A Look at Aircraft Finance – Part I

The availability of capital to fund aircraft acquisitions is one of the critical support structures that allows for commercial aviation industry growth and prosperity. In an environment of low central bank interest rates and highly liquid markets, investors from around the world have been flocking to the aircraft finance sector. While the enthusiasm for the industry is welcomed and has provided capital for fleet renewal and growth, some lessons can be learned from the historical progression of commercial aircraft finance that lessors, operators, and investors would be wise to heed.

In this edition of mba’s insight series, we will look at the three major pillars of commercial aircraft finance, the relationship of operators and lessors to those pillars, and the past investment cycles seen in the industry. From this solid foundational understanding, we will explore the importance of accurate asset valuation and discern some lessons that can be garnered from the study of past investment patterns. Finally, we’ll apply those lessons to the future of aircraft finance, identify emerging trends, and look for areas where caution may be warranted.

The Three Pillars of Aircraft Finance

When airlines or leasing companies acquire new aircraft, closing the transaction on a cash basis only accounts for about one-quarter of aircraft deliveries. In 2016, cash was used in approximately 28.0% of the $122 billion spent on procuring commercial aircraft.[i] For airlines, in particular, there are drawbacks to acquiring aircraft using cash. The airline winds up assuming the depreciation of the aircraft and the capital outlay is often enough to give both internal accountants and investors significant pause. For leasing companies, the reasons not to use cash in a transaction are much the same; if interest rates are attractive enough, there may be financing avenues that are more economically advantageous. These less cash-intensive alternatives make up the three main pillars of commercial aircraft finance.

Bank Debt

Taking on bank debt was, until the advent of leasing and elaborate collateralization schemes, the primary method by which airlines (and later leasing companies) acquired commercial aircraft. On the surface, bank loans for aircraft look much like a mortgage on a home or commercial building; the bank supplies the upfront cost of acquiring the asset and is paid back by the operator over time with interest added.

While they may seem relatively simple, in reality, bank loans for commercial aircraft can be highly sophisticated financial instruments. There is often an upfront cost to the leasing company or airline; 15.0% of the amount of the transaction is a typical number, but this can vary depending on the value of the underlying asset and the creditworthiness of the entity purchasing the aircraft. Large commercial banks will often pool their resources, spreading the risk among a syndicate of different financial institutions to fund the aircraft acquisition deal. Bank loans can cover the purchase of a single aircraft, or many separate airframe purchases may be packaged together into portfolios worth hundreds of millions of dollars. These loans can be unsecured, or the value of the aircraft themselves may secure them.

Often banks provide loans to airlines or leasing companies on a short-term basis, with the expectation that the purchaser will refinance their purchase. Known as warehouse or bridge loans, these arrangements can involve either fixed or revolving lines of credit that allow the aircraft acquisition to proceed while other financing deals are put into place. Additionally, banks may provide pre-delivery financing to allow commercial aircraft purchasers to make the required payments on new aircraft as they are being built. These payments are often equal to an amount that is between 10.0% and 20.0% of the sale price.

Capital Markets

Banks represent a single source of capital with which to fund purchases. The downside of bank loans is the substantial risk to a financial institution’s balance sheet; they are exposed to the depreciation of the aircraft asset and the risk of operator insolvency in what is a historically highly-cyclical industry. The capital markets offer a significant reduction of risk for lenders, providing financing to the commercial aviation marketplace. By collateralizing the debt, the risk of the transaction is spread out among a large pool of investors. Additionally, leveraging bond markets for aviation financing represents a significant increase in the amount of available capital, creating competition and reducing overall lending costs across the landscape.

Access to investor funds come in three general varieties:

  • Unsecured bonds: These bonds are most typically used by leasing companies who require flexibility in terms of payment profile. While underlying physical assets do not back them, these products are nevertheless very popular. In 2017, approximately $4.85 billion in unsecured bonds were issued to commercial aircraft leasing companies.[ii]
  • Asset-Backed Securities (“ABS”): These securities are backed by the value of the aircraft themselves, and in the case of leasing companies, the value of the rental contracts. ABS’s are complex financial instruments that are organized into tranches of payment priority and risk. The highest tranches are paid first but at lower return rates than the lower tranches. ABS’s are increasingly becoming a popular method for aircraft lessors to tap the capital markets.
  • Enhanced Equipment Trust Certificates (“EETCs”): These instruments function in much the same way as ABSs and are based on the value of the aircraft assets. They are typically issued by a single airline to fund equipment purchases.

Export Credit Agencies (“ECAs”)

ECAs are private or quasi-governmental financial institutions that issue export financing. The reason that ECAs exist is the result of a relatively simple calculation; increasing exports is good for national economies. When a domestic company imports a product to a foreign country, that export comes with political and commercial risks not inherent to domestic transactions. ECAs may provide direct financing, intermediary loans, or interest rate equalization loans to encourage export activity. Direct financing notes for commercial aircraft are standardized financial instruments that are based on a maximum 12-year term.  Examples of ECAs include the U.S. Export-Import Bank of the United States (EXIM), the European Investment Bank (EIB), and the Export-Import Bank of China. Since their role is to provide capital for international sales, the availability of ECA funds is of particular concern to aircraft manufacturers.

A Brief History of Aircraft Finance Trends

Up until 2008

The business of investing in commercial aircraft is nearly as old as the airline business itself. Technological development has always outpaced the ability of operators to afford to purchase the latest and greatest technology or to renew their fleets as they reached the end of their useful lives. For most of commercial aviation’s history, bank loans have been the “coin of the realm” of the aircraft finance world; banks would make loans that were normally backed by the aircraft themselves. Airlines would eventually own the aircraft, having assumed the costs of purchase, financing, and depreciation throughout the life cycle of the assets.

Bank loans for aircraft purchases often did not provide operators with the flexibility they required to refleet (or shed airframes) in response to market demands. Additionally, outright aircraft purchases can encumber airline balance sheets with numbers that are unattractive to potential investors. To address the need for operator flexibility and to meet market demand, commercial aircraft manufacturers began leasing aircraft in 1968. This first boom in leasing was led by McDonnell Douglas and Boeing who were looking to move their DC-9s, 727s, and newly developed wide-body products.

The intrinsic value of aircraft assets and the investment opportunity presented by providing capital to airlines operating on razor-thin margins was realized by corporate entities outside of traditional aviation circles. In 1967, GECAS wrote its first commercial aircraft lease to Allegheny Airlines. In the mid-1980s, amid an environment of falling interest rates and a commensurate plummeting of Treasury bill yields, institutional investors began to look for stable instruments that offered superior returns. They found those opportunities in the aircraft leasing market. Non-aviation companies as diverse as Xerox, IBM, and General Motors—even Greyhound—held lease notes on a substantial percentage of the world airline fleet.  On the back of this private capital, the total value of large commercial aircraft deliveries increased from less than $20 billion in 1982 to more than $50 billion in 1990.[iii]

With the growth in aircraft leasing by both dedicated aviation financing companies and others, new investment instruments were conceived to handle demand. The early 2000s saw an increase in more complex ABS and EETC-type products and increased competition in the financing space. After the shock of the 9/11 attacks, the commercial aviation industry seemed to be in a phase of solid recovery. There was abundant competition to write loans for new aircraft around the world. An AIN article in December 2007 quoted an anonymous lender who said, “I’ve seen some competition provide 100-percent financing on old aircraft, creating loans that were underwater from day one.”[iv] The market was overheated.

It is essential to pause for a moment to consider the importance of aircraft valuation to understand historical trends in aircraft finance. Most of the instruments (secured bonds, bank loans, ABSs, and EETCs) used to access capital for aircraft purchases are based on the value of the underlying assets themselves. In the case of the airlines, the market value of the aircraft is the operative value. For leasing company purchases, both the value of the aircraft and the rental contracts must be considered. Any historical evaluation of finance trends must include a careful assessment of aircraft valuations over time. The value of any of these transactions to the investment community is directly proportionate to the value of the assets which underlie those arrangements.

The 2006-2007 financial crisis to the present

The aircraft lending market was not the only overheated economic sector. It is now well-known that, in 2006, U.S. real estate values crashed as a result of excessive sub-prime lending. After years of easy money based on mortgage-backed investment instruments and foreign investment, portfolio values were reduced to dust virtually overnight. Liquidity in the market dried up almost entirely. There was virtually no money in the capital markets for lessors and airlines to borrow for aircraft acquisitions.

After the crash, the value of aircraft—and thus the value of aircraft based investments—took a similar hit. While the overall reduction in aircraft market values were not as dramatic as what happened to the stock market, they were negatively impacted to a degree that was palpable to prospective investors. Those institutional investors who had just had their “hair singed” by the worst economic crisis since the Great Depression were in little mood to get burned again. The anemic economic environment led to massive reductions in consumer spending, forcing airlines to slash the number of available seat miles (“ASMs”) in the marketplace and right-size their fleets.

In July of 2008, before the long-term impacts of the financial crisis were fully evident in the aviation industry, U.S. airlines flew more than 93 million ASMs system-wide. As the airlines aggressively cut capacity and parked airframes, ASMs fell to a low of 68.5 million in February 2010. ASMs did not recover to 2008 levels until July of 2011.

One of the major financing avenues that the commercial aircraft industry turned to was ECAs.  These quasi-governmental financial institutions stepped in to provide critical funding for aircraft manufacturers to export their products overseas, giving lessors and operators around the globe access to desperately needed capital to right-size their fleet mixes. By 2011, ECAs were the source of a full third of all commercial aircraft finance capital.[v]With the dramatic reduction in liquidity in the market, aircraft buyers, lessors, and manufacturers were forced to turn to financing systems outside of the capital markets to fund purchases of aircraft. Even as ASMs were reduced, newer and more fuel-efficient aircraft were making their way into airline fleets. Aircraft type shifts were particularly apparent in the regional airline sector; as mainline fleets mothballed inefficient older aircraft, regional airlines saw deliveries of larger and newer aircraft (the Embraer E-170 and E-175 were particularly notable).

As time passed since the shock of the financial crisis and world markets stabilized, the aircraft financing landscape underwent changes that rebalanced the capital sourcing mix. To spur consumer spending and bolster their economies, central banks around the globe slashed interest rates following the crisis of 2006-2007. These rates fell to—and remain—near historic lows. Those low rates, coupled with astounding industry growth and record airline profits, made both bank loans and capital markets plentiful sources of aircraft finance capital once again. The same low interest rates brought investors looking for better bond yields back to the market, adding more available capital to the mix. The amount that ECAs contributed to the total financing picture was impacted to the greatest degree. In 2011, 33.0% of aircraft financing was provided by ECA institutions. That percentage fell off precipitously in 2014, and by 2017 ECAs only provided 4.0% of the $122 billion in commercial aircraft capital.[vi]

Discerning patterns in investment from the past

Based on our look at the history of aircraft finance trends, it is possible to come to a few general conclusions.

  1. Valuation is critically important. The overall value of nearly all of the available financing instruments to both the financial institutions and their investors is predicated on the value of the underlying assets. In most cases, these are the aircraft themselves.
  2. Aircraft values, and thus the value of any investment instrument predicated on them, tend to track with GDP. This makes practical sense; as GDP falls, so too does consumer spending. Less consumer spending leads to less money entering capital markets. Airline bottom lines suffer directly as well. In poor economic conditions, discretionary travel spending tends to fall off. In the financial crisis of 2006-2007, aircraft values suffered—and remained somewhat flat for a period afterward—as airlines “right-sized” their fleets to the demand.
  3. Low interest rates tend to stimulate both bank loan and capital market financing (ABS/EETC/secured bonds) activity in the commercial aviation finance space. This applies to both lessors and operators; lessors have become especially active, as the airlines have learned that leasing aircraft allows for increased flexibility and attractive balance sheet benefits.
  4. ECA is an option, but not preferred in the face of low interest rates and highly-liquid capital markets. The standardized terms of these credits are often inferior to bank loans and the capital markets, making them an unattractive “last resort” option for many operators and lessors.
  5. The market is cyclical, and recognition of trends tends to lag behind reality. As we saw in the run-up to the financial crisis, when loans were being written for aircraft at a loss, unbridled enthusiasm for an asset class can create so much competition in the marketplace that financial institutions write notes that, on later examination, prove to be less than worthwhile.

Where is aircraft finance headed?

The commercial aviation finance industry is complicated, but by applying the lessons learned about the evolution of the aircraft financing sector and how investment patterns have changed in response to external events, some reasonable predictions can be made regarding the future. When projected industry growth, anticipated aircraft orders, interest rates, and levels of current investment are considered against historical data, clear directional indicators begin to emerge.

We are currently in a period of growth within the capital markets. Even as the airlines and lessors took advantage of greater bank loan availability and deleveraged risk in 2017, the capital markets sector is poised for continued growth in 2018 and beyond. Lessors, who typically require large amounts of capital to fund large purchase orders from commercial aircraft manufacturers, can be expected to continue to utilize the ABS and other bond-related instruments that have proven to be advantageous for them.

The overall growth of the capital markets and higher availability of bank loans is being driven from both a demand and a money-supply perspective. Demand for commercial aircraft continues to be strong and is anticipated to remain so for an extended period to come. In the next 20 years, it is expected that more than 41,000 new airframes will need to be delivered. This number will be driven by not only fleet replacement as airlines look to take advantage of more fuel-efficient designs, but also by traffic growth. The demand is particularly strong in Asia, which will account for more than 16,000 of these deliveries.[vii]

Even as interest rates have begun to climb slightly, they remain near historical lows. That fact has driven more lenders and investors looking for superior returns into the commercial aircraft finance space, increasing the overall supply of available capital in the market. New entrants have been primarily institutional investors in Asia who are looking for relatively stable instruments to grow their portfolios predictably.

Low interest rates and abundant capital will likely lead to a growth in the role that bank loans play in aircraft finance as well. As commercial banks in Eastern Asia and Australia have entered the space, competition has begun to increase among financial institutions to write loans. The competitive environment has suppressed lending costs for lessors and operators, ensuring bank loans will remain an attractive financing option.

Airlines and lessors have recognized the benefits of bank loans and the capital markets. The aircraft finance picture today is one that is relatively balanced with cash, loans, and ABS/EETC instruments accounting for about 90.0% of capital sourcing. Strong, liquid markets, low borrowing costs, and low interest rates have relegated ECAs to a fairly minor role in commercial aircraft finance. The percentage of capital sourced from ECAs can be expected to remain in the single digits into 2018 and beyond.

Some cautionary signs point to potential issues on the horizon. The influx of new lenders and institutional investors creates greater competition in the aircraft finance space. That is a good thing for lessors and operators, as it continues to allow them to access capital on desirable terms. However, as was seen before the 2006-2007 financial crisis, exuberance can disguise warnings that the market is overheated. That is why accurate valuation is essential; it is the value of the assets underlying an investment (whether it be a bank loan, an ABS, or an EETC) that determines its ultimate worth, not transitory movements of the market.

Interest rates creeping in an upward direction add another cautionary data point to the aircraft finance picture. Airlines, in particular, have demonstrated a strong willingness to aggressively control both capacity and debt. As interest rates move higher, history shows that consumer spending tends to fall. Reductions in consumer spending tend to result in fewer revenue passenger miles being flown for discretionary travel. Since a large percentage of the world airline fleet is leased, operators are well-positioned to absorb fluctuations in demand; leasing allows them the flexibility to adjust the number of seats in the market in a reasonably short period. If demand were to be substantially impacted by unexpected events, aircraft market values could be negatively impacted.

[i] Hammond, Rich. Aircraft Finance. Boeing , 2017.

[ii] “Aircraft leasing company bond issues 2017.” Aircraft Investor,

[iii] Richard Aboulafia | Aviation Week & Space Technology. “Opinion: Short-Term Memories Can Lead To Big Miscalculations.” Opinion: Short-Term Memories Can Lead To Big Miscalculations | Master the Supply Chain content from Aviation Week,

[iv] Padfield, R. Randall. “Aviation Finance.” Aviation International News, 3 Dec. 2007,

[v] Hammond, Rich. Aircraft Finance. Boeing , 2017.

[vi] Boeing. Current Aircraft Finance Market Outlook. Boeing, 2018.

[vii] Boeing. Current Market Outlook 2017-2036. Boeing. 16 Jun. 2017.

mba’s STAR Fleet Analyzes Aviation in South Korea

South Korea Aviation Market Snapshot

Powered by mba’s REDBOOK STAR Fleet

Leading up to the 2nd Annual Korea Airfinance Conference, mba generated a brief analysis of the Aviation Market in South Korea using data from REDBOOK’s recently launched STAR Fleet.

Here are some of the insights derived from the report:

  • Currently 396 aircraft are operated by South Korean carriers
  • Half of all aircraft operated in South Korea are leased
  • 75% of the country’s fleet is operated by the top three carriers
  • In 2017, there were 368K frequencies and 76.9M seats (each way) recorded in South Korea

Aircraft Value Update and Insights for Q1 2018

What’s Driving Values in Q1 2018?

REDBOOK’s ISTAT Certified Appraisal Team Has the Latest:

Relying upon the current market conditions and the aircraft transactions that have occurred at the end of 2017 and into the first quarter of 2018, mba has updated and released the Q1 2018 values on REDBOOK. Below you’ll find the highlights from the update and a look into the most highly traded aircraft of the year.

  • The E2-190, A319neo, 737 MAX 9 and 787-10 have been added to REDBOOK with deliveries commencing in 2018 for all four types.
  • Mid-vintage 737-800 market values continue to see heightened demand, with market values upwards of 2.0% over base.
  • The spread for new build neo/MAX aircraft over the ceo/NG expands as last off the line aircraft are discounted, widening the delta.

Please download the full insight for more updates on the Q1 2018 Aircraft Market. Please note, non-REDBOOK subscribers will have limited access.

Technical Records in Commercial Aircraft Leases

It would be accurate to say that a significant portion of any aircraft’s value is in the logbooks. An aircraft can appear to be physically in pristine condition, but without the technical records to back that assertion up, the value of the aircraft is severely impaired. The relationship between airplane value and the quality of its records has been understood for many years, but in an era where aircraft leasing has become an increasingly attractive option, the accuracy of the documentation is more important than ever.

Aircraft leasing has become a significant factor in today’s aviation marketplace. In the 1980’s as little as 1.7% of the worldwide commercial fleet was owned or managed by lessors. Today lessors, led by industry powerhouses like GECAS and AerCap, hold the titles to over 40% of the global aircraft fleet.[1] By 2021, half of all the aircraft in airline service globally will be supplied by aircraft leasing companies.

Even as they have become more popular, the fact of the matter is that commercial aircraft leases are far from simple. Leasing aircraft, whether it is one airframe or one hundred, is a complicated legal, technical, and logistical exercise. Misconceptions commonly arise when operators begin to consider the technical requirements that are imposed on them when they lease aircraft. It is often not enough to comply with the “letter of the law” when it comes to airworthiness documentation and component traceability; for a variety of reasons, lease agreements often impose more restrictive covenants on air carriers that can add up to substantial downtime and costs on the front or back end of a lease. The goal of this mba Insight is to identify some of the common issues encountered by both lessors and lessees and to capture some best practices that can help airlines avoid additional costs and leasing companies to preserve the value of their aircraft assets.

The Three Stakeholders in Commercial Aircraft Leases

When considering the technical aspects of airworthiness records, it is fundamentally important to have an understanding of the stakeholders that must be satisfied. The aircraft operator is one obvious stakeholder; they require the aircraft to be a reliable and operative vehicle with which to conduct their business. They have a vested interest in maintaining the aircraft and its records in an airworthy condition that their national aviation authority (FAA, EASA, JAA, etc.) considers acceptable.  The depreciation or resale of the asset is not their primary concern.  By leasing the aircraft, the operator has shifted the residual value burden of the aircraft to the leasing company.

The second stakeholder in the lease is the lessor, who has interests that differ substantially from those of the operator. The lessor’s primary business is preserving the value of their asset—that is, ensuring that the aircraft will retain its value and generate rental income for as long a period as is possible. Not only does a leasing company have to concern itself with minimizing the depreciation of its asset, but it must consider the future transferability of the aircraft as well. The goal of the leasing company is to ensure that, at the close of the lease agreement, the aircraft can be re-marketed to as wide a customer base as is possible.

Retaining the ability to quickly redeliver their asset is why the commercial lessors often dictate that the aircraft and its technical records be in a state that exceeds the regulator’s airworthiness requirements at the end of the lease term. The operator may only have to meet one standard, that of their national aviation authority. The leasing company has to ensure that their product can comply with the highest global standards so that their customer base is not artificially limited to one geographic region.

The third stakeholder is the financing party (or parties). While the leasing company has the primary and direct relationship with the aircraft operator; it’s rarely the case that the leasing company has 100 percent financial interest in the aircraft. A single aircraft may be collateralized by a bank, a consortium of banks, (or indeed other types of financial institutions). Financing parties therefore have risk centered on the leasing company’s continued ability to repay its debt obligations; and as the aircraft is held as collateral in many cases – the value of the asset itself. Financing companies have a vested interest in both the current and residual values, and watch both closely as values depreciate over time. An aircraft with sub-par technical records will have an adverse effect on current value; which if not corrected through the appropriate means will also affect the residual value. The leasing company provides the primary control, and mitigation measures when required.

Objectives for Stakeholders in Commercial Aircraft Leases


When an operator does not adhere to the technical records and maintenance conditions of a lease, or when an aircraft has significant gaps in maintenance program coverage, the value of the aircraft can be substantially affected. Problematic or missing records can represent an opportunity or an obstacle for a leasing company acquiring a used aircraft. Marc Wilson, mba’s Vice President of Technical, says, “What it boils down to is this – a sharped-eyed negotiator will use lapses in maintenance documentation as financial leverage. Or, it will force the leasing company to go back to the OEM for an expensive solution.”

The costs are real; mba’s experience indicates that airlines routinely spend upwards of $1 million on extra costs related to narrowbody aircraft returns to lessors. Overspending on widebody aircraft can easily exceed that amount by double. The majority of lease return costs and spending overruns are due to difficulties related to the accuracy and completeness of aircraft technical records.

Aircraft Technical Records are Essential to Aircraft Valuation

Accepting or preparing to return an aircraft to a lessor involves in-depth records checks. Aside from the basics that are common to every aircraft (airworthiness, registration, radio station license, and noise certificate), there are a host of maintenance records that need to be in a condition and format acceptable not only to the regulator but also to the leasing company. Among these maintenance records will be the status of life-limited components, hard time components, airworthiness directive and service bulletin compliance data, maintenance program data, and more.  Lacking any of these elements will create delays and necessitate extra work that can cost tens of thousands of dollars.


Aircraft technical records are more than just the basics, however. Anyone having even a casual relationship with aviation realizes that aircraft are sophisticated machines, composed of hundreds of individual components, a significant number of which have specific flight hour or cycle limits before they must be replaced, overhauled, or subjected to other prescribed maintenance requirements.  While the requirements for tracking the service life of these parts are generally well understood by operators, leasing companies rely on a higher standard of record keeping to preserve the value of their valuable assets. Instead of just tracking the number of flight hours or flight cycles, most lease arrangements require operators to adhere to the principles of back-to-birth and back-to-overhaul traceability.

Life-Limited Part Traceability

A significant part of any aircraft technical recordkeeping task is tracking the status of the life-limited parts on the airplane. Life-Limited Parts (LLPs) are those components that the OEM intends to be used for only a specified number of flight hours or cycles. When an LLP reaches the flight hour/cycle limit, it is no longer usable and must be permanently withdrawn from service and disposed of in a manner approved by the air carrier’s national regulatory body.

The problem with LLPs is that there is little consistency across the globe in methods used to track these parts. In the United States, the regulation that governs the tracking of LLPs is 14 CFR §43.10, which states in part that; “The part may be controlled using a record keeping system that substantiates the part number, serial number, and current life status of the part. Each time the part is removed from a type certificated product, the record must be updated with the current life status. This system may include electronic, paper, or other means of record keeping.”

The EASA regulations treat LLPs in a somewhat similar fashion. EASA M.A. 305 states that technical records must include “the component life limitation, total number of hours, accumulated cycles or calendar time and the number of hours/cycles/time remaining before the required retirement time of the component is reached.”

In reading the regulations, it is immediately apparent that the operative recordkeeping requirement is to track the part relative to its time or cycle limit. There are neither regulations that require specific evidence illustrating the accumulated time/cycles on the LLP such as engine logbook or shop visit logs, that a chain of ownership be established nor is there a requirement that previous owners’ show that the part was always kept in a secure environment. In the spirit of performance-based regulations, authorities generally grant operators a fair degree of latitude to choose a tracking method that works for them.

LLP component tracking and tracing is an area in which the commercial aircraft leasing industry is out in front of the regulators. Recalling that the primary concerns of aircraft lessors are to preserve the value of their asset and enable easy transferability to another lessee down the line, leasing companies have a significant vested interest in ensuring that they can prove the “chain of custody” of LLPs with a high degree of certainty. To that end, the industry standard has become more stringent than the regulatory standard; leasing companies, in particular, insist on back-to-birth (BtB) tracing for all LLP components installed in their aircraft.

BtB tracing of LLP components can impose significant time and work effort burdens on aircraft operators. If LLPs come directly from the component OEM, are installed on the wing, and simply stay there until their flight hour or cycle limit runs out, tracing the entire life cycle of the component is a relatively simple exercise. The reality is that airlines are continually removing, repairing, and replacing parts. In engines and APUs in particular, it would be an unusual situation for those highly complex modular assemblies that contain multiple LLPs to be returned to the lessors with the same serial numbers with which they were delivered to the operator. Instead, LLPs often make their way through various tail numbers during their life cycle, or even in between companies in the course of third-party MRO maintenance or parts interchange agreements.

BtB tracing involves retaining the original OEM Production Conformance Certificate or 8130-3/EASA Form One, a record of the operators or MROs that the component has passed through, along with a certified record of the hours that the part has been on the wing. Often, a statement of non-incident/accident is also required, which verifies that the component has not been exposed to saltwater, fire, severe stress, and has never been the root cause of an ICAO Annex 13-defined accident or incident.

Without these records, the overall value of the aircraft could be significantly impaired, and transfer between national jurisdictions could prove to be more difficult. The general rule around the world is that the aircraft owner, (the lessor in the case of leased airplanes), is ultimately responsible for providing proving the airworthiness of each LLP. Without BtB tracing, that level of certainty becomes difficult to attain.

Let’s look at an example of an engine having incomplete BtB LLP traceability, and how this might impair the value of an aircraft or the engine itself, and the costs associated with remedying the situation:

We have an engine, for which we cannot substantiate the BtB traceability on five LLPs. In our example, the engine has a CMV of $1,000,000; each of the LLPs has a list price of $100,000, a life limit of 20,000 cycles, and has 5,400 cycles remaining.

Let’s first examine the likely outcome, where the engine is being returned to the lessor as part of the redelivery of the aircraft:

The aircraft would be rejected (not accepted for return). The most likely scenario then would be that another engine (of at equal value and utility) would be substituted.

  • Additional cost and expense for the Lessee (Airline) in arranging title transfer, removing and replacing the affected engine.
  • Additional cost and expense for the Lessor, in marketing delays and possibly narrowing the market.

Now, let’s examine the likely outcome where the engine is being offered for sale for part-out.

The purchaser will realize that the five LLPs are of no use, as they cannot be re-sold as individual components. The price offered for the engine will be discounted to ascribe a zero-value to each of the five affected LLPs – resulting in a $135,000 price reduction.


Hard Time-Limited Component Traceability

Many of the parts on a modern commercial aircraft are subject to what is termed as “hard time” limitations. Landing gear assemblies are examples of hard time-limited components; it is often useful to think of these parts as assemblies since they are usually modular assemblies made up of a series of parts, some of which may be LLP components. The critical difference between hard time limited assemblies and LLPs is that components with hard time limits are intended to be overhauled, tested, and reused. They are designed by the OEM to last throughout the life cycle of the aircraft, so long as they receive the proper maintenance.

Given the “above the regulatory standard” applied by leasing companies to LLPs, it makes sense that hard time limited assemblies would be subject to the same scrutiny. The regulatory standard requires that operators track the flight hour or cycle status of hard time-limited parts. Leasing companies expect that any overhauled hard time components with which the aircraft is returned will come with sufficient documentation that shows not only when the overhaul was completed, but the details of that overhaul down to the “dirty fingerprint” record level. Additionally, the operator can expect to return the aircraft with a contractually agreed to amount of life remaining on both hard time-limited components and LLPs. Meeting this expectation requires careful maintenance planning and proper documentation on the part of the operator.

The reason that detailed back-to-overhaul records are so crucial for leasing companies is the same as the issues that drive their insistence on BtB records for LLPs: Asset value and the ability to redeliver the aircraft anywhere on the globe. Whether it is an engine, APU, or landing gear assembly, an overhaul involves complete disassembly and rebuilding of the component so that it is returned to a condition that is functionally equivalent to a new assembly leaving the OEM’s manufacturing facility. Old parts of the assembly may be replaced with new or repaired components. While it is permissible under FAA and EASA rules to use Parts Manufacturer Approval components in overhauls, that acceptance is not universal around the world. Thus, aircraft lessors generally insist on the use of OEM parts. OEM components ensure aircraft transferability and preserve value to the maximum degree.

PMA Components and DER Repairs on Leased Aircraft

The United States is unique in the world in that the FAA grants permission to manufacture aftermarket aircraft replacement parts under an authority called Parts Manufacturing Approval (PMA). The FAA approves these parts as being at least equivalent in quality to OEM components. While PMA parts are legal for use in U.S. flag aircraft, acceptance of PMA components for commercial aviation applications is not globally ubiquitous. Thus, lessors tend to avoid the use of PMA parts in their aircraft; the presence of non-OEM aircraft components could artificially deflate aircraft value, delay redelivery, and restrict the transferability of an otherwise airworthy aircraft.

The PMA parts issue is the backdrop for political and economic disputes as well. Some countries subsidize commercial aircraft parts manufacturers based within their borders. In doing so, they have shown a willingness to engage in protectionist trade strategies and use regulation to hamper foreign competition. Additionally, engine manufacturers, in particular, have made moves in recent years to tighten their grip on the aftermarket replacement parts marketplace; some engine manufacturers place severe restrictions on the use of PMA parts in the form of voided warranties or reduced levels of support.

The same issues surround the concept of designated engineering representative (DER) repairs. The FAA allows airlines and MROs to develop fixes for what would otherwise be unserviceable parts. Once these repairs are validated and deemed safe by an FAA DER, the operator or MRO can employ these procedures to render aircraft airworthy. Often, DER repairs can save an operator a lot of money in maintenance costs. Since DER repairs under the auspices of the FAA are not necessarily acceptable to foreign airworthiness regulatory bodies, leasing companies tend to avoid having these procedures employed in the maintenance of the aircraft that they own.

The bottom line is this: Both FAA PMA components and DER repairs create a situation where the aircraft may not be readily redeliverable to a customer on the other side of the world without significant additional costs and regulatory headaches. While some bilateral symmetries exist between the FAA and EASA, these agreements are not nearly comprehensive enough to accommodate leasing companies’ marketing needs. As such, the presence of PMA parts or a history of DER repair solutions can negatively impact aircraft valuation because it could render the aircraft much harder to place with another operator.

The Special Challenge of Bankrupt and Defunct Airlines: Gaps in Maintenance Program Coverage

When an airline ends up in bankruptcy or suddenly becomes defunct, it would stand to reason that lessors would be able to recover their aircraft along with the relevant technical records and then redeliver that aircraft to another customer reasonably rapidly. However, that is not the situation in which many lessors find themselves. An airline’s departure from business is rarely a well-organized activity. Key people leave their posts to pursue other opportunities. If the aircraft have stopped flying, dying airlines may see little use in fulfilling their contractual lease obligations concerning maintenance and record keeping. Finally, the aircraft themselves may be held hostage by other creditors: unpaid government taxes, fuel bills, airport fees, or MRO invoices may cause entities in some countries to attempt to hold onto the one part of the defunct air carrier that still has value—the aircraft themselves. The Cape Town Convention on International Interests in Mobile Equipment does provide a legal remedy for lessors to recover their aircraft, but exercising those rights can sometimes be a challenging endeavor. Additionally, there are many countries (especially in Africa and South America) that are not parties or signatories to that agreement.

As a lessor endures the slings and arrows of attempting to recover its assets, the clock is running. One of the major elements of commercial aircraft maintenance is continuity—that is the foundational principle that undergirds continuous airworthiness maintenance programs (CAMPs).  These programs require that maintenance is done at specific intervals that may be defined in terms of days, months, cycles, or flight hours. When an airline becomes defunct, the continuous maintenance of airworthiness essentially ends. Marc Wilson from mba says, “you can generally go no more than seven days without a maintenance action on the airplane. Once you roll over seven says—certainly more than 14—you start to get into a problem. The lessor must get a plan in place with the type certificate holder relatively quickly.”

International Redelivery Considerations: EASA CAMO

A particular challenge related to the redelivery of leased commercial aircraft is meeting the maintenance records requirements of the jurisdiction where the aircraft will be redelivered. Some of the most stringent regulations exist in the European Union; the governing authority in the EU, EASA, prescribes that each commercial operator must engage a Continuing Airworthiness Maintenance Organization (CAMO). The purpose of a CAMO is to ensure that EASA maintenance continuity, quality, and recordkeeping requirements are met. Among the tasks handled by a CAMO are ensuring compliance with airworthiness directives, monitoring LLP flight hour/cycles, scheduling maintenance activities, tracking certification maintenance requirement completion, and incorporating STC requirements into the overall aircraft upkeep and record keeping picture.

In short, CAMO is the glue that holds the entire airworthiness puzzle together. Since the advent of CAMO as an EASA requirement for air carriers, other countries have begun to adopt similar regulatory models. CAMO-esque regulations have taken root in the Middle East, Southeast Asia, and South Africa, among other locations. According to Marc Wilson, “Latin American countries have begun to transition from a framework modeled on the U.S. FAA towards EASA-type CAMO systems. At some point, the regulations that lessors have had to accommodate in Europe will come into vogue in South and Central America as well.”

The stringent requirements of the EASA CAMO regulations are one of the reasons why lessors insist on pristine technical records when an aircraft is returned at the end of a lease. If a commercial aircraft is to be redelivered in the EU, all of the maintenance activities on that aircraft must be predicated on the receiving airline’s CAMO. The lessor does not have an EASA air operations certificate, so it is not permissible for them to do the work required and then deliver the aircraft to the lessee. Whatever maintenance is done must be completed under the auspices of the receiving air carrier’s CAMO, and the maintenance organization identified by the air carrier’s CAMO must complete the work.

Bilateral Agreements between the United States and the European Union do prevent situations where work on the aircraft has to be replicated, but only if the technical records indicate that the appropriate maintenance has been performed to the standards outlined in the receiving air carrier’s CAMO. If the records received from the previous operator of the leased aircraft are not up to the CAMO’s standards, expensive and time-consuming delays can result. The air carrier could be left paying lease payments on an airplane that they cannot fly without costly and unnecessarily redundant maintenance actions.

The Importance of Timing: Preparing for Redelivery

Optimally, the review of an aircraft’s technical records is an ongoing process that is conducted throughout its service life; the entire concept of continuous airworthiness holds rigorous records review as a foundational principle. However, real-world operational needs and time constraints often force air carrier maintenance organizations to make hard decisions about where to deploy their resources. In the case of aircraft that are operating under a lease, delays in conducting maintenance tasks required by the lease agreement or improper recordkeeping can result in increased aircraft shop time and unexpected costs.

Lessors can be expected to monitor the health of their asset while the operator is flying it. “Lessors generally will keep an eye on things via visits to the operator throughout the lease term,” says mba’s Marc Wilson. “These visits often consist of a high-level inspection of the aircraft and a snapshot review of the technical records.” Many lease agreements incorporate language that stipulates that the lessor will have the opportunity to inspect the aircraft annually or on some other specified schedule.

In addition to keeping up to date on the condition of the airframe and the aircraft’s records, operators leasing commercial aircraft can also expect that the lessor will pay particular attention to the amount of time remaining on critical hard time assemblies like engines, APUs, and landing gear assemblies. Most lease agreements set forth requirements for the time remaining on these components when the aircraft is returned to the lessor; 18 to 24 months of remaining life (or the flight hour/cycle equivalent) are typical values. Unless the operator plans carefully, these requirements can raise end-of-lease costs; airlines may find themselves in the position of replacing hard time components on the aircraft at an earlier stage than economics and regulations would otherwise dictate.

Engines and APUs demand particular attention in the run-up to redelivery. Many commercial aircraft leases have a mirror in/mirror out clause, which means the lessor expects that the aircraft will be returned in a state that closely resembles the condition the aircraft was in when it was delivered to the operator. Typically borescope inspections will be conducted of the hot and cold sections to ensure that the engines and APUs meet redelivery parameters. Additionally, the engines will require maintenance runs to document that they are still producing the rated thrust. Since lease agreements often stipulate a maximum number of engine flight cycles since the last shop visit, operators will likely need to incorporate off-wing maintenance planning into their redelivery preparation timeline. Since many operators contract out their engine work to third-party providers, beginning this work 6 to 12 months before the end of the lease is not uncommon.

As the aircraft approaches the end of the lease, operators would be well advised to bring technical representatives from the lessor into the information loop at an early stage. The last ‘C’ check event before aircraft return is one of the natural places to solicit lessor input; ensuring that there is operator and lessor concurrence on the scope of the work can go a long way toward avoiding unexpected expenditures. Communication also gives the operator the chance to fully utilize the final ‘C’ check interval, which could eliminate unanticipated end-of-lease downtime and an overall increase in operational expenses.

The general impression among lessors is that airlines tend to begin the process of preparing for aircraft later than they should, which increases the costs to the carriers and creates uncertainty in lessor redelivery schedules. IATA publishes a helpful guide that lays out a timeline of pre-redelivery and redelivery tasks. Their Guidance Material and Best Practices for Aircraft Leases document lays out a 12-month footprint of activities that can be broadly grouped into three categories:


Even though IATA’s guidance places records assembly at the end of the redelivery preparation process, it is a best practice to get started early. “The proper time to commence the records review—it’s somewhat variable,” says mba’s Marc Wilson. “A good starting point to begin this review is about 9 to 12 months prior to lease end. This also allows the lessor’s marketing staff to have some insight into the projected return condition of the aircraft, and allows their marketing plan to be geared accordingly.”

A Summary of Best Practices

Air carriers spend millions of dollars each year on lease returns, and much of the money spent is related to unforeseen costs that are incurred as a result of misunderstandings regarding redelivery requirements and recordkeeping. A good place for operators to begin is with a thorough understanding of the redelivery conditions outlined in the lease agreement and planning around those stipulations throughout the life of the lease. A clear concept of the lessor’s requirements regarding return condition, PMA parts, and DER repairs should drive maintenance planning and MRO selection. Communication with the lessor throughout the lease term is another way of avoiding redelivery hassles. Getting the lessor’s input on their interpretation of the lease conditions provides an opportunity to settle disagreements before it costs precious time and funds to do so.

As the date that the aircraft is to be returned to the lessor approaches, operators should put a plan and a team in place at the earliest possible stage. The IATA Guidance Material and Best Practices for Aircraft Leases publication provides a useful template for framing a strategy. Since there are many moving parts in any aircraft return, early and frequent coordination between operator technical staff, the lessor, and any MROs or third-party maintenance providers that will be engaged is essential to success. Finally, operators should ensure that they reach an agreement on the work-scope of the final “C” check before work begins. Failing to achieve this concordance could result in extended shop time and inflated costs.


[1] IATA. October 7, 2016. “To Buy or Not to Buy, That is the Question.” IATA Economics Chart of the Week.

Boeing MAX v Airbus Neo: An Evolving Rivalry

When Airbus launched the A320 to compete against the 737 family of aircraft in 1984, it was competing against a mature company with a distinct first-mover advantage. It took Airbus a good number of years to catch up to Boeing’s order books, cementing both the A320 and the 737 as two of the most successful aircraft of all time, in terms of orders.  With the advent of a new generation of aircraft, we have seen a slight advantage of one manufacturer moving ahead, though it is still early days for both aircraft families. As of November 2017, Airbus commanded a healthy lead with 5,254 neos on order compared to 4,065 MAXs on order and a first-mover advantage in the 200-240 seat segment with the A321neo edging out over the MAX9 and MAX10.

Since the launch of the 737 Next Generation (NG) and the A320ceo family, the preference in the narrowbody market has shifted and resulted in the changes culminating in the MAX and neo family of aircraft. The most distinctive shifts we have observed are the general upgauging of the aircraft and a greater sensitivity to fuel prices. The upgauging of aircraft has resulted in every version of the MAX being built larger than its predecessor. Additionally, we see an upward shift in market share of the 200-240 seat aircraft in the narrowbody market. The A321neo has increased its market share to 28% from the 22% the A321ceo held in the ceo family and the MAX 9 and MAX 10 aircraft command 14% of total MAX orders compared to 8% the 737-900 and 900ER held with the NG family.

Order Book Review

Source: mba REDBOOK STAR Fleet November 2017,,

The Impact of Rapid Economic Growth

A large part of this upgauging can be attributed to the rapid economic growth in Asia. IATA estimates that the region will grow 4.7% annually, with China set to become the world’s largest aviation market by 2024 and India displacing the UK as the third largest market in 2025. While the Asian carriers have been riding on the wave of economic growth in the region, the infrastructure has been struggling to cope with the surge in demand and is lagging behind the growth of the carriers it’s trying support. To overcome these infrastructure limitations, Asian carriers are relying on larger aircraft to fly higher-density routes. A great example of this is Vietnam Airlines which has seen strong growth over the last few years but has been limited by infrastructure growth in the region. The airline operates a modern mix fleet with the smallest aircraft outside of its turboprop fleet being the A321-200 with the intention to lease 18 A321neos from Air Lease Corp and Aviation Capital Group. With the MAX and neo, we see that Airbus has had greater success in Asia, with orders in Asia accounting for 46% of the neo backlog. Boeing has taken a more balanced approach with the bulk of its MAX orders concentrated in North America at 33% and Asia coming in a close second at 30%.

Regional Overview of the MAX/neo Order Books

Source: mba REDBOOK STAR Fleet November 2017,,

Comparing Cost Advantages

The general upgauging of the narrowbody segment has worked in Airbus’ favor allowing the A321neo to pull ahead of the 737 MAX 10 due to its first-mover advantage and seat cost advantage. However, as we move down the product line we see a reversal with the MAX having a seat cost advantage over its Airbus counterpart, with the MAX 8 and MAX 7 having a $20k seat cost advantage over the A320neo and A319neo respectively. While this may intensify the competition between the MAX 8 and A320neo, the lower seat cost of the MAX 7 may come at a cost to Boeing. The lower cost per seat on the MAX 7 is a result of increasing the capacity of the aircraft which may take away some of the advantages the 737-700 gave to its customers.  The segment in which the A319 and 737-700 operate is somewhat niche compared to the larger variants, where operators care more about “right-sizing” and operating an aircraft within a narrower band of operating economics in which the aircraft is viable.  Although the bulk of the sales are still expected to come from the A320neo and MAX 8, the lower end of the narrowbody segment where the A319 and 737-700 currently operate should not be neglected.  With over 1,440 A319s and 1,125 737-700s in operation; and the average age of the fleet being 11.76 years and 11.8 years respectively, the 100-150 seat market may prove to be a pivotal market to capture even if the orders are solely for replacement rather than growth. With the new family of E2 jets by Embraer and the marketing efforts of Airbus behind the Bombardier CSeries, we could see a dilution of market share and an end to the long standing duopoly in the segment.

Cost per Seat Based on mba’s Market Values as of 4Q17

Source: mba REDBOOK 4Q17


In most other aspects, the MAX and the neo share very similar operating economics. The projected maintenance cost for both the MAX and the neo are comparable in the mid to long run. However, due to a longer interval for the first heavy check on the MAX, the A320neo has a higher maintenance cost for the first seven years. The maintenance cost over time for the neo is more gradual with cost increasing steadily over time. With the MAX, we see a spike at the 9 year mark as the first heavy check comes due followed shortly by a landing gear overhaul which runs on a shorter interval compared to the neo. Past this point, both aircraft have very similar maintenance cost as the MAX returns to a 6 year heavy check interval with the exception being the landing gear check intervals which is 10 years for the max and 12 years for the neo. This results in a higher cost for the MAX at the end of 20 years but will even out at the 24 year mark once the neo is due for the second landing gear overhaul. The lower cost observed with the MAX 9 compared to the A321neo is mostly attributed to the same engine variant being used on the MAX 9 as the MAX 8 while the A321neo’s maintenance cost is valued using the more powerful LEAP-1A32 and PW1133G which has a higher maintenance cost. The spike in maintenance cost at 15 years for the GTF powered A321 is due to its second engine shop visit coming due before the LEAP powered A321, but the cost eventually evens out again at the 20 year mark with the GTF A321neo coming out slightly more favorable.

Scheduled Maintenance Costs Accumulated Over the Life of the Aircraft

Source: mba aircraft maintenance cost database[1]

In addition, if the economic value of the current generation of aircraft is any indication of the value of the MAX and neo, both aircraft will have a very similar residual value curve with the MAX slightly ahead in all but the 100-150 seat segment where it closely trails the A319.

Average Historical Market Value Depreciation

Source: mba REDBOOK Historical Aircraft Values

Fulfilling Engine Expectations

As previously mentioned, an observed change in the market is that operators are becoming far more sensitive to fuel prices compared to 30 years ago. With the current fuel prices hovering around US$50.00 a barrel, the need for fuel efficient aircraft is dampened, however it was due to a spike in fuel prices that led to the inception of the re-engined aircraft families currently entering the market.  A major draw of the MAX and neo is the promised fuel burn advantage over current generation aircraft. At the core of the advertised double digit fuel burn advantage touted by both plane makers is the new generation of engines.

On the power-plant manufacturing side we see little change as the two existing incumbent OEMs, Pratt & Whitney (P&W) and CFM, continue to be the majority providers of engines in the 75-240 seat segment. Outside of the V2500 engines, most of the other P&W powered aircraft are nearing retirement, as such P&W has hedged the company’s future in the commercial aviation market on the success of the geared turbofan. So far, both the CFM LEAP and PW1100G have delivered on its promise of lower fuel burn, lower life-cycle maintenance cost and good dispatch reliability. However, the introduction of the new generation of engines has not been without hiccups. The PW1100G had two main issues that plagued its entry into service, namely a fault with an air seal and a combustor issue that P&W claims is isolated to aircraft operating in India. To compensate, P&W has had to divert some of the engines to a spare pool.  This combined with supply-chain shortages has resulted in a failure to meet its scheduled deliveries.

At the same time, CFM’s LEAP engines have not had a trouble free introduction into service. During a borescope inspection, several LEAP engines were found to have premature deterioration of the ceramic matrix composite coating on the turbine module. While both engine manufacturers have promised fixes for the respective issues, there has been a slight order advantage for CFM engines which have received around half of the neo orders and is the sole engine provider for the MAX.

The low fuel price environment and abundance of capital looking for yield in the aviation sector has resulted in a slightly tempered response to the new generation of aircraft and lease rate ranges have been wide.  The sale-lease-back market has seen rates for A320neo and MAXs in the low $300k’s in some cases, trading closer to where one would expect last off the line ceos and NGs, but also up to $400k in others, with many lease rates falling in between. The 25% swing in lease rates can be attributed to other lease parameters such as the lessee’s credit, term, return conditions and multiple aircraft placement deals; however it also shows a fragmented market with some operators unwilling to pay a premium during low fuel prices, and lessors have been willing to bend to gain market share, and others desperate for new aircraft to support fleet growth. Keeping this in mind, it is important to note that the lower rates are more reflective of the state of the capital markets and not reflective of the technical performance of the future generation aircraft.

In Summary

Despite the engine setbacks during the initial entry into service and the entrant of new competitors, the MAX and neo families of aircraft look poised to become economic successes for Airbus and Boeing. Although there have been initial leaders in the segment so far, it will not be surprising to see the competitive landscape re-adjust itself to look like the current generation of aircraft with a few new partnerships in the mix.


[1] Maintenance cost projected using average utilization of 737-800 and A320ceo and current estimated maintenance cost. Maintenance costs and intervals likely to change as engines mature and additional in service experience is accumulated. PW1100G excludes gearbox overhaul costs.

Helicopters: An Evolving Market

The fluctuating global economy and an increase in capital flooding the fixed-wing sector have redirected some aviation financiers to the helicopter marketplace. In the past, helicopter deals often escaped notice and the sector received comparably little investment. However, since 2010, changing currents in the world of helicopter finance and leasing are creating opportunities for manufacturers, lessors, operators and investors.

This edition of mba’s Insight Series highlights some of the complexities of the helicopter market by analyzing the recent history of the rotor wing environment, examining new possibilities in helicopter capital markets, and discerning future helicopter industry trends.

Enabling Global Infrastructure

A look skyward in nearly any part of the world will reveal the range of roles helicopters provide.  These mission critical assets are often essential to the sectors they operate in, with their vertical takeoff and landing capacity not met by any other system. It is this notion of “mission critical” which has underpinned the characteristic long economic lives and stable market values.

Like their fixed-wing counterparts, helicopters have varied capabilities for different roles. In analyzing the rotor wing marketplace, it is essential to understand the significant specialization in design among specific models of aircraft. mba broadly categorizes the helicopter landscape into five classes based on Maximum Take-off Weight (“MTOW”): light single engine, light twin engine, medium, super medium, and heavy.


Helicopter Classifications



The Shape of the Helicopter Sector

While there continues to be growth in demand for some sectors of the helicopter market, it has been a slow recovery from the softness felt by the wider market.  For many years, a key driver in the helicopter market has been from the offshore oil and Gas (“OSOG”) industry. Heavy and medium helicopters had proven to be effective in support of offshore platforms and the whole concept of super medium helicopters was formed for OSOG operations.  As an illustration, about 40.0% of the US$6 billion spent on new helicopters previously came from the OSOG industry.

From a decade high of nearly US$130 per barrel, the price of North Sea Brent Crude oil fell to a low of just under US$29 per barrel in January of 2015.[i] At that price, the economics no longer supported the extraction of oil from remote deepwater rigs. Exploration budgets were cut, and many offshore rigs were idled. Since December of 2012, there has been a 58.0% reduction in the number of drilling platforms operating in the North Sea;[ii] the Gulf of Mexico has seen a 40.0% decrease in the number of rigs since 2014.[iii] While the prices of Brent and West Texas Intermediate crude have risen from the low, the price per barrel still currently hovers at approximately 50.0% of the decade high. It is also important to consider that the global energy market is growing slower than at any other point in the past ten years. According to BP, global primary energy consumption increased by a low 1.0% in 2016, versus a 1.8% ten-year average growth rate.[iv]

The reduction in the price per barrel of oil diminished the demand for large helicopters, with flights out to rigs occurring less frequently and fewer people on board.  In 2015, Sikorsky shipped just 12 civil helicopters[v] and Airbus Helicopters booked only two orders for its heavy market helicopter, compared to 23 in 2016. Neither OEM has delivered any new heavy helicopters so far this year, indicating that the sector is softer and not just a reflection of issues with the H225.

The market for light and medium helicopters has not felt as much of an impact. Globally, there are more than 5,000 light and medium helicopters being used for public safety (police, fire, and EMS). When added to the nearly 9,000 utility helicopters in service, these aircraft make up a sizeable percentage of the world civil rotor wing fleet. This sector of the helicopter marketplace has seen sustained 4.0% annual growth.

Helicopter Leasing Comes of Age

Aircraft leases have been a fixture in the fixed-wing aviation industry for many years, however, the leasing of aircraft by operators from servicers dedicated to helicopters is a relatively new phenomenon. Before the formation of the Milestone Aviation Group in 2010, what leases did exist in the helicopter landscape were typically operating leases offered by banks and large equipment finance companies or large helicopter operating companies themselves; Era group began hybrid operations as an operator and lessor in 2005.[vi] Except for ITC Aviation in Japan, investment groups generally considered the helicopter market to be too small to warrant a full-fledged operating leasing operation.

Between 2002 and 2010, offshore oil exploration and production increased dramatically—the number of rigs nearly doubled. This expansion necessitated a significant increase in the number of helicopters available to service OSOG platforms and compelled new ways to finance aircraft acquisitions. Investors realized the potential; between 2010 and 2014 several leasing companies entered the market space, including Waypoint Leasing, Lease Corporation International, Lobo Leasing, and Macquarie Rotorcraft. With the more recent growth of the light and medium helicopter sectors, Infinity Helicopter Leasing was started in 2014 to focus on supplying assets to EMS and fire services.  GECAS, the largest player in the aircraft leasing industry, has also recognized the potential of the helicopter leasing space as they purchased Milestone Aviation Group during the peak of the market in 2015. Today, leasing companies are the most prominent purchasers of large civil helicopter assets, signaling that the helicopter leasing business is starting to mature into an industry similar to their fixed-wing counterparts.

The benefits of leasing have already been shown in the fixed wing market, and as helicopters have grown more technologically sophisticated and operationally capable, the new unit price creates investment challenges for many operators, especially in an environment where contracts for their services can be relatively short-term. Leases offer some significant advantages over traditional purchase financing that decreases the risk that acquiring new aircraft can pose to operators:

  • The residual value and asset disposal risk are retained by the lessor: The operator’s bottom line is not impacted by the depreciation of their helicopter assets. While helicopters tend to have long-service lives and hold their value well, operators must consider replacement costs and the fact that residual value is impacted by market demand.
  • Leases preserve working capital: In the modern helicopter services industry, cost efficiency is the key to profitability. Keeping large amounts of debt off the books, frees up cash for the operator, and looks more appealing to would be investors.
  • Leases can be tailored to individual contracts: Contracts for helicopter services come with unique elements. EMS and SAR contracts can be long-term, while OSOG or utility operations contracts can be shorter in duration. By matching the term of the lease with the length of a particular contract, operators can fill a short-term need. Also, having the ability to remove an aircraft and replace it with a newer or a reconfigured model allows operators more flexibility.

The Future of Helicopter Financing

Helicopter financing is still somewhat in its infancy when compared to the fixed wing market. Lenders and investors are not as familiar with the sector, and assuming that the assets behave in the same manner can be risky.  At the beginning of the current decade, private equity-backed companies buying up other operators was the main way investors were supporting the sector. In 2012/2013, bond issues and export credit were more frequent, with Milestone launching the largest helicopter export credit financing ever in 2013.  The oil down turn and resulting market softness seen in 2015, tested the helicopter leasing industry, which had been touting high residual values and market stability since their inception. However, the last couple of quarters in 2017 have shown that the market has started to find some balance.

The recent stabilization has raised some questions with financiers about whether or not it is time to revisit the space.  Debt transactions are common place among the helicopter lessor community whether it be unsecured revolving credit or securitized loans and notes. In the fixed wing world, airlines and lessors are looking to the debt capital markets as a source of funding. Since the end of 2015, near-record levels of financings were completed and in 2016, aviation-related debt securities issuance in these markets was around US$3 billion.  Over the past couple of years, there has been a strong return of the asset-backed securitization (“ABS”) market, showing the strength of investor demand for aviation assets. However, there has yet to be an ABS deal in the helicopter space.

ABS deals are usually favored by leasing companies, who in many cases act as the servicer to the portfolio rather than a direct lessor, while in return for capital investors are secured from risk. ABS issued by operating lessors are typically diverse across different asset types and operator credits to assist in mitigating insolvency risk.

While every transaction is different, the process of securitizing leased aircraft into ABS generally is as follows:

  1. The bank finances a large number of leases to a helicopter operator, or a group of operators. The bank seeks to securitize the leases to spread out the risk and raise additional funds.
  2. The bank forms a special purpose vehicle (“SPV”), an entity created specifically to purchase the leases from the bank.
  3. The SPV organizes the expected cash flow from the aircraft into tranches of risk, factoring in the credit and operational risks of the lessees. The credit rating agencies determine whether or not the tranches are investment grade.
  4. The capital raised through the ABS is used to pay off aircraft debt or to increase working capital to fund further leases. Over time, the investors get the free cash flow generated from the lease payments and aircraft dispositions, plus interest.

The real benefit of this type of transaction is that, by securitizing the leases, the risk is spread out rather than residing on one company’s or bank’s balance sheet. The contractual obligation to pay the investors ranks senior to the lessee’s other debt obligations, reducing investors’ exposure. The banks and lease originators who securitize aircraft leases, can increase their liquidity, thus allowing them to assist leasing companies in purchasing larger fleets.

The concept of ABS is something of a novelty in the helicopter marketplace. While the helicopters themselves have often been used as collateral in obtaining financing, there has not yet been a single example of a successful pooling of helicopter lease assets into an ABS portfolio. There are a few reasons for this: the helicopter lease market is still fairly young, and while banks and rating agencies are beginning to become more accustomed with rotary assets, that comfort level has not yet reached a point where a helicopter ABS would be widely considered.  The recent business jet securities 2017-1 has raised questions about the immediate viability of an ABS in the helicopter space, however, it is important to recognize the differences between the corporate jet market volatility and the mission critical nature of helicopter application.

In addition, the pool of available assets is still somewhat small compared to the fixed wing market. In order to get the same returns, a larger portfolio of helicopters would be required. One of the largest aircraft leasing corporations in the world, GECAS, currently owns 1,700 fixed wing aircraft, versus about 300 helicopters, with the second largest, Waypoint Leasing, owning a little more than 150 aircraft in its portfolio. In addition, rotorcraft maintenance differs from fixed wing in the number of Life Limited Components, which is considerably higher on a helicopter from an individual assembly basis.  When forecasting the maintenance for fixed wing assets there are typically only a few items that are reserved against: two or three airframe checks, landing gear, APUs, Engine shop visits and Engine LLPs. However, with helicopters over 15 items will need to be considered, and these will not be consistent across all types, however is somewhat mitigated by the higher enrollment of nose to tail power by the hour support agreements for helicopters as opposed to fixed-wing aircraft.

Finally, and most importantly, the real key to successfully executing an ABS transaction is ensuring that the assets are valued consistently and by reputable sources, helping in part to drive investor confidence in residual values.[vii]

Looking Ahead

The health of the helicopter leasing industry, and the rotorcraft market as a whole, is only as good as the demand for the services that those aircraft provide. As discussed above, the reduction in production by the OSOG industry has negatively impacted the demand for large and super-medium helicopters. While the price of oil is bound to recover somewhat, it is unlikely that it will reach the highs experienced in 2008 and 2012 anytime soon. The lack of further development in OSOG capacity will continue to hamper large civil helicopter and super-medium sales. It is important to note that large helicopters tend to have long services lives and hold their value exceptionally well. Progressive maintenance programs, upgrades, and life extension modifications push the useful life of large helicopters out to the 40-year mark and these aircraft are often valued at 70.0% to 80.0% of their original list prices, even ten years after they are originally delivered.[viii]

It is important to note that there is still demand for helicopters flying offshore missions, and lessors are still placing aircraft with operators for that use, albeit at a lower levels. New demand for helicopters in the energy production sector comes in the form of renewables, specifically wind turbine servicing. The number of offshore wind turbine installations has grown dramatically. In 2015, 419 new turbines were erected in Europe alone, representing a 108.3% year-over-year increase in power generating capacity.[ix] A further 338 wind turbines were added off of Europe’s shores in 2016.[x] The only viable method to move manpower to these turbines for installation and service is by helicopter and one helicopter can serve about 80 turbines. Therefore, this renewable energy production method represents a growth opportunity for the rotorcraft industry. Wind energy could become a dominant force in power production globally; one report estimates that wind could account for up to 20.0% of world energy production by 2030.[xi]

Another area the helicopter industry has seen growth is in the Search and Rescue (“SAR”) area. Traditionally, the sole province of militaries and law enforcement agencies, SAR capacity has begun to be outsourced to civilian providers. The most notable example of this shift is to be found in the United Kingdom (“U.K.”) where in 2016, Bristow Helicopters took on full responsibility for helicopter SAR operations in the U.K., flying S-92s and AW189s in the place of Sea King models. The takeover was positively received and the U.K. is considering a follow-on tender that would merge with border control and mountain rescue requirements.  In Sweden, Norrlandsflyg took up a portion of the SAR load when the Swedish Air Force could not keep up with demand. Similar moves toward SAR privatization have been made in Spain and Australia. Contracted SAR services are particularly attractive in the developing world, where limited government budgets make supporting a dynamic SAR capability impossible.

Industry trends continue to predict a relatively high demand for light single, light twin, and medium helicopters. The Honeywell 2017 Turbine Powered, Civilian Helicopter Purchase Outlook predicts that a full 44.0% of new purchases will be allocated to utility and EMS/law enforcement/SAR missions.[xii]  With 3,900 to 4,400 rotorcraft deliveries expected globally—more than 66.0% of which will be light single and twin-engine helicopters[xiii] there will be ample room for financial institutions and specialized helicopter leasing companies to explore new opportunities to finance these acquisitions.

In Summary

While the helicopter market might not be imminently ready for new financing arrangements, the stability over the last year indicates that things are looking more positive for the rotary space. mba has seen market values holding steady the last couple of quarters, as well as an increase in consideration from financiers and operators. New markets such as China, and new business models such as Uber Taxi, are propelling helicopters into a wider scene and exposing the sector to more investors. In the last five years, helicopter OEMS have released more new technology and more clean sheet models than in previous decades, therefore increasing the need for economic assistance, in one form or another.


[i] “The European offshore wind industry – key trends and statistics 2015.” WindEurope, 8 Aug. 2016,

[ii] “The European offshore wind industry – key trends and statistics 2016.” WindEurope, 5 Apr. 2017,


[iv] “Honeywell 19th Annual Turbine Powered, Civilian Helicopter Purchase Outlook.” 2017.

[v] “Honeywell 19th Annual Turbine Powered, Civilian Helicopter Purchase Outlook.” 2017.

[vi] Waypoint Leasing,

[vii] Huber, Mark. “Helicopter Leasing Remains Attractive.” Aviation International News, 31 Dec. 2016,

[viii] “Crude Oil Prices – 70 Year Historical Chart.” MacroTrends,

[ix] “Oil Production Vital Statistics January 2017.” Energy Matters, 6 Feb. 2017,

[x] “U.S. Energy Information Administration – EIA – Independent Statistics and Analysis.” Gulf of Mexico crude oil production, already at annual high, expected to keep increasing – Today in Energy – U.S. Energy Information Administration (EIA),

[xi] “Statistical Review of World Energy.”,

[xii] Huber, Mark. “Lockheed Martin Earnings, Sikorsky Deliveries Down.” Aviation International News, 25 Apr. 2017,

[xiii] “Market analysis: A brief history of helicopter leasing.” Helicopter Investor,

How Monarch Monetized Gatwick Slots Post-Collapse


Monarch Airlines Limited (“Monarch”) sold its London Gatwick (“LGW”) slots to British Airways for an undisclosed amount on November 24th, reigniting the discussion on airline slot ownership within the aviation community. In order to understand how a bankrupt carrier without an AOC was able to monetize these assets, it is useful to review the court’s hearings on the matter.


Septeber 26

  • Monarch requests slots at LGW and LUT for S18 season based on equivalent slots during S17

October 2

Monarch is placed into administration

  • CAA Provisionally suspends its AOC and proposes to revoke it, along with its operating license

October 24

  • ACL informs Monarch of its decision not to allocate the requested slots
  • ACL indicates they would reserve them pending the outcome of the decision to revoke its operating license

October 26

  • Slots were due to be allocated by ACL
  • Monarch applies for judicial review before the Divisional Court

November 8

  • Panel Hearing concludes that Monarch’s operating license should be revoked
  • Divisional Court dismisses Monarch’s claim to the slots but grants judicial review
  • Monarch states that it intends to appeal

November 22

  • Court of Appeal decision rules in favor of Monarch and its right to the requested slots

November 24

  • Monarch officially trades LGW slots for the S18 season with British Airways



On October 2nd Monarch was placed into insolvency administration and the Civil Aviation Authority (“CAA”) provisionally suspended its AOC and proposed to revoke it, along with its operating license. Hearings were scheduled for the proposed revocation of the operating license on November 8th, and for the proposed revocation of the AOC on November 28th.

Initial Ruling

In the November 8th hearing, the panel concluded that Monarch’s operating license should be revoked. The Divisional Court concluded that Airport Coordination Limited (“ACL”), the party in charge of slot allocation at LGW and London Luton (“LTN”), was not under a duty to allocate Summer 2018 (“S18”) slots to Monarch because Monarch was no longer an operating airline. In its view:

“The imposition of such a duty would not accord with the underlying objects and policy of the Slots Regulation or the Licensing Regulation. Furthermore, it is clear that, by 26 October 2017, when slots were allocated by ACL, Monarch was no longer an air carrier within the meaning of the Slots Regulation as it was no longer an air transport undertaking. It therefore fell outside the language of the Slots Regulation.”[1]

Moreover, the Divisional Court had taken into account that Monarch had neither pilots nor aircraft at its disposal, resulting in “no more than a theoretical possibility that Monarch would resume air transport operations again”.

Monarch subsequently appealed the case, bringing it before the Court of Appeal.

Court of Appeal Hearings

At the Court of Appeal hearings, the representative for ACL argued that it would be a paradoxical outcome if a coordinator were to be ordered to allot slots after the licensing authority of the Member State had decided to revoke the applicant’s operating license. During the proceedings, the Court of Appeal sought to answer three central questions surrounding the case to determine its ruling:

  1. Had (and has) Monarch ceased to be an “air carrier”?
  2. Should Monarch, even if still an “air carrier”, be denied slots on the basis that allocating them to it would be inconsistent with the purpose of the Slots Regulation?
  3. Should the Court anyway decline to grant Monarch any relief in the exercise of its discretion?

The Court of Appeal concluded that Monarch was still an “air carrier” when slots fell to be allocated on 26 October 2017 and, in fact, remains one now. The following rationale was given:

  • For the purposes of the Slots Regulation it is incorrect to assume that an airline stops being an “air carrier” whenever, and as soon as, it becomes unable to operate air transport services.
  • The determination between a carrier being “unable” and “temporarily unable” to provide services is unclear.
  • A collapsed airline, even one that has “no realistic prospect of resuming air transport services, can perfectly well be referred to as an ‘air transport undertaking.’” It may be a failed “air transport undertaking”, but that need not stop it being an “air transport undertaking”.[2]
  • The Slots Regulation does not contain specific language on the topic.
  • The CAA only initially suspended Monarch’s AOC on November 8th, giving Monarch 14 days to appeal the decision, thus expiring on November 22nd. Therefore, prior to November 22nd Monarch would effectively still be in possession of its operating license, including on October 26th, the day when the slots were allocated.

On November 22nd the UK Court of Appeal affirmed the right of Monarch to S18 slots at LGW and LTN. By the court ruling, it can be determined that the current status, not the likelihood of future operation, should be taken into consideration at the time of slot allocation; but moreover there is no clear definition of an “air carrier” and “air transport undertaking” according to the Slots Regulation.

[1] R (Monarch Airlines Ltd) -v- Airport Coordination Ltd, Final Judgement, November 22, 2017,

[2] R (Monarch Airlines Ltd) -v- Airport Coordination Ltd, Final Judgement, November 22, 2017,

Low Cost Carriers Emerging Against the Odds in Latin America

2017 has seen growth for Low Cost Carriers (LCC) in Latin America through both start-ups and airlines changing their business models. Despite mixed outlooks for the region due to political crises in major countries and commodity price and exchange rate shocks in 2016, IATA forecasts 5.4% annual growth of Revenue Passenger Kilometers (RPKs) over the next 20 years. LCCs are on a mission in the region to capture a large portion of that growth.

Source: OAG, World Bank; 2017 Data current as of 3Q
The first LCC in the region, GOL, began operations in 2001. For the next 15 years another LCC entered the market approximately every two years increasing to eight LCCs in 2016. In 2017 alone we have seen five LCCs begin operations in three countries where low cost service did not exist before, and the year isn’t over yet.

Figure 1 – Low Cost Carriers by Volume and by Country


LCC penetration has increased steadily over the last decade. Mexico and Brazil boast the highest LCC market share at 61% and 55% respectively. Colombia and Chile have recently seen LLCs take a 12% traffic position in their countries where there was no LCC presence five years earlier. Joining this growth segment, there are several additional LCCs expected to enter the region, specifically in Argentina and Peru, by early 2018.

Maintenance Matters in Aircraft ABS Deals

Maintenance value and the corresponding compensation, typically designated as “Supplemental Rent”, “Reserves”, or “End of Lease Compensation” within a lease agreement, contribute an essential element of value and liquidity within an Asset Backed Securitization (“ABS”) portfolio.

In an aircraft lease, lessors collect maintenance compensation for utilization on the individual components on each aircraft. These typically include the airframe, landing gear, auxiliary power unit (“APU”), engines, and engine life limited parts (“LLPs”). The chart below depicts a typical distribution of monthly maintenance reserves over each component, determined by cost and approximate interval of each relevant maintenance item on an A320-200.

Within an ABS deal, maintenance compensation collected from the lessees is funded into an aggregate Maintenance Support Account. Whereas typical leases will divide reserves into individual accounts to be drawn down at the time each component undergoes maintenance, the Maintenance Support Account is used to reimburse all future maintenance events for the assets in the portfolio, and is only required to have funding over a predetermined “look-ahead period”, typically 12 months.

In addition to supplementing cash flows in a portfolio, maintenance adjustments, as calculated by the cost of a maintenance event and the position of the aircraft in its maintenance life cycle, are applied to each aircraft’s Base Value. The maintenance adjusted values are then used to assess the overall value of the collateral pool and determine the loan-to-value (“LTV”) on each tranche of issuance.

As an aircraft ages the overall value of the asset depreciates. However, the cost to perform maintenance on each of its components increases over time with inflation. Therefore, as the asset ages the inherent value of maintenance in the aircraft becomes a larger portion of its overall value.

Based on the full life market value and the full maintenance value of the components on an aircraft, an approximate run-out value on each vintage of the aircraft can be derived. The maintenance value to full-life value ratio illustrates how the value of maintenance in an aircraft encompasses a larger factor of the asset’s total value over time. The example below is an estimation of the reinvestment needed to bring an A320-200 back to full-life conditions.

As a result of the dynamic between aircraft depreciation and maintenance appreciation, we find two immediate impacts on ABS transactions over time: First, the inherent maintenance value become a larger component of each aircraft’s value and therefore the overall collateral pool. Second, as lease rates decrease with the decline in overall asset value, the maintenance-related cash flows become an increasing portion of the ABS’s liquidity.

mba is actively involved in the aircraft ABS market, providing market studies, aircraft appraisals, and forecasting the value of maintenance and maintenance-related cash flows over the life of the portfolio.

Frequent Flyer Programs, Part 2: An International Perspective on Loyalty Programs and Spin-offs

In part one of mba’s series of articles about the hidden value of airline frequent flyer programs (FFPs), we discussed the impact these programs have on airline profitability, a brief history of how    the FFP business has evolved, and how changes to these programs will affect carriers and customers. Although FFPs are considered intangible assets, the amount of revenue that they contribute to the airlines’ bottom lines can be enormous; in some cases, 50% of an airline’s profits can come from the sale of FFP points or miles to their business partners (often credit card issuing large banks).[i]

This article will explore the global FFP business environment and explore ways that various airlines have used to attempt to unlock the value of their programs. Some FFPs are managed internally by their respective carriers, some are programs are operated as separate business units, some airlines’ FFPs are subsidiary business units that are partially floated to outside entities, and others have spun-off their loyalty programs altogether. We will look at some specific cases of each of those management options and examine the advantages and disadvantages of each approach.

Frequent Flyer Programs: Cash Cows with Hidden Values

It is not easy to determine the exact total value of FFPs.Because they are considered intangible assets, the revenues from FFPs are often lumped into the “other income” line on airline’s balance sheet; as such, these profits tend to escape the notice of all but the savviest investors. The effect of FFPs on the airline profit picture may soon become more visible to investors. The Financial Accounting Standards Board (FASB) has instituted new revenue accounting standards that will become effective in 2018. Among other changes, the new rules will require airlines to adjust their method of determining the standalone selling price for mileage credits, determine what status perks constitute material customer rights, and possibly change the way that they recognize co-branding revenues. The primary driver of these changes appears to be a desire on the part of the FASB to maximize the observable inputs to the numbers on the balance sheet.

Big Banks and Big Money

As was explained in mba’s previous article dealing with this subject, most of the profits derived from FFPs come from the bulk purchases of miles or points made by large banks, hotels, car rental companies, and other associated businesses. Subsequently, these points are used by the banks’ loyalty programs to reward their customers. The amount of money spent by the large credit card issuing financial institutions on miles is astounding. For example, American Airlines stated in their July 2016 SEC 8k filing that their most recent deal with Citi, Barclaycard, and MasterCard is expected to net $800 million in additional pre-tax income in 2018.[ii] Since these sorts of arrangements between airlines, major banks, and other businesses have become commonplace, it is logical to assume that the total value of FFPs globally has potential to reach hundreds of billions of dollars in aggregate.

While the sale of points and miles to financial institutions represents the largest piece of the FFP revenue pie, there are other ways in which these programs generate cash flow. FFPs are an effective way to promote the carriers high-margin premium class products, they provide significant distribution cost savings, they are outstanding customer relationship management tools, and the customer data itself is a valuable and saleable product.[iii] Additionally, many of the miles and points that are awarded to the clients of the large banks ultimately go unused. In these cases, revenue gained by the airlines represents nearly 100% profit. All of these benefits make FFPs a lucrative and recession resistant profit vehicle for air carriers. Over the past ten years, the struggle for airlines has been how to manage these programs best to realize their FFPs true financial potential.

The Frequent Flyer Program Management Options

In the universe of FFP management options, there are four general methods in use at airlines today: simple internalized FFPs, FFPs that are separate business units (which may be separately listed on a stock exchange), partially floated FFPs, and fully spun-off entities. Globally, the sizable percentage of airline loyalty programs are relatively underdeveloped. These internalized programs have not yet matured past a stage that focuses purely on passenger loyalty as a way to enhance an air carrier’s traditional business. The advantage of these relatively simple programs is that they are fairly inexpensive to manage and can exist in an environment of limited resources. The principal disadvantage of these limited scope FFPs is that they don’t directly produce revenues; since they are focused purely on organic growth, it is difficult for internalized FFPs to attract partners that can provide additional ancillary revenue streams.[iv] It is worth noting that IATA predicts that global air traffic will double over the next 20 years;[v] it is likely that many of these airlines will be looking to enhance the structure of their FFPs to realize more stable streams of revenue.

Frequent Flyer Programs As Separate Business Units

Running FFPs with the goal of producing additional revenue pathways is currently the dominant management mode used by most large network airlines globally. These FFPs are operated as business entities that are substantially separate from the airlines’ traditional line of business, the providing of air transportation. Operating FFPs as separate business units that have a degree of decision-making and budgeting autonomy allows for the formation of third-party relationships and the sale of miles or points as a commodity. The numbers bear out the revenue-generating power that this can harness for an airline. The top ten airlines globally earned an estimated $28.3 billion in ancillary revenues in 2016; FFP revenues accounted for $13.1 billion, or 46%, of those revenues.[vi] There is one disadvantage to this internal separate business unit model of management; because the value of the FFPs are considered intangible and are not easily discerned, attracting investment based on the performance of this line of business can be difficult.

There is one airline that has sought to break the mold and make the performance of its FFP more accessible to investors. In 2008, Qantas not only broke out its FFP as a separate division of the company but one that reported its earnings as a separate line item. This move has provided more investor visibility into Qantas’ financial performance, and is a move that no other airline that internally manages their FFP has yet matched.

The Partial Float FFP

A twist that has been seen on the separate business model of FFP management has been the public offering of FFP shares to the public. In these cases, FFPs are partially spun-off; they are managed, sell stock, and report earnings separately from their respective carrier, but the airlines themselves retain a majority stake. Referred to as a partial float, this allows the airlines to raise additional capital via the markets while still retaining the ability to garner some revenue from their programs. Two airlines have been noteworthy in heading down this path: the Brazilian airlines TAM and GOL. TAM, which recently merged with Chile’s LAN to create the LATAM group of companies, listed their Multiplus FFP as a separate company on Brazil’s stock index in 2010, selling 27% of the available shares.  GOL went even further with their Smiles program in 2013, retaining only a 57% total stake.[vii] While each airline was able to raise capital via a public offering, these arrangements mean that they cannot access the entirety of the profits from their FFP programs to use for growth or to cover expenses in an economic downturn. It is worth noting that the holding companies for the FFPs trade at consistently higher values than the airlines themselves.

To Spin or Not to Spin?

For the past ten years, some airline industry analysts have advocated for carriers to spin-off their FFPs entirely; realizing that there was inherent cash value in the programs, one view point was that spinning off FFPs could help the airlines access much needed operating capital. Air Canada did exactly that with their Aeroplan FFP in 2005, gradually selling stakes in their program until its ownership was completely under a separate company. The resulting company, called Aimia, Inc., acquired other loyalty programs and made monetizing those products its core business. While the sale of Aeroplan did allow Air Canada to access much-needed capital to stay afloat, it robbed them of the ability to use their FFP as a source of ancillary revenue.  Realizing that this arrangement placed them at a significant competitive disadvantage, Air Canada recently announced that they will be ending their relationship with Aimia in 2020 and will replace Aeroplan with a new internally managed product. During lean economic times, there was a strong temptation for other airlines to follow Air Canada’s lead; Aeromexico, in particular, was rumored to be considering spinning off their Club Premier® FFP to Aimia. As of this date, that has not occurred; Aimia currently owns a 29% share of the Club Premier program as a joint venture that is controlled by Aeromexico.[viii]

An example of a more fruitful and enduring FFP spin-off can be found in the relationship between Lufthansa and it’s Miles and More program. In 2014, Lufthansa split off its FFP unit to a separate entity that is still 100 percent owned by Lufthansa AG. Miles and More currently boasts a wide array of partners, including 40 airline partners and more than 270 non-airline associated businesses.[ix] While the Lufthansa/Miles and More transaction was not a spin-off to an entirely separate entity like the Air Canada/Aimia transaction, its success may provide a template for other airlines looking for greater flexibility in accessing the financial power of their FFPs.

Alliances are Essential to Success

It cannot escape notice that the airlines with the largest and highest revenue producing FFPs are also those that belong to—or are the founding members of—large international network alliances. The advantages of tying FFPs to alliances are manifest. Alliance membership positively impacts the customer’s satisfaction by increasing mileage accrual and redemption options, and airlines can benefit from increased marketing power and better economies of scale both operationally and in their FFPs. Belonging to an extensive network of airlines simply provides carriers with a much larger pool of potential customers from which to draw revenue.

While there are many airlines globally that belong to one of the three dominant alliances, there is further room for development. Currently, nearly 40% of the world’s airlines are not aligned with any particular alliance.[x] There can be little doubt that these airlines will be looking for alliance opportunities to tap into potential traditional and ancillary revenue gains.


It is obvious that FFPs are robust profit enhancing tools; the data strongly indicates that there is a strong correlation between airline profitability and strong ancillary revenues that are primarily driven by the monetization of FFP platforms. While there are several models of FFP management available to airline managers, the most successful programs appear to be those that are run as separate business units within the overall airline holding company. As seen from the Air Canada example, outright spin-offs of FFPs appear to net only temporary benefits; while the carrier may realize a temporary uplift in working capital, they will not realize the long-term ancillary revenue that FFPs can provide. Looking carefully at the timing of Air Canada’s divestiture of its Aeroplan FFP, it is evident that spinning off an FFP to an outside organization is something that is en vogue only when a carrier is in extremis and in need of an injection of cash to survive. Indeed, it appears that loyalty companies that operate FFPs tend to outperform their parent airlines in terms of EBITA margins due to their relatively low overhead and recession resistant product.

Whichever FFP management method that an airline chooses, it is clear that the decision-making process must be aided by the accurate valuation of their programs. Globally, mba expects that airlines will more actively consider the special value that FFPs offer. Since the revenues generated by FFPs represent a profit source that is free of the inherent risks found in their traditional lines of business, airlines will increasingly look to these highlight these programs to boost investor confidence, protect their bottom line performance, and access needed capital.


[i] Bachman, Justin. Airlines Make More Money Selling Miles Than Seats., Bloomberg, 31 Mar. 2017, Accessed 29 Aug. 2017.

[ii] United States. Securities and Exchange Commission. American Airlines, Inc: Form 8-K. July 12, 2016. Washington, D.C. American Airlines SEC Filings. Web. Accessed 11 Sept. 2017.

[iii] Pandit, Pankaj. Revitalizing Airline Loyalty-Frequent Flyer Programs. WNS Global Services. Web. 2015. Accessed 11 Sept. 2017.

[iv] Ernst & Young Advisory. Frequent Flyer Program: Ready for take-off. Ernst & Young Advisory. Web. 2014. Accessed 11 Sept. 2017.

[v] IATA. IATA – IATA Forecasts Passenger Demand to Double Over 20 Years, IATA, 18 Oct. 2016, Accessed 12 Sept. 2017.

[vi] Sorensen, Jay.  2016 Top 10 Airline Ancillary Revenue Rankings. Web. 2017. Accessed 11 Sept. 2017.

[vii] Ernst & Young Advisory. Frequent Flyer Program: Ready for take-off. Ernst & Young Advisory. Web. 2014. Accessed 11 Sept. 2017.

[viii] Diem, Sandra and Evert de Boer. Taking Club Premier to new Heights: How Aimia Helped Aeromexico Optimize Its Loyalty Program. Aimia, Inc. Web. 2012. Accessed 11 Sept. 2017.

[ix] “Company.” Miles & More – Company, Miles and More Gmbh, Accessed 12 Sept. 2017.

[x] Pandit, Pankaj. Revitalizing Airline Loyalty-Frequent Flyer Programs. WNS Global Services. Web. 2015. Accessed 11 Sept. 2017.