Alive & kicking
Frank Conway, director at management consultancy Oliver Wyman, on why leasing and finance providers are the lifeblood of the Middle East's aviation industry.
We have seen significant demand for equipment across many aircraft types throughout the Middle East and North Africa (MENA). Record orders have been announced by a variety of carriers in MENA and we believe this trend will continue in the future.
The 'lease versus buy equipment' financial analysis is an integral part of the acquisition decision-making process.
Aircraft leasing companies and financial institutions with interests in this capital intensive sector have, and will, continue to play a prominent role in the capital investment process.
Such institutions offer the carriers the opportunity to create the optimal capital structure balanced between owned and leased equipment.
Air travel in the Middle East has grown faster than any other region in the world. This view is supported by demand forecasts prepared by the primary OEMs. Based on such demand forecasts, we believe this interest will continue increasing as fleets grow larger and more diverse in the region.
It's a view shared by Airbus and Boeing, with both predicting ongoing, robust demand for equipment across MENA. We identified several trends for our clients that will preserve or fuel this demand into the future.
Geographically, the region serves as the gateway to the world. MENA developed its role as a trading hub over thousands of years, but a new force has developed.
Air travel is within reach for millions of new customers, particularly in developing countries and regions such as the Indian Subcontinent, Asia and Pacific Rim.
Demand for air travel is growing, vibrant and a natural result of developing nations and economies. As a result of this economic development, both in an out of MENA, tremendous opportunities now exist for operators.
Accordingly, we do not see a change in the pace of growth or demand for equipment. Another important trend is the emergence of the 'national flag' carriers.
The vast economic resources of such nations offer the operators a stable platform for rapid growth, the resources to create a quality service and well priced product experience that converts a traveller into a loyal frequent flier.
MENA leads the world in aircraft acquisitions, with the highest average asset value per plane. When coupled with Airbus and Boeing's forecast that fleets will double in this region during the next two decades, one might conclude that MENA will continue focusing its efforts on long-haul, double aisle or larger aircraft.
That is true; however, the region is also enjoying the emergence of low-fare, single-aisle carriers. These carriers fill an important niche, offering the customer a well priced efficient product and increasing the inflow of different aircraft equipment to the MENA market.
Similar to other parts of the world, low-fare carriers are enjoying success in the region by addressing customer needs: short-haul routes, service to secondary markets and attractive price models.
Every indication is that this trend will continue and serve as a complementary business model to the established (and growing) long-haul carriers in the region. We believe the market will grow dramatically, both in pure units, as well as products and pricing models offered.
This spectacular growth offers the lessor tremendous opportunity to expand client relationships, diversify its aircraft fleet and related portfolio risk.
Given the increasing demand for different kinds of equipment, the lessor can offer a client an attractive mix of lease maturities and structured payment programs, with predictable operational cost requirements.
The lessor can also provide a 'one-stop-shop' comprising maintenance, inventory and asset management programs.
Airlines lease planes instead of buying them outright for one reason: flexibility. Leasing is an efficient capital mechanism that permits operators the opportunity to deploy aircraft to the marketplace.
It also measures the allocation of the carrier's exciting capital toward non-equipment expenditures, such as infrastructure build out, route expansion, brand awareness and people development.
Bringing on a 'leasing partner' offers the airline the opportunity to move and grow rapidly into new markets, different regions and related product offerings.
Leasing is often an attractive option for start-up carriers; there is a significant initial investment period for most new airlines. As described above, a critical capital expenditure requirement is now shared by the lessor.
Mature, well developed carriers also use leasing as an important capital investment tool.
The 'lease versus buy' analysis can be applied by the branded carrier to avoid an over concentrated risk in one aircraft type, phasing in or out of markets in pursuit of the business plan or fleet rotation.
We assist clients as they evaluate the 'lease versus buy' analysis. Considerations include the level of debt attributable to the operator's equipment compared to debt held by a third party lessor.
An operator may wish to own outright key pieces of equipment that represent the cornerstone of its fleet, critical to the success of the underlying business plan.
The company may then build leased equipment around that asset pool. By doing this, one can achieve staggered maturities, flexible rate and renewal programs and management benefits. All can serve to minimise disruption to the operator and maximise its ability to focus on running an airline.
Today's aircraft represent a long-life asset. The equipment itself is versatile and can be adapted to other aviation uses during its life.
A leasing partner offers carriers the flexibility to choose where in that equipment life cycle it wishes to play. For the early phase, brand new, state-of-the-art equipment is critical for the carrier to exploit its brand.
Mid-phase carriers may turn to used aircraft, which serves as a valuable addition to its existing fleet by filling schedule gaps and demand requirements.
Finally, for the longer-term phase, the equipment might be suitable for a freighter operation, serving as an ancillary product offering.
In short, a well structured leasing program enables airlines to apportion asset's life into manageable phases for the operator and lessor's benefit.
A wide variety of dedicated aircraft leasing companies, financial institutions, and alternative financiers invest in aircraft on a global scale.
As noted, the portability of the asset makes well-maintained aircraft valuable investments to a wide variety of global investors.
In 2008, every indication is that additional aircraft orders will be announced in MENA.
Though it will be difficult to match the record setting pace of aircraft orders in recent years, the fleet mix may shift with the emergence of new business models and increased number of single aisles, as well as the development of regional jet concepts.
Elsewhere, we believe the key to equipment identification is, and will remain, a forthright, balanced relationship with the operator's lessor, financial institution, stakeholders and OEMs.
Like operators depend on a stable financial partner, an OEM offers a critical relationship that must be established, developed and carefully maintained for the airline to be successful.
An OEM offers an informed, critical view of the outlook for equipment in the industry where planes are not only relative to the assembly line, but also within the broader 'in service' global aviation community.
The OEM is able to offer the carrier unique and valuable insights about fleet availability throughout the world, well beyond the regions that the operator may cover.
Frank Conway and his colleagues serve global clients in Asia, North America, Europe, and the Middle East. The company offers similar services to the aerospace industry, with manufacturers, governments and operators requiring quick support to develop their respective strategies and business models.
Elsewhere, Oliver Wyman enables MROs to improve operational performance and develop growth strategies by identifying and exploiting new market opportunities. The final area of business for Oliver Wyman's aviation interests involves airports.
Its recent work includes helping clients manage change, driven by the emergence of low-cost airlines. The company also deals with new airport revenue models, privatisation, regulation, customer requirements and fuel costs.