Day 1 Airline and Aircraft Finance PDF

EU-ASIA CIVIL AVIATION PROJECT
A project supported by the European Commission, the European Industry and the Ministries responsible for Civil Aviation in Asia.
Top Level Management Seminar

Module 2: Fleet Planning
Course leader
William Gibson
Senior Consultant, Euresas
Bangkok - March 2004 Page: 1
S AM 1-32 Top Level Airline Management Seminar
Module 1: Business Strategy Module 2: Fleet Planning

Business Environment Andy Hofton, Airline and Aircraft Finance William Gibson,
Strategies to move out Airline Dynamics CASE: LAN Chile Senior
Alliances Consulting Aircraft structures & pricing Consultant,
Euresas
Corporate Planning Michel Folliot, Market Research Professor Paul

Legal Framework Aviation Lawyer Market Segmentation Clark, Managing
Bilaterals and Rights Branding Director, Euresas
Debate on Deregulation
Human Performance Factors Bruno Kahne, Fleet Planning: Setting the Scene Professor Paul
Change Management Senior Getting Organised Clark, Managing
Consultant, Assumptions Director, Euresas
Euresas
A/C performances & comparison
Route and Network Design Arturo Benito, Revenue Management Jol Lunot
Scheduling and Hubs Director Fleet Distribution Channels Air France
Planning, Iberia Airline Economics Consulting
Low Cost Carriers Ralf Anker, Investment Appraisal William Gibson,

Forecasting (Mapping module 2) Consultant, Anra Cash flows: Lease vs. purchase Senior
Aviation Aircraft ownership & values Consultant,
Consulting Euresas
Best practice survey Page: 2
Bangkok - March 2004
1
What we will cover

Airline and Aircraft Finance day
Airline financial analysis
Case: LAN Chile
Aircraft financial structures & pricing
Currency risk and the Euro
Airline Investment Appraisal day
Investment appraisal process
Lease vs. purchase analysis
Aircraft ownership & values
Best practice survey
Airline and Aircraft Finance
William Gibson
Senior Consultant, Euresas
2
Why is Airline Finance so critical?

Aircraft financing requirements
100
90
80
70
(US$ billion
60
50
40
financing gap
30
20
10
0
1989 1991 1993 1995 1997 1999 2001e 2003f 2005f 2007f 2009f
Airline operating cash flow

Post 9/11 CF forecast
Investment in aircraft & other equipment
Source: Airline Monitor
The new aviation environment

2001 full-year results
-4.7% revenue growth

-7.5% revenue growth $2.6 billion loss -4.5% revenue growth
$8 billion loss 30% of world revenue $1.1 billion loss
39% of world revenue 23% of world revenue
.4% revenue growth
$167 million loss
4% of world revenue
4.5% revenue growth
$754 million loss
4% of world revenue
A10- Current 35 (Sales & Market Shares) S AM 1-32 Top Level Airline Management Seminar
3
World airline industry performance

2002 full-year results
+11.5% revenue growth

-3.9% revenue growth $677 million profit +6.2% revenue growth
$11 billion loss 30% of world revenue $2.0 billion profit
38% of world revenue 25% of world revenue
$416 million profit
4.5% of world revenue
$932 million loss
3% of world revenue
A10- Current 35 (Sales & Market Shares) S AM 1-32 Top Level Airline Management Seminar
In 2003
Focus shifts to Asia
20.00%
Freight held up
10.00% better
0.00%
Traffic
-10.00% RPK change
Capacity
-20.00%
Airlines learning to ASK change
-30.00% reduce capacity Freight
quickly FTK change
-40.00%
and traffic is
-50.00%
returning
-60.00%
Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03
RPK = Revenue Passenger Kilometres Bangkok - March 2004 Page: 9

ASK = Available Seat Kilometres
FTK = Freight Tonne Kilometres S AM 1-32 Top Level Airline Management Seminar
4
In 2003
Focus shifts to Asia
2Q 02-03 2Q 02-03
Change in Revenue Operating profit margins
ANA SIA MAS Thai KAL* CX* JAL ANA SIA MAS Thai KAL* CX*
10.00% 15.00%
0.00% 5.00%
-10.00% -5.00%
-20.00%
-15.00%
-30.00%
-25.00%
-40.00%
2002 2003
Source: Airline Business
* KAL and CX are first half 2003
SARS impact on European carriers
2Q 02-03 2Q 02-03
Change in Revenue Operating profit margins
e
a
B anc
SA ns
e
Ib ir
ia
S sa
ha
A a nc
Fr
ia
al
LM
nn
S
SA an
ft
er
lit
Ib air
ia
A
ir
Lu
K a
Fi
r
A
fth
al
F
LM
nn
i
er
15.00%
lit
ir
Lu
Fi
A
B
0.00%
5.00%
-10.00% -5.00%
-15.00%
-20.00% 2002 2003

Source: Airline Business
5
Remember this?
12% operating margin is often seen as the target
North Am erica Europe Asia-Pacific Average all
10
Operating m argin (%)
8
6
4
2
0
-2
-4
-6
-8
-10
92/93
93/94
94/95
95/96
96/97
97/98
98/99
99/00
00/01
01/02
02/03
From Airline Business Dec 02 for sample of 50 airlines
Spotlight on: AIR FRANCE

Airline profit margins
8.0%
6.0%
Percent of revenue
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Operating margin 0.12% 1.91% 4.45% 5.68% 4.96% 6.92% 6.45% 5.22% 3.95% -1.78% -0.13%
Net profit margin -3.56% -0.55% -0.07% 0.63% 1.93% 3.10% 3.01% 3.09% 1.01% -3.93% -2.76%
Air France net -5% 2.70% 3.40% 3.40% 1.20% 0.90%
Profit margin is calculated as Profit divided
Bangkokby Revenue
- March 2004 Page: 13
Source: Airline Business S AM 1-32 Top Level Airline Management Seminar
6
The family jewels of Air France
With the Paris-Charles de Gaulle 2 hub, opened in 1996, Air France has a
valuable asset to ensure its development in the coming years.
The Paris hub enables Air France to attract medium-haul/long-haul connecting
traffic via Paris. The flights are organized into 6 connecting banks (or timespans),
each of which consists of a wave of flight arrivals and departures. The Paris hub is
the most efficient in Europe today, providing the largest number of connections
within a two-hour timespan.
The location of the TGV (high-speed train) station in the air terminal is an added
asset for connecting passengers. Paris-Charles de Gaulle 2 is the only airport in
the world providing both [local and trans-european high-speed] rail links.
Source: AirFrance.com, 2004
The airlines most valuable asset

Arrivals / Departures: Air France & Air Inter at CDG
(Summer: Friday July 7, 1995)
In 1995, Air France was the basket case of

European flag carriers, continually rescued by
the French State
Graphic courtesy of Patrick Bianquis, Air France
7
The airlines most valuable asset

Arrivals / Departures: Air France & Air Inter at CDG
(Summer: Friday July 7, 1996)
Air France today is one of Europes most profitable flag

carriers (and still majority state-owned)

Graphic courtesy of Patrick Bianquis, Air France
Is this a sustainable business model?

Lufthansa load factors by region
80.00% 69% BELF today
75.00%
70.00%
65.00%
60.00%
Europe North South Middle Africa Asia Overall BELF
Page: 17
America AmericaBangkokEast
- March 2004
Source: LH annual report, 2001, BELF estimated from source data

BELF: Break-even load factor Op exp per ATK / Traffic revenue per ATK
8
Is this a sustainable business model?

Lufthansa passenger yields
0.25
/Revenue-passenger kilometre
0.20
0.15
0.10
0.05
0.00
Europe North South Middle Africa Asia Overall
America America East
Source: LH annual report, 2001

Airline finance: the foundation

the Balance sheet
ASSETS = LIABILITIES + EQUITY
Current assets Current liabilities

- Cash - Creditors (Accounts Payable)
- Debtors (Accounts Receivable) - Notes payable
- Stocks (Inventories) - Accrued expenses
- Short-term investments
Long-term debt
Fixed assets
- Loans
- Property
- Bonds
- Plant and equipment
- Contingent liabilities
- Assets on finance lease
- Finance lease obligations
- Long-term investments
- Goodwill Stockholders' Equity
- Common & preferred stock
- Retained earnings
- Income statement
9
Balance sheet rules of thumb

What we own (assets) = what we owe (liabilities and equity)
Many of a companys most valuable assets arent there!
The Notes provide some answers
Debt is a nasty word, lets say liabilities instead
What about leases?
Cash is king!
Current assets Current liabilities
Long-term assets financed: x% equity, y% debt
Never give a sucker an even break!
Airline common-size balance sheet
British Airways
Cash 8% Current liabilities 25%
Debtors 10%
Stocks 1%
Key measure
Property & equipment 76% Long-term debt 50% 67% Long Term
Investments 5% Equity 25% 33% Debt Ratio
Totals 100% 100%
Total assets (m) $22,181
10
Who sets the Rules for Accounting?

National accounting and tax authorities
Generally Accepted Accounting Principles (US GAAP)
The International Accounting Standards Committee (IASC)
Key items for airline accounting
Do companies apply the rules?
Aircraft valuation and depreciation methods
Lease accounting
Maintenance costs
Revenue recognition
Frequent flyer programme accounting
Just remember, assets arent everything!

Equity value and profit margins
Total value of shares (equity)

in millions of USD 27-Sep-03 Net margin
Amadeus 3,989
Sabre Holdings Corp. 3,104 6.50%
Lastminute.com 1,063 -92%
ebookers plc 444 -7.40%
Air France 3,697
Lufthansa 5,075 2.20%
British Airways 3,064 -0.20%
KLM 612 -4%
Southwest 13,787 6.80%
Ryanair 6,002 27.20%
JetBlue 3,814 10.10%
Air Tran 1,147 8.20%
AMR Corporation 1,782 -15.10%
Delta 1,612 -7.40%
Continental 1,091 -2.70%
Northwest 827 -7.40%
11
LAN Chile - introduction
LAN Chile
The order
LAN Chile placed an order for 20 A320s in 1998, which were

scheduled for delivery between 2000 and 2005. This was a
ground-breaking deal in two ways. First, certain terms were
negotiated in collaboration with Grupo TACA, with TAM and
LAN Chile; in what was arguably the first example of joint
purchasing in the industry.
12
LAN Chile
The order
The deal was the first large-scale attempt of this Latin
American airline to break away from operating

leasing older aircraft into operating new aircraft,
acquired using long-term finance. In order to examine the
company and the deal, we will look at events in 1997 and
1998, as the sales campaign was completed and the order
took form..
LAN Chile
Questions
1. What are the current sources of financing for the airline
business?
2. Does the company's financial condition justify long-term
financing?
3. Given the current environment, how might the financing be
structured?
4. What is the overall profitability of the project, and what are
the sensitivities?
5. How do the dynamics differ between an airline and an
operating lessor?
13
LAN Chile
The airline
LAN Chile was founded as a national flag carrier in
1929, entirely financed and managed by the
government. Sixty years later, in 1989, the airline was
privatised, and embarked on a 10-year push to
expand and modernise the company through
acquisitions, fleet standardisation, and most recently,
a marketing alliance with a major North American
carrier.
LAN Chile
The airline
Like many flag carriers, the companys profit base
came from dominance of its domestic market, where
it held a 75% share of all passenger traffic. From this
base, the company was forming international
alliances which were expected to boost demand and
market share above the current 37%. To respond to
this increased demand, the company planned to
increase flight frequency on profitable routes, rather
than seeking new destinations.
14
LAN Chile
Fleet composition
Average
Average age of
Aircraft type Operating leased Total in fleet remaining lease
aircraft
term
B767-300ER 11 11 4.3 2.8
B737-200 13 13 2.8 16.8
B737-200 9 10 2.7 20.6
B737-200 (Cargo) 1 1 1.9 28
DC8-71 (Cargo) 5 5 .4 29.4
LAN Chile
Corporate finance
The greater resources generated by operations and
the capital increase have made it possible to amortise
short and medium- term liabilities, to raise the
working capital needed for projects to sustain robust
growth and to reduce the companys operating
leverage.
15
LAN Chile
Corporate finance
The BBB+ rating obtained during the year has
enabled LAN Chile to access international capital
markets and enjoy excellent rates of interest, thereby
reducing the companys cost of capital.
LAN Chile
Equity financing
Until the end of 1997, the company was owned by a

core group of three Latin American holding
companies. In order to broaden its financial base, the
company decided to issue approximately $65m in
shares in the form of American Depositary Receipts
on the New York Stock exchange, combined with a
$35m domestic offering.
16
LAN Chile
Equity financing
The ADR shares were originally issued at $14 per
share, and the issue was mostly subscribed by large
institutional investors. Subsequent to the issue, the
shares, like many emerging market issues, were
negatively impacted by the Asian monetary and
economic crisis.
LAN Chile share value

From the share introduction
Share price information Per share information
Last trade: $4-9/16 Dividend: $.229
52-Week high: $14-11/16 Yield: 5.02%
52-Week low: $2-1/2 Earnings per share: $.49
Price-earnings ratio: 9.31

17
Recovery in 2000
August 2001
18
September 17, 2001
and today
19
LAN Chile
Debt financing
Historically, the great majority of LAN Chiles aircraft had
been operated under operating lease. In developing its
financial strategy, the company decided that more long-term
financing would benefit the company through lower overall
financing costs. Long-term financing was provided in nearly
equal shares by bank loans ($73.4m) and capital leases
($75.5m).
LAN Chile
Debt financing - loan pricing
Amount
Loan pricing
(thousands of US$)
Libor + 2% 5290
Libor + .75% 63211
Libor + .5% 1790
Inter-company loans 3112
Total 73403
20
LAN Chile
Debt financing - loan maturities
Amount
Payment due
(thousands of US$)
1998 2821
1999 7424
2000 6845
2001 6101
2002 5355
2003-2007 26784
2008-2012 15803
2013 2270
73403
LAN Chile
Debt financing - leases
Operating lease payments Capital lease payments

Payment due
(thousands of US$) (thousands of US$)
1998 108937 11014
1999 106139 9583
2000 94343 9262
2001 87093 8702
2002 70272 8688
2003-2006 65280 28280
Totals 532064 75529
21
LAN Chile
Developments in 1998
In spite of continued difficulties experienced by
emerging market shares in stock markets, the company
was able to raise $70m through a private placement
based on the securitisation of future credit card sales.
The issue, with a maturity of 8 years, a two-year
principal grace period and ca coupon of 6.92%, was
given a rating of AA.

LAN Chile
In March of 1999, the company announced 1998
results, including a profit of $31m for the year. In
analysing the company's results, management issued
the following statement. Although the first quarter was
strong, during the remainder of the year LAN Chile
faced intense competition on key routes and a difficult
economic environment.
22
LAN Chile
RPKs increased 21.1% in 1998. This increase was
offset by a 9.2% reduction in overall passenger yield
caused mostly by an increase in competition in the
international passenger market. As a result, passenger
revenues grew by 9.9% in the year.
.
LAN Chile
Total operating revenue increase 11.1% Total operating
expense increase 16% while total system capacity as
measured by ATKs increased 19.4% This resulted in a
reduction of the operating margin from 8.2% to 4.2% for
the year.
Non-operating expense increased 98.7% mostly due to an
increase in interest expense associated with the purchase
of four new Boeing 767-300 aircraft.
23
LAN Chile common-size balance sheet
LAN Chile
Cash 1.4% Current liabilities 40%
Debtors 32.7%
Prepaid exp. & tax 7.5%
Stocks 1.3%
Property & equipment 49.6% Long-term debt 23% 38%
Investments 7.5% Equity 37% 62%
Aircraft financing structures and pricing
24
Jargon Watch!
Jargon-watch Exercise
Dear Sirs:
I am writing to confirm your purchase of 10 B737-800s, with escalation
terms and credit memos as discussed. I am sorry to say however that a
promissory note for advance payments will not be possible. Due to the
manufacturing lead-time and your need for immediate lift, our Asset
Management group has a 737 classic under a head lease, and could sub-
lease the aircraft to you under a dry or wet lease for the entire
manufacturing cycle. If you would like to discuss this possibility, please call
me directly.
Sincerely yours
Jeff Mayling
World Aircraft Company
25
Dear Sirs:
We are delighted to inform you that we have approved the asset-based
financing you have applied for, an 80% LTV, mortgage-style loan with a
10% balloon carrying a spread of 175bp over Treasury. Drawdown will
take place at delivery, with all advance payments and BFE being your
responsibility. If you wish to lock in the current rate, we require a
commitment fee of 35bp, payable immediately.
Welcome aboard!
Sincerely yours,
Sharabia Zingalos
Credit Unlimited
Dear Sirs:
We have completed the appraisal of your A300-B4, and are delighted to
inform you that the fair market value of the asset significantly exceeds our
breakage costs on a net present value basis. We can unwind this
leveraged lease with a minimum of difficulty, although we need approval
from the Export Credit Agency authorities. Given the cross-border nature
of the deal and the syndicating institutions, the arrangements will take
some time. Please therefore continue paying the installments until you
hear from us again.
Sincerely yours,
Sharon Stone
International Finance Corporation
26
Dear Sirs,
We have completed the analysis of your proposed SLB on an A340 to be
delivered in November. Due to documentation lead-times, the facility
probably wont fund before delivery. Should you required bridge financing,
a revolving credit facility can be made available at LIBOR+35bp. This
facility would be repayable bullet 6 months after the SLB funds.
Alternatively, the ABCP market could be tapped using ourselves as agents
and Morgan Paisley as bookrunner. Of course, Morgan Paisley would only
work on a best efforts basis. The commission on this type of commercial
paper would be around 225bp, payable out of proceeds.
Sincerely yours,
Will Rodgers
Brooks Brothers Aircraft Management
Time, risk and inflation

Most people agree that money has a value over time:
because of inflation, it usually has LESS value over time.
To compensate for RISK and INFLATION, bankers and
investors demand a RETURN.
What are the risks bankers consider?
The economist Irving Fisher came up with a formula

which captures the relationship between money lent
today, and money received in the future...
27
The basis of financial calculations
PV = Present value, todays money

C = future, uncertain cash flows
r is the big question, the cost of capital
T is the project horizon
t is the period under consideration (months or years)
The structure of loans

Looking at a deal
Cost of the asset $50,000
Amount financed (PV) $40,000
Interest rate (R) 10.00%
Fees 0.50%
Term (N) 15
Payments per year (P/YR) 1
Payment (PMT) $5,258.95
28
Constant-annuity payment structure
6000
5000
4000
3000
2000
1000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Payment
Bangkok - MarchPrincipal
2004 Interest Page: 63
Bankers ideal asset values

70000
60000
50000
40000
30000
20000
10000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Market value of asset

Bangkok - March 2004 Loan balance Page: 64
29
How do bankers view aircraft?

50000
80% Loan To Value
40000 ratio, or LTV
30000
US$000
20000
10000
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Years from delivery
Aircraft market value Loan balance Aircraft book value

Sharing the risks: Syndication and tranches

100%
90%
80%
Pct of original price
70%
60%
50%
40%
30%
20%
10%
0%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year from delivery
Aircraft value Senior tranche Mezzanine tranche

Junior tranche Top slice
30
Todays market: distress values

100%
90%
80%
Pct of original price
70% Many banks today are offering only 60% LTVs

60%
50%
40%
30%
20%
10%
0%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year from delivery
Aircraft value Senior Mezzanine

Junior Anyone want this?
Constant-principal payment structure
8000
7000
6000
5000
4000
3000
2000
1000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Payment Principal
Bangkok - March 2004 Interest Page: 68
31
Constant-principal loan with 10% balloon

8000
7000
6000
5000
4000
3000
2000
1000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Payment Principal Interest Page: 69

What is the constant-annuity payment for this loan?: $

Bullet financing payment profile

50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Payment Principal Interest

32
Comparing the deals
After-tax
Loan structures Payments Interest Tax shield
cash outlay
Constant-payment $78,884 $38,884 $13,609 $75,275
Constant-principal $72,000 $32,000 $11,200 $70,800
10% balloon $74,800 $34,800 $12,180 $72,620
Bullet financing
How much does money cost?
Credit ratings and loan pricing
33
Credit ratings
methodology
Credit ratings: the impact
Rating scales
Quality Moody's S&P
Extremely strong Aaa AAA Investment grade:
Very strong Aa AA suitable for fund
Upper medium A A
Adequate Baa BBB
managers
Speculative Ba BB
Non-investment grade
Vulnerable B B OR
Poor Caa CCC
Highly speculative C C Junk
There are three notches for each
rating, 1, 2, and 3 from highest to
lowest
34
Credit ratings and pricing the loan
Rating scales (for example only)

Quality Moody's S&P Interest margin (bps)
Extremely strong Aaa AAA 30- 50
Very strong Aa AA 50 - 80
Upper medium A A 90 - 120
Adequate Baa BBB 120 -150
Speculative Ba BB 180 - 210

Vulnerable B B 220 - 250
Poor Caa CCC ------------
Highly speculative C C ------------
How a syndication is priced

Lenders bid for part or all of the loan (typically 85% of value
Larger deals are shared amongst 4 or 5 participants
Risk may be shared equally or loan split into tranches
$MM Interest Rate
LIBOR + Tranche/rating Secured ?
100
200 bps No
Top slice
80
100 bps Junior tranche Part
60
Mezzanine
40 50 bps Well
tranche
20
25 bps Senior tranche Fully
0
Blended Rate: LIBOR +80 bps
35
The Yield Curve in 1999

10.00%
9.00%
8.00%
7.00%
6.00%
5.688% 5.688% 5.813%
5.64%
5.00%
4.00%
3-month 6-month 1-year 2-year 3-year 5-year 10-year 30-year
Treasury LIBOR
Strong Euro?
The yield curve in 2003
6.00%
5.00%
4.00%
3.00%
2.50%
2.00%
1.620%
1.00%
Overnight 6-month 1-year 2-year 5-year 10-year 30-year
US Treasury LIBOR EuroLibor

Source: FT, 3 December 2003
36
Airline credit ratings - 1999

Company Standard & Poor's Outlook Moody's
Air Canada BB S Ba3
Alaska Air Group BB+ S Ba2
Alaska Airlines BB+ S Baa1
America West B+ CW-P A2/B1
AMR Corp BBB- P Baa2
American Airlines BBB- P A2
British Airways A CW-N A2
Continental BB- S Ba2
Delta Air Lines BBB- P Baa3
Japan Airlines BB N Baa3
Northwest Airlines BB N Ba2
Qantas Airways BBB+ S Baa1
Southwest Airlines A- S A3
Trans World CC S Caa1
UAL Corp BB+ P Ba3
United Air Lines BB+ P Baa3
US Airways Group B+ P B3
Note: S&P, Moody's information is correct at February 16, 1999.

Outlook: N = Negative, S = Stable, P = Positive, D = Developing, CW = Credit Watch

2003
Rating Outlook
Air Canada CCC+ N
Airtran Holdings B- N
Air New Zealand B
Alaska Airlines BB N
All Nippon Airlines BB-
America West CCC N
American Airlines B- N
British Airways BB+ N
Continental B- N
Airline credit ratings - Delta Air Lines BB N
2003 ILFC
Japan Air System
AA-
BB-
N
Japan Airlines BB
Lufthansa Baa1
Northwest Airlines B N
Qantas Airways BB+ N
Scandinavian Baa3
Southwest Airlines A N
UAL Corp D
United Air Lines D N
US Airways Group D N
Source: Airfinance Journal March 2003

N = Negative, S = Stable, P = Positive, CW = Credit Wa
Red cells indicate a changed rating
37
Export Credit
Export Credit overview
Main characteristics
Players and roles
European vs. U.S. Export Credit
Current and future changes in the market
38
How important is Export Credit?

Export Credit: 20-30% of
total deliveries
Operating lessors: 25%
US carriers: mainly capital

markets (securitization)
Export credit The rest is financed by

Operating lessors commercial banks & airline
Securitisations (U.S.) cash
Airline cash/bank finance
Who uses Export Credit ?

Equities
Equities
Low
Low risk
risk Capital
Capitalmarkets
markets
airlines
airlines Tax investors
Tax investors
Banks
Banks
Medium
Medium risk
risk Banks
Banks
airlines
airlines Export
Export credit
credit
High
High risk
risk Banks
Banks
airlines
airlines Operating
Operatingleases
leases
39
What are the main features?

Facility
85% of aircraft price
USD or EUR or other currency case-by-case
full-payout, mortgage/annuity-style (lease) or
constant principal repayment (loan)
max. 12 years payout period
no grace period, no balloon but sometimes commercial mismatch
loans ranking pari passu
spares maximum 15% of first five aircraft, 10% thereafter
Securities requested
assignment of Title (lease) or Mortgage (loan)
government guarantee where applicable
registration in friendly jurisdiction
lease, insurance assignment
Players and roles

(Lease structure)
Coface Hermes ECGD
95%/100% 95%/100% 100%
French Banks German Banks British Banks
Agent
Optional:
Loan Commercial loan
85% Lenders
Title to the Aircraft
SPC
payment
Securities
Airbus
Lease
Purchase Agreement
Assignment and Manufacturer
Airline consent
Predelivery
Payments >15%
40
The Export Credit Agencies (ECAs) role

Facilitate exports from manufacturers countries
enhance the airline credit risk by providing

insurance/guarantees to banks
provides access to financing
results in lower bank margins
evaluate airline credit risk and proposed financing

schemes and take cover decision
The banks role

Propose financing schemes
Export Credit + Commercial financing
Stretched amortisation and potential for tax benefits
Prepare loan documentation and structure
Agent bank is the airline interface
Prepares all documentation
Co-ordinates with Airbus ECA approvals
Manages the funding process
Creates SPCs as necessary
During the repayment phase
Receive and dispatch airline payments
Monitor status of securities
Manage restructuring, repossession in event of default
41
The airlines role

Select (mandate) the Agent bank
Negotiate the financing structure
Prepare and defend a business case to the ECAs
Select the terms among the options
LASU/Pure Cover/Securitisation
Take delivery of aircraft
Provide securities as required by the ECAs and the
banks
Fulfil its repayment obligations
Manufacturers role
Advise airline on financing possibilities
Bring together airlines, ECAs and potential financiers
Apply for Export Credit cover
Manage the rate-fixing process (LASU)
Co-ordinate the approval and delivery process
42
The Export Credit process
Manufacturer Sale contract Airline

e
c as
ss
ine
s
Pa
ym Bu Loan and security
Application for cover en agreement
t
E.C.A. Insurance/guarantee Bank

European vs. U.S. and other Export Credit

Eximbank financing advantages
established product for capital market transactions
potential one-stop shop for guarantees and financing
and disadvantages
complex documentation process
less flexible
European ECA advantages
more sophisticated structures available
and disadvantages
three differing organisations, structures, legal frameworks
What about engines?
43
Enhancing the LASU structure

Mismatch Loans
60,000
50,000
40,000
30,000
20,000
10,000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Aircraft RV Export credit loan Mismatch ECA+Mismatch
Conclusions
Advantages for airlines
more attractive financing terms with ECA support
fixed interest rates available/covered
flexible enough to structure optimised tax & accounting
efficient structures
And disadvantages
Not available for everyone!
Business case and security requirements
Administrative lead-times and procedures
Relatively short repayment period
44
Currency Forex risk
Airline forex risk management

Unbalanced revenue and expense
home currency, local currencies, US Dollar
uncertainties in forecasting revenue and expense
Balance Sheet exposures to USD
aircraft PDPs and deliveries
financing charges (Interest + Principal)
Management considerations
currency netting: add up all cash flows, hedge the net exposure
period of risk hedging: no more than two years
only hard currencies can be hedged
cost of hedging vs. trading gains
45
Foreign-exchange (Forex) risk
1930 The gold standard
1944 Bretton Woods
1972 The floating-rate environment
1979 The European Monetary System
1992 Crisis in the EMS
1999 The euro
And now the euro
46
Challenges of the Euro

Dealing with economic shocks
PRINT
DEVALUE
MONEY? CURRENCY?
HEAVY DEFICIT
CUT INTERESTSPENDING?
RATES? iFiscal solidarity?
iLabor mobility/flexibility?
iInternational investment?
Investors potential view of

the euro area
NO INTERNAL FOREX RISK

+
COMPARABILITY OF FINANCIAL PERFORMANCE
+
HARMONISATION OF MARKET PRACTICES
=
BROADER, DEEPER MARKETS
47
Bourses and the euro

U.S.
U.S.
Tokyo
Germany
London
U.S.
EuroParis
area
Euro area
Toronto
Amsterdam Tokyo Share value, 1997
ShareShare
value,value,
1999 -2003+
2002
Other EU
Tokyo
London
Hong Kong
Italy
Stockholm
0 0 1000
2000 2000 3000
4000 4000 5000
6000 6000 8000
7000
0 1000 2000 3000 4000 5000 6000 7000
billion bn
billion
Historical overview
Value of the US dollar
250
200
1971 = 1000
150
100
50
0
01/71 01/75 01/79 01/83 01/87 01/91 01/95 01/99
GBP/USD FRF/USD DEM/USD

48
Historical overview
Value of the French Franc
350
300
250
1971 = 100
200
150
100
50
0
01/71 01/75 01/79 01/83 01/87 01/91 01/95 01/99
GBP/FRF DEM/FRF ITL/FRF ESP/FRF

Implications of the euro
Economic tension between the US and Europe

with friends like this
Consolidation in European finance & industry
Banks and financial markets well underway
Mobility in industry?
Obsession with euro vs. dollar exchange rate
what about the rest of the world?
Uncertainty in Asia and emerging markets
Increased use of euro in trade finance?
49
Currencies analysed
Americas Asia
Argentine peso Australian dollar
Brazilian real Hong Kong dollar
Canadian dollar Indian rupeeI
Indonesian rupiah
Chilean peso
Japanese yen
Mexican peso Malaysian ringgit
Europe Philippine peso
British pound Singapore dollar
Czech koruna Taiwan dollar
Danish kroner Thai baht
Norwegian Kroner
Swedish Krona
Swiss franc
The euro and the big three

110
105
100
Jan 1, 1999 = 100
95
90
85
80
75
70
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
US. Dollar British Pound Japanese Yen

50
USD and euro

vs. American currencies
230
210
Jan 1, 1999 = 100
190
170
150
130
110
90
70
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
Average/USD USD ex ARP Average/EUR EUR ex ARP

USD and euro

vs. European currencies
140
130
Jan 1, 1999 = 100
120
110
100
90
80
70
Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04
USD Euro
51
USD and euro

vs. Asian currencies
130
120
Jan 1, 1999 = 100
110
100
90
80
70
Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04
USD
Euro Page: 113
Euro performance - summary

Weak euro or strong dollar?: the uros introduction
The almighty dollar in Latin America
Large $ fluctuations against the European currencies
10-20% against Asian currencies
Dawn of the new century
Equity flight changes the rules: the Super-uro
Will the Reagan miracle be repeated this time?
Monetary blocs for the 21st Century
Latin America now more stable against Euro
Europe grows around the euro
Euro contracts and financings should begin here
Will the British financial giant join the euro?
Asian currencies seem to view USD and Euro as alternatives
A new reserve currency for the worlds most dynamic markets?
52
Thank you
53

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EU-ASIA CIVIL AVIATION PROJECT

Top Level Management Seminar

Bangkok - March 2004 Page: 1

S AM 1-32 Top Level Airline Management Seminar

EU-ASIA CIVIL AVIATION PROJECT

Module 1: Business Strategy Module 2: Fleet Planning

Corporate Planning Michel Folliot, Market Research Professor Paul

Low Cost Carriers Ralf Anker, Investment Appraisal William Gibson,

S AM 1-32 Top Level Airline Management Seminar

What we will cover

S AM 1-32 Top Level Airline Management Seminar

EU-ASIA CIVIL AVIATION PROJECT

Airline and Aircraft Finance

Bangkok - March 2004 Page: 5

S AM 1-32 Top Level Airline Management Seminar

Why is Airline Finance so critical?

Airline operating cash flow

S AM 1-32 Top Level Airline Management Seminar

EU-ASIA CIVIL AVIATION PROJECT

The new aviation environment

-4.7% revenue growth

Bangkok - March 2004 Page: 7

World airline industry performance

+11.5% revenue growth

Bangkok - March 2004 Page: 8

EU-ASIA CIVIL AVIATION PROJECT

RPK = Revenue Passenger Kilometres Bangkok - March 2004 Page: 9

EU-ASIA CIVIL AVIATION PROJECT

SARS impact on European carriers

S AM 1-32 Top Level Airline Management Seminar

S AM 1-32 Top Level Airline Management Seminar

EU-ASIA CIVIL AVIATION PROJECT

Spotlight on: AIR FRANCE

Source: Airline Business S AM 1-32 Top Level Airline Management Seminar

The family jewels of Air France

Source: AirFrance.com, 2004

Bangkok - March 2004 Page: 14

S AM 1-32 Top Level Airline Management Seminar

EU-ASIA CIVIL AVIATION PROJECT

The airlines most valuable asset

In 1995, Air France was the basket case of

The airlines most valuable asset

Air France today is one of Europes most profitable flag

Bangkok - March 2004 Page: 16

EU-ASIA CIVIL AVIATION PROJECT

Is this a sustainable business model?

Source: LH annual report, 2001, BELF estimated from source data

Is this a sustainable business model?

Source: LH annual report, 2001

EU-ASIA CIVIL AVIATION PROJECT

Airline finance: the foundation

Current assets Current liabilities

S AM 1-32 Top Level Airline Management Seminar

Balance sheet rules of thumb

Bangkok - March 2004 Page: 20

S AM 1-32 Top Level Airline Management Seminar

EU-ASIA CIVIL AVIATION PROJECT

Airline common-size balance sheet

Bangkok - March 2004 Page: 21

S AM 1-32 Top Level Airline Management Seminar

Who sets the Rules for Accounting?

Bangkok - March 2004 Page: 22

S AM 1-32 Top Level Airline Management Seminar