This is a demonstration contract and does not purport to be an actual transaction undertaken by the parties

mentioned

CASE STUDY: LEASE NEGOTIATION

SECTION 1: LESSOR DETAILS

Onyx Leasing Limited
• HQ: Shannon. offices in London and San Francisco
• Owns and manages a fleet of 75 aircraft valued at $3.2 bn
• Current fleet of 31 Boeing, 20 Airbus, 9 Bombardier CRJ, 5 ATR, and 10 Embraer aircraft
• Customers include 28 airlines in 16 different countries

Industry background
It is the Autumn of 2019 and the aviation industry is showing signs of a mild slowdown. Oil prices are
volatile and several geopolitical issues are causing global nervousness. Many airlines and leasing companies are
enjoying a period of sustained profitability that has run for nearly 10 years. However, storm clouds are on the
horizon. Revenue per available seat mile (RASM) is falling due to increased competition from ultra low-cost
carrier (ULCC) airlines which enjoy the benefits of a young (and cheap) labour force and relatively new aircraft;
financed and leased while interest rates were very low. Interest rates are forecast to rise by at least 150 basis
points (1.5%) over the next 24 months. Over the past 19 months, eighteen major airlines have declared
bankruptcy: seven in Europe alone. The most serious issue facing the industry is the crisis caused by the
worldwide grounding of the Boeing 737Max aircraft which has had a dramatic effect on all airlines (even those
that don’t fly the B737Max), and it has disrupted the whole sector. Boeing and Airbus both enjoy historically
large order books, but Boeing faces an existential crisis, the effects of which are uncertain.

Lessor background
Onyx Leasing Limited (“Onyx”) is owned by private investors and it has been in business for 10 years with a
good track record. The company specialises in emerging market placements and has been fortunate to have had
few airline failures amongst its lessees. Onyx has 2 Airbus A320-200’s on the ground, but a Letter of Intent has
been signed and the deal is expected to close in 2 months. In addition, 3 Bombardier CRJ900’s are AOG with
term sheet offers with two potential clients. Finally, one 1998 Boeing 757-200 will be returned off lease in
November, but the company is negotiating to part out the aircraft. Despite the aircraft currently off lease, the
company’s strategy is to add additional aircraft as opportunities arise. Current owners have committed to provide
an additional $180m in equity over the next year as part of a multi-year funding programme to take the
company’s equity to $800m.

Market background
Recent transactions on used aircraft leased by Onyx, for aircraft similar to those available as a result of the
recent bankruptcies, were leasing for $225,000 per month for Airbus A320-200s. Used narrowbodies are
generally leasing for a term of 5 years, and used regionals for 6 years. For new aircraft, rents on the A320neo
were leasing around $400,000 per month in late 2018, but more recently have fallen to around $380,000 based
on a lease term of 12 years. There is no market lease rate for B737-Max under the current circumstances, but
there has been a spike in rates for B737-800’s to $250,000+ per month.

Onyx’s analysis shows that you can decrease the rent by roughly $15,000 per month for a used narrowbody,
$30,000 per month for a new narrowbody, based on the average terms above, before the deals start to lose
money. The impact on Onyx of shortening the lease duration by 1 year requires roughly $5000 more in rent per
month on a narrowbody to get the same return.

Lessor Objective
As the marketing deal team for Onyx, your objective is to seek out leasing opportunities to place your current
aircraft while also looking at opportunities for additional aircraft. You know that your credit committee will
likely focus on lease components outside of the rent and the term, so it is important to focus on the deal
as an accretive addition to the Onyx portfolio.

Certificate in Aircraft Leasing October 2022 Case Study

 This is a demonstration contract and does not purport to be an actual transaction undertaken by the parties
mentioned

SECTION 2: LESSEE DETAILS

Royal Air Maroc
• Flag Carrier of the Kingdom of Morocco
• Service to over 94 airports in Europe, Africa, North America, and Asia
• Operates a fleet of 49 x Boeing 787 and 737 aircraft and 10 x ATR and Embraer aircraft
• Current order book of 2 x Boeing 787s and 2 x Boeing 737Max 8 aircraft

Industry background
It has been a tough time for RAM over the last number of years following several years of losses. Largely due to
extensive competition, it has struggled to maximise the opportunities of the vacation market while fulfilling its
key infrastructural role in the country. The North African market is subject to significant LCC competition and
Morocco is no exception. The growth of the VFR(Visiting Friends and Relatives) market, particularly with a
growing middle class travelling to Europe has meant that the market is growing in excess of domestic GDP. The
market is prone to terrorist related shock, although Morocco is considered reasonably stable and safe.

Company specific background

Fleet renewal and corporate re-structuring has allowed RAM to grow again, and in 2018 it exceeded 8 million
passengers per annum for the first time. After extensive analysis in 2012-2014, the company decided to order 4
x B737Max aircraft for delivery in 2018-2019. These aircraft were destined to be workhorses of the medium
range market. Two B737Max’s have been delivered but the current B737Max grounding and halt in production
has caused a major disruption to the business, with significant pressure from government to replace the aircraft
in order to alleviate increasing delays and flight cancellations.
The government is known to support the airline and has provided guarantees to the Export Credit Agencies
(“ECAs”) for ECA supported lending to the airline. While the airline has a predominantly Boeing fleet, that has
not always been the case and they have extensive experience with Airbus. In the current crisis, they have entered
discussions with Airbus to evaluate their options.

The CEO and CFO called the fleet team together to explain the dilemma the airline is facing. The CEO made it
clear that they need to source replacement aircraft as soon as possible, but at terms favourable to the airline.
RAM has an experienced fleet team and they will be tough but fair. From a recent industry conference, the team
learned that a large chunk of the B737-800 aircraft in storage had been placed with other carriers so the supply
is tightening. RAM would expect to pay maintenance reserves, but they will be careful in terms of delivery and
re-delivery conditions, whatever aircraft they go for.

Lessee Objective
As the fleet procurement team for RAM, your objective is to lease an aircraft at the best possible terms and
conditions. You will have to submit a lease summary to accompany a credit paper to the board outlining the
terms of the lease, if you manage to secure one.

Certificate in Aircraft Leasing October 2022 Case Study