Air travel demand remains strong, despite minor disruptions

Despite some softening in global economic growth, particularly in emerging markets, the
global passenger traffic results for June-to-August showed a continuation of the strong
growth in air travel demand. The only slowdown (a rise of 5.3%) has been recorded in June,
in part due to the timing of Ramadan, which affected the demand in the Middle East.
However, the industry expanded in July and August resuming the growth trend seen earlier
in the year, resulting in the overall 7.1% year-on-year growth during the period.
International travel in the Asia Pacific rose 7.7% during the period. This is a slowdown as
compared to 9.4% growth, recorded in May. Emerging regions of Asia have experienced
notable declines in trade activity in 2015. Meanwhile, according to Markit, Chinas
manufacturing sector has been struggling during the recent months, accompanied by
weakness in export orders, which can also negatively affect demand for business-related
international air travel.
European carriers recorded a 5.5% rise in international RPKs. As indicators of business
activity suggest that the regions economic recovery is on track, this is supporting demand
for international travel on carriers in these regions.
International air travel on North American carriers was up 4.2%, with the results for July and
August being by far the strongest in 2015. Expectations for better economic performance in
H2 compared to H1 should further support demand for air travel, but it is likely that the
strengthening dollar will continue to place downward pressure on international leisure travel
to the US.

Meanwhile, international air travel in the Middle East rose 14.7%, despite moderate growth
in June. According to Markit, major economies in the Middle East, including Saudi Arabia
and the United Arab Emirates, have seen slowdowns in non-oil sectors in Q2 2015, but the
rates of growth remain robust and this should help sustain solid growth in air passenger
demand for local carriers.
Growth for Latin American carriers was a robust 7.0% year-on-year. Regional trade volumes
have shown strong improvement during H1 2015, and despite weakness in Brazil and
Argentina, the increase in trade activity has provided a boost to business-related
international travel.
International RPK growth for African carriers was the weakest among all regions, with
volumes up 2.2%. However, the results improved in July and August, with a solid rise of
4.9% and 3.6% respectively. The upward trend, however, have been very weak, with
volumes year-to-date contracting 0.5%. The most recent result, although an improvement,
could well be owing to volatility in the volumes, as fundamental drivers suggest the
downward trend could continue.
All in all, although the global economic outlook is decidedly mixed, demand for aviation
connectivity remains strong. Growth in air travel, particularly the more price sensitive
economy class leisure travel, has received some support from lower fares. As the fall in oil
prices compared to mid-2014 expected to sustain growth and demand for passenger travel
in 2015, further expectations are broadly positive.

Airline business rollercoaster do banks really know what they sign

up for?

Several thousand at Air France, six thousand at Malaysian Airlines and almost 11,000 at
Transaero - these are the potential job cuts to be carried out by these major world carriers.
This once again comes to show that airline business always balances on a fragile edge
between profit and loss. However, if a carrier reaches an extreme point of bankruptcy, what
awaits its financial partners? Will the banks be able to repossess the aircraft they have
previously financed? Or will they end up with a $0.5-1 million loss-generating asset they
know
almost
nothing
about?
A grounded narrow-body aircraft generates approx. $40-50 thousand worth of losses each
month in a form of various technical and engineering works mandatory to keep it in fit-tooperate condition. In addition, one has to pay airport parking fees from a couple to a
dozen thousands of dollars per month. Multiply that by two, three or ten aircraft and you will
end up with quite a noticeable amount that someone has to pay for an unused fleet. If
unsettled, these debts will eventually be transferred to the aircraft owner as grounded
airplanes
are
often
used
as
bail.
Moreover, if a grounded aircraft is not properly maintained or is being put on storage until
better times, its preparation for re-entrance into service might require 3-4 million dollars. A
wide-body will require at least twice as much. For an investor, it also means lost returns due
to
unreceived
lease
or
interest
payments.
As an investment, aircraft are quite attractive since they employ large sums of money and
generate good returns up to several millions of dollars per Airbus A320 type
aircraft. However, ceaseless rollercoaster situation on the financial market and such events
as the most recent Black Tuesday in China discourage banks and institutional investors
from putting money into securities. Instead, they explore more predictable and long-term
assets which generate stable returns for a number of years, explains Tomas Sidlauskas,
Vice-President
at
AviaAM
Leasing.
A lucky investor will enjoy anticipated 7-12% returns if the aircraft is being successfully
operated by its first and second lessees for the term of both contracts. From the investors
side, this will require minimum engagement into technical processes (often, only during
aircraft
redelivery
and
delivery
to
the
second
lessee).

In some cases, a multiple aircraft finance deal foresees that the financing of separate assets
may be transferred to third-party investors. This way a major bank like Deutsche Bank,
Citibank or Goldman Sachs which already has certain experience on the aviation market
secures the required multi-million funding for an airline (or a leasing company), and then
sells some of the liabilities to other banks or investors. That is how new aircraft market
entrants and smaller banks typically receive an asset which they know little about. Of
course, primary banks did all required due diligence to ensure that the asset is liquid, but it
doesnt mean that together with the liabilities second-tier investors get precise instructions
how
to
maintain
and
remarket
the
aircraft.
Over the past 5-7 years, dozens of airlines went down all over the world thus suddenly
leaving their financial partners with numerous aircraft. Are these aircraft in good or poor
condition? What are the dos and donts for the bankrupting operators with regard to their
assets before they fully seize operation? Will it be possible to re-market the aircraft ASAP in
order to ensure that no-profit generation period doesnt exceed a couple of months? Thats
quite a set of time-sensitive questions for someone who has anticipated trouble-free
monthly returns 15 years in a row, shares Tadas Goberis, the CEO of AviaAM Leasing. In
other words, aircraft financing business requires you to have both technical competence and
round-the-year communication with as many potential lessees as possible. This is the only
way to prevent millions of dollars worth of losses in an unforeseen situation. Otherwise, look
for someone who already holds the required knowledge and let them act on your behalf.

Average Market Values

While the aircraft values were stable in Q2 2015, the period under review shows various fluctuations in all
aircraft
segments.
In Q3 2015, the narrow-body aircraft market values have shown a downward trend for almost all aircraft
types. Airbus A320 and Boeing 737-700, after a decline in value in Q2, were the only types that managed
to keep their value stable. In the meantime, Airbus A319 and Boeing 737-300/400/800 lost 3%, 6%, 8%
and
1%
of
their
market
value
respectively.
On the contrary, wide-body aircraft managed to increase their market values with the only exception of
Boeing 777-300ER the market value of which remained stable in Q3. The rest of the aircraft types -Airbus
A330-200/300 and Boeing 777-200ER - gained 5%, 1% and 5% in their market value respectively.

With regard to regional aircraft, their market values fluctuated from -8% to 8%. Bombardier CRJ-100/200
and Bombardier CRJ-700/705 were the only ones to gain 5% and 8% to their average market values,
respectively. Meanwhile, the values of Embraer ERJ 135ER/145ER/195LR suffered 8%, 3% and 2%
declines respectively.