Corporate Jet Market Conditions – 1H20

In this edition of mba Aviation’s Insight Series, mba Valuations Group explores the Corporate Jet Market.

How Many Aircraft did Major Airlines Operate Last Week?

In this edition of mba Aviation’s Insight Series, Ryan Cross investigates the fleet activity of major operators throughout the past week.

Key Concepts:

  • United Airlines leads the three US legacy carriers in terms of fleet activity, with 78% of its aircraft flying in the past week days—albeit with each aircraft typically operating fewer frequencies.
  • China’s large carriers are ahead of the rest of the world in fleet activation rates, with China Eastern Airlines and China Southern Airlines both operating a significant majority of their fleets.
  • The two main Australian carriers lag behind major operators elsewhere in the world.

U.S. Air Operator Safety Trend

In this edition of mba Aviation’s Insight Series, Danielle Hershey compares Part 121 Air Carrier Operations and Part 135 Air Taxi and Commuter Operations significant safety event trends.

Key Concepts:

  • Part 121 Air Carrier Operations continue to hold steady despite one significant event in 2019.
  • Although Part 135 Air Taxi and Commuter accidents with substantial damage have a decreasing trend over the past ten years, significant accidents continue to rise for Part 135 Operations.
  • Overall, Part 121 Air Carrier Operations continues to show a steady and stable trend within safety.

 

Evaluating the Airbus A220 and its Competition

In this edition of mba Aviation’s Insight Series, Ryan Cross analyzes how the A220 stacks up against its competitors.  He weighs the A220-100 against the Embraer E195-E2 and the A220-300 against the A319ceo and A319neo.

Key Concepts:

  • The A220-100 fills the niche for aircraft carrying about 110 to 125 passengers, but this type has sold in relatively small numbers.
  • Airbus’ orderbook reveals how the A319neo has sold poorly: the airframer counts 84 net orders for the type, amounting to just 1.1% of the entire A320neo family backlog.
  • The A319neo offers unappealing operational economics compared to the popular A320neo and A321neo.  This explains why the similar A220-300 has sold better.

 

Impact of Covid-19 on Capacity Planning and Revenues

In this edition of mba Aviation’s Insight Series, Steven Harokopus takes a look at the impact of Covid-19 on capacity planning and revenues.

The eight largest US air carriers by revenue have reduced capacity to varying degrees in response to lower demand and in an effort to save costs through smaller operations.

In the first half of 2020, the Subject Airline reduced their offering of available seat miles (ASM) approximately 43%, compared to the same period last year  Despite this drastic reduction in capacity, revenues per ASM decreased by an average of US¢2.6.

LCCs took advantage of their flexibility and maintained more capacity compared to their mainline competitors.  Southwest reduced capacity the least, cutting only 32% with a RASM reduction of US¢4.4.  Among the three mainline carriers American maintained the most capacity allowing them to overtake Delta in revenues for the first half of the year, even with a US¢3.2 reduction in RASM.

mba Insight: Evaluating the Boeing 787’s Backlog and Competition

In this edition of mba Aviation’s Insight Series, Ryan Cross analyzes the expected production schedule for each 787 series, reviews the pace of deliveries of the 767 and A330ceo programs, and studies 787 deliveries alongside those of its competitors from Airbus.

Key Concepts:

  • Due to the disruption caused to commercial aviation by the COVID-19 pandemic, Boeing cut production of the 787 Dreamliner aircraft to six aircraft per month.
  • Boeing has already delivered 975 aircraft (64.6%) of the existing 787 orderbook, leaving a backlog of 535 aircraft.
  • The pace of 787 deliveries demonstrates the aircraft’s first-to-market advantage over its competitors from Airbus, the A330neo and A350.

 

Trends in OEM Delivery Rates

In this edition of mba Aviation’s Insight Series, Ryan Cross explores how the pace of new aircraft deliveries slowed during the global financial crisis of 2007-08, in comparison to the sharp decline in deliveries caused by the COVID-19 pandemic.

US Airlines’ Effort to Manage Liquidity

In this edition of mba Aviation’s Insight Series, Steven Harokopus, Senior Analyst, Airline & Airport Services, takes stock of the US Airlines’ liquidity positions and their efforts to raise capital and preserve cash during the Coronavirus Pandemic.

Key Concepts:

  • Coronavirus related liquidity concerns have prompted carriers to encumber assets including SGR and frequent flyer program intangibles
  • Airlines are utilizing creative solutions to raise liquidity and reduce cash burn
  • CARES PSP funds are an important contribution to reaching management liquidity targets

The Covid-19 Pandemic has pushed air travel demand to historic lows for the first half of 2020 and led to widespread groundings that have shocked the industry’s passenger revenues. Many US airlines have seen ticket refunds outpace net revenue and prompted management to raise capital and implement changes to reduce cash burn. US carriers drew down credit lines and secured billions in new financing during the first quarter of 2020 as the initial downturn of the pandemic hit. Airlines moved quickly to bolster their balance sheets with cash. The table below shows the cash ratio for the eight largest US passenger airlines. The cash ratio is a measure of liquidity that compares the firm’s available cash to its near term liabilities. Although it is not always a widely used credit metric this ratio presents an interesting look at how management teams are handling this crisis as cash flow from operations has widely stopped. First quarter results indicate that for many of the subject airlines the cash ratio has slipped.  Alternatively, Southwest Airlines went into the crisis with a strong balance sheet and was able to quickly secure additional long-term financing that bolstered the firm’s cash ratio.

As second quarter results are reported, we expect to see the cash ratios improve as management teams have made significant progress securing long-term financing, managing costs through schedule changes and voluntary employee leave, and generating cash receipts as we begin to see a slight uptick in demand from the VFR and leisure segments. During the second quarter, all of the airlines above have been successful in raising capital by encumbering assets. In addition to collateralizing their fleets, US carriers have been able to utilize intangible assets to shore up balance sheets and refinance short-term debt. Delta, American, and JetBlue have collected raised over $6.7 billion in long-term financing through SGR assets and United recently issued long-term debt of $6.8 billion secured by its Frequent Flyer Program, Mileage Plus Holdings, LLC (“MPH”). Another significant factor improving airline liquidity is US government aide through the CARES PSP program. US airlines agreed to delay involuntary furloughs, continue service on underserved domestic routes, and limit financial engineering and executive compensation in return for grants and low interest loans from the US Treasury. The Treasury Department anticipates over $22B in total payroll support for the Subject airlines. Payroll support will keep routes open and airline staff employed as the carriers work to make travelers feel safe again.

All of the subject airlines have reported improvements in cash burn rates as the pandemic continues.  Delta and American have even set the ambitious target of approximately zero cash burn by the end of 2020. The Covid-19 crisis has seen many employees across the industry taking voluntary leave or accepting early retirement packages. Management teams have made significant progress in deferring or eliminating capital expenditures and non-essential projects. Raising long-term funds and taking creative approaches to preserving cash is going to be essential for the US carriers to continue operation and capture demand as it recovers.

 

Utilization Reductions due to Groundings Impact Maintenance Cash Flows

In this edition of mba Aviation’s Insight Series, Natasha Sidhu and Steven Harokopus of the Forecasting & Modeling group examine the effects of grounding related to COVID-19 on Aircraft Maintenance cash flow for lessors.

Key Concepts:

  • In general, maintenance compensation increases at near to the same rate as maintenance condition decreases, so when this is the case, a significant decrease in utilization will not have a significant negative impact on the maintenance cash flow portion of an ABS, barring bankruptcies and renegotiation of lease terms.
  • Leases with compensation significantly above or below cost should be re-forecasted to see if engine condition is now expected to be significantly higher or lower than previously forecasted.

Ups and Downs in the 2019 Air Cargo Market – Part I

At least nine-tenths of the global population live in countries with travel restrictions due to the COVID-19 pandemic.[1]  These restrictions have driven airlines to ground the majority of their fleet, causing a significant short-term reduction in utilization. As of April 13, 2020, mba records 11,606[2] aircraft grounded. Aircraft lessors typically collect supplemental rent tied to the asset’s utilization in the form of maintenance reserves. Aviation investors will see a reduction in liquidity related to maintenance reserve cash flows, in addition to liquidity reduction due to payment deferrals.

The impact of COVID-19 has been compared to the 2003 SARS epidemic when revenue passenger kilometers (RPKs) for the Asia-Pacific region and the Chinese domestic market bottomed out three months after the start of the outbreak followed by a recovery period before traffic returned to normal levels after six months.  However, the slowdown of growth resulting from the COVID-19 pandemic is expected to last much longer and affect all regions. IATA has reported that worldwide flights are down almost 80% by early April, the industry has been virtually grounded outside of the US and Asia domestic markets.

[1] More Than Nine-in-ten People Worldwide Live in Countries with Travel Restrictions Amid Covid-19 Phillip Connor – https://www.pewresearch.org

[2] REDBOOK, mba Analysis

The global groundings have resulted in a sharp decline in revenue and cash flow for airlines.  Aircraft lessors are negotiating with their lessees on rent deferrals and lease terms to bridge this period of uncertainty.  However, if airlines are unable to operate for an extended period of time, they face an increased risk of insolvency.  Should that occur, aircraft lessors would need to recover, remarket, and possibly perform costly maintenance to their aircraft.

How does a decrease in utilization affect forecasted maintenance values and cash flow?

Most maintenance events will be pushed to the future

A prolonged decrease in utilization will push utilization-driven maintenance events into the future. As per the breakdown in Maintenance Matters I, utilization-driven maintenance events account for the significant majority of maintenance costs and values. Based on aggregated data from recent short-term maintenance cash flow forecasts, calendar-driven maintenance accounts for ~15.0% of maintenance outflows.  Only airframe Heavy Checks and, generally, landing gear overhauls, are calendar driven. Unless the aircraft is placed in a long-term storage program, their date of next events will not be pushed forward for calendar-driven events. However, these events cost significantly less than engine overhauls and engine Life Limited part stack replacements. If a lessee defers maintenance payments and is not utilizing the aircraft, then the increase in lessor exposure is only from the calendar-driven events.

There is a potential benefit for lessors in situations where airlines are reaching to reduce cash outflows by as much as possible. If maintenance is compensated at the expected event costs, but major shop visits are held off by minor repairs, maintenance compensation accounts could exceed the cost of the maintenance events at time of redelivery, and in most lease agreements, the lessor would keep this excess.

For example, take an engine with a planned overhaul interval of 20,000 Flight Hours and an expected overhaul cost of $3 million, with compensation negotiated to be $150 per flight hour, so that when an overhaul is performed, the reserve bucket equals the cost. Let’s model a base case normal utilization for this engine, a Scenario 1, where there is decreased utilization due to COVID-19, and a Scenario 2, where there is decreased utilization and non-qualifying engine repair is used to extend the life of the engine another 1000 Flight Hours.

The Maintenance Value of Leases with Compensation varying significantly from cost could change significantly

In a situation where the supplemental maintenance rent matches the cost of maintenance, a utilization decrease will slow the decrease of the asset’s maintenance adjusted value. Similarly, an increase in utilization will lower the asset’s maintenance adjustment, but the lessor will receive an offsetting incremental cash flow. This outcome breaks down when maintenance reserves are higher or lower than the cost of the corresponding maintenance events.

Maintenance compensation is heavily negotiated and, especially for reserved aircraft, can be based on assumed maintenance costs and cost escalations at delivery, often over a decade before redelivery. This can lead to maintenance compensation rates being significantly above or below cost over interval at redelivery. If engine overhauls were anticipated to occur slightly before, after, or during redelivery could have Lease Encumbered Values become significantly higher or lower.

Historical Values Trends of Commercial Aircraft Over Time

In this edition of mba Aviation’s Insight Series, Ryan Cross and Alex Cosaro assess how aircraft values performed during and after recent shocks to the global economy.

Key Concepts

mba uses its data on the fluctuation of aircraft values over time to gauge how values might change in the future, due to the economic disruption caused by the coronavirus (COVID-19) pandemic.