AIRLINE FLEET

MANAGEMENT
INDEPENDENT ANALYSIS FOR OPERATORS OF, AND INVESTORS IN, AIRCRAFT & AIRLINES

North America Europe Russia & CIS

$16.4bn $12.7bn $687m

China
$2.7bn

Latin & South

America
$2.3bn

Africa Middle East APAC

$1.4bn $2.6bn $5.9bn

MRO FORECAST: UNSETTLED

DESPITE TENTATIVE GROWTH RECOVERY LOOKS
SET TO TAKE ANOTHER COUPLE OF YEARS
PLUS:
INTERVIEW WITH JOHN LEAHY, COO, AIRBUS
ETIHAD: SIX YEARS YOUNG AND GROWING FAST
HOW MUCH FURTHER TO THE WTO VERDICT?
INVESTIGATING THE JOL MARKET

November-December 2009 Issue: 64

 AIRLINE FLEET C O N T E N T S
MANAGEMENT November - December 2009 Issue 64

MANAGING DIRECTOR
Philip Tozer-Pennington: philip.tozer@ubmaviation.com NEWS ROUND-UP
Tel: +44 (0) 207 579 4840
3 The latest news from the airline and aircraft finance industries.
EDITOR
Daniella Horwitz: Daniella.Horwitz@ubmaviation.com FOCUS
Tel:+44 (0) 207 579 4849
8 The long and winding road: How much further to the WTO verdict?
JOURNALISTS After the leaked interim report, the industry awaits the World Trade Organisations
Mary-Anne Baldwin: Mary-Anne.Baldwin@ubmaviation.com verdict on the dispute between Airbus and Boeing over unfair government
Tel: +44 (0) 207 579 4843
Sarah Morgan: Sarah.Morgan@ubmaviation.com financial support.
Tel: +44 (0) 207 579 4853
16 Lessor focus: AWAS
PRODUCTION
Kalven Davis: kalven.davis@ubmaviation.com
AWAS has been in the aircraft leasing business for nearly a quarter of a century. It has
Tel:+44 (0) 207 579 4851 managed to prosper thanks to the combination of a shrewd investment strategy and
diversified portfolio. Frank Pray, AWAS president and CEO, talks to AFM.
DISPLAY ADVERTISING
Philip Tozer-Pennington: philip.tozer@ubmaviation.com
Tel: +44 (0) 207 579 4840
22 Etihad: six years young and growing fast
AFM profiles one of the fastest growing airlines in commercial history in its sixth year
AIRLINE FLEET MANAGEMENT of operation and finds it on track to achieve a turnover of nearly $3bn.
(ISSN 1757-8833) Online: 1757-8841) (USPS 022-324)
is published bi-monthly by UBM Aviation Publications Ltd and distributed
in the USA by SPP, 95 Aberdeen Road, Emigsville PA. Periodicals postage
paid at Emigsville, PA. POSTMASTER: send address changes to AIRLINE
TRADING, LEASING AND FINANCE
FLEET MANAGEMENT, c/o PO Box 437, Emigsville PA 17318. 26 Investigating the JOL market
Subscription records are maintained at
The JOL is no longer in such high demand. However, some airlines still regard JOLs as
UBM Aviation Publications Ltd. 1st Floor, Ludgate House, 245
Blackfriars Road, London, SE1 9UY, UK. successful financing tools when used in the right conditions.
UK annual subscription cost is 150.
Overseas annual subscription cost is 170 or $300
AFM INTERVIEW
E-EDITOR & CIRCULATION MANAGER
Paul Canessa: paul.canessa@ubmaviation.com
32 Its bad, its painful but weve been through this before
Tel: +44 (0) 207 579 4873 Speaking at Airbus Global Market Forecast 2009-2028 and later in interview with AFM,
John Leahy, COO Airbus, gives upbeat long-term predictions, including a tripling of
All subscriptions enquiries to: traffic demand and doubling of the worlds passenger fleet.
Van.Quach@ubmaviation.com
Tel: +44 (0) 207 579 4874
Website: www.ubmaviationnews.com MAINTENANCE OPERATIONS
Printed in England by Wyndeham Grange Ltd. 38 MRO World Forecast Report
Airline Fleet Management is a licensed trademark of UBM Aviation The MRO outlook for 2010 is unsettled; there are some tentative signs of growth in the
Publications Limited. All trademarks used under license from UBM Aviation aviation industry, but few think that the economic downturn will dissipate within the
Publications Limited.
next 12 months, more likely it will be within another two to three years.
1999 2009, UBM Aviation Publications Limited. All rights reserved.

Airline Fleet Management, part of UBM Aviation, has used its best
efforts in collecting and preparing material for inclusion in Airline Fleet INDUSTRY DATA
Management but can not and does not warrant that the information
contained in this product is complete or accurate and does not assume 48 World fleet summary: September October 2009.
and hereby disclaims, liability to any person for any loss or damage caused
by errors or omissions in Airline Fleet Management whether such errors
or omissions result from negligence, accident or any other cause.
This publication may not be reproduced or copied in whole or in part by any
means without the express permission of UBM Aviation Publications limited. Cover image: Global MRO Forecast 2008, courtesy of Frost & Sullivan.

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From Waviatech For a demonstration phone +44 (0)1293 817 655 or visit www.waviatech.com
 NEWS ROUND-UP The latest on deals, mergers, appointments and more
Poor 3Q for US Airways
US Airways Group has reported a 3Q
net loss of $80m, or $0.6 per share;
this compares to a net loss of $866m,
year-on-year. Excluding special items,
the company reported a net loss of
$110m or $0.83 per share and said that
fuel hedging was a major contributor
to its losses.
Continental loses $18m in 3Q
Continental Airlines said it lost $18m, or 14
cents per share, during the 3Q; this com-
pares to a loss of $230m year-on-year,
mainly due to high oil prices. The airline said
its quarterly figures would have reached a
profit of $2m had it not been for large sev-
erance costs and payouts on write downs.
Load factor rose to 85.8 per cent from 82.9
per cent and capacity fell 4.1 per cent.
Six 737s for Norwegian Air
Norwegian Air Shuttle has placed an
order for an additional six 737-800NGs,
the low-cost carrier now has a collective
48 737s on order with the manufacturer
and an additional 22 from lessors.
Norwegian Air has seen growth con-
tinue through the recession.
Walsh fails to calm threat of
Christmas walkout
Willie Walsh, CEO of British Airways (BA),
met with union leaders hoping to dissolve
the impending threat of a walkout over
Christmas. Reports suggest that Walsh
and Derek Simpson, the secretary of BAs
workers union, Unite, failed to reach an
agreement and the strike is likely to go
ahead. Unite and its members are fighting
against BAs plans to cut up to 3,700 jobs
starting next month.
om
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INTERTURBINE AVIATION LOGISTICS GMBH (former Interturbine Logistik GmbH) WORLDWIDE MATERIAL SUPPORT
Germany +49 4191 809 300 France +33 5 34 40 0670 UK +44 1480 377 111 Czech Republic +420 234 280 160 Hungary +36 29 526 071
Russia +7 495 989 2327 USA - Central
Canada +1 450 632 0647 Brazil +55 11 8578 9740 UAE +971 4 7030 418 P.R. China +86 10 8048 6340 ext. 4029 Japan +81 3 6868 3169
Singapore +65 654 69858 India +91 99 4551 9691 Australia +61 7 3292 5200 South Africa +27 11 826 1167
NEWS HIGHLIGHTS
JAL to come under state-run restructuring body
Japan Airlines (JAL) shares fell 11 per cent on October 16 on news that banks had
knocked back its restructuring plan reports suggest the airline will be taken over by
the Enterprise Turnaround Initiative Corporation of Japan (ETICJ) within days of going
to press. The ETICJ is a state-owned body set up in October to bring failing
companies to financial safety. JAL, which is in need of a 180bn ($1.96bn) loan, plus
a capital injection of 300bn ($3.27bn), announced it is cutting its staff by 44 per
cent, increasing staff losses from 6,800 to 13,000. Banks rejected Seiji Maeharas,
Japans transport ministers, request that they let go 300bn ($3.3bn) including
250bn ($2.75bn) owed in loans and approve a debt-to-equity swap. The airline was
also moved further into junk status by Standard & Poor. ($1 = 90.69)
Iberia to launch new airline
Iberia plans to create a new airline to turn round its unsustainable fall in AIG lends ILFC another $2bn
revenues and demand. Based in Madrid, the new carrier will fly short- and American International Group (AIG)
medium-haul routes and feed and distribute traffic to Iberias growing long- said it has loaned its aircraft leasing
haul network. The strategy, Plan 2012, will push growth in Iberias most unit another $2bn in government-
successful long-haul routes, such as those between Europe and Latin America backed funds from the Federal
and a reduction in seat supply on short- and medium-haul routes. The carrier Reserve Bank of New York. The latest
will re-launch its business classes on long-haul routes. Iberia made a net loss loan to International Lease Finance
of 72.8m ($109.2m) during the second quarter of this year. ($1 = 0.66) Corporation (ILFC) is in addition to the
$1.7bn AIG lent in March, which was
Air India to lease aircraft as government stems aid used to repay debt and other
Indias ministers have ruled that Air India will only receive government funds if it can obligations. The loans are backed by
match that amount through cost-saving strategies. Air India is seeking INR2,000 crore in aircraft that make up ILFCs fleet.
equity and a soft loan of INR3,000 crore from its government, yet political leaders have
made clear they will not supply financing without drastic measures from the carrier. Air Boeing reports 3Q loss of $1.6bn
India, which has 111 new aircraft on order worth a collective $15bn is looking to lease Boeing lost $1.6bn in the third quarter
seven aircraft including three 777-200s and four A310Fs. ($1 = INR46.72) results as charges from its delayed 787
and revamped 747 dragged down results.
Gatwick sold for 1.5bn to GIP These figures forced the company to slash
The British Airports Authority (BAA) has agreed to sell Londons Gatwick this years profit forecast. This loss, at
Airport for 1.5bn ($2.46bn), less than BAA had hoped for. BAA, majority- $2.23 a share, was 30 cents a share worse
owned by Spanish infrastructure company Ferrovial, announced the sale on than the $1.93 analysts expected. And
the third day of its appeal hearing against the Competition Commission Boeings revenue of $16.7bn was $500m
ruling that it must offload three airports (Gatwick, Stansted and Glasgow or less than forecast. Shares of the US
Edinburgh) by 2011. BAA said it has agreed to sell Gatwick, to a consortium airframer fell 59 cents, or one per cent, to
led by Global Infrastructure Partners (GIP), which already owns London City $51.30 in pre-market trade after results
Airport. The deal is due to be completed in December. ($1 = 0.60) were announced on October 21.
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Airline Fleet Management | 3
 NEWS ROUND-UP The latest on deals, mergers, appointments and more
Skywest swings to S$5m profit
Skywest has reversed its 1H pre-tax loss of
S$2.5m, swinging to a pre-tax profit of
S$5.1m for the year ending June 30,
2009. The airline reported revenue of
S$180.9m. Skywests revenue for charter
operations doubled as the number of
charter flights rose from 1,566 in FY08 to
2,614 in FY09. ($1 = S$1.39).
Airstream to remarket nine
328s
Airstream International Group has
been mandated by 328 Jets to
remarket nine Dornier 328 Jet aircraft.
The aircraft were previously operated
at Skyway Airlines, a subsidiary of
Republic Airways Holdings. They have
been held at Myrtle Beach, South
Carolina for inspection.
Up for AirTran, down for Southwest
JP Morgan raised AirTran Holdings stock
rating on October 19 to overweight from
neutral, citing lower costs, higher profits,
improved liquidity and a battered share
price, with a price target range of $9.50 to
$11.00. JP Morgan also downgraded
Southwest to underweight and slashed its
price target to $6.50 from $11.50.
New US airline safety bill
passed in response to Buffalo
crash
A new bill aimed at stricter airline
safety standards has been passed by
the US House of Representatives. The
Airline Safety and Pilot Training
Improvement Act of 2009 was passed
with a vote of 409 to 11. This safety
bill was a response to the February
Q400 crash in Buffalo, New York,
which killed 49 people onboard and
one on the ground. Continental had
contracted Colgan Air to operate the
short flight from Newark, New Jersey
to Buffalo. The bill will require the
FAA to combat pilot fatigue and
airlines will also have to disclose on a
passengers ticket whether they will
be travelling on a separate commuter
jet company that is contracted by a
larger commercial airline company.
6| Airline Fleet Management
PEOPLE IN THE NEWS
ALTA appoints new executive committee
ALTA (Latin American and Caribbean Air Transport Association) has appointed its
new six-member executive committee for the 2009-2010 period, responsible for
guiding the associations efforts and facilitating the development of air transport.
Roberto Kriete, chairman of Grupo TACA, will continue as ALTAs president and
Manuel Borja Chico, Mexicanas CEO, will become the associations new VP. The
rest of the committee is as follows: Fabio Villegas, CEO, Avianca; Pedro Heilbron,
CEO, Copa Airlines; Enrique Cueto, CEO, LAN Airlines; and Libano Barroso, Acting Spanish government to
CEO, TAM. provide loans to A350 XWB
suppliers
OKeefe named CEO of EADS North America Spains government agreed to a 359m
EADS has named Sean OKeefe as CEO to lead the operations of EADS North ($521m) loan to Spanish-based part
America. His appointment is effective November 1, 2009, and he will suppliers for the A350 XWB project includ-
become a member of the EADS executive committee beginning January 1, ing its Trent XWB engine, say a number
2010. OKeefe is set to replace the current CEO of EADS North America, of media sources. The government has
Ralph Crosby, who will remain as non-executive chairman. said that the loan is not attached to the
controversial A350 launch aid supply of
HSH Nordbank strengthens senior which is yet to be agreed. France has
management team agreed to loan Airbus 1.4bn, Germany
HSH Nordbank has appointed Constantin von 1.1bn and Britain 400m for the
Oesterreich as the banks chief risk officer production of the A350 aircraft. Airbus
effective November 1, 2009 for a three-year receipt of such EU loans is currently being
period. Von Oesterreich, a proven risk- contested by Boeing through the World
management expert, joined Deutsche Bank in Trade Organisation (WTO), it is believed
1973 and held various executive positions. Most the WTO has ruled that launch aid
recently, he was responsible for the credit-risk previously given to the manufacturer was
management of real estate outside The Americas. against competition laws. ($1 = 0.67)
Dr Martin van Gemmeren has also been
appointed member of the management board JetBrokers opens European
and head of the restructuring unit for a three-year service
period. From 1996 to 2006 Dr Van Gemmeren JetBrokers, the Missouri, USA-based
worked as a consultant and, later on, partner of aircraft broker, is to open a new Euro-
management consultancy McKinsey & Company. pean service, headquartered in the
Constantin von Oesterreich
UK and Switzerland. JetBrokers
New appointments at JetBlue Europe will be headed by John Merry
JetBlue Airways has named Andres Sandoval VP, flight operations and Marc in Switzerland and Tim Barber in the
Gross VP system operations, planning and control. Sandoval, previously a UK. Like its US parent, it will offer a
JFK chief pilot, is also an A320 captain and has been with JetBlue since 2002. portfolio of pre-owned private jets,
Gross joins JetBlue from Northwest Airlines, where he held the position of business turboprops and helicopters.
director system operations control and central load control. We have discussions underway in
the UK, Switzerland, Italy, France,
UBM Aviation appoints new staff Germany, Scandinavia and through-
UBM Aviation has appointed Stephen Baggett cargo sales director, Americas, and out CIS. Interest is ranging from entry
Carole Zander executive assistant. Both will report directly to Brendan Hickman, level jets and business turboprops all
CCO at the Chicago office. Hickman joins the company most recently from APL the way up to a Falcon 900EX. Were
Logistics where he was responsible for sales of all logistics services for both talking to a good number of buyers
international and domestic transportation management to its Midwest region. as well as to sellers, said Barber.
Zanders most recent experience was in support of senior executives at Baxter
Healthcare. Ex-Im Bank achieves highest ever
financing level
Holt takes up the reins at Arik Air Ex-Im Bank has achieved its highest
Arik Air, a Nigerian commercial airline, has appointed Jason Holt as its new financing level since its establishment in
MD, effective October 19, 2009. Holt comes from Arik Airs London office 1934, authorising more than $21bn in
where he has worked as a consultant and advisor, supporting the airline as support of US exports during the fiscal year
it integrated its brand new A340-500 fleet into its operations. 2009. Ex-Im Bank helped fill the gaps in
trade financing created by the inter-
Dvorak named CEO of CSA national economic crisis, just as Congress
National carrier Czech Airlines (CSA) has appointed Miroslav Dvorak as chairman of intended when it created the Bank during
the board and CEO, succeeding Radomir Lasak. Dvorak will remain CEO of Prague the 1930s, said Fred Hochberg, Ex-Im
Airport, a separate state-owned company. The board also appointed Miroslav Bank chairman and president. That has
Zamecnik, an economist and state adviser, as its supervisory board chairman. He enabled us to help create and sustain US
replaces Vaclav Novak, who resigned after his plan to turn around the loss-making jobs, as we are mandated, and we have
airline was rejected. done this as a self-sustaining agency
without taxpayer-provided funds.
 FOCUS WTO report
Half a decade of conflict on and the United States and European Union (EU) are still pigeon-stepping
towards an agreement over the financial support of Airbus and Boeing. In September 2009 a leaked
confidential interim report by the World Trade Organisation (WTO) ruled that EU subsidies given to the
European airframer Airbus created a disadvantage for its American adversary, Boeing. Now the latter is
just months away from receiving its own ruling from the WTO after a counter-claim by the EU. As we step
slowly towards the final chapters of this epic debate, AFM examines the background to the case and the
potential impact of the ruling.
A LONG AND WINDING ROAD:
THE JOURNEY TOWARDS
A WTO VERDICT
ON OCTOBER 12, 2004 THE US REQUESTED FORMAL WTO
consultations, alleging that France, Spain, Germany and the UKs
subsidisation of Airbus was unfair and illegal. Meanwhile Boeing
claimed Airbus growth had already pushed two airframers,
Lockheed and McDonnell Douglas, out of the market and was
significantly reducing its own share.
In 1995 Airbus held only 18 per cent of the market, in just under a
decade and a half thats rocketed to average 50 per cent. Boeing is
arguing that this steep trajectory was reliant on excessive financial
support from EU governments. In the last five years alone, the US
share of worldwide deliveries has fallen by nearly 20 points, says
Tim Neale, Boeings spokesman on the subsidy dispute.
According to media reports, the WTO, in its 1,000-page interim
dossier, ruled that many of the reimbursable loans dating from the
1970s had indeed adversely affected Boeings sales. This included
a $13bn loan for the development of the A380 (which Airbus will
likely be required to repay on commercial terms) and around a
few hundred million dollars in illegal loans which was spent on
research and development for Airbus aircraft.
But Airbus is not dejected its thought that around three
quarters of the US claims against it were rejected and that
although some loans exceeded limits, the WTO ruled that there
was no blanket defiance as the US had claimed.
The argument
The US believes that loans made to Airbus were far below
commercial rates particularly as the loans supported the launch of
new aircraft, a risky business that can be beset with all kinds of
challenges. Airbus gets massive government assistance and
nothing is asked in return except repayment on terms that are not
available commercially and therefore are a subsidy Airbus can and
should finance new product development with its own money, or
money borrowed on commercial terms, Neale told AFM.
Government support of the aviation industry was under the
bilateral agreement EU-US Agreement on Trade in Large Civil
Aircraft (LCA) from 1992 until 2004 when Boeing unilaterally
withdrew. Airbus has said the 3.7bn ($5.5bn) committed to it
8| Airline Fleet Management
in reimbursable launch aid since 1992 marries with the bilateral
agreement and argues that EU governments so far have made
handsome returns on their initial investments, even though
there are instances where Airbus has been able to obtain
financing on more favourable terms from private lenders. Airbus
currently pays around 300-400m ($450-600m) each year in
government loan repayments. To date its repaid over 7bn
($10bn) and its argument to both Boeing and the WTO is that its
repaid its loans at a rate of 140 per cent.
Repayable grants were used on three of the nine Airbus aircraft
launched since 1992; the A330-200, the A340-500/600 and the
A380. Speaking to the French newspaper La Tribune during
Airbus first public response after the ruling was leaked, Louis
Welsh, chairman of Airbus and co-president of the executive
committee of EADS, said: Reimbursement grants have an
advantage their transparency. Everyone knows the volume and
conditions. I remember we repaid these advances and beyond for
the A320 and A330.
While spokespeople for the US Trade Representatives, the EU
Trade Commission, Boeing and Airbus could not comment on
many aspects of the case for legal reasons, Maggie Bergsma,
spokesperson for Airbus, reasoned that such government support
is not only the historical norm but a permissible option for
significant sector companies. It is a system that has been
working in Europe already for a long time, and thats not only
in the aviation industry Aerospace is in many countries a key
industry and part of a strategic sector within a lot of
governments. There has always been, and we expect always will
be, some kind of government support of this sector.
Boeing has argued that Airbus has the financial acumen to go it
alone and only by doing so can it compete fairly. The alternative
is for Airbus to use the profits it generates from current sales,
and/or money borrowed from commercial lenders on commercial
terms to finance the development of its airplanes. Thats what
Boeing does, and Airbus has the wherewithal to do the same
rather than continuing to rely on European taxpayers to fund it
products, say Neale.
A350 XWB has just received funding from a number of EU governments
Though Boeing paints itself a paler shade than white, in its
counter-claim to the WTO, the EU portrayed quite another
picture. During his interview with the French newspaper, Welsh
stressed that Boeings subsidies, including those from NASA, the
Department of Defense (DoD) and from reimbursable Japanese
aid, had been opaque.
The EU claimed that Boeing had long since flouted the bilateral
EU-US agreement, it quarreled that the 787 programme in
particular had been dependant on subsidies which breached the
WTOs guideline and that Boeing had received unprecedented
prohibited production subsidies. The unions complaints include
claims that NASA illegally and unfairly waived its patent rights
providing access to trade secrets, and allowed Boeing the use of
its facilities and staff without cost. It argues against Boeings use
of DoDs research and test facilities and the sale of Boeing spare
parts at what it says are above-market prices. These federal
research benefits were worth $16.6bn over the last 20 years, says
the EU. The union also claims that 70 per cent of Boeings 787
development costs were financed by the Japanese government,
exceeding the 33 per cent cap.
Submitted on October 6, 2004, the EUs proceedings against
Boeing argued that its lavish subsidies of $23.7bn (over the
past two decades) allowed the company to engage in aggressive
pricing of its aircraft which caused Airbus a loss of sales, market
share and revenue.
Airbus has claimed that it generates more than 100,000 US jobs
while Boeing outsources 50 per cent of its 787 work outside of
the US. However Patty Murray, a US Senator, says the subsidies
paid to Airbus have created a market distortion that has cost
American jobs and cannot be allowed to continue. Murray
helped initiate the WTO proceeding under former US president
Bushs tenure claiming the launch aid had meant that Boeing
has been forced to compete not only with Airbus, but also with
the treasuries of the European governments that support them.
The fallout
Some have argued that in light of the vast numbers of subsidies
divvied out during the current recession, these cases are
antiquated and irrelevant. So they received government support,
hasnt everybody? And are we all to go to war with our
government-backed rivals?
12| Airline Fleet Management
Neale argues that support given during the recession is not
comparable to EU loans, but rather that short-term, temporary
actions have been undertaken by governments in order to avert
global economic depression. He proffers that: companies
receiving the aid had to submit to increased government
involvement in their businesses on many levels. In the case of US
automakers, labour agreements were revised, dealerships and
product lines were discontinued, leadership changes were made,
and outstanding debt was renegotiated all in exchange for the
governments help. Government loans in their differing forms
however, have been supplied to both manufacturers for decades
both in and out of recessions.
Of course the most tenable argument is that neither party actually
needed a bailout, and nor did they receive one. Any financial
support was not a life-line but a means for growth. Airbus is a
healthy company, with more than $11bn of cash on its balance
sheet and a leading position in the commercial airplane business,
says Neale on behalf of the likewise healthy Boeing. Bergsma
argues that compared to the billions pumped into the economy,
the amounts which concern both cases are absurd.
Though not to be mistaken with recession-induced bailouts,
support of either manufacturer is like a bandage to the bleeding
industry and world economy. Both Boeing and Airbus have
recently highlighted that growth in their own companies boosts
GDP growth. Particularly during this financial quagmire
governments will look to raise the economy by fast and secure
means; hence financial support of any aviation company is for the
greater good. Is it safe to argue, especially given the timing, that
governments should impede the buoyancy of companies so
closely linked to world economic growth?
Moreover the fallout from this war could scatter ash over wide
expanses. If trade agreements fail to be met, sanctions can be
applied although these may affect the aviation industry,
sanctions are most commonly placed on different sectors; it can
be on Roquefort cheese, Florida oranges or luxury goods, says
Bergsma. Boeing has been clear in its approach it is happy for
trade sanctions to be set against the EU should the WTO agree it.
And although the objective would not be to punish European
exporters but to bring pressure to bear on European
governments to come into compliance with the WTO ruling, says
Neale, its effects would be no less damaging to those involved.
 Additionally the final ruling will set an important precedent for
governments around the world with ambitions to grow their
respective aerospace industries, notes Baroness Catherine Ashton,
European Union trade commissioner. With Commercial Aircraft
Corporation of China, Sukhoi, Bombardier and Embraer all knocking
at the door to commercial aircraft manufacture, the final ruling
could affect development of a worldwide aerospace manufacturing
market, which would at last break the current duopoly.
Boeing argues that Airbus was bolstered to its position by an
unfair advantage, yet in 1995 Boeing had an 82 per cent strong-
hold on the market, the aviation industry could not afford for
such a monopoly to continue much further. The industry has
benefitted from Airbus rise to success and can only profit from
further broadening of the market which would reduce prices and
bring new technologies to the fore.
Baroness Ashton,
Closer to home is the concern that a restriction on financial
EU trade commissioner
support could affect the future development of aircraft, making
the 787 and A380 delays seem conventional. If a lack of funds
does delay the development of new aircraft, the commercial
aviation industry could be globally affected.
In the current term Boeing must have hoped that EU governments
would not court controversy and provide loans for the A350, yet
Airbus has recently firmed loans of $2bn from France, $1.6bn from
Germany and $600m from Britain. Although Spain has not yet
confirmed its full support, it did agree to a $521m loan to Spanish-
based part suppliers for the A350XWB project including its Trent
XWB engine in early October. Leahy told reporters at Airbus Global
Market Forecast 2009-2029, that: We see no risk to the A350
programme from the WTO [finding]. The programme is on track for
deliveries in 2013. All three models have launched weve got
about 500 firm orders and were proceeding with the A350. There
is no problem with the WTO on that.
One direct threat to Airbus however, is the sale of its A330 to the
US for use as Air Force Ones aerial refueling tanker. Airbus won
a $35bn contract with the US government for the provision of the
Military A330 Multi Role Tanker Transport (MRTT), however, the
US Government Accountability Office gave a vote of no-
confidence against the decision in June 2009 after President
Barack Obama was petitioned by many in his administration not
to strike a deal with Airbus. In particular Sam Brownback, a US
Senator, gave his warning in a letter to Ron Kirk, the US trade
representative ambassador, stating that the purchase of aerial
tankers from Airbus would have a detrimental affect on its claim
to the WTO. He said: The US Government needs to speak with
one voice on the question of launch aid, and I will press the
Department of Defense to ensure its procurement policies are
consistent with your trade priorities. In his senate blog,
Brownback said that the question of whether to bid for the
tankers was a no brainer. He added: The WTO has ruled that
Airbus acted illegally when developing the A330; the Department
of Defense should not look the other way.
The resolution
At the time of going to press Boeing and Airbus were about to
submit comments on the trade dispute bodys interim report on
the EU. The WTOs final ruling should be published by the end of
this year or very early next year with a 90-day appeals limit
thereafter. The post-appeal ruling against the EU is expected to
conclude by the 2Q 2010. On the US part, an interim report is
due in spring 2010, the findings will action a six-to-nine month
case and allowance to appeal within a further 90-day period.
14| Airline Fleet Management
The claims and counterclaims
Infrastructure aid:
The US claims that Airbus received unfair support on a
number of infrastructure projects and upgrades.
The EU claims Boeing has received preferential treatment
regarding infrastructure development, in particular with the
787 project. Airbus says it pays a market-based
rent for the infrastructure its uses.
Research and technology aid:
The EU says it abides by the cap provided in the bilateral
EU-US agreement for such support. It argues that the cap is
ten times lower than that of NASA and the DoD for Boeing.
Airbus also argues that it repays the funding but that Boeing
does not.
The EU allegations about NASA and DoD aid to Boeing are
overblown and unsubstantiated, and we are confident they
will be dismissed by the panel examining those charges. Tim
Neale, Boeing spokesman.
Preferential loans :
The US has said Airbus received preferential loans from the
European Investment Bank (EIB) which Boeing and the US
believe were not in conformance with WTO rules.
The EU has said the EIB had given a number of European
airlines loans to purchase Boeing aircraft. It said the loans
Airbus received were in full conformity with its lending rules.
Airbus has said it doesnt expect closure before 2013-2014,
though Boeing conjectures somewhere nearer 2012. Either way,
it feels we have reached just another milestone on the long road
to nowhere, The conclusions of what is an interim report are
nuanced. Its not a [case of] this side wins or that side wins,
adds Baroness Ashton. Its an unquestionably intricate case that
will take months of heavy negotiations.
Yet the outline of an olive branch seems detectable. Ashton also
told journalists that an out of court negotiation between Airbus
and Boeing may be a better solution despite adding that until
we see what the reports say its difficult to know. Indeed around
two-thirds of the WTOs cases have been settled through out of
court consultation.
What we will need to do is sit down and negotiate the kind of
support and how existing support can be kept or limited to create
a fair balance between the different countries, says Airbus
Bergsma before likewise adding that Boeing must first come
forward with openness: A negotiated solution can only be
created when everything is on the table, when there is an open
discussion.
And this is where we have a frustrated outtake of breath because
Boeing seems doggedly firm on being the victor in this argument
and it appears that nothing short of a complete reform will satisfy
them.
What is clear is that both parties are buttressing the general
aspiration for a healthy, competitive market that is still nurtured
by governments. As Ashton reminds us: The ambition is that we
find ways to support these industries in a viable way for the
future because economically that makes sense We need to
have viable industries.
 LESSOR FOCUS AWAS

AWAS has been in the aircraft leasing business for nearly a quarter of a century. It has managed to grow
and prosper thanks to the combination of a shrewd investment strategy and diversified portfolio. Frank
Pray, AWAS president and CEO, talks to AFM about the companys recipe for success.

LESSOR FOCUS:
AWAS
IN A RECENT AIRCRAFT LESSOR RANKING BY ASCEND AWAS
was listed as seventh by managed value and 20th by owned
value. The company has come a long way from its birthplace in
Aircraft type % of CMV
Australia in 1985 when it was founded by TNT and News
Corporation as a leasing venture. It was sold to Morgan Stanley MD-11F
in 2000, which subsequently sold the business to Terra Firma 2.3% MD-80
Capital Partners (a private equity firm) in 2006. The headquarters 777 0.7% F-70
of the company are now in Dublin, Ireland, where the majority of 1.3% 0.3%
its 120 staff is based. There are also offices in New York, Miami 757-F
and Singapore. 1.5% 767 A320
757 15.3% 24.9%
The current AWAS portfolio stands at 209 aircraft valued at about
1.6%
$5bn, with 98 customers on the books. The biggest customer is
Singapore Airlines. Other customers include: US Airways, Gol, 747-400F A330
Asiana, Korean, China Eastern and Cargolux. The bulk of the 7.4% 16.1%
737-NG
portfolio (about 25 per cent) is made up of A320s. About 17 per 17.3%
cent are 737NGs, 15 per cent 767s, 16 per cent A330s and eight 747-400
per cent 737 Classics (see graph). 1.8%

Frank Pray, AWAS president and CEO, says that what the industry
will see on a net basis is continued growth of the lessors
portfolio. In 2010 the company will add seven new aircraft (five
A330s, and two A320s). Three A330s will go to Singapore
Airlines, and one each to Hawaiian and Iberworld. One A320 will
go to Jetstar Pacific and the other A320 customer has not been
disclosed. The significant amount of orders that the company has
with the two major airframers will not come into effect until
2011/12, with 2013 being the peak. There are various pipelines
through which AWAS is planning to add further assets to the
portfolio, including sales and leasebacks of used and new aircraft.
There could be further direct orders with Airbus and Boeing and
possible M&A activity over the next couple of years.
AWAS has not been shy of M&A activity in the past. Readers may
remember the companys acquisition of Pegasus in 2007. Pray
says that one of the advantages of the acquisition was economies
of scale: You dont need many incremental staff if you add a
significant amount of assets to a well-run platform We were
able to take all of Pegasus overhead expense cost out of the
business and fully integrate it into AWAS. The other point, that
seems to be forgotten sometimes, is that Pegasus had a very
attractive forward-order pipeline of aircraft delivery from Airbus
and Boeing. At that time AWAS did not have access to near-term
delivery positions because they were sold out. So we also
A340
737-CG 0.7%
8.7%
acquired those positions, which have been very successful so far.
From a global perspective, the combined Pegasus and AWAS
portfolio allowed for a much bigger portfolio diversification and
a broader customer base.
A330 resurgence
Single-aisle aircraft such as the 737NG and A320 are in demand
with AWAS customers, and there is also a desire for the A330 and
767. Pray says: While the 737 and A320 are mainstream, the
A330 and 767 are a little bit of a surprise. On the 767, it is more
of a stop-gap measure to manage capacity requirements to cope
with the 787 delays From a pure economic perspective, airlines
are discovering that the A330s, especially the A330-300, provides
very compelling operating economics, even in comparison to the
787. He thinks that while airlines such as Virgin Atlantic and
Singapore Airlines initially focused on a shorter term commitment
to the A330 because of the delay of the 787, the A330 are not
necessarily viewed as interim aircraft anymore. There is basically
a new resurgence of the A330 in this market all of our forward
order A330s are placed.

16| Airline Fleet Management

 Talking about the geographical spread, Pray says that a year or
two ago, most of the fleet would have been in Europe, but that Regional distribution of AWAS
has significantly changed and will continue to do so. Today the
largest exposure is in Asia, where 36 per cent of the fleet is Middle
operating; 27 per cent is currently deployed in Europe; 18 per East 1%
cent in North America; and 12 per cent in Latin America. It is
Africa
expected that many of the new aircraft deliveries over the next
year will occur in Asia, with few going to Europe. He adds: If you
Latin 6%
fast forward another 12 months you would see our exposure in
America
Asia is likely to be higher than 40 per cent and our exposure in
12% Asia
Europe would be declining further. We are also looking at
36%
North
expanding our presence in North America.
America
18%
In what ways does AWAS
Europe
differ from the competition?
27%
Prays says: I think what sets
us apart is that we dont see
ourselves as metal traders.
We see ourselves as a
financial services business
that is focused on rigorous
investment-led decision- company focus is on measured risk-taking, looking at every
making We dont just transaction on a risk-adjusted return basis, which Pray says is
lease aircraft, we actively buy fairly unique. Individual transactions are assessed in the context
and sell them. The AWAS of the overall portfolios asset mix, rental yield, graphical
approach is to optimise the diversification and credit risk. Another point to consider is that
portfolio through specific the senior management team has the combined experience of
buy, hold and sell strategies over 150 years and has seen quite a few peaks and troughs in the
that are assessed on a industry. Pray thinks that these factors explain why AWAS will
forward-looking basis. The probably do quite well coming out of the current industry
Frank Pray, AWAS CEO situation in comparison to other competitors.

Risk assessment
According to Pray, one of the necessary attributes of a

If you fast forward another 12 months you would see

our exposure in Asia is likely to be higher than 40 per
cent and our exposure in Europe would be declining
further. We are also looking at expanding our presence
in North America.
ILFC, were basically funding themselves short in the US
successful aircraft lessor is a diversified portfolio, not only by
asset types, but by geographic region, airline credit risk, and
asset vintage, because this reduces the exposure to the business
on individual risk elements. He says it is also important to match
the portfolio to the funds available, suggesting that the reason
some large lessors are in distress today is because they focused
on a funding strategy that was not matched with the maturity
of their lease portfolio. So to a large extent the likes of CIT,
commercial paper market, but were lending long If you look
at the strong lessors today, whether that is ACG, AerCap, or
AWAS, they are more perfectly hedged.

AWAS may be in a stronger position than many competitors,

but it cannot be immune to the fact that there is consolidation
in the industry, for example the merger of Genesis Lease and
AerCap Holdings. Pray says: The big reason why the ILFCs,
CITs, and RBSs are not selling today is that the debt structure
that these businesses currently have is not transportable to a
buyer. What you have with the Genesis acquisition of AerCap is
that the Genesis financing structure was transportable to
AerCap. Secondly, Genesis was not a real aircraft leasing
company. It did not even service its own portfolio that was
done by GECAS. So the merger of the two is really more
focused on the merger of capital structures through share
swaps, as well as the mergers of the portfolio. Pray believes
that several of the weaker players in the market today will soon
be merging with stronger players. I would see AWAS
continuing to be a player in that way. I would not be surprised
if we were to participate in at least one more market
consolidating acquisition over the coming years.

18| Airline Fleet Management

 Top 10 lessees
10%
% of Monthly Revenue

8%

6%
Now, counter to all that, the airline industry is suffering, not
4% from a funding gap, which is something that was invented by
bankers! They are suffering from a passenger gap, meaning less
people are travelling and filling seats in airplanes. Pray believes
2%
declining passenger yields have resulted in a weaker airline
industry, which affects lessors in terms of high levels of defaults
0% and non-payment.
e n er M L a x ys rn an
por
a iia ish TA GO sian olu wa ste re
a w gf A rg i r a o With regards to asset financing, Pray thinks lessors, such as
ng Ha Kin Ca S A na E
K
Si
AWAS, are finding the banking market approachable. He feels
U i
Ch banks are more likely to lend directly to lessors because it is a
more diversified way of funding the same asset. Rather than
putting all your eggs in one basket with one airline, with one
aircraft type, in one spec by lending to lessors, there is a more
diversified approach from a pure risk perspective. And if you
Recession impact actually look at the lessor market, banks have actually supported
The operating lease market has seen softening lease rates, with it quite well over the past couple of months.
some aircraft types affected worse than others. However, Pray
says that from a lessor perspective, the softening market only Pray expects the economic situation to stabilise in 2010, but
affects those undergoing a repricing event, such as scheduled warns that airlines are not yet out of the woods. In the past year
lease expiration or a premature redeployment after repossession. the airlines had a cost problem due to the rise in fuel prices.
If you manage your portfolio right, you dont experience Superimposed on that was a funding problem in terms of
repricing on more than 10-15 per cent of your portfolio at any refinancing and financing of new equipment. I see that easing for
point in the year. A declining lease rate environment doesnt next year. The challenge for 2010 is a revenue problem in terms
affect us as much as you would think. The other compensating of general ridership and revenue generation. Airlines will
factor is that interest rates have reduced significantly over the last continue to see challenges next year, predominantly from a
couple of years. Some of the funding AWAS has in the business revenue perspective. Capital and banking markets will become
is on a floating rate debt basis, so at times of lower interest rates, stronger. And we feel that this will be a good platform for further
the interest expense line goes down as well. improvement of the outlook in 2011.

20| Airline Fleet Management

 AIRLINE FOCUS Etihad
Etihad calls itself a private company, but with 100 per cent of its shares in the hands of the government
of Abu Dhabi it is run along the lines of other government departments in terms of its accountability.
James Rigney, CFO at Etihad, declared at the ISTAT European conference that it is one of the fastest-
growing commercial airlines in aviation history.
ETIHAD: SIX YEARS YOUNG
AND GROWING FAST
WHEN JAMES HOGAN, ETIHAD CEO, AND JAMES RIGNEY, CFO,
joined the company in late 2006 the company made about three
quarters of a million dollars in a year, now the airline is on track
to achieve a turnover of nearly $3bn. The airline has notched up
more than 40 global awards for service and innovation including
Best Business Class at the 2009 Skytrax awards. Today Etihad
finds itself in a strong cash liquidity position, to the point where
Rigney claims the airline could trade six months without
James Rigney, receiving revenue and still stay afloat.
Etihad CFO
A young, growing fleet
At the end of August Etihad had 46 aircraft, the vast majority
of which were Airbus models, with 12 A330-200s making up
the largest number of any of its aircraft types, followed by 10
A320-200s. The rest of the fleet is fairly evenly spread among
aircraft types; in total the fleet is comprised of four families.
Etihad saw two A340-600s enter into service on August 1 and
September 1, 2009, and is due to see a new 777-300 (for
higher density markets, mainly Manila) enter the fleet in
December of this year; this brings the number of Etihads 777-
300s to six aircraft, which represents the entire Boeing portion
of the fleet.
Etihad doesnt have the legacy issues that airlines of 50-60
years-old have; it has no old aircraft or out of date IT systems. By
2020 Etihad plans to have 152 aircraft. Rigney also claims that
its plans encompass the opportunity to accelerate the retirement
of certain fleet types, to keep the fleet young.
22| Airline Fleet Management
Etihad also has orders for the 787 and despite the problems faced
by Boeing with the programme, Rigney assures us that the airline
does not have any plans to cancel or reduce its order. He
maintains: Our analysis and our evaluation and negotiation said
that this was a very good aircraft for Etihad. Boeing is a regular
Etihad contact and the aircraft is due to be delivered in 2014.
Etihad is being kept abreast of where the programme is, but with
aircraft not due to arrive for several years there is less concern over
whether the 787 is going to be ready in the immediate future.
Expanding and competing
Etihad is expanding its routes, it recently started operating to
Chicago and had its inaugural flight to Cape Town on October 1.
There are other new routes due to open over the next 12 months.
Colombo will be the airlines first new route launch of 2010, and
bring to 59 the number of destinations available across its
network. Rigney envisages the airline will grow to nearly 100
destinations in 2020. He also said that, currently from the Gulf
hubs one can travel almost anywhere in the world, one-stop.
Japan is a key market for Etihad. Rigney expands: Japans an
important market in terms of traffic flows for Etihad, its an
important trading market for Abu Dhabi, its been on our
planning horizon for quite some time. The issue for Etihad is
achieving the optimal airport slots into Narita, which we have
now achieved, so well be flying that route in 2010. He
concludes: Our plan is to be in Japan for the long-term. Etihad
will also be upping frequency on incumbent routes.

Third from left: H. H. Sheikh Khalid bin Zayed Al HNayhen, deputy chairman of Etihad
and on his right James Hogan, CEO of Etihad at the Paris Air Show.
To facilitate this expansion, the airline is taking on or has taken
on additional aircraft for 2010; it plans four additional aircraft by
that time. Rigney notes that: July and August and September
have seen significant pressure on yields, which the industry is
impacted by at the moment. But while we stay within our budget
parameters, we have no need to look at our flying programme or
scaling back our flight programme. He continues: So our
intention is to fly the programme 2009/2010 and beyond.
In relation to Etihad competitiveness, Rigney points to increased
capacity in 2009 by 18 per cent with the addition of 11 new
aircraft. Our seat factors for the first nine months of 2009 were
in line with 2008, which is a fair achievement [in the context of
the increased capacity].
He asserts: Our only issue at Etihad today is yield. Like most
airlines now, were very focused on revenue management and
cycling of aircraft, connectivity and how we partner with other
airlines, so we start every day with a revenue meeting, because
thats our only issue at Etihad today. There was a decline in its
yields through February and on through July. However Rigney
announced at ISTAT: Weve arrested this drop in yield. The
airline saw improvement in yields in August and September.
At the Paris Air Show 2009, Qatar Airways, another successful
Gulf carrier, was scornful of the low-cost airline model. Rigney
notes a rapid spread of low-cost carriers (LCCs) from American
origins across Europe and the Asia-Pacific region and recognises:
theyve worked their way into our part of the world. But LCCs
dont seem to be a concern. Rigney says: The difference is that
low-cost airlines in the traditional Ryanair sense do not exist in
the Gulf or the Middle East.
Although he maintains: We compete against all types of carriers
that fly into the region and fly throughout our hub.
Well-placed in an emerging global hub
It is estimated that 25 per cent of the worlds new passenger jets
will head for the Middle East, which appears to be emerging as a
global aviation hub. Rigney accordingly sees the nature of
competition being between regions and not airlines: The Gulf
hubs compete against the Asian hubs and the Gulf hubs have
been successful over the last five to 10 years. He believes the
Gulf hubs are maturing and compares them now to Asia in the
1970s and early 1980s, when those hubs were in development.
Following the prominence of the Middle East region, its carriers
were the only ones to grow in July according to IATA; they grew
by 13.2 per cent. Etihad is no exception, its capacity and traffic
24| Airline Fleet Management
has grown, says Rigney, by 18 per cent in 2009. The fact that
Gulf Air has been sustaining losses of $1m a day has proved that
being a successful Middle Eastern airline is not inevitable, so
Etihads growth through the recession and at a percentage
higher than the Middle East average which is already bucking
the global trend is a marked achievement.
Looking at the recent strength in the market Rigney looks at
Etihads uniqueness: When you look at Etihad: our location and
our segmentation is very different to an American or European
airline. The airline sits on the doorstep of the Indian sub-
continent, and has the worker traffic segment, which comes out
of Manila and Indonesia. It benefits from the religious movements
of Umrah and Haj. Also 52 per cent of Etihads traffic has the
origin and destination of Abu Dhabi, the richest city in the world
according to Forbes magazine, whose economy has been less
affected by the banking crisis. The Indian sub-continent and
Middle Easts populations, both in close proximity to Etihad,
combine to that of a similar size to China; India alone has a
middle-class population of 300 million. All these factors provide a
very strong potential base for Etihad as it expands into the future.
The future
Etihad already has a picture of its medium-term goals: We have
very clear objectives of where wed like to be in five years time.
We aim to be the best airline in the world, certainly not the
biggest airline, but the best airline in the areas we choose to
compete. Also we will be profitable and we will be a self-
sustained airline.
In relation to navigating the current economic reality, Rigney says:
Well be managing the recession like most other businesses and
most other airlines. We focus on our business and the environment
in which we operate and weve been successful in achieving our
financial results for the first six months. Our seat factors, year-to-
date, are in line with last year. The future for Etihad looks to be
one filled with expansion and current trends in Middle Eastern
markets do not suggest many clouds on the horizon.
Giovanni Bisignani, IATAs director general and CEO, commented
on October 19 in a keynote address to the Middle Easts leaders
at the 42nd Annual General Meeting of the Arab Air Carriers
Organisation in Jeddah, Saudi Arabia, that: The Middle East is
an oasis of some good news for this industry. This is the only
region that is growing. Over the first eight months of the year
passenger demand expanded by eight per cent, outstripped by a
capacity increase of 13 per cent. However, he also noted: But
growth has not yet translated into profitability. Growth without
profit is not sustainable. Rigneys preoccupation with yield
demonstrates Etihad takes this seriously.
Etihad is reporting a high level of cash liquidity, so it is in a strong
position to weather shocks. Emirates, the national carrier for the
United Arab Emirates, saw its profits drop 72 per cent in May
2009; there have been no later releases from them to report an
improvement in its fortunes. So Etihad is doing more than just
flying on the coat tails of a Middle East premium travel wave. A
word of caution going into this seemingly rosy future is the
nature of the Etihad market. The airline, alongside most other
Gulf carriers, has positioned itself for the premium market and
there seems to be adequate demand for such a service. However,
just because this premium demand has historically been strong
does not necessarily secure it into the future. The LCCs may be
an incidental feature of Middle Eastern travel currently, but the
change in the character of other markets has shown how quickly
that can change and this downturn may have made even the
well-heeled Middle Eastern traveller question the longevity of
their deep pockets.
 TRADING, LEASING & FINANCE JOL
The JOL had its heyday in 2003/4 when it was a popular form of aircraft financing. Since then tax laws
and economic conditions have changed and it is no longer in such high demand. However, some airlines
(such as Lufthansa) still regard JOLs as successful financing tools when used in the right conditions.
INVESTIGATING THE
JOL MARKET
A JAPANESE OPERATING LEASE (JOL) IS AN OPERATING LEASE
fully or partly funded by a Japanese investor or equity sourced
from Japan. It is a tax/financing structure that can provide airlines
with 10 to12 years of low-cost aircraft funding. David Fowkes, of
TechDawn Aviation Consultants, expands: An investor with
Japanese tax liability puts up a minority portion of equity funding
(the balance is debt, typically a bank loan) in exchange for the tax
benefits associated with the aircraft. The tax investor must take
some actual asset risk to receive this tax benefit. The JOL evolved
from the Japanese Leveraged Lease (JLL). This was a similar
financing structure in which the investor took no asset risk. When
the Japanese tax authority required that an investor take some
portion of asset risk for most transactions, the JOL was developed.
There are two types of JOL: an open-ended JOL, or JOLCO
(Japanese Operation Lease with Call Option). John Leech, SVP
and head of marketing at ORIX Aviation, defines a JOL as a pure
operating lease where the investor takes the asset risk, whereas
with a JOLCO there exists a purchase option and in the event that
it is exercised, the aircraft is sold to the airline at a fixed price.
The main requirement for any JOL is the 90 per cent test. This
means the overall lease rentals payable during the life of the
transaction cannot exceed 90 per cent of the Japanese lessors
acquisition costs when it acquired the aircraft.
Any company that is not publicly listed can invest in JOL
products. The majority of investors are institutional or Japanese
corporates that have tax capacity, but there can also be single
investor deals. According to ORIX, a qualified investor can be
summarised as: being familiar with the asset itself, fully funded,
or having sufficient capacity to get funding for purchasing the
aircraft. A loan should be on a non-recourse basis to the aircraft,
but with recourse to an investor. Lenders are typically banks that
have relationships with airline lessees.
26| Airline Fleet Management
History of the JOL
The JOL has its origins in March 1999 when the Japanese Tax
Authority (NTA) changed the basis upon which investors in JLL
could claim depreciation on cross-border deals. This change
meant cross-border JLLs were not as attractive for Japanese
investors as they had been previously. Owen Mulholland, partner
at Norton Rose, says: I think it is really one of the last examples
of a leveraged finance deal where you have an equity investment
being leveraged with debt, with the tax benefit for Japanese
investors One of the challenges for the investors is how to
manage the resultant asset risk and residual value risk, which
goes with an operating lease structure.
In 2003/4 airlines favoured the JOL because it offered relatively
cheap financing and took the aircraft off the balance sheet. The
economics of this type of transaction appealed to airlines
because they resulted in an attractive margin when the deal was
viewed as a whole. For the Japanese investors there was a tax
benefit, which came from being able to claim the relevant
depreciation allowances.
New regulations on JOLs were passed by the NTA with effect
from April 1, 2005. Bertrand Grabowski, a member of the board
of managing directors at DVB bank, says the NTA imposed a set
of rules that required the investor/lessor to be active as opposed
to passive. So not only did the investor have to prove that he is
taking some true exposure in the residual value of the aircraft
but he may also have to demonstrate that he has the knowledge
and the expertise to do leasing. Under those circumstances,
many single investors simply exited the market. Leech states
that these regulations aimed to specify the nature of an asset
investment where an investor should be actively involved in the
investment at their own risk. He believes this promotes selectivity
in finding appropriate investors.

At a time when raising funds for airlines and lessors is
a challenge, Tokyo is certainly not the cheapest place to
look for money
Bertrand Grabowski, DVB bank
Pros and cons
There are some disadvantages associated with the JOL. It is a
long-term commitment typically the transactions are of about
10 years duration. JOL structures can be relatively inflexible
once they are up and running it can be difficult to revisit the
terms of a JOL if anything changes. Mulholland says: An airline
is not dealing with an operating lessor in the traditional sense; it
is really dealing with Japanese investors. Over the life of a
transaction, an airline may need to go to those investors and
seek their consent from time to time to do various things. That
process needs to be handled quite carefully in order to make sure
the investors fully understand the issues and the airline gets an
answer within the timeframe it needs.
Grabowski says that debt of a Japanese lease must be booked in
Tokyo to avoid withholding tax. He says: At a time when raising
funds for airlines and lessors is a challenge, Tokyo is certainly not
the cheapest place to look for money. However, he points out the
advantages: low execution risk, simple documentation and 100 per
cent financing. There is also attractive economics to the extent
that Japanese investors depreciate the aircraft in their balance
sheet and subsidise lease rent by a fraction of this tax advantage.
28| Airline Fleet Management
An investor can earn fixed income during the lease term and make
capital gains by disposal of the aircraft at the lease expiry. Leech
says capital gain expectation depends on the prevailing market
conditions when the aircraft is sold. An investor can only take
depreciation of the aircraft to the extent of their invested equity
amount if the transaction is partly funded by non-recourse debt.
Lufthansa leads the JOL field
JOLs have proved to be very successful financing tools for
Lufthansa. In fact Markus Ott, head of corporate finance, said at
the European ISTAT conference, that JOLs are the German flag
carriers most used financing tools. Since 1998 Lufthansa has
closed 41 JOLs and accrued $363m of NPV benefits with tax
lease structures such as JOLs. From 2003-2008, Lufthansa
conducted $2,654m worth of JOLs. More recently, in January
2009, the airline conducted a JOL for an A320 worth 39m ($1
= 0.76) and in July 2009 it conducted four JOLs for three A321s
and one CRJ-900 worth 130m ($1 = 0.67). Lufthansa currently
has the following aircraft on order: 15 A380s, 20 747-8s, seven
A330-300s, 39 A320s and 15 A319s, and it is likely that a good
portion of these will be JOL-financed. Ott said that the Industrial
and Commercial Bank of China (ICBC) and Bank of China (BOC)
have participated in recent Lufthansa JOL financing and both
have expressed an interest in financing the A380.
Today the financial crisis has negatively affected global financing
and the JOL is no exception many investors have left the JOL
market. Fowkes says this is because there are fewer investors with
significant Japanese income looking for a tax deduction and the
greater relative risks associated with airline credits and investing in
aircraft. Grabowski notes the market has been negatively
impacted by the fall of corporate profits in Japan, which
mechanically dries up the amount of taxable income available for
tax deals. He adds: By the same token, the free fall of the US
dollar is not an incentive for Japanese yen-based investors to
invest in aircraft (traditionally US dollar-denominated assets).

The global economic downturn, taken together with the
difficulty that any airline has in sourcing financing at
attractive rates, means that the economics of the
transaction have increased considerably since 2003/4.
The JOL is available for the right airlines and the right
type of aircraft; there are investors out there who want
to invest in these structures.
Owen Mulholland, partner at Norton Rose
30| Airline Fleet Management
For the reasons described above, the JOLCO market has
significantly reduced and is almost exclusively concentrated on
big names. According to DVB Bank, compared to a volume in
2003/4 of $4-5bn, todays market is less than $2bn. However,
Grabowski says that on the pure operating leases front, some
significant Japanese players such as Mitsubishi, Mitsui, Marubeni,
Sumitomo are among the most active in strengthening their
platforms and maintaining a global reach.
Mulholland thinks the few JOL deals that have taken place in the
past few months reflect the willingness of Japanese parties to
put equity into well-known flag carrying airlines. Recently SAS
closed a transaction with Nomura and Babcock&Brown for the
financing of a 737-800. In addition to Lufthansa, airlines such as
Air China, KLM and British Airways have closed JOLs in 2009.
DVB has arranged several deals for Ryanair in the last three years
and ranks on the top of non-Japanese institutions acting as fully
fledged arranger.
Where do you see the main source of aviation financing coming
from over the next few years? asked Norton Rose recently in a
comprehensive transport survey. None of the respondents
suggested JOLs might be a growth area. It seems that JOLs can
be regarded as niche products. According to ORIX, JOLs will
continue to be an attractive investment opportunity for
professional investors and there is still room to expand the
investor base in Japan.
Mulholland concludes: The global economic downturn, taken
together with the difficulty that any airline has in sourcing
financing at attractive rates, means that the economics of the
transaction have increased considerably since 2003/4. The JOL is
available for the right airlines and the right type of aircraft; there
are investors out there who want to invest in these structures. It
is about bringing together the right group of investors with debt
at a level that the airline is prepared to pay for with the right
credit and the right assets.
 AFM INTERVIEW John Leahy, Airbus
Were all expecting this years figures to reflect the swooping falls in passenger numbers and revenues,
but John Leahy, chief operating officer at Airbus, has given the industry a pep-talk with a confident 20-
year forecast. Its bad, its painful but weve been through this before, he argues. Speaking at Airbus
Global Market Forecast 2009-2028 and later in interview with AFM, Leahy gives upbeat long-term
predictions, including a tripling of traffic demand and doubling of the worlds passenger fleet.
AFM INTERVIEW:
JOHN LEAHY,
COO AIRBUS
SINCE THE DAWN OF THE JET AGE YOU COULD COUNT ON AIR
traffic doubling every 15 years, John Leahy, chief operating
officer, at Airbus affirms. And while this year has been exacting,
Airbus has stayed relatively on track with deliveries; in 2008 it
beat its 40-year record.
While confessing that it is looking more and more difficult as we
get towards the end of the year, the airframer is not adjusting
its goal to take 300 orders this year. In its 20-year forecast, Airbus
projected a healthy, if somewhat surprisingly optimistic 24,951
global aircraft deliveries comprising 24,097 passenger and 854
freighter aircraft. Thats basically 1,200 aircraft a year between
the two manufacturers, at least before any new commercial
aircraft manufacturers step into the market, says Leahy. These
orders will contribute over $3.1tn to commercial aircraft
manufacturers during the next two decades; We think were
relatively well-positioned to get the lions share of that market.
Regarding passenger aircraft, Airbus predicts demand for 16,977
single aisle aircraft; 4,097 small twin-aisle aircraft; 1,705
intermediate twin-aisle aircraft; and 1,318 very large aircraft
(VLA) over the forthcoming 20-year period.
On what the talking heads say
While Airbus and Boeings forecast were all but mirror images, a
number of the industry analysts such as Ascend and The
international Air Transport Association (IATA), have given differing
verdicts. IATA which produces statistics that many regard as a
benchmark of the industry gives much gloomier figures
regarding global passenger numbers. Yet, says Leahy, IATA does
not count domestic traffic or low-cost carrier (LCC) traffic in its
numbers. It bases its statistics on legacy carriers international
flights these are more negatively affected, while LLCs will have
30-35 per cent of the market by 2059, the airframer calculates.
32| Airline Fleet Management
The body has also said that global airline losses will reach $11bn
this year up from the previously forecast $9bn. It estimates that
that $80bn will disappear from the industrys bottom line and
says though the fall has been harder and faster than 9/11, it will
take many years to recover - especially as the industry will post a
further $3.8bn in losses next year. Yet Airbus is altogether more
optimistic. Leahy says the important tracker is aircraft deliveries
and adds that Airbus is targeting figures not dissimilar to those
of 2008 and 2009; thats about 480 aircraft.
Lots of people have talked about massive cancellations during
the recession, now thats not really true, proffers Leahy, pointing
out that 1998s backlog figure was 1,000 aircraft compared to
the current figure of almost 35,000. The backlog has grown
rather substantially but the order cancellations stay relatively
minor. That doesnt mean airlines dont ask for deferrals and if
they ask for deferrals 12 months from now that can affect your
production line, but we really dont see many of these
cancellations that talking heads in this industry tend to get
soundbites over.
According to data from Ascend, aircraft values are depreciating
at a rate much faster than during the previous two industry
recessions. Ascend says the average value of a new A320 fell 12
per cent over the one-year period of 2008 to 2009, compared to
19 per cent over the five-year peak-to-trough period of 1998 to
2003 and the seven per cent during the three-year period of
1990-1993. However Leahy, who tracks lease rentals of A320s
and 737s closely says: rentals are not down very much and are
staying relatively flat, we have gone down much less in this
recession in terms of pricing than we did in the recession during
9/11 and through SARS, much less. Prices of new aircraft have
remained flat during this period.
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 Demand Cycle
24,097 New deliveries 854
24,951
Recycled
3,134
Passenger
fleet Converted
2,585
Freighter
fleet
7,417 Retired 1,306
8,723
Passenger aircraft 100 seats
Source: Airbus
Passenger and freighter forecast
While Leahy purports that overall, this downturn is much like
previous ones, he does believe that damage to the freight market
is the worst weve ever seen, adding that the smaller freight
operators are in very serious financial difficulty. Despite the
general view that the freighter market is showing a leveling-off,
Ascend said in its September 2009 market review document,
Viewpoint that the softness in demand could continue or even
deteriorate further. I think youll be seeing a shake-out of the air
freight market over the next couple of years and perhaps some
consolidation as well, says Leahy.
Despite lowering its freighter forecast for the next 20 years,
Airbus says the market will grow an average of 5.2 per cent, more
than doubling over the next two decades. It forecasts that 2,585
passenger to freighter (P2F) conversions will take place and as
many as 1,306 freighters will be retired from the worlds fleet. Of
the P2F conversions, 786 will be small jets, 1,285 will be regional
and long-range aircraft and 514 will be VLA. Airbus expects to
see 854 deliveries of new freighter aircraft.
Leahy told AFM there are no plans to further reduce forecasts or
production rates for passenger aircraft, indeed Airbus has
increased its 20-year demand forecast by 700 units; reflecting a
rise in oil prices which it expects to reach $100 per barrel by
2015. If there is a risk [to production] its no more than five per
cent on the downside, but then equally theres potential for five
per cent on the upside, he said. Airbus has already cut its
production rates on the A320 family aircraft by two units per
month from 36 to 34 as from October this year and has cut rates
of the A380 from 18 to 14 this year a further drop from the
January revision of 21 to 18. It will also no longer be increasing
its production of the A330 and A340 but maintaining it at 8.5 per
month. Airbus has said production cuts will not affect
employment or its target number of deliveries and while the cuts
are a clear marker that not all is perfect, they do match with
comments made by the airframer earlier this year that it would
not keep the faucet running, thus flooding the market with
unwanted aircraft.
34| Airline Fleet Management
We are trying very hard to keep our
production lines running smoothly and
not run into the peaks or fall into the
valleys that our competitor seems to
do every time there is a cycle.
Leahy adds that it is something the company keeps a very close
watch on and is in contact with some airlines daily. We are
trying very hard to keep our production lines running smoothly
and not run into the peaks or fall into the valleys that our
competitor seems to do every time there is a cycle. He admits
that the company expects to see additional requests for deferrals
and cancellations and that there is some overbooking in the year
ahead, but that their forecasts account for this.
Airbus expects around half of next years deliveries to be funded
by ECAs and while he believes it is going to be a tight winter
with some airlines running very low on cash reserves, there will
be enough financing opportunities to see operators through the
downturn. Banks are loath to loan he said in his forecast, but
the economy is still fighting towards a recovery. Since August,
China, Japan and the US have all been in expansion mode in
manufacturing. Thats one of the reasons why the world stock
market is going up and why people are feeling better about the
economy. According to the forecast, Chinas domestic aviation
travel has grown at double-digit rates since the beginning of this
year such growth within Asia and the BRIC countries (those
with growing economies: Brazil, Russia, India and China) is
pushing the economy towards stability. The three key areas
for growth in aviation are the Middle East with 6.9 per cent
growth expected over the next 20 years; Asia-Pacific, with six per
cent; and the Commonwealth of Independent States (CIS, the
11-member state which includes Russia) with 5.9 per cent; these
are shortly followed by Latin America with 5.8 per cent. Airbus
calculates that air traffic grows or declines at about two times the
rate of GDP; thus when the developed world recovers and
emergent regions boom, air traffic will surge too.
Looking at just one of the industrys main areas for expansion,
Airbus sees massive growth potential in countries where air travel
infrastructure is being developed. It calculates that on average
each person in the US travels on an aircraft twice a year; people
in India travel only 0.5 times. You have to multiply that by 20 to
get up to one trip per year, per person, so think about what
happens to world air traffic if the 1.2 billion people in India fly 20
times more than theyre flying today, and this is still only half
the rate of travel as within the US.
Added to the worlds growing desire to fly, Airbus spoke in its
forecast about the swell of major cities, or what it calls
megacities, defined by Airbus as those that contain 10,000
passengers willing to fly at any one time. There are 37 megacities
today and Airbus expects this to grow to 82 by the end of 2028
while existing megacities will increase in size.
 Small aircraft manufacturers, Embraer and Bombardier are
Passenger and freight demand starting to close in on Boeing and Airbus reign on the market,
as too are Commericial Aircraft Corporation of China (COMAC)
Number of new aircraft* US$ (billions) and Sukhoi. COMAC has unveiled plans for its new C919
18,000 16,977 1,400 narrowbody due 2016. China has said they can produce an
16,000 1,200
1,206 aircraft at $50bn less than a like-for-like Boeing or Airbus
14,000 narrowbody and at 15 per cent less emissions. Leahy admits that
1,000 in the long term the market will open to other manufacturers but
12,000
819
10,000 800 believes it will take many years to carve the skills and knowledge
to contend. It isnt just the ability to build an aeroplane, you
8,000 600 571
482 have to market it and service it around the world, you also have
6,000
4,237 400 to have a family of aircraft. Both Lockheed and Douglass of the
4,000
2,008 200 United States were very good military and civil contractors and
1,729
2,000 both had to exit the commercial business because they didnt
0 0 have modern, full-line products. It took Airbus at least half of its
Single-aisle Small Intermediate Large Single-aisle Small Intermediate Large
& small jet twin-aisle twin-aisle aircraft & & small jet twin-aisle twin-aisle aircraft & 40-year existence to prove that its products could be serviced
freighters & regional & long-range large freighters & regional & long-range large
freighters freighters freighters freighters freighters freighters and maintained to the same standards as its competitors so
% unit: 68% 17% 8% 7% % value: 39% 27% 15% 19% weve got another 20 years to see whether the Chinese, the
Passenger aircraft 100 seats + freighters Russians and everybody else that claims theyre going to
manufacture large commercial aircraft, actually have products
Source: Airbus
that will stand the test of time.

By the end of this 20-year forecast there is no doubt in my mind

that we will have competition someone will have to come to
grips with that, but I dont see the foreign manufacturers being
VLA and small aircraft demand
major competitors to Boeing or Airbus over the next 20 years.
To match projected demand, Leahy underlined the need for
larger aircraft: We cant just paint the sky wing-tip-to-wing-tip
with small airplanes congestion wont allow for that. The
number of VLA is expected to hit 1,318 by 2028, taking 15 per
cent of the market. Despite the new-age need for large aircraft,
growth in the size of airframes is a customary phenomena;
aircraft size has increased by an average of 1.2 per cent each year
this means a 26 per cent increase in aircraft size by the end of
2028. Very large aircraft have to be an important part of the
growth story, says Leahy, not least because we do not have the
infrastructure to manage this number of passengers, nor the
sums of money needed to develop it sufficiently.

Yet there is also demand for smaller commercial aircraft. In

discussions after the market forecast, Leahy disclosed that the
awaited single-aisle aircraft is not likely to take flight until 2014.
He later told AFM that such major developments take time:
What you need to have is substantial step change in both
engine and airframe technology. We dont want to just bring out
a new airplane that would cost us maybe $10-$12bn. It would
cost Boeing the same amount to produce; it would cost the
airlines a lot in terms of infrastructure to introduce this new type.
[We first need] a real step change in fuel burn, in cash operating
costs and maintainability and we have to wait for that technology
to be developed we cant just wish it into being. We see both
engine and airframe technology starting somewhat after 2020,
we think around 2024 would be the appropriate time for entry
into service.
Despite a depression in the market and questions over the
legality and continuation of EU government loans (Airbus was
recently ruled to have taken illegal government aid from the EU
by the World Trade Organisation), development of the new
single-aisle has not been marred by a slump in investment. We
havent slowed research and development [but] when you pull
the trigger to bring a programme to commercial reality and
industrialisation, then thats when you start spending billions and
billions of dollars, right now we can spend hundreds of millions
of dollars in research, development and technology to make sure
we have the best possible product, because it has to last at least
50 years we need to make sure we get it right and not just
come out with an interim airplane.
THE LOW DOWN ON THE NEWS
A view to buy ILFC?
On the controversial statement in the French newspaper, La
Tribune, which suggested that together with Jean-Paul Gut,
EADS deputy CEO, Leahy may have a view to purchase ILFC
shares with Qatari financing, Leahy was unambiguous and
resolute, responding that the statement was unfounded.
On Clintons plea for Boeing
Discussing Hillary Clintons, US secretary of state, self-confessed
shameless pitch to Rosavia, Leahy said: I think when you
have to get politicians to put pressure on countries to buy your
product it says perhaps youre secretly a little embarrassed about
the technical and commercial merits of your product. Clinton
told Russias new airline that the US Ex-Im bank would welcome
an application for financing to fund its $3bn purchase of
aircraft should it be with Boeing. Leahy confirmed that
expansion into the developing Russia is an important part of
Airbus outlook. Of course were hoping to win that one, or at
least a piece of it. We think Russia is a major market.
Will Airbus play ball with Ryanair?
On Ryannairs continued attempts via the media to push Boeing
and Airbus into a price war for the tender of some 200 aircraft,
Leahy again confirmed that he had no intention of entering the
competition, commenting: If Mr OLeary wants to buy aircraft he
knows how to call his friends over in Seattle and place an order.

36| Airline Fleet Management

 MAINTENANCE OPERATIONS MRO FORECAST

The MRO outlook for 2010 is unsettled; there are some tentative signs of growth in the aviation industry,
but few think that the economic downturn will dissipate within the next 12 months, more likely it will
take another two to three years.

MRO WORLD
FORECAST
REPORT
AIRBUS HAS FORECAST A JUMP OF FOUR PER CENT OR MORE
in global air travel next year while Boeing has said the market is
unlikely to rebound before 2011. The European airframer
expects a decline of less than four per cent in 2009, followed by,
at worst, unchanged demand in 2010, according to Laurent
Rouaud, SVP market and product strategy. Boeing has said traffic
may drop by as much as eight per cent in 2009, without giving
a precise forecast for next year 2010 will be a year of
economic recovery, but 2011 will be the year for air-travel
recovery, according to Randy Tinseth, Boeings marketing chief.
Airbus has forecast an increase of six per cent or more in 2011.

According to AeroStrategy/OAG, the international aviation
management consultancy, the current air transport market is
$44bn and this will contract to $41.8bn in 2009, about $3bn
below the 2007 peak (see graph, p46). However the MRO
market is expected to recover early next decade and reach $55bn
by 2018. The recession and associated fleet contraction is
expected to result in three years of lost MRO market growth.
Source: AeroStrategy
Nathan Smith, industry analyst, aerospace and defence at Texas-
based consultancy Frost & Sullivan (F&S), observes: Global airlines
are slowing deliveries and extending delivery dates, overall aircraft
orders are down, but MROs are not expected to be impacted
immediately by order deferrals. One reason for this is that new
aircraft generally have their first heavy maintenance check at
between 18 and 24 months and airlines may need to retain older
aircraft until new ones arrive to replace them.

AeroStrategy estimates that by 2017, MRO The industry is likely to continue reducing capacity and aircraft
fleets to match travel demand, with much of the fleet reduction
outsourcing will increase to 73%, up from 52% in 2007 due for completion in 2009. Smith says in the short-term MRO
2007 - 2017 MRO Supply Structure by Market ($B)
providers are not expected to be affected because although global
25 airlines are adjusting fleet capacity there is higher aircraft
Captive
utilisation. Historically, heavy aircraft maintenance and
20 modifications have been the most profitable for MROs. But now
many airlines have removed older, inefficient aircraft that were due
Outsourced
for heavy maintenance. In the long-term this will have a negative
15
impact on those MRO providers anticipating the heavy
maintenance work.
10 90%
Tay Kok Khiang, president, Singapore Technologies Aerospace (ST
75% Aerospace), the leading Asian maintenance provider, anticipates
5 85%
70%
that MRO spending on older and less fuel-efficient aircraft, such as
30% 75%
40% the 737 Classics and MD-80/90, will be seriously affected as a
12%
0 result of fleet restructuring. Next in line will be the reduction of
2007 2017 2007 2017 2007 2017 2007 2017
Engine Line Component Airframe Heavy activities in direct support of day-to-day operations such as line
and component maintenance. Tay agrees that the effect on heavy
Note: outsourced includes separate MRO businesses that are owned or partially owned by airlines
maintenance would be felt somewhat later in the cycle.

38| Airline Fleet Management

 Global MRO expenditures are $45B; engine O/R and
North America are the product/regional drivers
2007 Commercial MRO Market
$45B
Modifications 9%
Airframe Heavy 14%
Engine 34% L.America 4%
Middle East 5%
Component 20%
Asia Pacific 17%
Line 23%
Engine overhaul is the largest driver
of MRO spend
AeroStrategy points out that subsequent to 9/11 US carriers
reduced capacity by four per cent (in 2002/2003) and this,
combined with a change in maintenance habits, meant MRO
spending fell by 12 per cent. One can expect a similar occurrence
in this cycle. In the air transport sector, airlines have announced
plans to park or retire over 750 aircraft. When this is combined
with the 200-300 retirements in a normal year, AeroStrategy says
that it accounts for a four per cent global air transport fleet
reduction. In further efforts to reduce costs, carriers will defer
maintenance, renegotiate maintenance contracts, get rid of
excess inventory and cannibalise their fleets. This means that air
transport MRO spending will probably slump and then recover as
economic conditions improve and there is a catch-up on
maintenance and replenished inventory.
40| Airline Fleet Management
Africa 3%
E. Europe 2% India 1%
China 4%
N. America 36%
Europe 27%
North America and European
operators account for almost
two-thirds of MRO spend
Source: AeroStrategy/OAGback
AeroStrategy predicts a decline in spending of five to 10 per cent
in the air transport MRO sector in 2009, depending on the
individual position of the MRO supplier. However, it stresses that
not all markets will be equally impacted by the downturn. The
most affected will be older generation aircraft (737-3/4/500, MD-
80, DC-9, DC-10), 50-seat regional jets, the North American
market and discretionary modifications. The least affected
will be new generation aircraft (A320, A330/340, 737NG, 777,
E190), leased fleets, low-cost carriers with strong balance sheets,
Asia-Pacific and Middle East markets. Older engines such as the
JT8D Std, JT8D-200, CF6-50 and CF6-80A are most likely to be
affected by fleet reductions. The least affected will be the new
engines such as the V2500, CFM56-5/7, GE90, Trent.
However, recovery is forecast to begin in 2010 as GDP and flying
activity grow once again. Over the whole of the next decade,
AeroStrategys latest forecast shows annual growth at 2.4 per
cent per annum, resulting in a market of $55bn in 2018.
Tom Gentile, VP and GM of GE Aviations services operation
believes that about 2,300 engines are out of service, representing
13 per cent of the fleet. The lower number of cycles and the
higher number of retired aircraft translate into fewer shop visits.
He says: While GE- and CFM-powered engines tend to be
newer and more fuel-efficient, the downturn is impacting our
fleet. GE Aviation is forecasting total shop visits to be down
about five per cent this year from last year. In previous
downturns, such as after 9/11, it has taken between 24 and 48
months for the market to recover fully, so we expect shop visits
overall will be relatively flat for the next few years. That said,
some engine lines, such as the GE90 and the CFM56-5B and -7B
will see substantial shop visit increases as these modern and
efficient fleets come into their maintenance periods.
 In 2017, the European and Asia Fleets will be
nearly the same size as North America
2007-2017 Air Transport Fleet
2017
10,000
2007

8000
Eastern
India
6000
China Africa
4000
Western
Other Middle East
2000
Latin
America
0
North Europe Asia Rest Of
America World

Source: AeroStrategy/OAGback

MRO spend
North America has the largest slice of the MRO pie and engine
overhaul is the largest spending driver. North American and
European operators combined count for almost two-thirds of the
market. F&S states North America retained 37 per cent of the
market in 2008 but with continued growth in global MRO
markets. The forecast is a gradual decline of this share over the
next 10 years. The expectations are that revenue will decline by
an estimated three per cent between 2008 and 2013. Global
MRO revenues are estimated to grow at a CAGR of 3.7 per cent
or $53.6bn in the same period.
In terms of MRO spending, the Asia-Pacific region is the fastest-
growing area. Aircraft MROs here are rapidly gaining market
share as the global airline fleet increasingly operates in that
region. F&S warns that the forecasted steady growth of the
global MRO market masks significant instability as low-cost Asian
and Latin American MROs capture increasing market share. North
American MRO is forecast to retain the largest market share for
2008 2017, but will experience a steady decline.
and large MRO providers (engine OEMs and third-party providers)
expanding their capabilities in the region to provide support.
Specifically, India and China have been actively entering the MRO
market and view this as a growing industry, in which they want
to become players.
Unlike engine MRO where cost is related to spare parts, more
than two-thirds of airframe heavy maintenance is related to
labour. Consequently heavy maintenance is outsourced to
countries with lower labour rates. F&S says about 70 per cent of
aircraft maintenance in the US is currently outsourced and
expectations are that about 86 per cent will be outsourced by
2013. Smith says the MRO market in Europe has begun to lose
some of its glimmer; European labour rates are higher than those
in the US and Asia. Airframe work is labour intensive and we
find that some of this work is now being shifted to Eastern
Europe and Asia to assist in cost reductions. Europe keeps most
of its aircraft maintenance regional and outsources less than both
Asia and the US.

Spending on aerospace maintenance, repair &

Outsourcing trends overhaul (MRO) is equivalent to manufacturing
In the Americas, MRO is primarily done by engine OEMs or
2007 aircraft production and MRO markets ($B)
airlines that perform MRO work on their own fleets. However, 140
Gentile notes that many US carriers, such as Southwest, $116B $117B
120
Continental, Northwest and US Airways, have outsourced their
MRO work to reduce the costs associated with operating shops. 100
Europes MRO market has the airlines actively seeking third-party 80
MRO work along with the engine OEMs and third-party 60
providers. He says that the Asia-Pacific region has a strong
40
presence doing overhaul work on aircraft and the major carriers
20
in the region do their own engine MRO work. Yet the majority of
the engine MRO work has been outsourced. As the fleets have 0
Manufacturing MRO
grown in the last few years, there is a trend toward the airlines
Source: OAGback/AeroStrategy/Teal Group

42| Airline Fleet Management

 North Americas fleet will have the highest portion
of old and mature aircraft in 2017
2017 air transport fleet by region and generation (28,000 aircraft)
Aircraft operators are expected to continue to send aircraft
Old overseas for maintenance, but F&S says future migration of
100%
aircraft outside of the US is expected to slow due to: new
90% Mature
presidential administration (keeping jobs at home); demands
80%
from labour and consumer groups; and demands for more FAA
70% oversight. Outsourcing will diminish if MRO unit cost and labour
60% rates increase. The majority of widebodies will be sent overseas,
50% but narrowbody maintenance will remain close to the regional
New
40% base. F&S predicts that line maintenance outsourcing will grow
30% from approximately 10 per cent in 2008 to 21 per cent in 2013.
20% Engine MRO remains the largest segment in outsourcing and will
10% retain the largest percentage of MRO growth.
Next
0%
North America Europe Asia Latin Middle Africa Flat freight
32% 27% Pacific America East 4% Demand for cargo conversion in 2008 fell short of production
25% 7% 5%
levels in 2007 with flat expectations for 2009. According to F&S,
cargo traffic fell 23 per cent in 2008 with expectations of a three
Source: AeroStrategy/OAGback
to six per cent decline in 2009. This is mainly due to the fact that
as aircraft orders are deferred, existing aircraft are in service for
longer and there are less conversion platforms available. This
pushes up the market price for desirable used aircraft. A CAGR
of 4.25 per cent is forecasted for the period 2009 to 2013 with
The majority of airframe heavy maintenance is outsourced to the number of aircraft growing from 1,947 to 2,397. Overall one
regions in Latin America, where labour rates are still about 25 per can expect cargo growth to be slow during the next two to three
cent below the North American market. However, capacity is years. North American cargo deliveries will consist primarily of
limited, particularly when it comes to widebodies. Mexican and narrowbody aircraft. A320 and A330 conversion are expected to
Central American facilities typically cater to narrowbody fleets. be available around 2011 and 2012 respectively, and 777
VEM in Brazil is probably the regions largest widebody facility conversions are expected to be available in 2012. Despite the
and the company is actively trying to grow its business, as are the popularity of MD-11s, the number of these aircraft available for
major Mexican carriers. conversion is declining.

44| Airline Fleet Management

 MRO spending will increase at a 3.1% CAGR to Survival
exceed $60bn by 2017 How can stakeholders survive in these straitened circumstances?
Smith says that to remain competitive in MRO airlines must
2007 - 2017 air transport MRO market ($B) change. He suggests they outsource their maintenance work or
CAGR
run their internal M&E as a separate business and insource
60 Modifications 2.8% additional work. Those providers that do not position themselves
50 Airframe Heavy 1.5% to meet the different requirements of fleet restructuring may find
themselves with excess capacity. Gentile notes that excess
Component 3.9% capacity has been an issue in the MRO industry for many years,
40
but says one cant estimate how many providers have been and
30 Line 2.5% will be affected by this. GE Aviation has reduced shop floor space
by more than 2 million ft2 in the last five years. Today, GE is
20 focused on expanding its MRO network of providers, which
Engine 3.8% include airlines and third-party providers. The network providers
10 have access to GE material and technology and offer customers
TOTAL 3.1%
a choice as to where they can have MRO work performed.
0
2007 2009 2011 2013 2015 2017
Smith observes that the MRO industry continues to change
1% less than 4% fleet growth through consolidation and restructuring, much of which is due to
Forecast is in constant 2007 Dollars its highly fragmented nature. This fragmentation has led large
MRO suppliers to continue to expand through partnerships, and
Source: AeroStrategy/OAGback
acquisitions. He says that consolidation of the industry removes
smaller or weaker MROs and allows top-tier MROs to align prices
and cost. Tay feels that consolidation may not be very beneficial
unless there are real synergies. He suggests that collaborations
between OEMs and MROs can extend the OEMs reach to
Tay says that in view of the reduction in freight volumes, customers in a cost-effective manner.
passenger-to-freighter (PTF) conversions requirements can be
expected to soften. However, many of the conversion Customers now want more bang for their buck and there is a
programmes are not for adding capacity but to enable freight demand for more one-stop-shops. Engine MRO providers will
operators to retire older aircraft, which are not cost effective to need to offer more than just engine MRO services; they should
operate. Therefore, while there may be a shift in demand, it provide more value-added services. Examples are integrated total
would likely be a question of timing as to when the conversion solutions that encompass fleet management, off-wing MRO, on-
would take place. Generally programmes that are ongoing are wing support and spare engine support. There is growing
likely to continue, while new programme launches may not take demand for integrated MRO solutions with cost guarantees.
place in the near future. In fact, some forward-looking freight Smaller companies may not be able to provide a range of
operators may be worrying about how to respond when the services, so they could concentrate on providing a product that
recovery picks up. fulfils a niche market, thus maintaining profitability.

2008 outsourcing by market ($B)

25

Captive
20

Outsourced
15

10
78%

5
70%
12% 53%
0
Engine Line Component Airframe
Heavy

46| Airline Fleet Management

 Full component support is the single largest
outsourced component MRO segment in EMEA
2007 segment size as portion of spend in Europe, Middle East and Africa ($3.2bn)

In-house 30%

Tailored fleet contracts 5%

Support oriented
10%
Full component
Service Component repair support
Integration traditionals
12% 28%
Price shopper 12%

Breadth
Source: AeroStrategy analysis

The long view

In the long-term the nature of the air transport fleet will consist
mainly of new-technology aircraft. The fleet is expected to
almost triple in size over the next decade, with the old and
mature technology fleets reducing by a third. This has significant
impact on MRO portfolio management in terms of types
supported and there will also be growth in airframe maintenance
checks as the existing fleet ages (particularly the A320-family).
MROs will also have to take into account the cost of establishing
capability for new generation aircraft. Advanced composite
materials mean higher fuel efficiency and new engines spend a
longer time on wing, so despite an increased cost of
maintenance these factors can have an overall positive impact on
the cost of operations.
There will ultimately be a recovery the UKs Confederation of
British Industry (CBI) predicted the recession will last throughout
2009 and after six quarters of negative growth, recovery is
expected to build through 2010. MROs need to address certain
opportunities now in order to be ready. Manpower is one of
those issues. In the next two years the demand for qualified
mechanics will probably remain static due to the global economic
crisis, but in 2011 it is expected to rise disproportionately high,
as will man-hours. Thus MROs should continue to train
mechanics in order to be ready for 2011 and beyond. However,
this is a tricky line to tread. If too many mechanics are certified,
redundancies will occur, if too few, MROs will not be able to
compete effectively.
Tay concludes the current downturn offers a good opportunity
for airlines, OEMs and MROs to reflect on their direction, take
stock, and plan ahead for the recovery. He points out that in the
current climate, safety and quality are even more important, as
all have to be cautious about reputation and performance risk.
Both airlines and MROs always have to remember that quality
is a value that cannot be compromised regardless of the
prevailing business environment.

Source: OAG Fleet iNET, 27 October, 2009

Worldwide fleet summary by region September to October 2009

Region Net Delivered Leased Purchased Retired Returned Fleet at 31st
Orders New 2nd hand to lessor October 2009
Africa 2 9 13 15 0 1 2,380
Asia Pacific 12 62 36 25 1 13 6,676
Europe 2 48 56 59 9 64 1,273
Middle East 2 17 15 4 2 8 1,798
Central America 0 2 8 10 0 4 7,783
South America 0 8 6 20 0 2 2,821
North America 0 62 43 242 35 85 17,602
Undisclosed Orders 12 0 1 0 0 1 16
Total 40,349

48| Airline Fleet Management