Aviation Industry and Aviation

Financing in Emerging Markets

May 2011

About Standard Chartered Bank

Global Network, Local Presence

Listed on both the London Stock Exchange and
the Hong Kong Stock Exchange
Top 25 companies in the FTSE-100 by market
capitalisation
Over 1,700 branches and offices in over 70
countries with 85,000 employees

We work seamlessly across borders and product

groups, giving you full access to the resources of
our bank

Unrivalled network, tailored solutions

Core strength in Asia, Africa and the Middle East

Over 150 years of on-the-ground experience in many of the worlds fasting growing economies
We deliver world-class, award-winning solutions built on innovative and comprehensive financial products

Standard Chartered Bank in Middle East

SCB has an unbroken history of 90 years in the

Middle East: Oman (1968), Bahrain (1920), UAE
(1958), Qatar (1950), Lebanon (2000), Jordan
(1925) and Saudi Arabia (2011), and with over
150 years on the continent
Lebanon

One of the largest foreign bank networks in the

region
Retail presence in 6 countries (UAE, Oman,
Qatar, Bahrain, Jordan and Lebanon) and WB
Capabilities extended to include Egypt (1 rep
office, 2008), Iran (rep office, 1992) and Iraq (1
rep office).
Network of 29 branches, 170 ATMS
4,000 staff in the region with the highest
diversity within the Group (70 nationalities)

Jordan

Bahrain
Commenced
operations in Saudi
Arabia in Feb-11

Qatar
UAE

Oman

Aviation Finance Team

SCB has a multi-product platform to offer financing solutions and meet the growing demand
for aircraft leasing and financing in its markets across Asia, Africa and the Middle East.
Acquired Pembroke in 2007, adding operating leasing to finance capability
We have dedicated and first class Aviation Finance professionals in Ireland, London,
Singapore and Hong Kong.
In-house expertise includes remarketing, technical, legal, structured finance and lease
management
Owned fleet of 48 aircraft, management of 34 aircraft (excluding financing).

Dublin
London

Hong Kong
Singapore

Aviation Finance Product Range

Range of Products

Operating
Lease

Debt
Solutions

Selected Awards

Commercial jet aircraft

(passenger and freighter)
Aircraft engines

PDP Deal of the Year 2010

Tiger Airways

Finance lease

Multi currency Pre-delivery Financing

Loan Deal of the Year Middle East 2011

Debt financing

Qatar Aviation Lease Co.

Islamic financing solutions

Asia Deal of the Year 2009

Air India
Bridge Financing for 7 x B777 and 3 x B737-800

Export credit financing

Africa Deal of the Year 2008

USD650 million Revolving Credit Facility

Ethiopian Airlines

Aircraft finance advisory and

structuring services

Management
Services

Purchase and Operating Lease of 2 x B767-300ER

Middle East Deal of the Year 2008

Lease marketing and

management advisory
Aircraft sales, repossession and
technical advisory

Qatar Airways

Best Islamic Structured Financing Deal 2010

USD500 million Finance Lease for three B777

Qatar Airways USD150 million Islamic Facility

Etihad Airways

Company administration services

USD102 million Senior Secured Commercial Loan

Facility for one A340-600

Country Deal of the Year (Qatar) 2009

Aircraft Finance Recent Transactions

Tiger Airways Holdings

Ltd
USD80 million
COFACE Facility for
twoA320-200

Tiger Airways Holdings

Ltd

2010

USD68 million
Pre-Delivery Payment
Financing Facility for six
A320-200
2010

Sole Arranger

Sole Debt Arranger

Ijarah Deal of the Year 2009

QALC

Air India

USD200million
Finance Lease
for eight A320 family

USD905 million
Bridge Financing Facility for
seven B777 and two B737800

2010
Sole Arranger, Structuring Bank, SWAP
provider.

2009
Lead Arranger

Aircraft Debt Deal of the Year, Middle East, 2010

Qatar Airways USD150m Islamic Facility
Aircraft Equity Deal of the Year 2008
Acquisition of Pembroke By Standard Chartered

Demand for Air Travel

World Airline Traffic Forecast (RPKs)
20

14

7.5

15

12

5.0

10

2.5

0.0

-2.5

-5

8
6

Long-term Growth
2009-2029

Global GDP = 3.2% pa

Passenger traffic = 5.3% pa

Growth 5.1% pa

RPK Growth

-5.0

-10
Source: IMF, ICAO, IATA

Forecast

(Cargo = 5.9% pa)

0
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
20
22
20
24
20
26
20
28

GDP Growth

Historical

10
RPK's (trillions)

% growth rate (RPK's)

10.0

19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
F

% growth rate (GDP)

World GDP and Air Passenger Traffic (RPK*) Growth

Source: Airline Monitor, Boeing

Demand for air traffic is closely linked with the global

economic cycles.
Air passenger demand (RPKs) has grown at around 1.5
to 2.0 times the trend long-term growth rate in GDP.
Last cycle resulted in 2.5% decline in traffic (2009).
Strong recovery in 2010.

20 yr traffic growth forecast of 5.3% pa driven by

long term global economic growth of 3.2% p.a,
Other Key drivers:
- Global trade and tourism
- deregulation of air travel markets,
- growth of low cost carriers
- Emerging economies

*RPK Revenue Passenger Kilometre (a measure of passenger demand, representing each kilometre each passenger is carried)

Long-term Global Demand for Aircraft

Airbus projections of global aircraft demand (2009 2029)

Boeing projections of global aircraft demand (2009 2029)

40,000

35,000

35,000

30,000

Number of Aircraft

20,000
15,000
10,000

30,000
Number of Aircraft

25,850 new
aircraft*
USD 3.2
trillion

25,000

30,900 new
aircraft
USD 3.6
trillion

25,000
20,000
15,000
10,000

5,000

5,000

2009

2029

2009

New deliveries by type (2009 2029)

2029

New deliveries by type (2009 2029)

Regional
Jet
(2%)

Large Widebody
(7%)

Large Widebody
(6%)

Twin
Aisle
(23%)

Twin Aisle
(24%)
Single Aisle
(69%)

Single Aisle
(68%)

* Airbus forecast excludes Regional Jets

Source: Airbus GMF 2010-2029 / SCB estimates

Source: Boeing current market outlook 2010-2029

Emerging markets are driving air traffic growth

Traffic growth (RPKs) by region

Air traffic forecast by regional flow (2009-2029)

Added traffic
2009-2029

2009 Traffic
25%

Asia/Pacific
North America

20%

Europe

15%
Domestic China

10%

N. America - Europe
Europe - Asia

5%

Middle East - Asia

0%

N.America - Asia

RPK Growth 2009-2029

Latin America

-5%

N. Am - L. America

-10%
2005

Source: IATA

2006

2007

2008

2009

Asia

Middle East

Latin America

Africa

Europe

N. America

2010

Emerging Markets

+ 6.1% p.a

Mature Regions

+ 3.7% p.a

Europe- Mid East

500

1000

1500

2000

RPK's (billions)

Source: Boeing, Airbus, Standard Chartered

Aircraft Demand from Emerging markets

New Aircraft Deliveries

Mix of Backlog by Region in Different Cycle

17%

7%

11%

19%

13%

11%

32%

18%
22%

31%

28%

21%

57%

50%

42%
20%

1981

1991
N. America

2001
Europe

Asia

2010
Other

Source: Ascend On-line

Emerging Markets account for around

60% of current order backlog

(2009-2029)
Number

Value
($million)

Asia/Pacific

10,320

$1,320

N. America

7,200

$700

Europe

7,190

$800

Middle East

2,340

$390

Latin
America

2,180

$210

CIS

960

$90

Africa

710

$80

TOTAL

30,900

$3,590

Source: Boeing GMF 2010

Emerging Markets long term

financing requirement of $2 trillion
58% of total demand

Need for External Finance

Global Airline Net Profit Margins (1980-2011F)

Airline Industry Financing Requirement Forecast

$120

5.0%

Cash Flow

4.0%

$100

3.0%

Capital Expenditure
External Capital Required

2.0%

US$ Billions

$80

1.0%
0.0%
-1.0%

$60

$40

-2.0%
-3.0%

$20

-4.0%

20
10

20
08

20
06

20
04

20
02

20
00

19
98

19
96

19
94

19
92

19
90

19
88

19
86

19
84

19
82

19
80

19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
F
20
12
F
20
14
F

$0

-5.0%

Source: Airline Monitor

Historic profitability is highly cyclical and rarely

exceeds 3%

Generated cash flows only partially cover capital

expenditure needs (historically around 52% on average).

Average annual net profit margin of 0.05% since

1980

Airlines currently facing a financing shortfall

opportunity for external financing.

Net profit of $16Bn estimated for 2010 (a 2.9%

margin).

Demand for external capital is forecast to increase.

Emerging markets net profit for 2010 of $9.8Bn

(Asia $7.6Bn, Middle East $1.1Bn, L. America $1.0BN)

10

Primary Sources of Industry Financing

Traditional Sources

Developing Sources

Commercial Banks

Regional / Local Banks and Lessors

Capital Markets

Islamic financing

Export Credit Agencies

Sovereign Wealth Funds

Operating Lessors

Pension Funds

Airlines cash

Private Equity / Hedge Funds

Manufacturers

11

Financing Trends Impact of Financial Crisis

Boeing Aircraft Deliveries

Impact of Financial Crisis

Demand dropped as airlines tried to
reschedule deliveries
Liquidity became restricted and
expensive
Number of Banks exited the market
Capital markets limited
Lessors remained active but
inadequate access to debt funding
Concern over funding gap for new
deliveries

Source: Boeing Capital Corporation (May 2011)

Total funding requirement (Airbus and Boeing) of $62Bn

in 2010

Heavy reliance on ECAs doubling of

capacity
Manufacturer financing came back

Forecast to increase to $77Bn this year

12

Commercial Banks
Evolution of Aircraft Banking

The 60s-80s primarily US based banks Chase, Citibank, Wells Fargo, NationsBank

The 80s dominated by Japanese banks Sumitomo, Fuji Bank, IBJ

The 90s to today European banks KfW, Calyon, Natixis, DVB, BNP

Next Generation eg. SCB, ICBC, Bank of China

Impact of financial crisis

Focus on existing customer base and better quality credits.

A number of banks existed the market, reducing industry participants.

Restrictions on market liquidity increased pricing.

Increased support from Export Credit Agencies (ECAs) to fill funding gap.

Current Market Trends

Pricing remains high, lower LTVs, low interest rates, cost of liquidity.

Expected higher cost of capital due to Basel III will increase debt pricing.

New sources of financing Islamic Banks, regional banks in Asia / Middle East , rise of Chinese
banks into aviation market

13

New entrants Bank Financing

Regional Banks - Asia

Initially set up to provide finance for domestic airlines but moving to establish
a global presence.

ICBC closed a SLB for two B777-200ERs with British Airways

China Development Bank provided $358m debt facility to AerCap for 4 x A330s
CCB participated in an islamic lease to finance two B777s for Emirates
ICBC provided debt for JOLs for three A321s with Lufthansa

Regional Banks Middle East

Developing regional aircraft financing appetite and capability.
Al hilal Bank provided Islamic Finance Lease for A340 for Etihad.
Noor Islamic Bank participated in Islamic lease to finance Emirates B777s.
Emirates Bank was lead arranger for DAE $800m loan and credit facility.
Arab Banking Corp. co-arranger for loan for Etihad A340s.

14

Islamic Financing
Islamic banks in Asia and the Middle East are an additional source of aircraft
financing and increase the pool of liquidity available to the sector.

Most common structure is the Ijara finance lease. This has been used by Emirates
and Qatar Airways.

Standard Chartered arranged an Islamic financing for Qatar Airways in 2009. This
$160m deal for one B777-200LR combined an Ijara finance lease and a murabaha.
Banks involved in the structure included Maybank & Bank Islam (Malaysia),
Sumitomo Mitsui Banking Corporation, DBS (Singapore), Masraf al Rayan (Qatar)

Emirates financed two A330-200 aircraft in 2003 using Islamic Operating Leases
Some points to note:
The longer tenor nature of aircraft financings (typically 10 to 12 years) can be a
constraint for some Islamic banks

Documentation is more complex than conventional aircraft financings.

Shariah scholars may have differing views on acceptable transaction structures

15

Operating Leasing

Effectively provides 100% financing. Available to weaker credits

Sector continues to grow accounts for c. 36% of global market.

Increasingly Important source of financing for emerging market airlines.

Lessor access to liquidity restricted post-crisis. Long-term debt still challenging for
most lessors.

Increase in use of ECAs for lessor deliveries.

Increase in sale / leaseback transactions.

New entrants backed by private equity bringing additional liquidity and competition
to the market.

Growth of Chinese lessors

16

Operating Lease Evolution

Operating Leasing as % of Total World Jet Fleet

(In service aircraft)

40%
35%

6,709

(Number of operating
lease aircraft in service)

World Airline Passenger Jet Fleet (2010)

Ownership Pattern

5,335

Owned
(26%)
Finance
(39%)

30%

Owned
(26%)

3,452
25%

2,221
20%

33%

15%

1,009

Finance
(38%)

25%
21%

10%

234

5%
0%

36%

Leased
(36%)

88
2%

4%

1980

1985

12%

Source: Ascend Online, Pembroke estimates

1990

1995

2000

2005

2010

Source: Ascend Online

Operating lease proportion has tripled since 1990 and is

now a major component of the financing mix.

17

Growth of operating leasing in Emerging Markets

Airline Passenger Jet Aircraft Emerging Markets

1985

1990

1995

2000

2005

2010

1,488
aircraft

1,866
aircraft

2,787
aircraft

3,780
aircraft

4,433
aircraft

6,341
aircraft

3%

47
leased

15%

284
leased

22%

601
leased

26%

892
leased

37%

1,648
leased

40%

2,521
leased

Airline operational fleet has grown rapidly in the last 15 years to over 6,000 aircraft

At the same time the proportion on operating lease has doubled to now be 40% of the total
fleet

18

Leasing is established in all regions

Passenger Jet Aircraft on Operating Lease (May 2011)
Africa

Asia

33%

35%

40%

Europe

48%

Latin America

Middle East

N. America

28%

48%

Australasia

39%

Source: Ascend Online

19

New entrants - Leasing

Emerging Market Lessors
Numerous leasing companies have been set up in China to provide
equipment leasing ICBC, CDB Leasing and Minsheng.
BOCA and Hong Kong International Leasing already active.
Establishment of Free Trade Zones to support leasing/financing industry.
Chinese lessors primarily focused on domestic finance lease market but
plans to expand internationally and development operating lease capability.

Private Equity
Air Lease Corporation: raised $1.3Bn equity, $2.0Bn debt. Successful IPO.
Avolon: backed by Oak Hill. Raised $750m in equity in 2010 and a further
$250m in Q1 2011, over $1.5Bn in debt.
Jackson Square Aviation: backed by $500m in equity from Oaktree, $400m in
debt.
RPK Capital Partners backed by $600m from Carlyle Group.
HKA Capital: secured a portfolio of nearly $3.0bn in assets by completing its
acquisition of Allco Aviation
20

Export Credit Agency Financing

Guarantees / financing provided by US EX-IM and European ECAs (Coface, ECGD, Hermes).
EDC and BNDES in regional aircraft sector.

Home Country rule excludes US and certain Europe Airlines (UK, France, Germany) from
accessing ECA guarantees.

ECA support increasingly important immediately post financial crisis.

Accounted for around one-third of all aircraft deliveries in 2010 (approximately $23Bn) and up
to 78% of all eligible deliveries.

Around 65% of ECA transaction to airlines, 35% to lessors.

Introduction of new Aircraft Sector Understanding (NASU) should lead to increased pricing and
lower LTVs for airlines. This is likely to result in lower volumes after 2012 and a move back
towards more commercial debt.

21

Capital Markets

Corporate bond markets remain volatile but capacity available for good credits. Limited due to
investment grade rating requirements.

EETC markets open to aircraft financing but still primarily US based transactions.
Approximately $1.7Bn raised in 2010 (vs. $4bn in 2009).

Aircraft securitisations still limited.

Equity / tax investors focusing on strong credits.

JOL/JOLCO investors still active for the best credits

KG market available

Private equity funding returning for new leasing ventures

22

Emirates Airlines Financing Example

Financing Structures
going forward

Sources of Funding
Commercial
20%

Exim /ECA guaranteed

loans & Bonds

Op Lease
43%

Operating Lease, inc.

German KG market
ECAs
22%

Bonds
10%

EETCs / securitization

Commercial loans inc.

Islamic structures

Islamic
5%

$22 bn in last
14 years

Bonds, Sukuks, Private

Placement

199 Aircraft on
order

Source: Emirates Presentation 8th Annual Middle East & Africa Airfinance Conference Sept 2010.

Diversity of Funding Sources is Key

23