Altitude Aircraft Leasing Trust – BT

Don’t dismiss aircraft trust

WITH GE’s Altitude Aircraft Leasing Trust looking to a listing on the Singapore Exchange, investors will have another asset class to look at. But how do aircraft match up against the other asset types, such as real estate or ships?

On gut feel, one might imagine the global aviation industry is facing more challenges than it can handle. Exogenous shocks from terrorist attacks and contagious diseases like Sars have surely hurt passenger traffic, and within the industry, legacy carriers and national airlines face stiff competition from low-cost carriers. Major US carriers floundered in bankruptcy as recently as 2005.

But the sector has recovered. Bankruptcy regulations allowed North American operators to renegotiate labour contracts and to cut costs. With economic growth, their operating profits rose to US$7.4 billion in 2006, against operating losses of US$300 million in 2005, according to the International Air Transport Association. Delta and Northwest were the last two American carriers to emerge from bankruptcy this year.

Further, it is wrong to think global air travel fell significantly, even following the worst of 9/11 and Sars. Figures from aviation consulting firm Simat Helliesen & Eichner (SH&E) show that global passenger and freight traffic – key determinants of demand for aircraft – have been rising steadily over the last 30 years.

Since 1991, air traffic dipped in only two years: 1991, prior to the first Gulf War, and 2001, following 9/11. And unlike the average stock market tumble that wipes out a fifth of an exchange’s market value, these were genuinely dips, not plunges, in traffic.

Sars certainly hit Asian air traffic hard. On the other side of the Pacific, Air Canada was the exception that proved the rule – with the largest domestic Asian population of any country in the world outside of Asia, Canada saw plummeting air traffic, nearly plunging its national carrier into bankruptcy. But other visitors to Asia are holiday-makers from Europe, who simply decided to fly somewhere else around the sunnily unaffected Mediterranean for their vacation. So European air traffic rose, offsetting the Asian decline on a global level.

This is significant because, as a senior aviation banker puts it, aircraft are ‘about as mobile as assets can get’. During Sars, he says, aircraft were redeployed from Asia to the US and Europe, while subsequently, as US airlines face troubles, aircraft have been transferred and put to use in Asia.

Thanks to growing wealth levels, Asia is where the growth is. According to SH&E and Boeing estimates, Asia’s passenger traffic growth is expected to rise by 7.1 per cent per year till 2026, compared to 4.1 per cent in North America and 5.6 per cent in Europe. Freight traffic is projected to grow faster.

Demand for new aircraft

The upshot is that many new aircraft will be needed. Consider that in China, there are only 1.3 passenger aircraft, including backlog orders, per million people, compared to 3.7 in the rest of the Asia-Pacific, and 30.4 in North America.

Airlines will also need to renew their fleets. US carriers tightened their belts during the lean years of 2000-2005 and have ageing fleets. Further, high fuel costs – jet fuel prices more than doubled between December 2003 and April 2007 – and concerns over global warming mean that the aviation industry will need new, efficient aircraft and engines.

None of this would matter to trust investors if not for the fact that about 30 per cent of the world’s aircraft in operation today are on operating leases, or about US$150 billion worth. By historical trends, this is expected to rise to 40 per cent over the next 10 years. If, as one banker believes, about US$50 billion to US$60 billion worth of aircraft will be delivered per year in the coming years, even established airlines, let alone start-up LCCs, will need financing support. The banker thinks between half to two-thirds of the value of annual deliveries will need third-party financing.

Competition for assets exists, from RBS and Macquarie, from Boeing, and from listed trusts like Ireland-based Aircastle Aviation. But AALT has the advantage of counting GE Commercial Aviation Services, the world’s single largest jet operating lessor with a fleet of over 1,700 aircraft, as sponsor. With the world’s second largest player, International Lease Finance Corp, which has nearly 1,000 aircraft, GECAS accounts for over half of the world’s aircraft.

So, while details on AALT’s initial public offering have yet to emerge, if you’re a yield investor, don’t be turned off just because it deals in aircraft.

Reference : Preliminary Prospectus