.
For the legacy carriers the need
is to grow revenue and reduce
cost and here just as we have seen
a change in the operating envi-
ronment, the usual approach to
$17 bn
ABU_250113_050-051 50 18/1/13 16:36:50
fightglobal.com/ab February 2013
|
Airline Business
|
51
-5
0
5
10
15
20
Nov Oct Sep Aug Jul Jun May Apr
G
r
o
w
t
h

r
a
t
e
s

(
%
)
Trafc growth trend
-5
0
5
10
15
Nov Oct Sep Aug Jul Jun May Apr
G
r
o
w
t
h

r
a
t
e
s

(
%
)
Capacity growth trend
-10
-5
0
5
10
Nov Oct Sep Aug Jul Jun May Apr
G
r
o
w
t
h

r
a
t
e
s

(
%
)
Freight growth trend
A4A AEA AAPA ALTA AACO
US MAJORS (A4A MEMBERS) PASSENGER STATISTICS: NOVEMBER
Region Pax trafc RPK Capacity Load factors Freight FTK
Million Change change Percent Change Million Change
Domestic USA 59,662 0.7% 1.7% 83.3% -0.8 1,508 2.9%
North Atlantic 10,968 -6.1% -7.2% 78.7% 1.0 841 -3.9%
Latin America 8,409 9.8% 9.8% 80.3% 0.0 209 -4.3%
Trans Pacic 7,827 6.1% 1.8% 81.9% 3.3 988 3.8%
All international 27,204 1.8% 0.0% 80.1% 1.4 2,038 -0.3%
TOTAL MONTH 86,866 1.0% 1.1% 82.3% -0.1 3,545 1.0%
YEAR-TO-DATE 1,045,251 0.7% -0.1% 83.4% 0.7 37,779 -0.6%
SOURCE: Airlines for America.
PLANNED CAPACITY GROWTH NORTH ATLANTIC: FEBRUARY
Airline Weekly capacity ASK Weekly frequency Weekly seats offered
Million Change Total Change no. Thousands Change
British Airways 1,134 3.3% 623 +36 169 2.6%
United Airlines 1,057 83.1% 757 +413 161 93.2%
Delta Air Lines 909 -3.6% 570 -22 138 -2.4%
Lufthansa 763 -5.5% 336 -38 103 -6.4%
American Airlines 516 -9.3% 350 -38 78 -10.1%
Air France 439 -1.8% 208 -2 65 -1.3%
Virgin Atlantic 437 -5.0% 192 -6 66 -2.0%
Air Canada 403 1.5% 264 -1 66 1.3%
KLM 300 -1.6% 150 +0 44 -0.6%
US Airways 272 -8.9% 172 -12 44 -8.1%
TOTAL MARKET 7,560 -2.4% 4,385 -115 1,129 -2.3%
US MAJOR PASSENGER YIELD: A4A AIRFARE REPORT
Route 2012
Unit May Jun Jul Aug Sep Oct Nov
Domestic /RPK 10.37 10.48 10.04 9.87 9.70 10.22 10.26
change 5.1% 4.9% 2.7% 0.2% -0.6% 3.7% -0.1%
North Atlantic/RPK 8.87 9.27 9.04 8.41 8.86 8.52 8.92
change 2.8% 2.9% -0.5% -1.7% 0.0% -1.2% 3.0%
ASIA-PACIFIC AIRLINES (AAPA MEMBERS) INTERNATIONAL TRAFFIC
Month Passenger trafc RPK Capacity Load factors Freight FTK
Million Change change Percent Change Million Change
September 63,594 3.3% 2.2% 77.8% 0.9 5,003 -0.4%
October 63,406 2.1% 0.9% 76.6% 0.9 5,052 -5.8%
November 62,649 7.9% 3.5% 76.7% 3.1 5,217 0.9%
YEAR-TO-DATE 706,348 6.1% 4.7% 77.5% 1.0 54,179 -3.7%
SOURCE: Association of Asia Pacifc Airlines.
For low-cost carriers
the need is to take
a greater share of
higher-value trafc,
but control costs
cost cutting is now not enough
and attention should focus on
seeking to even more closely rep-
licate the production models of
the low-cost carriers, which
means transformational change.
Conversely, for low-cost carri-
ers competing against legacy air-
lines the need is to take a greater
share of higher value trafc. This
means that in some areas they
will try to replicate aspects of the
legacy carriers as markets con-
verge, but with a need to keep
costs controlled.
There is one additional aspect
coming into play that may add
particular interest during 2013.
Recently, there has been a lot of
discussion about the likely trend
of the oil price, with some com-
mentators suggesting that it could
fall to $90 a barrel by the middle
of the year, if not slightly below.
The issue, however, is whether
this would only be a short-lived
benet or whether it reects a re-
setting of the oil price.
In either case, the need for con-
tinuing structural change remains
not just for the current year but
beyond as ever the only con-
stant in the airline industry is
change and the more controlled it
is, the better.
AWAITING
NEW DATA
AWAITING
NEW DATA
ARAB AIRLINES (AACO MEMBERS): NOVEMBER
*
Passenger trafc RPK Capacity Load factors
Million Change change Percent Change
Intra Arab world
**
3,503 -1.4% 10.1% 48.4% -5.6
With Other Regions 26,459 7.8% 12.4% 66.3% -2.8
TOTAL MONTH 29,962 6.7% 12.0% 63.6% -3.2
YEAR-TO-DATE 350,595 11.2% 10.1% 69.1% 0.7
NOTES:
*
Estimates.
**
Includes domestic. SOURCE: Arab Air Carriers Organisation.
EUROPEAN MAJORS (AEA MEMBERS) TRAFFIC: NOVEMBER
Region Pax trafc RPK Capacity Load factors Freight FTK
Millions Change change Percent Change Million Change
Domestic 3,675 -8.2% -9.7% 68.5% 1.1 5 -17.3%
Intra-Europe 14,608 2.8% -0.8% 70.6% 2.5 64 2.0%
North Atlantic 14,916 3.0% -0.5% 82.5% 2.8 812 -0.7%
Mid Atlantic 4,889 3.3% 2.0% 83.2% 1.1 168 2.9%
South Atlantic 4,707 -2.4% -3.6% 79.6% 1.0 213 -14.5%
Far East/Australia 13,662 4.7% 2.2% 78.3% 1.9 1,158 2.4%
Sub Saharan Africa 5,295 4.3% 0.0% 78.4% 3.3 267 2.8%
N.Africa/M.East 3,189 -2.1% -2.0% 67.7% 0.0 105 -1.7%
TOTAL MONTH 64,965 2.0% -0.8% 76.5% 2.1 2,824 -0.6%
YEAR-TO-DATE 800,865 4.3% 2.1% 79.3% 1.7 30,010 -3.5%
SOURCE: Association of European Airlines
LATIN AMERICAN AIRLINES (ALTA MEMBERS): NOVEMBER
Pax trafc RPK Capacity Load factors Freight
Region Million Change change Percent Change Million Change
Total Intra-LatAm
*
13,459 11.9% 3.8% 76.4% 5.5 145 8.0%
Total Other Intl 5,692 7.5% 6.7% 78.3% 0.6 303 -1.3%
TOTAL SYSTEM 19,151 10.6% 4.7% 77.0% 4.1 448 1.5%
YEAR-TO-DATE 207,061 8.3% 6.2% 76.5% 1.5 4,085 -2.5%
NOTE:
*
Domestic and International fights. SOURCE: Associacion LatinoAmericana de
Transporte Aereo.
NOTE: ALTA data for September not available.
ABU_250113_050-051 51 18/1/13 16:36:51
FORUM APPOINTMENTS
fightglobal.com/ab 52
|
Airline Business
|
February 2013
Bransons choice: Craig Kreeger
EXECUTIVES ON THE MOVE
IN BRIEF
European Regions Airline
Association has appointed
Simon McNamara as its new
director general. He takes
over from long-standing
incumbent Mike Ambrose.
Paul Helminger is now
chairman at Cargolux. He
holds the same position at
Luxair, which owns a 43.4%
stake in Cargolux.
Cameroonian carrier
Camair-Co has named
Matthijs Boertien to head
the national airline,
replacing Alex van Elk as
general manager.
Chang Kuo-wei, president of
Taiwanese carrier Eva Air
has been promoted to the
position of chairman.
UK leisure carrier Jet2 has
named Steve Heapy as its
new chief executive, replacing
founder Philip Meeson.
Slovenian fag carrier Adria
Airways has dismissed its
chief executive Klemen
Bostjancic. It has appointed
Mark Anzur to succeed him
in the interim.
Scottish regional airline
Loganair has named Stewart
Adams as chief executive.
AWAS has named Marlin
Dailey as chief commercial
offcer, reporting to the lessors
president and chief executive
offcer, Raymond Sisson.
Dailey joins AWAS from
Boeing after a 32-year career
where he worked in a variety of
executive leadership roles.
Jeff Fegan is to retire as chief
executive of Dallas-Fort
Worth International airport on
1 September or if a
successor is found earlier.
AirAsia has promoted
Siegtraund Teh to group
chief commercial offcer. He
replaces Kathleen Tan.
EUROPE
KREEGER IS THE NEW
HELMSMAN AT VIRGIN
American Airlines executive
Craig Kreeger has been selected
by Virgin Atlantic to spearhead
its operations, replacing outgoing
chief executive Steve Ridgway.
He joins Sir Richard Bransons
airline after a 27-year career at
American that included several
senior vice-president roles.
During this time Kreeger
worked closely with Oneworld
alliance member British Air-
ways, with which the US carrier
sealed its transatlantic joint ven-
ture in 2010, following years of
opposition by regulators.
Virgin vociferously lobbied
against that partnership, and it is
styling its recent tie-up with
Delta Air Lines as an assault on
its rivals dominant market share
at Heathrow.
I am delighted to be taking on
the role of Virgin Atlantics chief
executive, says Kreeger. I have
been competing with it for many
years, but have always admired
its laser focus on its people, its
products and its customers.
His immediate priorities will
centre on the implementation of
Virgins joint venture with Delta
as well as rolling out its new
domestic services at London
Heathrow airport.
In taking the place of Ridgway,
Kreeger succeeds one of the long-
est-serving airline chief execu-
tives in Europe.
Ridgway had been chief exec-
utive at Virgin since 2001, having
been with the airline since 1989
and becoming its managing
director in 1998.
He announced the end of his
11-year tenure last September.
I am very pleased to wel-
come Craig Kreeger to Virgin
Atlantic as the new CEO, says
Ridgway. He will be taking
over at a time when the airline
enters a new phase with the
Delta deal to implement, the
commencement of short-haul
competition for BA on UK
domestic routes, as well as the
arrival of the ultra-efcient [Boe-
ing] 787 eet in 2014.
Kreeger was appointed senior
vice-president for customers at
American Airlines in 2012,
having spent six years as its
London-based senior vice-presi-
dent for international.
He was picked for the job
ahead of Virgins chief commer-
cial ofcer, Julie Southern, who
had been touted in the media as
one of the leading candidates to
land the role.
He is replaced as its senior
vice-president customer service
by Englishman Jon Snook, who
was previously Americans vice-
president for operations plan-
ning and performance.
Martin Rivers London
HARTMAN TO STEP
DOWN FROM KLM
KLM chief executive Peter Hart-
man is set to retire in January
2014. While no replacement has
been announced, media specula-
tion in the Netherlands suggests
one of KLMs managing directors
and former transport minister
Camiel Eurlings is a candidate.
Hartman has not made any dis-
closure of his
intentions
after stepping
down.
He became
chief execu-
tive of the
SkyTeam car-
rier in 2007,
having been promoted from
deputy chief executive and chief
operations ofcer to succeed
former incumbent Leo van Wijk.
A former chairman of IATAs
board of governors, Hartman
joined KLM in 1973 as an engi-
neering and maintenance con-
troller, becoming vice-president
for ground services in 1989 and
senior vice-president for cus-
tomer services in 1990.
Since then he has held vice-
president roles with responsibil-
ity for personnel and organisa-
tion, and engineering and
maintenance. He was appointed
to the KLM board of managing
directors in 1997.
Alex Thomas London
MORE CHANGE AT
AIR BERLIN
Wolfgang Prock-Schauer has
been charged with seeing
through the turnaround at Air
Berlin after replacing Hartmut
Mehdorn as chief executive.
Prock-Schauer, former chief
of BMI, had held the post of
chief strategy
and planning
ofcer since
October after
the Air Berlin
board was
restructured.
The airline
is undergoing
a restructur-
ing programme but board chair-
man Hans-Joachim Korber
points out that there is still a
great deal more to be achieved
to meet our strategic commer-
cial objectives.
Mehdorn, who has been
heading the airline in the capac-
ity of interim chief since Sep-
tember 2011, stepped down
from this position by mutual
agreement with the board. He
retains his board seat.
Prock-Schauer had also for-
merly served as the head of
Indian carrier Jet Airways.
Niki Lauda has also left the
board of the airline and is being
replaced by Austin Reid, the
former BMI leader.
David Kaminski-Morrow London
Peter Hartman
Wolfgang
Prock-Schauer
Browse our extensive library of
interviews with airline leaders:
ightglobal.com/CEOs
ABU_250113_052 52 18/1/13 14:05:21
flightglobal.com/ab February 2013 I Airline Business I 53
One industry, one job site
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THE industry job site
at Jobs.Flightglobal.com
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ABU_25.01_053:ABU_250311_062-063 18/1/13 09:36 Page 53
COMMENT
fightglobal.com/ab 54
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Airline Business
|
February 2013
The home of Airline
Business on the web
is on the Airlines
Channel of
fightglobal.com:
ightglobal.com/ab
W
hen Gordon Camp-
bell Gray created
One Aldwych, his
luxury ve-star hotel
in central London,
he wanted it to be a snob-free zone
where everyone was treated exactly the
same. So I hired only Australian
doormen because they dont under-
stand snobbery. You couldnt educate
them to be snobbish they dont get it,
he says.
Some experts believe the Aussie
laid-back attitude to hierarchy is one of
the factors behind the countrys envia-
ble aviation safety record that is exem-
plied by its national airline. (Recall
those immortal words said by Dustin
Hoffman in the movie Rain Man:
Qantas never crashed.)
In the highly charged atmosphere of
a cockpit during the critical stages of
ight during adverse operating condi-
tions, it is vital that the junior pilots
have no fear of challenging the deci-
sions of their superiors. It is something
that comes naturally to Australians,
apparently, and far less so to other cul-
tures and countless numbers of air-
line passengers have died as a result.
But, in 2012, the rest of the worlds
airlines managed to all but mirror the
safety record in Australia. Whichever
way the statistics are cut, world airline
safety last year was exceptionally good,
particularly in terms of accident rates
and in simple accident numbers.
IATA is rightly proud of the fact that
for the rst time in history not one of its
member airlines suffered a hull loss to
a Western-built jet. It also underlines
the associations ongoing commitment
to raise the safety bar through its IOSA
safety oversight initiative.
A special report on 2012 safety sta-
tistics published by Flightglobals con-
sultancy arm Ascend explains that the
fatal accident rate dropped from about
one per 1.4 million ights in 2011 to
one per 2.3 million ights in 2012. On
this basis, 2012 was certainly the safest
So before all the champagne corks
start popping in celebration of 2012, ask
yourself whether you really believe that
the worlds airlines have suddenly
become as safe as the statistics suggest.
Unfortunately Ascends senior safety
analyst Paul Hayes, for one, thinks not:
2012s accident rate, perhaps, should
be considered more of a uke than the
new norm, he warns.
Of course the industry cares about
safety, because un-safety costs lives.
And, although not scientic, fatal acci-
dents are the way the public judge the
safety of the airline industry.
Ascend believes the underlying glo-
bal passenger fatality rate is probably
about one per six million passengers
carried about three times better than
during the 1990s, but only perhaps 60
times better than the 1950s.
Nevertheless, airline safety is contin-
uing to improve rapidly, and last year
has reinforced that trend in an emphatic
manner. The industry, on average, prob-
ably becomes twice as safe about every
10 years, while trafc growth globally is
only forecast to be perhaps 3-4% per
year over the same period. So, on aver-
age, we might expect about 30% fewer
fatal accidents a year by 2023.
Arguably, the only thing wrong with
the declining number of fatal/hull loss
accidents is that it makes it harder to
learn new lessons. But there are plenty
of incidents, and the industry must now
redouble its efforts on eradicating all the
remaining preventable accidents
especially the ones that havent killed
any customers yet.
year ever and, on the face of it, 65%
safer than 2011, which itself had been
labelled the safest year ever, says the
report. But, what conclusions can really
be drawn from safety statistics?
Those with long memories will
recall what happened after 1984, which
was at the time the industrys safest
year ever. Only two passengers died in
Western-built jet total losses (a Cam-
eroon Airlines Boeing 737) in 1984, but
safety fell off a cliff the following year.
In 1985, some 1,480 airline custom-
ers died in jet accidents, including 505
passengers in what is still the worst air
crash involving a single aircraft, a Japan
Airlines 747.
SAFETY IS NO ACCIDENT
The aviation industry can pride itself on making 2012 the safest year on record. But
while the fatal accident rate is at the lowest ever, history proves that it may be a little
premature for airlines to start their self-congratulation
Experts believe the
Aussie laid-back
attitude to hierarchy
is a factor behind
Australias safety
record exemplied
by national
airline Qantas
WHAT ARE THE IT TRENDS?
Airline Business and SITA have again
teamed up to produce the annual
Airline IT Trends survey, and are now
circulating the questionnaire. To fnd
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