{audio:0:00:01} David, a pleasure to have you with us today. I think a good place to start would be to really explore the structure of the aircraft leasing organizations and the teams. Given the portfolio is global, how is the business structured?

{audio:0:00:19} It depends, primarily, on the size. A smaller company, or a smaller branch, starts out relatively small. You probably have a sales guy and then he’s reporting back to headquarters, somewhere. If it’s a small company, just starting, there are a small number of people. Those people still have to take on the same tasks, essentially, that are there in a big organization. The salesperson, obviously, to generate and originate the leads. You’ll need finance people to make sure that the finances are under control. Those might be your pricing people, as well. You’ll have a risk person, who may or may not be your finance person. Certainly, you’ll have legal people, tax people, perhaps. Sometimes, if you’re a small company, you might start with outside counsel, but aviation law is considerably different from other types of law, so it’s important to make sure you get people who are knowledgeable in the field.

{audio:0:01:42} With the tax people, when you grow in size and become international, in particular, you need people that know the ins and outs of all the tax treaties, between countries and jurisdictions. That becomes quite an important piece that can be overlooked. Technical people are extremely important to the transactions, particularly if it’s used aircraft or pre-owned aircraft, because you can really get caught from just missing paperwork or having an inspection gone wrong. Those are critical, but not so critical when you’re just dealing with new aircraft. If you’ve ordered a bunch of aircraft or you’re just doing purchase leasebacks, that’s not as critical, up front. But when it comes to repossessions or redeliveries, those are some very key people.

{audio:0:02:50} What is the biggest challenge with the somewhat decentralized structure? I understand it’s centralized for the HQ and then you have various different regions that are working the same portfolio.

{audio:0:03:03} I’ve been in Asia for 30 years and always had a headquarters back in the States. When it’s Asia and the US, it’s not too bad, because you’re 12 hours out. But once you get a European entity in there, as well, then you’re always forced to have calls in your night. Europe hooks up in their daytime and the morning in the States. It does make for a lot of late nights, when you’re out here in Asia. But it comes with the territory; it’s part of life and you get used to it. It can be more difficult not having your entire team out here with you. First of all, they don’t understand the customer as well because you are, primarily, the only advocate for the customer that they don’t know. If it’s an American or a United or a BA or something like that, everybody knows them. When you’re talking Srivijaya or Nok Air or something like that, it’s more difficult. It’s hard to explain and it makes the process more complicated and more challenging.

{audio:0:04:31} Let’s say you’ve got a customer in Malaysia or South East Asia, for example, do you have to compete, internally, to allocate aircraft to the customer or do you have a designated number of aircraft for the region? How does that work?

{audio:0:04:47} For most companies, you’ve got certain assets you’re trying to place as quickly as you can, at the best price you can. You’re fighting it out with every other salesperson. Quite honestly, the jurisdictions in Asia are tough, from both the legal standpoint and the financial standpoint. It’s more difficult to get management to agree with your deal, as opposed to sticking with a Lufthansa or something like that, which they’re familiar with. It is quite a fight, sometimes.

{audio:0:05:28} Moving on to look at the challenges during this crisis, how do you compare the challenge for lessors today, during Covid-19, versus 2008, for example?

{audio:0:05:43} The financial crisis of 2008 impacted the financial community, it impacted big businesses. It didn’t impact Asia as much as it did Europe and the US. We actually took a lot of aircraft out of the US and brought them out to Asia, during that time. That crisis didn’t really affect the passenger. I compare this crisis now, more akin to 9/11, because passengers are going to be scared to fly. In the aftermath of 9/11, passengers were scared to get on an airplane. I think this is happening now, as well. After 9/11, regulators and airports were quick to adapt security measures, extra scanning and all that kind of stuff we’ve learned to live with.

{audio:0:06:50} In today’s world, passengers are still scared and they’re going to be scared for a while. I think, until there is either a treatment or a vaccine, a lot of people probably won’t fly and that’s far more daunting than either 2008 or 9/11.

{audio:0:07:15} Can we walk through the relationship dynamics with the airline, if an airline goes bankrupt, and how the lessor relationship and the repossession of the plane actually works?

{audio:0:07:29} A lot of that depends on the parties. Unfortunately, I’ve had to deal with several struggling airlines. Most of them didn’t go bankrupt, luckily, but they reacted in different ways. When an airline just closes the doors, won’t talk to you, shuts the records in a room and makes it very difficult, then it’s very painful for everybody. Lawyers get involved and it becomes quite difficult.

{audio:0:08:03} I’ve been lucky enough to work with some airlines, though, that were very accommodating, to the degree that they could be. Nok Air, for example. They were struggling and, luckily enough, they helped me take the aircraft out and get everything repositioned back. Eventually, we renegotiated everything and were able to get them back up and running. That was a credit to both GECAS, my company at the time, and Nok Air management, working together and being able to restructure something.

{audio:0:08:44} But we’ve had others that just shut down and I’ve had to sit in the lobby of hotels, waiting for the CEO to come out, just to try to catch him, because he won’t return calls and emails. Those, typically, don’t go so well. It’s unfortunate when it goes like that, because it’s frustrating for everybody.

{audio:0:09:04} Are the lessors protected through the security or collateral that they have on these planes?

{audio:0:09:16} Typically, if you’ve got a few months deposit, you tend to find that you burn through that pretty quickly, if it’s contested like that. If it’s not, in the case of Nok Air, where they flew the planes out for us and stuff, that was much easier. If they’re grounding the aircraft, shutting the records up, won’t respond to emails, they get some lawyer involved that probably doesn’t have anything to do with aviation law, those bills rack up, pretty quick. You’ve got parking fees, sometimes you’ve got fuel charges. We had one customer that was, unbeknown to us, several months behind on payments for engine reserves, powered by the hour. Those bills rack up really quickly and you just try to minimize as much as you can and move on.

{audio:0:10:14} Whether or not you finally go back and try to get them through lawsuits, I don’t see those as being terribly successful; occasionally, but not most of the time.

{audio:0:10:26} But the lessor is not liable for those maintenance fees and fees on the engines or the plane?

{audio:0:10:33} Theoretically, no. But if they want the aircraft back then, a lot of the time, they have to pay.

{audio:0:10:39} So the engine OEMs will come to the lessor, who then own the plane, to pay the power by the hour fees?

{audio:0:10:45} If you don’t pay it back, they could just drop the coverage, which means that everything that was paid in previously would go to waste. It depends on the situation but, in that one, it was hour by the hour type of a deal. They had been paying for three years, but they hadn’t paid for the last few months and so it was still quite a big bill to pay, to get it back on that program and continue.

{audio:0:11:13} So GECAS had to pay that, effectively?

{audio:0:11:17} What do you see as the biggest risk with lessors renegotiating rates or deferring rates and then, potentially, airlines going bust and the lessors having to reallocate those planes, in this market?

{audio:0:11:34} The unknown is the hardest part. Any time with restructuring, it’s only as good as what’s being told to you, in terms of what the rebuilding plan is. Hopefully, you’re seeing additional equity coming in or something that’s quantifiable. But that’s not always the case. It might be that they’re having a tough time or something is happening where we need to lower rents or liquidating their cashflow situation. We’ve had to restructure many deals, over the years. Normally, it’s a combination that’s equitable to both sides. Reducing the rent for a short term and then it goes up, during the higher season or extending the term. So, at the end of the day, net/net you’re pretty much the same; that’s always the goal.

{audio:0:12:39} But sometimes, their recovery plan doesn’t work and that’s the biggest concern; is that really going to save them?

{audio:0:12:50} In your opinion, the biggest risk is that the lessors are deferring the lease rates for airlines, pushing it down the road, but you still don’t know the demand in 12 months’ time?

{audio:0:13:03} Yes; particularly in this case, with Covid-19. We don’t know when traffic is going to be back up. A survey in Australia, yesterday, said that by the end of the year, it will only be back to 15% of international traffic; that’s scary. You can live with six months, maybe nine months, if you know it’s happening. Deferral or paying part interest, just to cover the financiers interest payments. But to go for an unknown amount of time, which is what we’re looking at right now, to see where we’re at, is very difficult. Some of the big three airlines in the States are saying that they don’t think they’ll be up to 70% before 18 months. Those are pretty scary numbers.

{audio:0:13:59} What do you think the second-order effect of that situation is? Let’s say that you don’t get back to 60% to 70% in 18 months’ time, what are the biggest impacts that you’d be looking at, on residual values and rates?

{audio:0:14:16} First of all, I think there’s going to be several airlines that don’t make it. That’s inevitable. I think I heard a quote of about 800 airlines around the world, 400 of those were less than 10 aircraft. There’s going to be a lot that don’t make it. The fact is, residual values will drop, temporarily, during this time, particularly if the MAX comes back online at some time during this period, then you’ll have more seats available. Prior to this, the values were very high, because there wasn’t enough left, because of the MAX situation. There were also engine situations, on a number of aircraft. It was a tight market, to get aircraft.

{audio:0:15:13} Now, obviously, there’s so many sitting around, a lot of them aren’t going to survive. So there will be a dip in the revenues, I think, until whatever happens, whether it’s a vaccine or something else, when people start to get comfortable being elbow to elbow with somebody again. That’s really when things are going to start to come back in full force. But there will be people wanting to place airplanes, even for the period of the next 24 months. Particularly, with a lower residual value or lease price, if you will, and low fuel prices, it might be a decent time for new entrants to come in. For some of those people that have been cash strapped and will probably go bankrupt, there will probably people coming in, to fill their shoes.

{audio:0:16:12} On the point of residual values then, how did residual values change in both 2008 and 9/11?

{audio:0:16:23} In 9/11, it was a fairly quick recovery. We did actually take a lot of aircraft out of the US and brought them out to Asia. AirAsia was one of the benefactors of that. We worked with Tony Fernandes, when he was taking over AirAsia from the previous owner, HICOM. We were looking at, possibly, thousands of airplanes sitting on the ground and we worked a deal with him that allowed him to take over the airline, as they had our aircraft, initially. It wasn’t as bad as we expected it to be or we thought it might be, at that point. Luckily, we didn’t have planes sitting on the ground that long.

{audio:0:17:13} The financial crisis, as I mentioned, it devastated a lot of the US and European airlines. But it really wasn’t bad for Asia. We were actually growing. AirAsia was growing, Lion Air was growing, so we brought a lot of kit out of the US and Europe and brought it out to Asia.

{audio:0:17:35} This pandemic is worldwide; it’s got everybody. I think it’s more severe, in that sense. I hope that there is a decent treatment or vaccine soon, so that people will feel comfortable rubbing elbows again. But there will be some near-term pain, no doubt. Nobody likes to see an airplane sitting on the ground so I expect lessors to try anything they can. There might be shorter-term leases; they might just do two or three-year leases, rather than five or six. But most leasing companies are in the long-term game. You invest in an aircraft for eight or ten years, so a two-year blip isn’t going to do too much damage here. Most of the leasing companies are okay.

{audio:0:18:42} Some of the asset-backed securities might take a hit a little bit; there’s been a lot of those in the last several years. Those are areas of concern to watch out for, but I think, in the longer term, it should come back.

{audio:0:19:02} What is your estimate on the impact on wide-body versus narrow-body residual values, today?

{audio:0:19:09} Even before the pandemic outbreak, the wide-body market was already softening a little bit. It might take longer to come back. The recovery from this, near term, the next six or nine months, is going to depend a lot on government policies. In the US, you can fly domestically, relatively easily, but you can’t fly to a lot of parts of Europe. In Asia, Malaysia isn’t allowing any foreigners to come in, at this point. Australia and New Zealand are all locked down. The recovery is going to be quite staged, depending on the regulations. No business traveler is going to want to go travelling if they don’t actually have to, if they’ve got to spend two weeks in quarantine, in a government hotel somewhere.

{audio:0:20:16} So a lot of that is going to be driven by the policies of the countries. Just between Singapore and Malaysia, at the moment, we have to spend a month in quarantine, in either side, just to get a meeting done, so it’s not going to happen.

{audio:0:20:32} Are widebody planes likely to be on the ground for longer than the narrow-body aircraft?

{audio:0:20:43} I think so, at least in this region. With so many different countries, in a small area, they’ve all got their own rules and it’s going to make it that much more difficult. Europe does have some internal rules, as well, as far as quarantine. The UK is talking about implementing a quarantine, as well, so if that happens, it’s going to make it that much slower to get people back in the seats.

{audio:0:21:20} So what do you think the residual value today is, of those wide-body planes, given the market, the oversupply of planes, the lack of demand? Are we talking a 20%, 30% decline?

{audio:0:21:34} I don’t think they’ll go down that much. Perhaps, as I said, there will be some short-term deals, just to get the planes back flying. Again, I think it depends on how long we’re going to be in this situation. Luckily for some, some regulators are allowing cargo to be put in the seats of these planes, in the cabin. So some are doing that now. Or have cargo flying in the belly. AirAsia has got belly cargo only, at this point, till they get regulatory approval of having it in the seats. Some countries have allowed that. India, I think it was Indigo, just had a record A320 with cargo stuffed inside of it, it was reported last week. There’s creative ways of using the airplanes, but it’s not the way we all want to see it.

{audio:0:22:43} What do you think is the biggest challenge for lessors, today?

{audio:0:22:48} I think it’s the unknown. Every customer is different, so you have to look at each scenario. The US guys have got some grants or bailouts or loans. Liquidity is the biggest thing, for any airline or any company, for that matter. Those that have good liquidity, that can tap into credit lines will do better. Singapore Airlines struck a deal with some assets; US airlines have got the government support. But those that don’t, such as Virgin Australia, South African, they were hurting beforehand, but this is, most likely, the nail in the coffin, unless they can get some investors that are going to come in and save the day. It’s really trying to assess each customer and what the long-term outcome is going to be and then making a decision, based on that.

{audio:0:23:52} It might be, great, you can extend your contract. We’ll give you a rent holiday for a few months, or whatever it is, or restructured in some way. But some guys aren’t going to make it out, so you’ve got to start planning.

{audio:0:24:09} How does that typically work? Can we walk through the rent deferral or restructuring process with an airline? I think AerCap recently came out and said that they’ve given rent breaks to some of the airlines of two to three months and in the rest of the lease period, they will make up that cashflow. But are there any other ways that the airline cannot pay the lease rate or can restructure it? What ways have you typically found?

{audio:0:24:40} As I explained earlier, it’s trying to keep yourself whole, in one manner or another. It might be, okay, pay half rent for three months and then you pay your normal rent, plus the other half, once that period is over. It might just be a matter of restructuring the whole deal, so that it’s a lower rate, over a longer term. It could be, as some countries are doing now, with mortgages, you just pay the interest and then we’ll defer the mortgage and extend the loan further. There’s different ways of doing it. At the end of the day, there’s a bank that needs to be paid its interest, whether it’s the leasing company or where they get their funding from. Even the lessor can’t just grant a holiday and not take a hit so they have to pass on some of it. If it’s a short-term thing, then it’s not so bad; hopefully you have enough protection against that. I don’t think that most lessors, these days, would be in a situation that they couldn’t do a slight payment holiday. Again, it’s assessing each individual customer and their ability to repay it. That’s the more difficult thing because there will be people going bankrupt.

{audio:0:26:15} Let’s say you’re doing more long-term restructuring or to a different rate, do you still aim to be paid whole and have the same IRR or the same cashflow return on the aircraft or do you think lease rates will really decline, after this period?

{audio:0:26:31} The goal is to have the same return, effectively. Normally, the airlines are quite understanding of that. You’ve signed up a deal with your investors and they expect to get that. If you help them out then, typically, they will help you out. If it’s dropping the rent by 50% and extending it for twice as long, then that might be the way to make it work. There’s different ways of doing it. Some people don’t want to be stuck in the deal that long, so then you restructure a different way. You’d make it higher rents in their high seasons and that type of thing, to help the cashflow for them, while you’re still getting your return.

{audio:0:27:19} Let’s say you buy an aircraft, such as an A320, how do you look at calculating the return and making sure that you can meet a certain hurdle rate when you do allocate or sell an aircraft to an airline?

{audio:0:27:34} It’s become very aggressive over the last 10 years or so. Lease rate factors have been coming down, which is the percentage of rent versus purchase price. That’s really just based on, many times, the cost of funds and how aggressive you can be. Lessors, depending on their credit standing and how cheaply they can get funds, really dictates how aggressive they can be, for the most part. The Japanese leases and a lot of banks coming into the sector that have much lower costs of funds, made it very aggressive and everybody tries to see the best way to get the new aircraft.

{audio:0:28:35} The used aircraft is a different story. Used aircraft tend to be more a factor of market price. If you want to place your aircraft, you’ve got to have a decent market price. You can make up some of that by having a better product, new Wi-Fi system or whatever it is, with all the bells and whistles that some people like; some people don’t like it. Low-cost carriers don’t like it. If your asset is more desirable, for one reason or another, it can get a little bit of a premium. But really, there’s a small band that you can price within, in order to get your aircraft placed.

{audio:0:29:27} Some lessors, such as GECAS, were very much of the mindset of placing everything out. When it was due to come off a lease, we would try to place aircraft a year or a year and a half in advance. We had a good strategy for bringing it through to the next customer, but some people like to gamble a little bit and wait until just beforehand and hope the market is higher and they can benefit from the market being tight. Sometimes that works and sometimes it doesn’t work. In reality, it’s all just a matter of what you’ve got, when you’ve got it, and what price you’re willing to give it. If you’re competitive, you get a look. If you’re not competitive, there’s usually more than just a few assets out there to have a choice from.

{audio:0:30:24} Clearly, the global interest rate or cost of funds, globally, has inflated aircraft values. Do you think that the Asian, Japanese or Chinese lessors have an advantage over the Western lessors?

{audio:0:30:47} It’s a different forum, if you’ve got your own bank, you’re generating your own money, so that is certainly a disadvantage for Western leasing companies. GECAS, being part of GE, had a fairly good rating, most years. We enjoyed a fairly low cost of funds, compared to a lot of the mid-sized lessors. But yes, it definitely plays into your tactics and how you approach the market. You’re not always the cheapest. A lot of times, with new planes, it’s just a matter of when you have the slot available. If you have a slot, when the airline wants it and it’s in the right spec, then you get the deal. That’s why leasing companies are one of those major purchasers of aircraft, so they can control the skyline, to some degree.

{audio:0:31:51} So the fleet composition really matters, for lessors? How do you compare the likes of AerCap’s fleet, versus GECAS or even the Chinese and Eastern lessors?

{audio:0:32:05} AerCap took over GECAS, some years ago, when they bought out ILFC, as far as size. But the dynamics are not that different, I don’t think. BOC was Singapore Aircraft Leasing. They were brought out by the Bank of China and, I believe, their funds are primarily from the bank, but they’re managed out of Singapore, with the board being in China. They’re not unlike AerCap or GECAS, as far as the way they operate the bigger leasing companies. It’s more the bank banks, the Standard Charters and those kind of guys, American companies and European companies, such as BNP and all those guys, that all compete in the same area.

{audio:0:33:15} While Chinese investors, Chinese banks and insurance companies are all relatively new to the scene, it really hasn’t changed the dynamic of what is happening in the leasing business.

{audio:0:33:29} If we just take AerCap’s fleet, for example. I think they’ve got 37 billion of assets, they claim that, roughly, it’s 70% narrow-body, 30% wide-body and I think the CEO recently said, roughly 70% are US or China flagship carriers, of the fleet. They’ve got 12% current wide-body tech. Looking at wide-body, long-haul travel is challenged, wide-body massively oversupplied, current tech out of favor. How do you look at the residual value of this type of aircraft, today?

{audio:0:34:15} You’ve got the financial residual value and you’ve got the practical residual value. A lot of times, you have to take it right down, because things aren’t moving. It’s an accounting mandate. There are times when the companies do have to revalue their fleets and, perhaps, take book value down. We’re hopeful that this isn’t going to be that long of a downturn that that’s going to be necessary. But if you have planes sitting on the ground for a year, that’s quite considerable. We were fortunate, in my time with GECAS, we had very few AOGs, and that was something that we were proud of. Out of a nearly $40 billion fleet, we would only have one or two planes on the ground at any time, not signed up to somebody and that was quite an achievement.

{audio:0:35:21} It’s going to be a balance of the bankruptcies versus what aircraft you can try to place on contracts, with either new people or other airlines that had plans and hope to get back to those plans, sooner rather than later. The residual values, if you’re in a situation where you have to part out the aircraft, if there’s no potential home for it, that’s when you really face the residual value effect. You’ve made the decision that it’s not going to fly anymore, you can’t put it on lease anymore, so you’re going to have to sell it or scrap it out, then you really come face to face with the reality of residual value. At that point, you can’t hope that it’s going to come back again.

{audio:0:36:18} Clearly, there’s probably no market for these planes right now, in terms of the secondary market, but if you were to part that out, or even sell these current wide-body tech today, what would you estimate it at?

{audio:0:36:32} It’s hard to put a number on it, obviously. 380s, for example, there’s no home for them. Lufthansa is going to try to convert one to a freighter; that’s interesting news. Freighter traffic, luckily, is up. It’s the first time it’s been up in decades, to this degree, anyway. Once belly cargo starts flying again then, unfortunately, it might not be that long-lived. There are aircraft like that, where the people that are holding the title to them are probably wishing they didn’t. They might have had a good run on lease, for however many years, but they’re still stuck with a pretty expensive asset that probably doesn’t have a home.

{audio:0:37:31} But it still has some value, right, in terms of part value? But it might be 30% or 40% of the book value, potentially?

{audio:0:37:39} That’s probably a fair estimate, I’m guessing. Unfortunately, for the 380, in particularly, it doesn’t have a lot of common parts with any other aircraft. The 330 and 340 had a lot of commonality, so you could extract some value out of those airframes, but the 380 doesn’t have a lot of commonality with anything else. The engines are different; the airframes are different. There’s not that much you can get out of it.

{audio:0:38:15} How do you even look at residual values when there’s zero demand?

{audio:0:38:21} You can only look at what you think you can get, at the end of the day, whether that’s selling it to the spare parts market or doing it yourself, if you’ve got your own tear-down facilities. You’ve got to extract that value, as much as you can and it may or may not be there. Some of the older 738s will likely go into freighter conversions. Get a fleet of like aircraft and put them into freighter conversions; that’s already been started by GECAS and others. Those are home for some of them, I think, eventually. The prices will come down enough, perhaps after this, especially if the MAX gets online before all this starts to settle down and the 800s, particularly the older ones, will drop in value enough that it will justify spending the millions of dollars to put in freighter conversions.

{audio:0:39:30} What about the 777s or the 330s, in residual value and parts?

{audio:0:39:38} I think there are still decent second and third homes for those. The market has been soft and demand was weak, even before the Covid-19 outbreak. If you want to keep them flying, you can find somebody. It might not be at a great price, but you can usually find somebody that will take them and at least keep them flying. When it’s on your books and generating something, it’s better than nothing, so you don’t have to depreciate it as much or write it off.

{audio:0:40:19} What about the opportunity for lessors, in this market, in purchasing leasebacks?

{audio:0:40:26} It’s been quite large. BOC just announced 20 aircraft, the other day. It’s a time when the airlines need cash and if they have assets that are unencumbered, then it’s a good way to release that cash. So purchase leasebacks are a huge tool and it is a buyer’s market, so you’re probably getting a pretty good deal on the aircraft and the airline is getting the cash to pay their salaries and everything else that they need to do.

{audio:0:41:00} Do you get a much higher return in those times? What happened in 9/11?

{audio:0:41:04} Again, you get back to your lease rate sector or whatever and however you are going to compare the value of a deal. It might be possible to get a steal from an airline that’s gone bankrupt and then put that to somebody else, eventually, and make a good deal on it. But a straight purchase leaseback, where it’s the same customer, you don’t really want to take advantage of the situation and gouge them on the price and then gouge them on the rent. Normally, the rent is in line with whatever the purchase price is. If it’s a low purchase price, it’s a lower rent; if it’s a higher purchase price, it’s a higher rent. That’s fairly transparent when you’re doing purchase leasebacks, within a degree. But, as I said, if they’re buying from outside, if you’re buying from a failing airline, which might need cash but doesn’t want the asset, you’ve got to place it somewhere else and you’ve got to find a home so you might be sitting on it for a while. Therefore, the lower price you paid for it, might be justified, because you’re going to take a risk of it sitting on the ground.

{audio:0:42:18} So the actual cash return for the lessor is not materially higher during this time, in purchasing leasebacks?

{audio:0:42:24} Not necessarily. It might be better after the first lease expires, because then you’ve got a lower-priced asset and that’s going to go on in the future, hopefully in good times, where you can make better returns on that. Leasing is a long game, so you’re not necessarily looking at the first transaction, to make it pay for itself.

{audio:0:42:51} Effectively, you’re buying a relatively distressed asset, putting it on your balance sheet and then maybe having a lower lease rate in the short term, but then you have a longer lifetime to earn more cash, from that lower-priced asset?

{audio:0:43:07} I’m curious about how you’ve seen lease rates evolve, over the last 20 or 30 years. Obviously, with the decline in interest rates, that’s propped up aircraft prices, how has it evolved and how do you see lease rates, specifically, and the competition of the lease rate evolving from here?

{audio:0:43:31} In my salesman world, it’s always based on market. If competitor X is offering $300,000 for a wide-body, I can’t be at $400,000. For me, it’s always been a competitive view and then it’s up to you and your team and then your company, ultimately, to decide whether or not the risks associated with that price are worth it or not. You’re always playing the best return scenario, but the tolerance band for pricing is only what the competition will take. I’ve been fortunate, in most of my career, to have very good relationships with the airlines and that helps a lot, in negotiations. It’s not going to help me get a better price, but it might help me know what’s going on or where I’m at or give me the last bid. But it’s never going to justify a huge delta in rent or anything like that.

{audio:0:44:49} You’re dealing with smart people that are watching out for their best interests. They do look around, they do know, for the most part, what the market rates are. You’ve got to be in the ball park. It’s all driven by competition.

{audio:0:45:14} Do you just give a lease rate and a maintenance rate, as a total lease rate? How do you and the airline negotiate that deal?

{audio:0:45:40} Different airlines have different takes. First of all, if they have maintenance facilities, then, obviously, they want to do the work on the aircraft. Typically, in South East Asia, there would be a rent portion, a deposit portion and maintenance reserves. For the most part, the average airline, mid-sized or start-up, those are the sort of leverage that you have to play with. Obviously, for the higher risk, you have more deposit, hopefully. Reserves are, essentially, an insurance policy, as well. You’re just betting that if the airline hands you back the aircraft prematurely, that you’ve got money in the bank to perform the maintenance. If there’s an MTPH program, with one of the OEMs, then that allays some of that fear, but not necessarily always because, as I mentioned earlier on, with the situation we’ve had, a default uncovered that there were unpaid reserves. That’s one area that you can play a little bit in.

{audio:0:47:07} A lot of leasing companies would low ball on the maintenance reserves, which increases their risk but it makes the cashflow lower. Perceptively, for the airline, it looks as if they are paying less per month. The only problem with that is, when that maintenance event becomes due, then they have to dip into their own pocket, to make it up and they don’t always reserve for that. That has actually caused some airlines to go bankrupt.

{audio:0:47:36} The original leases, in China, were very much that way, where it was just a rent and no reserves, but they had to return the aircraft in such condition that was mid-life or three quarters life or something like that. Then when they got to the end of their leases, they were looking at tens of millions of dollars of payments, to get it back into that condition or pay out the lessor. So a lot of the early ones ended up just extending and extending, to try to offset some of that. Those were some lessons learnt in China. It looked like a great deal, initially, to them, because they were just paying their basic rent. But at the end of the day, they realized that it really wasn’t such a good scenario.

{audio:0:48:29} How many months, typically, do you take in security deposit and maintenance deposit?

{audio:0:48:37} It depends. Some companies will take letters of credit, in exchange for cash deposits. Typically, if it’s a start-up airline, with very limited capital and unknown management, you want more. It might be nine months or a year. It could be a combination of cash and LC. Particularly with start-ups, low-cost carriers especially, they are low cost so they typically do not have a lot of equity to start up with. Normally, we wouldn’t look at somebody unless they had $50 million of cash available. A lot of people come to you with only $10 million and say, we’re going to lease the aircraft; we don’t need that much.

{audio:0:49:36} Is it a few months that you take, as a lessor?

{audio:0:49:39} Typically, two or three months, for an established client.

{audio:0:49:47} The numbers that I’ve seen from the industry, for the last few years, roughly, the basic lease payment, plus the maintenance revenue, is roughly 11% or 12%, as a percentage of the aircraft purchase price. Obviously, you deduct depreciation and the interest payments and the overheads for the lessor, to come to some kind of return on asset of the aircraft.

{audio:0:50:24} That’s why I’m not in finance. The pricing guys and the finance guys work very hard at trying to ascertain, first of all, particularly if it’s a new product, what the initial costs are, what the life of it is going to be and then the technical costs, going through the whole life. You’re looking at a 25 to 30-year life for an aircraft and trying to determine what those maintenance costs are going to be, what the attractiveness is going to be, the usefulness to the client, to the airline. What kind of revenue can they get off 10 extra seats, in this configuration versus this configuration? Does putting in extra fuel tanks allow them to make more money or not? All of those sorts of things go into the analysis of residual value, because it all plays a part into the whole life income of the asset. It’s way beyond what I’ve had to do, from my sales perspective.

{audio:0:51:53} What are the core lessons you’ve learnt, selling and leasing aircraft, in your experience?

{audio:0:51:59} A lot of it is just style, I think. I’m very much about consultative selling, as one of the flash words. I believe in trying to work with the airline, to understand what their needs and goals are. I’ve worked with a lot of start-ups, over the years and a lot of restarts and trying to understand what their objectives are, helps to focus the approach that I can help bring to them. A lot of times, it’s not price, it’s not reserves, but there’s other things. It might be holiday schedules or high-traffic seasons that dictate what they can do. The last thing that you want to do is to get off on a bad footing, putting a plane with them, having rental commitments, in the low season, when they’ve got no income. The more you understand what the customer faces, the better you can work out a reasonable solution that will work, longer term.

{audio:0:53:25} A lot of people don’t do that. They just go in, place an aircraft and then hope everything goes well. But I find I’ve got very relationships with the people I’ve done deals with, because it is a partnership, as opposed to just a selling opportunity.

{audio:0:53:47} How do you think those airlines would be thinking today? It clearly is different, on a case by case basis, but what type of conversations do you think the salespeople at the lessor companies will be having with airlines?

{audio:0:54:05} Hopefully, in most cases, it’s the way I mentioned – the more you communicate, the better the outcome, in almost every case. If the airlines are not paying their lessors and not talking to them, that’s going to be a pretty bad situation. Most of them will be talking to them and be trying to work things out. A lot of my job was doing that, unfortunately. Some of the jurisdictions I had, it was just that tough. Inflation in Indonesia was terrible and the exchange rate really caused havoc with the airline operators there, over the years. Being there all the time, a few times a month, just trying to see what’s happening, what’s going on and how we could keep things going. It’s maybe a little bit different from the US or Europe, where things are more business-like, as opposed to having to go and have coffee and really get to understand the situation, because it’s not always reflected in the finances.

Challenges for Aircraft Lessors

The difference between previous crises and COVID-19 pandemic

How lessors approach deferring leases for airlines and recouping deferred rates later

Challenges for Aircraft Lessors

Former VP, Marketing and Sales at GECAS

inpractise.com/articles/aircraft-lessors-challenges

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David Settergen

Former VP, Marketing and Sales at GECAS

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Challenges for Aircraft Lessors(May 14, 2020)

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