Dec 1st, 2011

Aircraft as investments

By Dick Forsberg, Head of Strategy

Investing in aircraft assets is, on first principles, no different to making investments in any
other asset class. In its simplest form, the mantra of “buy low, sell high” applies, although
perhaps it should be modified to “buy well, sell better and manage assiduously in between”.

Everybody involved in the commercial aviation sector will be fully aware of its highly
cyclical nature. The importance of this fundamental fact cannot be overstated when it comes
to investing in aircraft – and within the broad definition of “investing” should be included
any transaction that relies on the asset’s future value as security against a financing
arrangement. Commercial lending banks are just as much taking asset risk on the provision of
secured debt into an aircraft financing as an operating lessor taking that asset onto their books
– although some banks only come to realise this when they are facing a loan default and
possible (re)possession of the asset.

The industry cycle has been a core component of commercial aviation for at least 40 years –
in other words since almost the dawn of the jet age. Over all of that period of time aircraft
have been bought and sold at various stages of their economic lives, including at the end of
their lives for part-out, with the aim of making some money from it along the way. Whilst the
volume of trading does not come close to that seen in some other asset classes and the
industry is far from transparent in the way that trades are reported, there is more than enough
empirical evidence available to establish close correlations between i) the age of an aircraft
and its value and ii) the proportion of the asset’s value that can be realised through a sale at
each stage of the industry cycle. Understanding these relationships, along with the ability to
manage the assets during the hold period, is critical to building a successful aircraft
investment portfolio.

Exhibit 1. – The Industry Cycle

The industry cycle influences not only aircraft values, but also the relationship between
supply (seats and aircraft) and demand (passengers), airline profitability, financial liquidity
and aircraft trading activity. All are linked and the transition from one phase of the cycle to
the next is at the heart of extracting value from aircraft investments (see Exhibit 1).

Before getting into the detail of how to better understand these key investment drivers, is it
worth noting that there are multiple investment models, each requiring different skill sets, or
at least different mixes of skills, to manage the portfolio and protect investor value. There are
also different types of investor, from hands-on traders of metal (either whole aircraft or
components) to arms-length passive financial institutions for whom an aircraft is nothing
more than an opportunity to diversify a financial portfolio or manage a tax position. In
between are a wide range of participants, from specialists to generalists, equity and debt
providers, whose intimacy with aircraft operations, technology and value trends is diverse
and frequently incomplete. Each investor category and each business model will have its own
focus, requirements and priorities when it comes to building an aircraft portfolio. The criteria
applied to the selection of assets for investment, as well as the timing and routes for realising
the embedded value in the investments will depend on the business model adopted and the
requirements and motivations of the investors, however the basic rules for selecting the right
assets, paying the “right” acquisition price and realising the expected profit on disposal apply
to all investors and all business models.

At its simplest level, the investment economics of an aircraft portfolio can be expressed as

Return = 1∫ n (Rent, Term, PV, FV, CoF)

In other words, transaction economics are a function of the purchase price, the sale price, the
lease income stream, which is itself a function of the terms of the lease agreement, and the
all-in financing costs. Whilst all of the elements of the investment proposition are important,
if the wrong asset type is purchased, too high a price is paid or the investor has unrealistic
expectations of future value performance, the expected returns will not be met.

Exhibit 2: Example of asset value movements through the cycle

Market to Base Value Ratio: 737-800

1997-2010 year of build

For most investors, aircraft investment will be a cycle play, buying when values are within a
cyclic low range and aiming to sell as the cycle approaches a future peak (See Exhibit 2). For
some, of course, their specialist ability to manage values as aircraft approach the end of their
economic lives will dictate a different strategy, where technical management of component
lives (especially engines) is the over-riding criterion.

Who invests in aircraft?

There are two broad categories of aircraft investors – the metal people and the money, or
paper, people. The metal investors are those that first come to mind when thinking about
aircraft as investments, but the latter are also an important component of the broader market,
especially with respect to sustaining financing liquidity. These include the buyers of EETC
paper in the US capital markets and investors in the public market lessors. Whilst the former
rely mainly on the tranched structure of their investment vehicles to manage risk, the latter
will apply the same judgement and investment decision tools as would be applied to any
other stock market transaction.
Equity investors on the metal side can be classified as primary or secondary. Primary
investors come in a variety of forms, but all are motivated by the strong risk-adjusted returns
that can be made from owning commercial aircraft, if the appropriate management platform
is in place and a suitable investment strategy applied. Aircraft have consistently generated
stable risk-adjusted returns for investors throughout the economic cycles, outperforming
many other asset classes (Exhibit 3).

Exhibit 3: Returns on aircraft and other asset classes 1983 – 2002

Equity investors from the private equity space have been prominent during the current
(2009/10) cycle inflection, with additional support coming from institutional investors such
as pension funds and insurance companies. Over the years, sovereign wealth funds and banks
have also been significant participants (e.g. Temasek, Investment Corporation of Dubai,
WestLB, Bank of China, RBS, Standard Chartered) and are likely to remain heavily engaged
in the sector.

A small number of operating lessors have positioned themselves in the public markets,
deepening the pool of investors through the IPO process and, due to the number of
shareholders, becoming proxy investors themselves, with a considerable amount of freedom
to make investment decisions within the organisation.

Whilst primary investors tend to be fully informed on the sector and closely associated with
an asset management platform that supports their investment activities, secondary investors
generally take an arm’s length approach and rely extensively on third party managers for
industry knowledge, investment decisions and asset management. At the secondary level,
investors can buy into managed asset backed securitisation (“ABS”) structures that offer
passive participation in pools of leased assets that are blended to de-risk the portfolio and
come with a recognised asset manager to support the income stream. Other variations on this
theme include managed funds for high yield investors, typically with a high equity
component and generating strong cash yields and lower IRR returns. There are also a number
of financial and tax-based structures that cater for the specific needs of an investor group (e.g.
JOLs, KG Funds). In short, the industry has always been innovative in developing asset based
structures that are investor friendly and do not require first-hand industry expertise on the part
of the investor.

Selecting the Right Assets

The first step towards building an aircraft investment portfolio is to ensure that the assets
acquired will achieve the value growth required and expected by the investors. From Exhibit
4 it can be seen that all aircraft are not equal when it comes to value retention. This chart
compares a selection of aircraft that could all be purchased new in 1999 and shows their
retained market values after twelve years, represented as a percentage of their original
acquisition costs. There is a large difference between the best and worst performers, with
value retention ranging from almost 60% down to 15% – a gap that can never be closed by
any means at ones disposal around the structuring or terms of the transaction.

Exhibit 4. Aircraft Value Retention 1999 – 2011

Whilst it is often possible to make a profitable investment in one of the weaker-performing

assets at some point in its life-cycle, it is critical that investors should be able to make a
determination of the likely value retention performance of their target aircraft at whatever
point in the life-cycle they are choosing to invest – and also to ensure that they have the
appropriate asset management skills and resources at their disposal, as these vary
considerably through the life of the aircraft.

The wide variation in aircraft value retention goes beyond simple trading volatility, which is
more related to how the market behaves at different points in the cycle – more of this later.
The fundamental ability of an asset to retain more, rather than less, of its value over time is
essentially a measure of its liquidity and the way to better understand the value retention
capabilities of different aircraft types is to compare their relative liquidities. In order to do
this, it is necessary to identify the key drivers that influence an aircraft’s attractiveness over
its lifetime. It is important here to think about attractiveness to investors rather than to the
airlines that operate the aircraft, although with several of the factors the interests of the two
will coincide. The core drivers, of which no more than 12-15 should be included in the
analysis, can be broken out into market-related and performance-related metrics. The former
include such things as total sales (in service and future orders), customer base (number of
airlines and geographic dispersion) and the level of lessor commitment, with negative factors
including the level of manufacturer support (proportion of the fleet on the OEM’s balance
sheet) and the number of aircraft in storage. Performance related factors include the level of
technology, the stage of the aircraft’s production life-cycle, its operating economics and fuel
burn, family membership, mission flexibility, potential for freighter conversion and the
degree of cabin and specification standardisation ( the Boeing 787 represents an important
step change in this regard relative to previous generations of widebodies).

Exhibit 5: Relative Liquidity Ratings

Having selected the appropriate factors, which should all be measurable today and capable of
being forecast into the future, a system of scores and weights can be developed and applied
so that a “perfect” investor aircraft would have a score of 100. In this way it is possible to
build up a relative hierarchy of investment scores for each aircraft or aircraft/engine
combination under consideration, allowing an investor to apply a cut-off threshold score,
above which an investment in the asset type would be deemed acceptable (see Exhibit 5,
which includes a target investment threshold of 55% – note that the specific aircraft types
shown have been disguised). The criteria selected and the scores and weights applied will
vary depending on the investor’s objectives and business model, but the output – a set of
“relative liquidity scores” – will allow any investor to identify investment targets that meet
their criteria on a consistent and objective basis. An ability to look ahead through projections
of the core criteria adds a significant dimension to the power of this approach by identifying
future inflection points that can be used to guide investment acquisition and disposition
decisions within the portfolio. Thus, aircraft types with ratings that begin below the threshold
but cross it over time are potentially attractive future acquisition targets, whilst those whose
ratings are trending below the line are more likely to be disposal candidates.

Understanding Aircraft Values

Having identified the aircraft types that meet the investment criteria and will therefore be
core target assets for the investment portfolio, the next step is to understand how their values
will perform through the phases of the industry cycle and over the longer term, starting with
what is an appropriate acquisition price and extending over the life of the aircraft.

Exibit 6. Real Value as percentage of Real Original Value

Statistical regression analysis (measured by R2) has shown that some 2/3rds of an aircraft’s
underlying value retention is directly correlated to nothing more complicated than the age of
the asset (see Exhibit 6, which shows the distribution of values achieved on the sale of
several thousand aircraft over the years, expressed as percentages of their original cost).

The clever stuff comes in figuring out what influences the remaining 1/3rd of value retention.
At any point in the life of an asset, its value will be closely linked to its remaining economic
life and, from an accounting standpoint, this can be benchmarked by calculating the Net
Present Value of the cash flows over the remainder of the aircraft’s economic life, making
appropriate assumptions around lease terms, lease rates, default probabilities, transition costs,
etc.

Economic life is ultimately determined by the ability of an aircraft to generate profits for the
airlines that operate it both in absolute terms and also relative to alternative aircraft types that
might be available as competitors at the outset or introduced later in its life. As a broad rule
of thumb, current generation 100+ seat commercial jets will have an economic life of around
25 years, although plenty will still be in commercial service beyond 30 years and life
extension through cargo conversion is also possible for some aircraft. Whilst there is always
plenty of debate, especially during low points in the industry cycle, around the appropriate
assumptions for economic life (which directly impacts depreciation policies and aircraft
values), there continues to be strong evidence, as shown in the survival curves in Exhibit 7,
that economic life has not materially changed since the 1970s. Short-term cycle-driven
events, such as the parting out of a small number of young in-production aircraft, should not
be taken as a signal that the entire fleet has had its useful life curtailed.

Exibit 7. Jet Fleet Survival Curves 1965 – 1995 Build Years

It should also be noted that, whilst it is important to be able to account for an aircraft’s value
at any point in its life, asset trading activity and value realisation is closely aligned to the
different phases of the industry cycle. Over the past several decades, a pattern of value
volatility has been established around the inflection points of the cycle, influenced by the
liquidity of the asset in question, and it is this volatility that drives the whole cyclical aircraft
investment model. Whilst the amplitude of this volatility will vary depending on the aircraft
type and its relative liquidity, there is a consistent temporal correlation between value
movements across all aircraft, which results in values rising and falling broadly in phase. This
can clearly be seen in Exhibit 8, which contrasts the value movement of two quite different
aircraft through the cycle.

Exhibit 8. Market to Base* Value Ratio

Constant five year old vintage aircraft

Before getting into aircraft values too deeply, it is worth setting out some definitions of the
key terms that are used when describing an aircraft’s value. Several of these are defined by
ISTAT (the International Society of Transport Aircraft Trading, which is the industry body
representing the interests of aircraft owners, appraisers and traders) and they are set out in the
box below.

Base Value is the Appraiser’s opinion of the underlying economic value of an aircraft in an
open, unrestricted, stable market environment with a reasonable balance of supply and
demand, and assumes full consideration of its “highest and best use.” An aircraft’s Base
Value is founded in the historical trend of values and in the projection of value trends and
presumes an arm’s-length, cash transaction between willing, able and knowledgeable parties,
acting prudently, with an absence of duress and with a reasonable period of time available for
marketing.

In most cases, the Base Value of an aircraft assumes its physical condition is average for an
aircraft of its type and age, and its maintenance time status is at mid-life, mid-time (or
benefiting from an above-average maintenance status if it is new or nearly new, as the case
may be).

Market Value (or Current Market Value if the value pertains to the time of the analysis) is
the Appraiser’s opinion of the most likely trading price that may be generated for an aircraft
under the market circumstances that are perceived to exist at the time in question. Market
Value assumes that the aircraft is valued for its highest, best use, that the parties to the
hypothetical sale transaction are willing, able, prudent and knowledgeable, and under no
unusual pressure for a prompt sale, and that the transaction would be negotiated in an open
and unrestricted market on an arm’s-length basis, for cash or equivalent consideration, and
given an adequate amount of time for effective exposure to prospective buyers.
Securitized Value or Lease-Encumbered Value is the Appraiser’s opinion of the value of
an aircraft, under lease, given a specified lease payment stream (rents and term), an estimated
future residual value at lease termination, and an appropriate discount rate. The Securitized
Value or Lease-Encumbered Value may be more or less than the Appraiser’s opinion of
Current Market Value. Moreover the Appraiser may not be fully aware of the credit risks
associated with the parties involved, nor all related factors such as the time-value of money to
those parties, provisions of the lease that may pertain to items such as security deposits,
purchase options at various dates, term extensions, sub-lease rights, repossession rights,
reserve payments and return conditions.

Source: ISTAT International Appraisers’ Program. 11th May 2008

Base Value is the most widely used term to describe an aircraft’s underlying, intrinsic value
i.e. before any impact resulting from prevailing market conditions. It is frequently applied to
a “standard” aircraft specification and configuration, particularly when quoted in a generic
sense or presented in a broader table or list of values, rather than applied to a specific aircraft
or serial number. Since Base Value pertains to a somewhat idealised aircraft and market
combination it may not necessarily reflect the actual value of the aircraft in question, but is a
nominal starting value to which adjustments may be applied to determine an actual value. It is
also true to say that in real life an aircraft rarely sees base market conditions, as base market
is a transitional state in the cycle between weaker and stronger conditions.

The Market Value of a specific aircraft will remain consistent with its Base Value in a stable
market environment, but where a reasonable equilibrium between supply and demand does
not exist, trading prices, and therefore Market Values, will vary from the Base Value of that
aircraft. The extent to which Market Values vary relative to Base Values through the cycle
will be determined by their attractiveness to airlines and to investors i.e. their relative
liquidity. The qualities of the aircraft will dictate the level of volatility (the size of the Market
Value movement above and below Base Value) attached to it. This is the arbitrage
opportunity for aircraft investors and, whilst perhaps stating the obvious, it is absolutely
critical to get it right.

A common additional requirement when valuing an asset is a Maintenance-Adjusted Value.

The majority of leases written today, at least for young aircraft, include return conditions that
relate to a zero time maintenance condition aircraft, rather than the historically more
traditional half-life status. This requires the lessee to return the condition of the aircraft at
redelivery to “as new” status, either by performing restoration work or by paying a pre-
agreed adjustment fee that reflects the difference between the actual status of the aircraft and
zero time. Either way, the lessor/investor gets back an aircraft that is, in monetary terms, in
the same technical condition as the day it was delivered. This is an important element of the
overall investment proposition and a key element of the transaction economics. However, as
the ISTAT definitions state, the standard appraised value relates to a half-life asset, so a
separate valuation of the aircraft in zero-time condition must also be obtained, to reflect the
expected condition of the aircraft at redelivery by adding back the value of the extra life.
So, how can investors find out what an aircraft is worth in Base, Current and Future Market
Value terms? Most stakeholders in the industry rely heavily on professional aircraft
appraisers, of which there are many, offering a wide range of resources and capabilities, each
catering to a different mix of customers and markets. At one end of the spectrum lie the
largest appraisal companies, often selling a range of advisory services, with global coverage,
substantial analytical resources and heavily invested in intellectual capital. At the other end of
the scale are a number of small “Mom and Pop shops” that rely heavily on their contacts and
networking to supplement their analysis, but usually have extensive industry experience. In
the middle are a number of mid-sized organisations, often with a more technical focus and
capability and well-suited to preparing more customised sets of values than their larger peers
will typically be asked to provide. In each case, it is important to remember that, as
customers, investors are buying opinions, not black and white facts. Whatever the level of
modelling and analysis that the appraisers bring to bear on the task, their output will always
be a blend of art and science. The assumptions that they build into their forecasts and their
individual views of markets, technical developments, manufacturers capabilities, etc, will
result in a set of value opinions that will differ from those provided by their competitors.

Exhibit 9. 777-300 ER Base Value Forecasts

Whilst the variations are usually quite narrow for Base Values of commodity in-production
single aisle aircraft, the divergence may be substantial for widebodies or for less liquid
aircraft (see Exhibit 9) and increases with the forecast horizon. Hence, it is critically
important for investors to understand the capabilities and characteristics of each appraiser and
also what their target customer base may be (several specialise in US capital markets
transactions, for example, which have different requirements from those of aircraft traders
and produce different outputs). Having selected an appraiser that matches their requirements,
an investor should take the time to understand as fully as possible the core assumptions and
considerations that are going into the appraiser’s analysis to ensure that they do not hold
diametrically different views to their own.
In some cases, the appraiser may be able to incorporate bespoke assumptions into their
analysis. In most cases, however, and certainly when it comes to downloading valuations
from the automated on-line valuation services that are now offered by several of the larger
appraisal firms, it may not be possible to obtain anything other than a set of values based on
standard assumptions. This lack of controllability over such a key component of the
investment mix leads to the conclusion that smart investors should have their own in-house
valuation capability to augment the services available from external appraisers. This is still
rare amongst aircraft investors and leasing platforms as it requires not only a very specialised
skill-set, but also considerable investment in time and money to develop a robust set of tools
that essentially replicate what the professional valuation firms are providing. However, for
those that are willing to make that investment, the benefits are significant. Firstly, the
dependence on third party assumptions, which are often opaque, is removed; secondly, with
the ability to input one’s own assumptions comes the capability to run alternative scenarios
(for example, assuming a slower economic recovery, significantly higher fuel prices, the
launch of a new replacement aircraft, etc), which helps to build out a volatility picture;
thirdly, it brings the ability to benchmark and validate what the external appraisers are saying
about asset values. However, the appraisers cannot be ignored and exert considerable
influence – remember that the world at large, including lessees, lessors, lenders, aircraft
buyers and sellers all have sight of the appraisers’ output and most of them will be relying
upon it.

Acquiring the assets

The window of opportunity to acquire assets at attractive discounts to their long-run base
values commences as the cycle moves into its weakest phase and lasts until a point in the
recovery when the level of discount available no longer supports the return criteria for
investors. Rather than attempting to identify the exact nadir in the cycle and cluster purchases
narrowly around that point, most investors’ buy phase will span 3 – 4 years, including the
early stages of the upturn, during which they will be able to continue to acquire aircraft at an
acceptable discount to base values.

Acquisitions may be sourced through three broad channels: firstly, through the purchase and
leaseback of aircraft delivering to airlines as part of their own direct orders with the
manufacturers, or of aircraft already delivered and on the airline’s balance sheet; secondly,
through the purchase of aircraft or portfolios of aircraft from other lessors and investors; and
thirdly, by way of direct orders placed with the manufacturers. Whilst the sale and leaseback
channel most commonly sources the core of investor portfolios, portfolio acquisitions are
attractive as a way of getting earning assets onto the books quickly or through particular
circumstances pertaining to the vendor which offer an attractive acquisition opportunity.
Portfolios or bilateral purchases will also be an important source of assets for investors in
used aircraft. Direct orders may not be appropriate for all business models, but can provide a
strategic benefit by ensuring that a pipeline of aircraft is available for placement into airlines
throughout the cycle, even at times when sale and leaseback pricing has become relatively
unattractive, and provides an additional product for a lessor to offer. Direct orders should
ideally be placed during the weaker phase of the cycle, when competitive pricing is more
likely to be available, resulting in a delivery stream of well-priced aircraft peaking towards
the top of the cycle when the placement of new assets is highly sought after by the airlines
and supports strong lease rates.

Taking care of asset value

Having selected their target aircraft and made prudent investments at the right point in the
cycle, investors will have their eyes on some point in the future when they can expect to
harvest the embedded value of these aircraft as their market values rise with the cycle
recovery.
However, in order to ensure that the aircraft they sell still retain all of the value they expect, it
will be essential to manage the aircraft assiduously from a technical and risk perspective.

Technical asset management begins even before the asset is acquired, as there is potentially
significant value to be lost or gained around the detailed specification of the aircraft. Beyond
the core characteristics of the aircraft (weight, engine type, engine thrust) are a wide range of
option items that may be selected by a purchaser, either for inclusion in a new build aircraft
or added/removed at a later date . These will include options that enhance performance (such
as auxiliary fuel tanks, winglets), address operational requirements (TCAS, crew rest
modules, air-stairs, cargo loading systems) or enhance the on-board product (in flight
entertainment systems, galley layouts, over-sized overhead bins). Some may be required for
regulatory purposes and most will have both a cost (to install/acquire) and a value, which
should be considered in the context of whether the item is a long-term enhancement for the
majority of possible future operators of the aircraft. Some of the items are high cost, but may
not be high value and a detailed specification review by technical experts will ensure that the
investment price paid reflects the value of the selected specification.

Technical input into the drafting of a lease contract is also highly value-added, as this is
where the return conditions are defined, as well as the level of any maintenance reserves that
will be paid during the term of the lease. Having the “right” return conditions can have a
material impact on the overall financial performance of the investment, running potentially
into millions of dollars. Maintenance reserves protect the lessor/investor from the full cost
having to put an aircraft into its return condition in the event of a default and it is important
that the correct rate is set to reflect the actual or proposed operation of the aircraft by the
lessee.

Finally, from a technical perspective, regular inspections of the aircraft throughout its time on
lease, as well as at lease expiry, plus the ability to audit, approve and monitor the
maintenance provider that is taking care of the asset all protect and enhance the value of the
asset and the investment made, as does close technical involvement and support during the
redelivery process itself.
In the same way, a rigorous approach to credit risk management will also help to protect the
asset and the income stream from the investment, by providing on-going oversight of the
aircraft operator and an early warning of any deterioration in business performance that might
suggest that a default may occur. At this point, the involvement of “work-out“ specialists,
including commercial, financial and technical experts, will quickly be able to determine
whether it makes sense to work with the airline as they seek to resolve their problems or
whether a termination of the lease should be pursued. It is always better to be decisive in
these circumstances, as delay and uncertainty invariably make the situation worse (i.e. the
level of unpaid receivables keeps on rising). As has often been said, “hope is not a strategy”
and the investment is far better protected by having the ability to move fast and decisively to
mitigate any losses.

Realising profits
For most investors, returns will be realised principally from the arbitrage between the prices
at which aircraft are acquired and their market value on disposal. Where a dedicated
leasing/asset management platform is established to support the investment, there may be
additional value in the platform itself as a “machine” capable of acquiring, managing and
disposing of aircraft assets efficiently and profitably based on the skills and experience of the
team and the network of relationships it will have with industry stakeholders.

In any investment, the exit strategy is best determined at the outset. There are several options
available for aircraft metal investors, all of which are time sensitive – as noted at the start of
this chapter, this is essentially a cycle play. In the majority of cases, each, or at least most, of
the options will be brought into play as the recovery cycle develops. This will occur on a
sequential basis as the channels will open up at different points in time in the cycle.

If only to enhance investor confidence, it will be important to demonstrate the liquidity of the
invested assets as early as possible in the recovery cycle and a small number of assets may be
selected for sale whilst the cycle is still at a relatively low point and opportunities for
acquisitions still exist. As the cycle improves, additional distribution channels, including
larger bilateral sales, ABS structures and managed funds, will become available.

Assets targeted for sale should not simply be those yielding the largest profits; indeed this is
often a poor strategy as it reduces the quality and earning potential of the remaining portfolio.
Asset sales in support of an overall portfolio strategy can help to reduce concentrations,
improve yields and otherwise manage asset and counterparty risk exposures.

Pursuing a systematic program of asset disposals through the up-cycle by a combination of

“retail” sales of individual aircraft or small clusters of aircraft to smaller investors and more
structured “wholesale” disposals (e.g., securitizations) of larger portfolios of aircraft delivers
a number of strategic objectives over and above the harvesting of embedded profit:
 1. It serves as a hedge against the realization of value solely through a corporate
disposal;
2. It creates financing “headroom” for further acquisitions;
3. It enhances the platform franchise value by demonstrating an active trading
capability;
4. where sales are to comparatively passive investors, it adds an income stream
by establishing a role as an asset manager.

In aircraft leasing, as in the economy generally, M&A activity tends to occur in the run-up
towards the peak of the business cycle. During the last industry cycle, market values for
aircraft rose above base values in 2005 and disposals of aircraft leasing platforms in that
cycle were concentrated in the period from 2005 to 2007 (see Exhibit 10 below).

Exhibit 10: Platform Valuation Metrics

Market
Announced Closed Transaction EBITDA
Target Acquiror Value
Date Date Value ($M) Multiple
Multiple
Pegasus
11/5/07 11/5/07 Terra Firma 3,400 N/A N/A
Aviation
22/1/07 22/1/07 Guggenheim Aircastle 1,595 N/A 0.98x
Bank of
15/12/06 15/12/06 SALE 3,234 13.9 1.09x
China
Och Ziff
28/9/06 18/1/07 GATX 1,460 N/A N/A
/Macquarie
30/1/06 24/3/06 AWAS Terra Firma 2,500 10.6 1.03x
25/4/05 30/6/05 debis Cerberus 2,167 8.5 0.8x
9/3/05 16/6/05 Boullioun ACG 2,650 N/A 0.93x

Source: Public data

Acquisitions generally take one of two forms: i) consolidating (e.g. acquisitions of Bouilloun
by ACG, Guggenheim by Aircastle and Pegasus by Terra Firma; or ii) facilitating market
entry (e.g. acquisitions of AWAS by Terra Firma, SALE by Bank of China, GATX by Och
Ziff and Macquarie and debis by Cerberus). IPOs during this period (e.g., Genesis, Aircastle,
Babcock & Brown Air) were predominantly highly structured/high yield disposals of a
portion of the portfolio of a larger entity rather than disposal of an entire entity as such.

Given the cyclical nature of the business and the inherent uncertainty associated with the
cycles, investors must be prepared to hold their investments over a longer term if the
circumstances for an exit are not favourable. In this regard, having the support of a capable
asset management platform will substantially mitigate the risks associated that arise with the
passage of time – remarketing, managing defaults, technical asset management, etc. An exit
executed under duress or in pursuit of a fixed term investment strategy is unlikely to realise
the anticipated returns and investors are well advised to reflect on these issues at the outset.

Dick Forsberg
Head of Risk & Strategy, Avolon

Tel: +353 1 231 5825

Mobile: +353 87 969 1369

Email: dforsberg@avolon.aero

This article was first published in the 4th Edition of Aircraft Financing, from Chapter on
“Aircraft As Investments”, published by Euromoney.

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