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Contents Page Overview 1 Historical Background to the Aircraft-Backed Debt Market 2 The Market for Aircraft-Backed Securities 5 Basic Comparison between EETCs and Pooled Lease ABS 8 The Changing View of Pooled Aircraft ABS versus EETCs 9 Typical ABS Deal Structures 11 Our Basis Approach to Aircraft Cash Flow Modeling 12 Data Quality and Model Risks 13 Relative Value Analysis in Pre-9/11 Pooled Aircraft ABS 15 Worldwide Market for Commercial Aircraft 18 Commercial Aircraft Leasing Companies 18 Lease Rate Update 20 Aircraft Demand Forecasts 21 What Makes a Good Leasing Asset? 22 The Impact of Fuel on Aircraft Operating Expenses 25 Appendicies 1 Useful Web Sites for Additional Data 30 2 Airline Monitor Forecast of Aircraft Requirements 31 3 Aviation Forecasts from FAA and IATA 32 4 Current Order Book for Large Commercial Aircraft 33
Overview
Debt backed by commercial aircraft and aircraft-related assets is making a resurgence in the new issue market. Hedge funds and private equity groups are investing in the aircraft sector in record numbers, and some recent high-profile deals highlight the potential in the sector:
Cerberus Capital, a $13 billion private equity group, purchased debis AirFinance in June and has used the securitization market to source term Structured Products Research September 7, 2005 Commercial ABS Background to Aircraft-Backed Debt Securities
Mark Heberle mark.heberle@wachovia.com 704-383-1936
Chris van Heerden chris.vanheerden@wachovia.com 704-715-8321
Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
2 financing for the transaction. The recently priced $1 billion Aircraft Lease Securitization (AERLS 2005-1A) was met by strong investor demand. Earlier this summer, UBS brought an unwrapped securitization of aircraft engine leases for Willis Engine Lease Finance. The $200 million split-rated Baa1 Moodys/single-A Fitch Class A1s priced to yield LIBOR plus 153 bps. This was seen as a strong print for unwrapped aircraft-related risk. Aviation Capital Group purchased Boullioun Aviation from West LB in July 2005 for $2.65 billion and is likely to be returning to the securitization market with at least one and possible two transactions to finance this acquisition. Private investment firm Oaktree Capital Management of Los Angeles has teamed up with Pegasus Aviation in a joint venture to purchase additional aircraft for this three-time issuer in the pooled aircraft ABS market. Morgan Stanley has announced it will be selling AWAS, its commercial aircraft leasing business. AWAS, the former Ansett Worldwide Aviation Services, is a stand-alone leasing company with a portfolio of 155 commercial aircraft with a market value of approximately $2.5 billion. Likely buyers will probably look for term financing in the pooled aircraft ABS market.
In addition, a number of opportunity funds have started up in recent years to purchase aircraft from airlines under extraordinary stress. This expected new issuance should revive the sector with newly structured debt based on the current reality for lease rates. This should also create new interest in the sector from investors that have been out of the market for a number of years since the market peaked prior to 9/11.
Historical Background to the Aircraft-Backed Debt Market
Before deregulation of the airline industry, which started in the United States in 1978, the industry was financed primarily by the banking sector with a combination of loans and mortgages on aircraft. A few large carriers maintained monopoly pricing in protected markets. Service levels were high with hot meals and drinks provided. Air travel remained the domain of business travelers and only wealthy individuals and their families used airlines to travel on vacations. Systemwide load factors were near 50% in the early 1970s; fully half of the seats were unoccupied.
Deregulation allowed airlines to compete directly by letting market forces determine routes and fares, while allowing for an influx of new entrants. Prices dropped and airlines were forced to focus on cost containment. During the 1980s, airlines were able to remain relatively profitable by developing a system of yield management to maximize revenue on a particular flight. In effect, passengers were charged different amounts for similar service. Price-insensitive business travelers were charged significantly higher prices for the convenience of last-minute bookings, which subsidized the lower cost being charged to vacation travelers with the flexibility of booking travel farther in advance, and load factors increased.
Before deregulation, the industry was financed primarily by the banking sector. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
3 By the 1990s, the largest U.S. airlines had developed huband-spoke networks to more efficiently provide service to their extensive route structures when the first Persian Gulf War sent the sector into a three-year downturn. As airline credit deteriorated, traditional sources of financing that relied heavily on corporate credit dried up and new structures evolved that migrated to a higher reliance on asset value and structure for the repayment of debt.
Exhibit 1: The Movement from Credit Risk to Asset Risk
Source: Wachovia Securities.
Exhibit 1 depicts the various alternatives available to finance aircraft, as they range along a continuum from reliance on corporate credit risk at one end to reliance on assets and structure at the other. Early forms of finance in the sector, such as bank loans, leveraged leases and mortgages, relied primarily on the airline credit for repayment. Equipment trust certificates (ETCs) and pass-through certificates (PTCs) were rudimentary forms of structured finance where airlines would finance individual aircraft in stand-alone structures.
These structures gave way to enhanced equipment trust certificates (EETCs; pronounced double-E TCs). The enhancement to these securities came from adding larger pools of aircraft, with more than one aircraft type, then issuing several tranches of debt. A final enhancement over the ETCs was the addition of a liquidity facility that would continue to service interest payments for 18 months in the event of default by the airline.
As banks withdrew from direct lending to airlines, the void was partially filled by specialized leasing companies with the expertise to maximize the value of commercial aircraft through active management of their aircraft portfolios. These operating lease companies were able to diversify the credit risk across a large number of operators in diverse geographic locations, and they had the asset-specific expertise to be able to move aircraft out of low-growth markets and redeploy them in high-demand areas of the world.
Many of these operating lease companies are owned by profitable parent companies that can use the valuable depreciation expense associated with aircraft ownership. They have grown rapidly through sale/leaseback transactions as heavy losses by carriers have made them inefficient holders of these assets.
New structures evolved that migrated to a higher reliance on asset value and structure for the repayment of debt. Aircraft financing alternatives range along a continuum from reliance on corporate credit risk to reliance on assets and structure. Credit Risk Asset Risk / Structure Bank Loans Mortgages ETCs / PTCs EETCs Pooled ABS Leveraged Leasing Bankrupt EETCs (UAL) Wrapped Tranches Credit Risk Asset Risk / Structure Bank Loans Mortgages ETCs / PTCs EETCs Pooled ABS Leveraged Leasing Bankrupt EETCs (UAL) Wrapped Tranches Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
4 In Exhibit 2 on page 4, we have used the Airclaims CASE database to break down the market for Western-built jet aircraft in use by airlines to show the changing pattern of ownership and management in the commercial jet aircraft market since 1990. Both EETCs and pooled aircraft ABS are structured financings that use special purpose vehicles (SPVs) to hold ownership of the aircraft being financed. These SPVs are grouped under the category of Broker, Bank or Manufacturer within the CASE database. Therefore, aircraft financed in a EETC will show up as owned by Broker, Bank or Manufacturer but managed by an airline. Similarly, aircraft that are financed in a pooled aircraft ABS transaction will show up as owned by Broker, Bank or Manufacturer but managed by an operating lease company.
We have looked at changes in both ownership as well as management and made the following observations:
In 1990, airlines owned 59% of the aircraft in standard airline usage. That number dropped to 45% by January 2005. Over that same period, airlines went from managing 76% of their aircraft down to 64%. Operating lease companies increased their share of aircraft managed from 17% in 1990 to 30% by January 2005. Their direct ownership percentage only increased from 13 to 16%, as much of their recent growth has been financed in the pooled aircraft ABS market.
Exhibit 2: Changing Ownership of Commercial Aircraft Aircraft Market by Manager Category Aircraft Market by Ownership Category Year A i r l i n e s B r o k e r ,
B a n k
o r
M a n u f a c t u r e r O p e r a t i n g
L e a s e
C o m p a n y O t h e r T o t a l A i r l i n e s B r o k e r ,
As a result of deregulation, air service for consumers has vastly expanded at lower prices. Airlines are using assets significantly more efficiently than they did prior to deregulation, however, fierce competition in a high-operating-margin business means airline credit remains vulnerable, and we expect aircraft ownership to continue moving into the hands of operating lessors. Capital markets funding for these aircraft will mean continued growth for the pooled aircraft ABS sector. Operating lessors increased their share of aircraft managed from 17% in 1990 to 30% by January 2005. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
5 The Market for Aircraft-Backed Securities
Exhibit 3: Aircraft-Backed Debt Issuance 0 2 4 6 8 10 12 14 16 18 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 $ b i l l i o n s ABS EETC Other Source: Wachovia Securities.
The first pooled ABS transaction was done in 1992, whereas the earliest EETC transactions were done in 1994 (Exhibit 3). Issuance peaked in 2000 with a total of $15.1 billion from 30 transactions. In 2001, issuance in the sector appeared headed toward record levels until the terrorist attacks of 9/11 halted issuance of pooled aircraft lease ABS.
The EETC market remained open after 9/11 as Delta Air Lines, Inc., came to market just days after the attacks with a $1.4 billion EETC transaction. In the fourth quarter of 2001, the EETC market remained open to American Airlines, Inc., and Southwest Airlines Co. as they brought to market deals of $1.7 billion and $614 million, respectively. Issuance across the aircraft-backed market dropped dramatically in 2002, with only eight deals pricing for a total of just $4.3 billion.
2003 marked the return of pooled aircraft ABS to the market post 9/11 with the Wachovia Securities-led Aviation Capital Group 2003 transaction. The deal featured a supplemental rental facility, which helped provide cash flow to the transaction in the event that lease rentals dropped below a threshold amount. 2003 also marked the emergence of the repacked transaction of existing securities and the use of monoline wraps to increase liquidity. In Exhibit 4 on page 6, we highlight the repackaged and wrapped transactions that have been brought to market since 2003.
The Bear Stearns-led Aircraft Certificate Owner Trust 2003 is the largest repackaged transaction at $1.3 billion. The deal was a repackaging of the guaranteed portions of US Airways EETCs. This was also the only repackaging of EETC collateral to date. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
6 The most popular securities for wrapped transactions have been the senior securities of the LIFT transaction that was initially brought to market in 2001. These securities appealed to the monoline wrap providers, because they had been rated by S&P and were investment grade at the time the transactions were wrapped.
Exhibit 4: Repackaged and /or Wrapped Secondary Aircraft Securities Date Deal Amount ($mm) Credit Enhancement Underlying Security Lead 4/22/2003 ACBN 2003-1 1,365 MBIA A Classes of US Air EETCs BS 9/23/2003 CSTLE 2003-1W 75 MBIA CSTLE 2003-1 A1s LB 11/13/2003 LIFT 1W A3s 47 Ambac LIFT A3s WS 12/4/2003 CRABS 2003-1 200 Subordination AIRPT A9s / Zero CPN MS 1/14/2004 CSTLE 2003-2W 125 MBIA CSTLE 2003-2 A1s LB 3/31/2004 ARTS 2004-1 312 Subordination/ MBIA $156mm LIFT A1s/A2s MS 4/15/2004 ARTS 2004-2 60 Subordination/ MBIA $30mm LIFT A1/A2s MS 5/17/2005 UCAT 2005-1 203 Ambac $145mm LIFT A1s/A2s UCM 2,387 Source: Bloomberg LP, Rating Agency websites, Wachovia Securities
There were no pooled aircraft ABS deals brought to market in 2004 with a total issuance of a mere $2.8 billion. With the recent pricing of the AERLS transaction that financed the Cerberus Capitals acquisition of debis AirFinance, the pooled aircraft ABS market is again active with new issue activity.
Exhibit 5: Total Issuance of Aircraft Backed Debt In terms of total market size, there has been total issuance of $72 billion in securities backed by aircraft since 1992, of which there is approximately $51 billion outstanding (Exhibit 5). The EETC market represents 54% of the securities issued but 61% of the securities outstanding. The next largest segment of the market is pooled lease ABS, which represents 37% of total issuance but only 28% of the current market.
The greater contraction of the ABS market is partially explained by the fact that in 2001 Morgan Stanley called its entire MSAF program, which had been a major issuer in this market. The EETC market has benefited from greater liquidity with a current market size of $34 billion versus approximately $13 billion in the ABS sector. The other category of aircraft-backed securities consists of the funded portions of synthetic transactions and deals backed by loans on corporate jets.
$72 billion in aircraft- backed securities have been issued since 2005. Other 9% EETC 54% ABS 37% Source: Bloomberg LP and Wachovia Securities estimates. Total Issuance: $71.72 billion Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
7 Exhibit 6: Estimated Current Outstanding Aircraft-Backed Debt Continental Airlines, Inc., represents 22% of the EETC market with $9.1 billion in issuance from 20 transactions (Exhibit 7), whereas United Airlines is second with 13%. American, Northwest and Delta account for approximately 11% market share each. These top five issuers represent 68% of the market. Investors interested in evaluating cross-sector opportunities between pooled aircraft ABS and the EETC market need to understand that moving from EETCs into ABS requires giving up liquidity for structure.
Exhibit 7: EETC Issuance by Airlines Continental Airlines 22% United Airlines 13% American Airlines 11% Northwest Airlines 11% Delta Air Lines 11% US Airways 10% Other 22% Source: Bloomberg L.P. and Wachovia Securities, LLC.
Continental Airlines, Inc., represents 22% of the EETC market with $9.1 billion in issuance from 20 transactions. Other 11% EETC 61% ABS 28% Source: Bloomberg LP and Wachovia Securities estimates. Total Outstanding: $51.45 billion Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
8 Basic Comparison between EETCs and Pooled Lease ABS
Aircraft-backed debt securities follow along a continuum based on a reliance on corporate credit from the unsecured debt and ETCs at one end of the spectrum to a reliance on structure and collateral in the EETC and ABS markets on the other. EETCs are corporate debt securities with certain characteristics of securitized assets. In the current environment, the corporate credit component has weakened and the securities are trading more on the reliance on their structural support and the quality of their aircraft.
EETCs and pooled aircraft ABS are being affected by weakening airline credit quality and LTV levels that are being eroded due to the assumed reduction in aircraft values post 9/11. To address the ramifications of these stresses, we compare EETCs with aircraft lease ABS based on diversification, re-leasing risk and risk due to the erosion of aircraft values.
Diversification. Aircraft pools diversify the risks to lessees, aircraft and geographic regions. As aircraft become available from either normal lease maturities or default by an individual airline, the aircraft can be marketed in other regions. Meanwhile, EETCs have concentrated exposure to an individual lessee and a narrow range of aircraft types. On the other hand, EETCs are typically backed by newer aircraft and the credit quality of the individual lessee is usually higher in a EETC than the overall credit quality in a pooled transaction. However, U.S. airlines have been the most drastically affected by the terrorist attacks, and most EETCs are issued by U.S. airlines, highlighting the primary strength of regional diversification.
Re-leasing risk. Pooled aircraft ABS have come under stress due to lessee credit weakness and, to varying degrees, the number of aircraft types coming on the market due to U.S. and foreign fleet reductions. EETCs, on the other hand, are generally fully amortizing corporate obligations over the life of the security. In other words, the aircraft lease securitizations have re-leasing risk, whereas the EETCs have individual credit risk and the risk that, in the event of default, the aircraft will have to be marketed in a distressed market. In the current environment, the binary credit risk of the EETC transactions has become more pronounced and therefore these transactions have greater risk to the net realizable value of the underlying aircraft.
Risk of aircraft valuations. Protection is provided to pooled aircraft ABS deals and EETCs in the form of overcollateralization. As discussed earlier, the typical LTVs of the EETCs are lower than those of a pooled aircraft lease securitization for a given rating level. Although both asset classes are exposed to the risk of declining aircraft values, the structure of the pooled aircraft lease securitizations is more resilient to short-term shocks and recessions. To understand why, we need to take a closer look at aircraft valuation methods.
Within the context of airline finance, valuations are described as being either base value or market value. The base value of an aircraft is an appraisers opinion of the underlying economic value of an aircraft in an open, unrestricted, stable market Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
9 environment with a reasonable balance of supply and demand. These values assume that aircraft can be marketed under stable market conditions. Market value, on the other hand, is the appraisers opinion of the most likely trading price for the aircraft in the then-current economic environment. Differences between base values and market values become important in times of severe stress such as these. Base values will be more stable than market values.
Aircraft lease securitizations will generally have annual reviews to update their base values. To the extent that base values drop more than 5% below the expected base values in the deal, the scheduled amortization of senior classes is generally accelerated at the expense of the junior classes to bring LTVs in the deal back into balance. EETC securities, on the other hand, do not have annual appraisals, and investors need to take this into account when looking at cross-sector opportunities.
EETCs are more exposed to market value risk, whereas pooled aircraft lease securitizations are more exposed to base value risk. Although EETCs are structured with liquidity reserves that can cover interest payments for 18 months while an aircraft is being marketed for sale, the risk in the current environment is that the stress on aircraft values will keep market values below base values for an extended period. For EETCs, this effect is partially offset by newer collateral and lower LTVs. Many investors have mistakenly assumed that these lower LTVs are a sign of more conservative structuring of EETCs. This is not so; the lower LTVs associated with EETCs are warranted due to the reliance of these structures on realizable asset value.
The Changing View of Pooled Aircraft ABS versus EETCs
Exhibit 8: Pooled Aircraft ABS versus EETCs
EETCs Pooled Aircraft ABS At time of issuance Pros Cons No lessee diversification No geographic diversification No servicer Generally unrated lessee base Aircraft generally older than in EETCs In the Current Market Pros Cons Major U.S. airlines in trouble Structures not working as contemplated in bankruptcy Some deals have older aircraft types All deals are suffering from lower lease rates ABS: Asset-backed securities; EETCs: Enhanced equipment trust certificates. Source: Wachovia Securities. Newer aircraft Generally core to airline fleets Low investment-grade lessee Diversified by aircraft, geography and lessee Actively managed pool Newer aircraft Most managers have been able to keep aircraft flying, albeit at lower lease rates
EETCs are more exposed to market value risk, whereas pooled aircraft lease securitizations are more exposed to base value risk. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
10 We have summarized the changing view of the pooled aircraft ABS market versus the EETC market in Exhibit 8. When these deals were first being done, one positive feature of EETCs was that they were backed by newer aircraft that were core to the issuing airlines fleet. EETCs were almost all issued by the major U.S. carriers, which was viewed as a good thing until the downturn in the U.S. market that was exacerbated by the events of 9/11. The downside of the EETC was that there was no diversification in credit exposure and there was little diversification among aircraft types.
Another drawback of these structures was the lack of a dedicated servicer. This was not generally viewed as a major negative, however, because there was no expectation of having to remarket the aircraft during the life of the deal. Unfortunately, as a number of these transactions are tested by bankruptcy, the lack of professional servicers has become an issue as creditors with limited industry knowledge attempt to enforce their rights in these transactions.
The pooled lease transactions, on the other hand, were issued with a broad diversification across lessees, aircraft and regions worldwide. The negatives for the pooled lease deals were that their aircraft were older on average than the EETCs and that their lessee base generally comprised unrated entities around the world.
In the current environment, many of those unrated companies have fared much better than the major U.S. airlines that issued EETCs. However, due to the severity of the decline in commercial aviation, some older aircraft types will be retired early and the shorter expected useful lives of these aircraft have a greater effect on the pooled lease deals than the EETC deals. In addition, the global nature of the downturn has temporarily reduced the value of regional diversification.
One aspect of the pooled lease transactions that has become more valuable is the value of active management. These transactions were structured with the full knowledge that aircraft would have to be placed with more than one lessee over the life of the transaction. The ability of these managers to repossess and release aircraft has been severely tested over the past several years, and most have done a good job of keeping their aircraft flying. As with the EETC market, relative value will hinge on a thorough analysis of the aircraft backing the transactions and the structural support given a particular security.
One aspect of the pooled lease transactions that has become more valuable is the value of active management. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
11 Typical ABS Deal Structures
Exhibit 9: Typical Pre-9/11 Deal Structure 0 200 400 600 800 1,000 1,200 1,400 1,600 J u l - 0 1 J u l - 0 3 J u l - 0 5 J u l - 0 7 J u l - 0 9 J u l - 1 1 J u l - 1 3 J u l - 1 5 J u l - 1 7 J u l - 1 9 J u l - 2 1 J u l - 2 3 J u l - 2 5 P r i n c i p a l
( $ m i l l i o n ) Source: Wachovia Securities. A-Class Second Pay A-Class Senior Amortizer
Pre-9/11 pooled aircraft ABS transactions were intended to pay down the liabilities of the structure in advance of the projected depreciation of the underlying aircraft in the portfolio. Generally, commercial aircraft are expected to fly in revenue service for 2530 years with many examples flying for much longer.
Each transaction has its own set of assumptions related to useful life and depreciation based on the particular makeup of the portfolio of aircraft with some deals using 25-year useful lives and assumptions of residual value, while others assumed 30-year useful lives and no residual value.
A typical pre-9/11 pooled aircraft ABS transaction was structured similar to the example shown in Exhibit 9. The senior A classes in these deals would usually represent 70%75% of the liabilities in the transaction and were generally issued on a floating-rate basis. Subordinated tranches were generally amortizing securities with fixed and floating coupons. Payment of principal was based on minimum principal paydown curve as well as a scheduled principal paydown curve.
In Exhibit 9, there are two second-pay securities, originally structured as soft bullets, that were projected to be refinanced 23 years from the time of issuance. Failure to refinance these securities was to result in the payment of a step-up coupon of 50 bps. Since the downturn in the aviation sector that followed the events of 9/11, none of the pre-9/11 transactions have refinanced their soft-bullet securities. These deals have all experienced reductions in lease rate cash flow and have therefore not had sufficient funds available to pay the subordinated step-up coupons.
Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
12 Given the low cost of funds represented by these original transactions, we do not anticipate any of these transactions refinancing any of these existing structures. Although severely distressed, these securities are very resilient to indenture events of default. The most likely event of default in the current market is the failure to pay senior class interest. Due to the resiliency of their structure and their prevalence in the capital structure, many senior second-pay securities have extended out to their minimum principal curves and, in many cases, trading at distressed level. Senior second-pay securities represent the largest portion of the tradable supply of securities in this sector.
In the first year or so after 9/11, trading activity in the sector used stress runs based on parallel shifts in the cash flow from each deals offering memorandum. By early 2004, this method of evaluation had given way to a more detailed analysis based on modeling of cash flow at the aircraft level. In the following section, we describe the Wachovia Securities methodology for modeling asset cash flow in these pre-9/11 aircraft transactions.
Our Basic Approach to Aircraft Cash Flow Modeling
Modeling future cash flow on aircraft ABS transactions is a difficult undertaking. The market has been changing rapidly, and estimates of aircraft values and lease rates are in continuous flux. Our goal is to evaluate deals based more on consistency in our approach rather than presenting these cash flows as our best guess of the income stream likely to be experienced by the deals. These cash flows do not represent our best guess of future cash flows; rather, they represent our conservative estimate of cash flows with limited credit being given for the correlation of lease rates and interest rates. Due to the static nature of these scenarios, they are not appropriate for a full evaluation of subordinate tranches in this sector. Pricing on subordinate tranches reflects significant option value and represents leveraged bets on the recovery of this sector.
In the past several years, investors in this sector have taken conservative views on cash flows and market values and then run those cash flows against forward LIBOR to come up with conservative return assumptions. These calculated returns are viewed as conservative, because the combined effect of running distressed and declining cash flows against a steep forward curve is to mute the correlation of lease rates and interest rates. This analysis continues to evaluate the universe of pooled aircraft ABS transactions in this conservative manner. Our basic methodology in evaluating pooled aircraft ABS transactions involves estimating or using actual reported current lease cash flow for each aircraft in the portfolio. estimating or using actual lease rollover dates. marking leases to market after the conclusion of the current lease using third- party lease rate data from Airclaims. making assumptions for new lease rate terms, downtime and rate decline percentages. making a reasonable assumption for collection of maintenance reserves as a percentage of lease revenue.
Senior second-pay securities represent the largest portion of the tradable supply of securities in this sector. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
13 running the resulting cash flow through the liability waterfall of the transaction using forward LIBOR. Our cash flow models have been enhanced through the creation of a centralized database of our residual value assumptions for every aircraft type and year combination in our universe of aircraft that back these deals. This centralization of the residual value modeling is the key component of our revised asset models. In our prior models, each aircraft would have its residual value modeled as a percentage of its initial base value. Although we were standardizing the percentage recovery for different aircraft types, the differences in initial base values created an inconsistent dollar value of recovery for similar aircraft.
To gauge our models, we have to standardize our assumptions beyond just the residual value of different aircraft types. Other significant assumptions that have to be considered are terms of new lease rollovers, useful lives of aircraft and the roll down of future lease rates as the aircraft age. Our generalized default assumptions for cash flow modeling are as follows: New lease rollover termsfive years Lease rate decline for second-lease rollover10% Useful lives of passenger aircraft are assumed to be 25 years, and freighters are assumed to have useful lives of 15 years from time of conversion. Residual values are calculated from the residual value database to ensure consistency across various transactions.
Data Quality and Model Risks
Modeling risk can be associated with the data quality as well as simple bugs in your calculation engine. The sector came of age at a time when the reporting requirements were not very onerous. Some servicers, such as GECAS, have voluntarily increased the amount of data that they report on their deals. In Exhibit 11 on page 14, we summarize our views on the quality of inputs that we have for each deal. The grades given for the data quality have the following general meanings: Ausually given most relevant information on a monthly basis; Bmost rollover dates updated in quarterly reports; and Conly minimal updates given for the lease rollovers of aircraft. Estimates on these deals entail assumptions about when leases roll over. Also, in most cases there is no breakdown of the current lease rate by aircraft and lessee. EAST, PALS 1999 and PALS 2000 provide the most lease rate and rollover data of any of the transactions in the market.
Our cash flow models have been enhanced through a centralized database of residual value assumptions. Some servicers, such as GECAS, have voluntarily increased the amount of data that they report on their deals. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
14 Exhibit 11: Cash Flow Models Summary Data Data Quality Notes ACAP 2000 C Current lessees derived from Airclaims CASE database and annual appraisal (August 2004); lease expirations estimated except about 10 that have detail in CASE; lease rates estimated. We have serious concerns over our ability to predict lease rollovers. Aerco B Lessee data from the quarterly report; expirations are estimated based on summary table in quarterly report; lease rates are our estimates AFT 1999 A Lessee plus expiration data from monthly report; lease rates estimated AIRPT C Lessee plus expiration from CASE and 10-Q; lease rates estimated. EAST 2000 A Full lessee, lease rate and rollover data published monthly. We grade the available data as an A. LIFT A Lessee plus expiration data from monthly report; lease rates estimated PALS 1999 A Lessee, expiration and rates from monthly report PALS 2000 A Lessee, expiration and rates from monthly report PALS 2001 B Lessee data from monthly reports; some expiration given in monthly reports; rates estimated TAF B Lessee, expiration and rates from quarterly reports Source: Wachovia Securities.
Investors in the aircraft ABS sector have to be diligent about doing the work to become comfortable with the risks inherent in this asset class. Modeling aircraft lease cash flow and then evaluating the corresponding liability waterfall is fraught with potential modeling risks. Even though the focus of this discussion is on the asset- side modeling of these deals, the resulting analytics that we will be evaluating at the deal level will be greatly influenced by the assumptions being made in the liability models. From this perspective, the biggest risks are those related to the modeling of hedges in the deals. In Exhibit 12 on page 15, we show the swap notional amounts in Wachovia Securities liability models as a percentage of the Class A balances outstanding on each deal.
Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
15 Exhibit 12: Liability Model Hedge Assumptions Swap Balance as % of Class A Swap Data Source Balance ACAP 2000 Estimate 30.6% Aerco Mar 2005 quarterly report 85.4% AFT 1999 Dec 2004 quarterly report 83.1% AIRPT Dec 2004 quarterly report 88.8% EAST 2000 Mar 2005 quarterly report 64.7% LIFT Estimate 111.0% PALS 1999 Fixed-rate deal, no hedging 0.0% PALS 2000 Estimate 36.3% PALS 2001 Estimate 103.7% TAF Estimate 27.4% Source: Wachovia Securities.
In addition, investors should avoid the pitfall of attributing too much predictive power to even the most elegant models. The key from the investor viewpoint is to evaluate opportunities in the sector in such a way as to gain comfort that model error is skewed to the upside.
Relative Value Analysis in Pre-9/11 Pooled Aircraft ABS
The senior amortizing securities in the pooled aircraft ABS sector have remained the most liquid securities in the sector and currently trade in the context of LIBOR plus 200 bps area. These securities traded as wide as LIBOR plus 400 bps during the worst of the downturn as large European structured investment vehicles (SIVs) were liquidating their holding of these securities.
These securities are pro rata with regard to interest payments with the rest of the A class securities but senior with regard to principal payments. However, in the event of an indenture event of default, these securities would become pro rata and pari passu with the rest of the A class securities for both principal and interest. Active markets are made in most of these securities, but trading is most pronounced for those securities with the largest outstanding balances.
In Exhibit 13 on page 16, we show the current outstanding balances of current-pay senior amortizing classes in the sector. AIRPT A8s represent a full 25% of the tradable supply in the sector. Along with the LIFT A3s, these are the most actively traded senior amortizers.
The senior amortizing securities in the pooled aircraft ABS sector have remained the most liquid securities in the sector. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
In our Aug. 1, 2005, issue of Aircraft ABS Analytics Sourcebook, we introduced our IO/PO analysis of the second-pay senior securities in the pooled aircraft ABS sector. This analysis provides investors with a handy reference with which to judge the relative merits of the second-pay senior securities in the sector by comparing the recent market prices to an intrinsic value that we have developed by separating the interest and principal components of our base case cash flows and valuing them separately.
In Exhibit 14 on page 17, we highlight the results of our analysis under our base case cash flow assumptions from August 2005. In our base case for this analysis, we value the more senior interest component at a discount margin (DM) of 100 bps and the principal with a targeted 10% yield. We add these separate intrinsic value components together and compare the total intrinsic value to the current market price of the securities. The dollar price difference between the intrinsic value and the current market price is in the highlighted column. The analysis is also calculated at a DM of 150 bps and a yield of 15%.
Additional exhibits have been generated based on parallel shifts in our cash flow projections with Exhibit 15 on page 17 based on 120% of base case cash flow and Exhibit 16 on page 17 based on cash flow that is 80% of our base case. Under this evaluation methodology, we are able to highlight the following interesting dynamics taking place in the market for these senior second-pay securities:
Securities for which a principal window is opening soon trade at levels more in line with their intrinsic value. The ACAP A1s are trading at only a point lower than their intrinsic value, whereas deals with late principal windows are trading at significant discounts to intrinsic value. Second pays that are cuspy on the repayment of principal, such as the AIRPT A9s, have a natural resistance in their trading levels as lower cash flow may actually extend the IO cash flow. Thus, the A9s in our base case have an IO value of 44 (Exhibit 14) and this increases to 50.86 at an 80% cash flow scenario (Exhibit 16). Recent activity in repackaging these senior second pays favor higher-rated securities and those rated by S&P. This had been the reason for a number of transactions that involved wrapping LIFT A1s and A2s (i.e., the UCAT and AIRPT A8s and LIFT A3s are the most actively traded senior amortizers. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
17 ARTS deals). The S&P rating is necessary for monoline insurance companies to calculate their capital charges related to any secondary wrap transactions. This becomes important for investors looking for an exit strategy related to insured repackaged deals. While the ARTS deals did not have a monoline wrap, it certainly helped that the LIFT A1s and A2s were rated investment grade at the time the transactions closed. The cheapest cash flows in the market are the distressed second pays off of deals that are not expected to fully repay principal. The second-pay securities off of the PALS deals all trade at levels substantially below their intrinsic value.
The cheapest cash flows are distressed second pays not expected to fully repay principal. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
18 Worldwide Market for Commercial Aircraft
Exhibit 17: Worldwide Fleet of Aircraft in Airline Usage
Worldwide Fleet of Aircraft in use by Airlines Source: Airclaims, CASE Database Aircraft in Airline Usage worldwide (28,059 Aircraft) Jets (Western built) 65% Jets (Eastern Built) 7% Turboprops (Western Built) 20% Business Jets 1% Turboprops (Eastern Built) 7% Western built Jet market by Manager Category (18,289 Aircraft) Airline 64% Other 6% Operating Lease Company 30%
Commercial aircraft leasing companies market aircraft to airlines around the world. The vast majority of the aircraft managed by these operating lease companies are Western-built jets. At this point, it is worth a few moments to look at how this market relates to the broader world market for commercial aircraft. In the left pie chart in Exhibit 17, we summarize the total worldwide fleet of 28,059 aircraft being flown in standard airline usage, either passenger or cargo aircraft flown by airlines as of August 2005.
Sixth-five percent of the world airline fleet is made up of Western-built jets, the vast majority of which are built by Boeing, Airbus, Embraer and Bombardier. Boeing and Airbus are the primary Western manufacturers of large commercial aircraft (LCAs) and Bombardier and Embraer are the main Western manufacturers of regional jets (RJs).
The pie chart on the right side of Exhibit 17 breaks down the world fleet of Western- built jets by manager category. Of the 18,289 world fleet of Western-built jets, 30% are managed by leasing companies, whereas 64% are managed by the airlines. This equates to 5,408 Western-built jets managed by the leasing companies.
Commercial Aircraft Leasing Companies
Leasing companies control a large and growing percentage of the world fleet of commercial jet aircraft. GE Commercial Aviation Services (GECAS) and International Lease Finance Corp. (ILFC) are the two largest lessors in the market (Exhibit 18, page 19). A number of hedge funds and private equity firms have been actively investing in the leasing market recently with implications for issuance in the pooled aircraft ABS sector:
Cerberus Capital, a $13 billion private equity group, purchased debis AirFinance in June and has used the securitization market to create term financing for the transaction. The recently priced $1 billion Aircraft Lease Securitization (AERLS 2005-1A) was met by strong investor demand. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
19 Aviation Capital Group purchased Boullioun Aviation from West LB in July 2005 for $2.65 billion. Aviation Capital is likely to be returning to the securitization market with at least one and possible two transactions to finance this acquisition. Private investment firm Oaktree Capital Management of Los Angeles has teamed up with Pegasus in a joint venture to purchase additional aircraft for this three-time issuer in the pooled aircraft ABS market. Morgan Stanley has announced it will be selling AWAS, its commercial aircraft leasing business. AWAS, the former Ansett Worldwide Aviation Services, is a stand-alone leasing company with a portfolio of 155 commercial aircraft with a market value of approximately $2.5 billion. Likely buyers will probable look for term financing in the pooled aircraft ABS market.
Exhibit 18: Top Lessors by Total Aircraft Managed and On Order
After several years of inactivity, leasing companies are again placing orders for new aircraft with the manufacturers. According to Airclaims CASE database, lessors have a total of 574 aircraft on order (Exhibit 18). The vast majority of these orders for new aircraft are coming from ILFC and GECAS with current orders for 298 and 147 aircraft, respectively.
Much of the recent investment comes as private equity funds look to capitalize on the recovery taking place in the industry. Lease rates for commercial aircraft hit bottom in mid-2003 in the wake of the SARS epidemic and the active portion of the Gulf War. At that time, the monthly lease rate for a mid-1990s 757 had dropped from a pre-9/11 level of $300,000 a month to around $100,000. In the current market we have heard of individual aircraft being placed between $175,000 and $200,000. In the next section, we look at the changes in lease rates across a wider cross section of aircraft that are relevant to pooled aircraft ABS investors. After several years of inactivity, leasing companies are again placing orders for new aircraft with the manufacturers. Manager In Service Stored Current Total %Total On Order Grand Total %Total 1 GECAS 1,488 50 1,538 28% 147 1,685 28.2% 2 ILFC 821 9 830 15% 298 1,128 18.9% 3 Boeing Capital Corp 214 15 229 4% 0 229 3.8% 4 Aviation Capital Group 206 6 212 4% 11 223 3.7% 5 CIT Aerospace 180 5 185 3% 35 220 3.7% 6 Pegasus Aviation Inc 155 59 214 4% 0 214 3.6% 7 debis AirFinance BV 165 19 184 3% 24 208 3.5% 8 GATX Air 170 2 172 3% 2 174 2.9% 9 AWAS 152 3 155 3% 0 155 2.6% 10 RBS Aviation Capital 152 1 153 3% 0 153 2.6% 11 Babcock & Brown Aircraft Management LLC 136 5 141 3% 0 141 2.4% 12 BAE SYSTEMS Regional Aircraft Asset Management 87 29 116 2% 0 116 1.9% 13 Pembroke Group 96 11 107 2% 0 107 1.8% 14 Singapore Aircraft Leasing Enterprise Pte Ltd 61 1 62 1% 28 90 1.5% 15 Jetran International Ltd 26 40 66 1% 0 66 1.1% 16 FINOVA Capital Corp 45 17 62 1% 0 62 1.0% 17 World Star Aviation 48 7 55 1% 0 55 0.9% 18 ORIX Aviation Systems Ltd 54 0 54 1% 0 54 0.9% 19 Sumisho Aircraft Asset Management BV 43 0 43 1% 0 43 0.7% 20 Tombo Aviation Inc 40 0 40 1% 0 40 0.7% All Others 662 128 790 15% 29 819 13.7% Total 5,001 407 5,408 100.0% 574 5,982 100.0% Source: Airclaims Ltd. Case database and Wachovia Securities Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
20
Lease Rate Update
Exhibit 19: Summary of Lease Rate Changes by Aircraft Type
Lease rates have registered significant gains in the course of the past year for in-production types (Exhibit 19). Lease rates shown in this exhibit are the simple averages of lease rate across all years of build for specific aircraft types. In effect, these can be thought of as mid-production-range lease rates.
Many popular narrowbody aircraft have shown lease rate increases of 15%20%. The biggest gains, however, have been made by long-range widebodies. In particular, the 767-300ER has registered a 45% improvement in one year, as the mid-vintage monthly rental went to $387,000 from $266,000. On the other hand, lease rates have slipped mainly for those aircraft types at or near the end of their useful lives. This includes DC-9-30s, which were produced from 1966 to 1981, as well as 737-200s and 767-200s. MD-80s are a notable exception, as this type has seen declines even for late 1990s production models. For example, a 1998 MD-83 went from $110,000 in June 2004 to $90,000 a year later. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
Growth in the market for commercial aircraft has historically been highly correlated to growth in worldwide GDP. World demand for air travel in terms of revenue passenger miles peaked in 2000 and finally recovered to record levels by 2004. The Airline Monitor provides a closely watched independent industry forecast of demand for both revenue passenger miles and growth in the world fleet of aircraft in airline usage. The current Airline Monitor estimate of growth for air travel calls for revenue passenger miles to return to their long-term trend averages of 4%5% per year through 2025.
Growth in the market for commercial aircraft has historically been highly correlated to growth in worldwide GDP. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
22 In Appendix 1 on page 30, we have included a listing of Web sites that can be used to find additional data on the sector. Included in this listing are a number of manufacturers and industry groups that provide their own forecasts of aircraft demand. Web sites that contain industry forecasts are noted with an asterisk. Over the next 20 years, the number of aircraft in service is widely expected to double and require financing of more than $2 trillion in aircraft investment by the worlds airlines.
What Makes a Good Leasing Asset?
The marketability of an aircraft is affected by a variety of factors. From a lessors perspective, a good leasing asset is one in which, if I get this aircraft back, I want a lot of people that I can talk to about the plane and I do not want a lot of competition from other aircraft that are being actively marketed. In general, the following are drivers of marketability of a commercial aircraft type:
Number of current operatorsA high number of current operators is always preferable as lessors benefit when multiple carriers compete for a limited number of available aircraft. Number of aircraft in production runA long production ensures a solid installed base of users and a broad market for used aircraft as well as spare parts. In-production status/backlogTwo of the most popular in-production aircraft are the A230 and the 737-800 with current unfilled orders of 607 and 597, respectively (see Appendix 4 on page 33 for Airbus and Boeing order book and backlog information). These large order backlogs ensure that the aircraft will remain in production for years to come and that carriers in need of these aircraft in the near term will likely be looking to the leasing market for near-term lift. Conversely, when an aircraft goes out of production, late- production cycle aircraft can be expected to depreciate at a significantly faster rate than their mid-production cycle counterparts. Existence of a cargo conversion programThe potential for cargo conversion will act as a support to aircraft values and can extend revenue service of an aircraft for as much as 1520 years after conversion. Number of young aircraft on groundHigh numbers of available aircraft hurt the lessors ability to capture attractive lease rates for their aircraft. However, distinction must be made between newer vintages, which will have a material negative impact on lease rates, whereas older vintages approaching the end of their useful life will have less of an effect.
The combination of the first two of these drivers is referred to as the market mass for the aircraft. Exhibits 22 and 23 on page 23 show the market mass for various aircraft types. For the top 35 aircraft types, we have provided additional details of marketability on Exhibit 24 on page 24. These drivers of marketability are for specific aircraft types, individual aircraft marketability will also be affected by its age, engine type and maintenance condition.
Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
23 Exhibit 22: Narrowbody Aircraft Market
Narrowbody Market Mass (June 2005) EMB170 ERJ-145 CRJ-100/200 717 A321-100 A321-200 737-600 MD-83 F100 737-700 737-500 737-400 A319 737-800 MD-82 757-200 A320-200 737-300 CRJ-701 A318 ERJ-135 737-900 757-300 0 25 50 75 100 125 0 300 600 900 1,200 1,500 1,800 2,100 Number of passenger aircraft in service and on order N u m b e r
o f
c u r r e n t
o p e r a t o r s
Source: Aviation Specialist Group, Inc.
Exhibit 23: Widebody Aircraft Market Widebody Market Mass (June 2005) 767-400ER MD-11 A300-600R A340-300 767-200 A330-300 767-300 777-200 A330-200 767-200ER DC-10-30 747-200 777-200ER A310-300 747-400 767-300ER 777-300 A340-600 A340-500 777-300ER 0 15 30 45 60 75 0 75 150 225 300 375 450 525 Number of passenger aircraft in service and on order N u m b e r
o f
c u r r e n t
o p e r a t o r s
Source: Aviation Specialist Group, Inc. The A320 has the largest market mass of all narrowbodies... whereas the 767- 300ER has the largest market mass among widebodies. B a c k g r o u n d
Fuel is the second largest component of operating expenses for airlines. In Exhibit 25, we have highlighted the current airline cost index data from the Air Transport Association, an industry organization that represents carriers that fly more than 95% of U.S.-scheduled airline service. According to its data from Q1 2005, fuel represents 19.2% of the operating expense structure of the airlines, up 55.24% year over year. This increase in fuel cost has come at a time when the carriers have been making strides to reduce labor cost, which remains the largest component of an airlines operating expense at 28.1%.
In the aftermath of Hurricane Katrina, there has been a lot of renewed discussion regarding oil prices and the airline industry. Specifically, investors are worried about the impact of higher fuel prices on the operating economics of older aircraft types. Fuel is just one component of the operating cost of an aircraft, and we have reported on a number of occasions that the lease rates on older aircraft types have continued to fall for the older less efficient aircraft types, while lease rates on new aircraft have been rebounding from their lows of last year.
The bottom line is that total cost per available seat mile will be an important driver in decisions about which aircraft to use for a particular mission. However, we have learned over the past several years that other factors can have as much or more weight in the decision-making process. These other factors include the availability of alternatives and the ability of a carrier to finance those alternatives. After all, we are four years past 9/11, and there are a great many older fuel-inefficient aircraft flying today because the carriers financial condition precludes replacing these aircraft with newer models.
Fuel is the second largest airline operating expense. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
26 In a series of charts published in Aviation Daily from June 21July 8, 2005, Arlington, Va.based Eclat Consulting, Inc., analyzed aircraft operating costs by aircraft type. In this analysis, Eclat used DOT Form 41 data to evaluate the cost associated with crews, fuel, insurance and maintenance for each operator of an aircraft. We took the results of this analysis at the aircraft level and have extended it to evaluate the relative burden of fuel prices on the operating costs of a variety of aircraft in terms of cost per available seat mile.
The data analyzed is for the 12 months ended December 2004. The average jet fuel price over this period was 82.7 cents per gallon and stood at 230.1 cents a gallon on Aug. 30. While we cannot isolate the effects of hedging with any accuracy, the vast majority of airlines have been underhedged and remain exposed to higher fuel prices. The cost of fuel is up more than 84% (Exhibit 26).
In the wake of Hurricane Katrina in late August 2005, jet fuel spiked to $2.05 a gallon. It is too early to say whether disruptions to refineries and distribution channels will keep these prices elevated for an extended period, but we thought this would be as good a time as any to refresh our analysis of cost per available seat mile (CASM) for different aircraft types. We also calculate the fuel-related CASM component of cost for each aircraft type. In this analysis, we group the aircraft types analyzed by body type among large commercial aircraft and separately break out regional jets and turboprops.
Over the past year, the price of fuel is up more than 84%. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
27
Narrowbody Aircraft
Exhibit 27: CASM for Selected Narrowbody Aircraft - 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 7 5 7 - 3 0 0 A 3 2 1 7 3 7 - 9 0 0 7 3 7 - 7 0 0 L R A 3 2 0 7 3 7 - 8 0 0 / 9 0 0 7 5 7 - 2 0 0 A 3 1 9 7 3 7 - 3 0 0 / 7 0 0 7 3 7 - 4 0 0 7 1 7 - 2 0 0 M D 8 0 7 3 7 - 5 0 0 F 1 0 0 D C - 9 - 5 0 D C - 9 - 3 0 7 3 7 - 2 0 0 Source: Eclat Consulting and Wachovia Securities.
Exhibit 28: Fuel CASM for Selected Narrowbody Aircraft Among narrowbody aircraft, the clear winner was the 757-300 with a CASM of 3.10 cents with fuel accounting for 1.41 cents, or almost 45.6% of the total cost. At the other end of the spectrum are the 737- 200s and the DC-9-30s with fuel costs per seat mile of 2.73 cents and 3.11 cents, respectively.
As a whole, the narrowbody group averaged 5.14 cents per seat mile over the period analyzed of which 1.80 cents was attributable to the cost of fuel. Narrowbody aircraft are generally a little more expensive than widebody aircraft on a per seat mile basis and cheaper than both regional jets and turboprops.
Exhibit 30: Fuel CASM for Selected Widebody Aircraft Widebody aircraft as a group are the most efficient in terms of CASM, averaging only 4.60 cents. Of that total, fuel averaged 1.94 cents per seat mile. The A330 came out on top with a CASM of only 3.60 cents, while the A300-600 was the least efficient with 5.40 cents CASM.
In terms of fuel efficiency, the widebody aircraft bested the narrowbody group by 0.54 cents per seat mile. Among widebodies, the 767-400s had fuel costs of only 1.68 cents, and the DC-10-30s were the least efficient at 2.4 cents per seat mile.
Fuel CASM (Cents) Total CASM (Cents) Fuel as % of Total CASM A330 1.72 3.60 47.8% 767-400 1.68 3.70 45.4% 747-400 2.08 4.40 47.2% 767-300 1.85 4.70 39.4% 777-200 1.98 4.70 42.2% 767-200 2.15 5.00 43.1% DC-10-30 2.40 5.20 46.1% A300-600 1.84 5.40 34.2% Average 1.94 4.60 42.2% Source: Eclat Consulting and Wachovia Securities. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
29
Regional Jets and Turboprops
Exhibit 31: Fuel CASM for Selected Regional Jets Regional jets are ideally suited to thinner routes that cannot be economically served by the larger narrowbody aircraft. However, that does not mean that they are cheaper on a seat mile basis. With an average of 9.09 cents per seat mile, this group averages 3.95 cents a seat mile more than the narrowbody group.
In terms of fuel efficiency per seat mile, the RJs came in at 2.92 cents CASM versus 1.94 cents for widebodies and 1.80 cents for their narrowbody counterparts. Among the RJ group, the larger (70 seat) CRJ-700s had the lowest overall CASM at 6.80 cents. Surprisingly, the CASM for the CRJ-900s appear to be high at 10.4 cents per seat mile. This relatively high cost was driven by lower average daily usage by the airlines analyzed. The CRJ-900s averaged just 5.9 block hours of daily operations versus 89 hours a day for the smaller aircraft.
Exhibit 32: Fuel CASM for Selected Turboprops Turboprops came in slightly more efficient as a group than the RJs with an average fuel CASM of 2.37 cents versus 2.67 for the RJs. However, in terms of total costs, the turboprops were significantly more expensive than the RJs with an average cost of 17.3 cents a seat mile.
Fuel CASM (Cents) Total CASM (Cents) Fuel as % of Total CASM CRJ-700 2.45 6.80 36.1% ERJ-170 2.58 6.90 37.3% ERJ-140 3.55 8.40 42.2% ERJ145 2.30 8.70 26.5% CRJ-200/ER 3.15 9.60 32.8% CRJ-900 4.46 10.40 42.9% ERJ-135 3.60 11.00 32.7% BAE 146-300 3.68 11.60 31.7% Do328RJ 5.29 18.00 29.4% Average 2.92 9.09 32.1% Source: Eclat Consulting and Wachovia Securities. Fuel CASM (Cents) Total CASM (Cents) Fuel as % of Total CASM DHC8-400 2.26 9.50 23.8% SAAB 340 2.00 13.50 14.8% EMB 120 3.86 16.10 24.0% ATR-72 2.16 18.50 11.7% J41 3.89 18.80 20.7% DHC8-100 4.64 20.30 22.9% ATR-42 3.52 22.80 15.4% DHC8-200 4.62 25.70 18.0% Source: Eclat Consulting and Wachovia Securities. B a c k g r o u n d
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Websites Link News and Industry Data Sources Air Transportation Stabilization Board http://www.ustreas.gov/offices/domestic-finance/atsb/ ATA - Air Transport Association http://www.airlines.org/home/default.aspx BTS - Bureau of Transportation Statistics http://www.transtats.bts.gov/ FAA - Federal Aviation Administration* http://www.faa.gov/ IATA - International Air Transport Association* http://www.iata.org/index.htm International Civil Aviation Organization http://www.icao.org/ Monitor Daily - Leasing Industry News http://www.monitordaily.com/ Regional Airline Association http://www.raa.org/ SpeedNews - Aviation News and Information http://www.speednews.com/lists/lists.shtml Manufacturers Airbus* http://www.airbus.com/ Boeing Commercial Airplanes* http://www.boeing.com/commercial/flash.html Bombardier http://www.aerospace.bombardier.com/ Embraer http://www.embraer.com/english/content/home/ Deal Specific Websites Aerco http://www.aerco-group.com/ AFT http://www.aftreports.com/ Airplanes Pass Through Trust http://www.airplanes-group.com/ EAST http://www.eastreports.com/ LIFT http://www.liftreports.com/ Servicers Aviation Capital Group http://www.aviationcapital.com/ debis AirFinance http://www.debisairfinance.com/ GATX Air http://www.gatx.com/air/index.asp GECAS http://www.gecas.com/ ILFC http://www.ilfc.com/ Pegasus http://www.pegasusaviation.com/ World Star Aviation http://www.worldstaraviation.com/index.html * These groups all have their own commercial aircraft forecasts available on their websites. Source: Wachovia Securities. Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
31 Appendix 2: Airline Monitor Forecast of Aircraft Requirements
IATA International Cargo and Passenger Forecasts 2004 2008 AAGR AAGR 2004-2008 2004-2008 North Atlantic 7.70% 5.20% 8.50% 4.80% Trans-Pacific 9.90% 5.90% 10.30% 4.60% Europe Asia/Pacific 14.90% 7.10% 11.40% 7.00% Europe Middle East 18.90% 7.70% 7.80% 6.10% Europe Africa 7.20% 5.50% 7.40% 5.60% Within Asia/Pacific 19.50% 8.30% 12.00% 6.10% Within Europe 7.50% 4.80% 7.80% 5.70% Within Latin America/Caribbean 9.30% 5.40% 4.40% 3.70% TOTAL INTERNATIONAL 11.00% 6.00% 10.10% 6.00% Total Domestic 5.90% 4.50% N/A N/A Total International and Domestic 7.60% 5.00% N/A N/A Source: IATA Summary Growth Data Passengers Freight Tonnes ROUTE AREA 2004 2004
Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
33 Appendix 4: Airbus and Boeing Current Order Books
Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
34 Appendix 4: Airbus and Boeing Current Order Books (continued)
Airbus Order Book and Backlog for In-Production Aircraft Type and Variant Orders Deliveries Unfilled A320 Family A318 71 23 48 A319 1075 733 342 A320 2021 1414 607 A321 446 333 113 3613 2503 1110 A300/310 A300 592 545 47 A310 260 255 5 852 800 52 A330/340 A330-200 303 192 111 A330-300 241 168 73 A340-200/300 244 239 5 A340-500 26 18 8 A340-600 115 48 67 929 665 264 A380 149 0 149 TOTAL 5543 3968 1575 Source: Airbus Website 9/3/05
Background to Aircraft-Backed Debt Securities September 07, 2005 STRUCTURED PRODUCTS RESEARCH
35
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Structured Products Research (704) 374-4784 Brian P. Lancaster Managing Director Head of Structured Products Research (704) 715-1864 CMBS, CRE CDO and Real Estate Research (212) 909-0064 brian.lancaster@wachovia.com Mark Heberle Director ABS Research (704) 383-1936 mark.heberle@wachovia.com Dennis F. Kraft, Ph.D. Director ABS Research (704) 715-8345 dennis.kraft@wachovia.com Tony Butler, CFA Vice President CMBS and Real Estate Research (704) 383-0189 tony.butler@wachovia.com Bruce Miller Vice President Quantitative Research (704) 374-6440 bruce.miller@wachovia.com Gregory W. Laughton Associate CMBS and Real Estate Research (704) 715-7685 greg.laughton@wachovia.com Stephen Mayeux Associate CMBS and Real Estate Research (704) 374-2298 stephen.mayeux@wachovia.com Shane Whitworth Associate Quantitative Research (704) 715-7936 shane.whitworth@wachovia.com Anik Ray Analyst CDO Research (212) 451-9744 anik.ray@wachovia.com Chris van Heerden Analyst ABS Research (704) 715-8321 chris.vanheerden@wachovia.com Fixed Income Market Strategy Richard Gordon Managing Director Fixed-Income Market Strategist (708) 246-3903 rich.gordon@wachovia.com (704) 383-8758 Corporate Credit Research (800) 528-4570 Tim Patrick Managing Director Head of Investment Grade & High Yield Research (704) 374-6198 tim.patrick@wachovia.com James P. Dunn Jr., CFA Managing Director Basic Industries (704) 715-8377 jim.dunn1@wachovia.com Gail Golightly Managing Director Insurance (704) 383-4836 gail.golightly@wachovia.com John D. Mulkey Managing Director Gaming & Lodging (212) 451-9751 john.mulkey@wachovia.com Dan Sullivan Managing Director Real Estate Investment Trusts (704) 383-6441 dan.sullivan@wachovia.com Lee D. Brading, CFA, CPA Director Printing/Publishing, Building Products, Homebuilding (704) 383-6491 lee.brading@wachovia.com Bishop Cheen Director Media and Entertainment (704) 383-0473 bishop.cheen@wachovia.com Kristina L. Clark, CFA Director Specialty Finance, Banks, Brokers (704) 383-9919 kristina.clark@wachovia.com G. Gary Garcia Director Utilities (704) 374-6452 gary.garcia@wachovia.com Andy Green Director Defense & Aerospace, Wireless (704) 383-6606 andy.green@wachovia.com Bryan C. Hunt, CFA Director Food & Beverage, Supermarkets, Retail (704) 383-0728 bryan.hunt@wachovia.com Greg Hyde Director Industrials, Environmental Services (704) 383-0208 greg.hyde@wachovia.com Thomas M. Molitor Director Consumer Products (704) 383-0018 tom.molitor@wachovia.com S. Ross Payne, CFA Director Energy, Pipelines (704) 383-3619 ross.payne@wachovia.com Eric J. Selle, CFA Director Automotive, Industrials (704) 383-4086 eric.selle@wachovia.com Chuck Slaybaugh Director Basic Industries (704) 715-8318 charles.slaybaugh@wachovia.com Jeffrey S. Stewart, CFA Director Consumer Products, Apparel, Soft-Line Retail (704) 383-9073 jeff.stewart@wachovia.com Dimitri Triantafyllides, CFA Director Cable, Telecom (704) 374-2307 dimitri.triantafyllides@wachovia.com Miles L. Highsmith, CFA Vice President Healthcare (704) 383-6384 miles.highsmith@wachovia.com Grant Jordan Vice President Theaters, Theme Parks, Resorts (704) 715-7022 grant.jordan@wachovia.com Eric T. Kalamaras Vice President Energy, Refining, Midstream, Energy Services, Coal (704) 715-8319 eric.kalamaras@wachovia.com Cameron Newton Vice President Basic Industries (704) 715-8378 cameron.newton@wachovia.com John Patrick Walsh, CFA Vice President Healthcare, Business Services, Technology (704) 715-1504 johnpatrick.walsh@wachovia.com Gregory B. Wilcox Vice President Consumer Products (704) 374-4413 greg.wilcox@wachovia.com Christine Bave Associate Defense & Aerospace, Wireless (704) 374-7148 christine.bave@wachovia.com Kelly W. Burton Associate Printing/Publishing, Building Products, Homebuilding (704) 383-5599 kelly.burton2@wachovia.com Donovan Chaney Associate Consumer Products, Apparel, Soft-Line Retail (704) 383-4030 donovan.chaney@wachovia.com Robert Crawford Associate Food & Beverage, Supermarkets, Retail (704) 715-7340 robert.crawford@wachovia.com Erica Gates Associate Basic Industries (704) 374-7026 erica.gates@wachovia.com Christopher Harris, CFA Associate Energy, Pipelines (704) 715-8466 christopher.harris1@wachovia.com Kristin L. Hill Associate Specialty Finance, Banks, Brokers (704) 715-8358 kristin.hill@wachovia.com Robert Hauff Associate Insurance (704) 374-4176 rob.hauff1@wachovia.com Kamal Patel Associate Utilities (704) 715-8195 kamal.patel@wachovia.com Banu Asik Analyst Cable, Telecom (704) 715-4126 banu.asik@wachovia.com Duncan Brown Analyst Healthcare (704) 715-8332 duncan.brown@wachovia.com Shannon Hedspeth Analyst Specialty Finance, Banks, Brokers (704) 715-8336 shannon.hedspeth@wachovia.com Jason Jones Analyst Real Estate Investment Trusts (704) 715-7932 jason.jones@wachovia.com Stephanie Renegar Analyst Automotive, Industrials (704) 715-7038 stephanie.renegar@wachovia.com Napoleon Wallace Analyst Energy, Refining, Midstream, Energy Services, Coal (704) 715-7409 napoleon.wallace@wachovia.com Wachovia Securities For copies of Structured Products Research reports, please contact Bonita Carroll at (704) 374-4784. To view reports online, access our Web site at wachoviaresearch.com