Airline business – do banks really know what they sign up for?

Several thousand at Air France, six thousand at Malaysian Airlines and almost 11,000 at Transaero - these are the potential job cuts to be carried out by these major world carriers. This once again comes to show that airline business always balances on a fragile edge between profit and loss. However, if a carrier reaches an extreme point of bankruptcy, what awaits its financial partners? Will the banks be able to repossess the aircraft they have previously financed? Or will they end up with a $0.5-1 million loss-generating asset they know almost nothing about?

A grounded narrow-body aircraft generates approx. $40-50 thousand worth of losses each month in a form of various technical and engineering works mandatory to keep it in fit-to-operate condition. In addition, one has to pay airport parking fees – from a couple to a dozen thousands of dollars per month. Multiply that by two, three or ten aircraft and you will end up with quite a noticeable amount that someone has to pay for an unused fleet. If unsettled, these debts will eventually be transferred to the aircraft owner as grounded airplanes are often used as bail.

Moreover, if a grounded aircraft is not properly maintained or is being put on storage until better times, its preparation for re-entrance into service might require 3-4 million dollars. A wide-body will require at least twice as much. For an investor, it also means lost returns due to unreceived lease or interest payments.

“As an investment, aircraft are quite attractive since they employ large sums of money and generate good returns – up to several millions of dollars per Airbus A320 type aircraft. However, ceaseless rollercoaster situation on the financial market and such events as the most recent ‘Black Tuesday’ in China discourage banks and institutional investors from putting money into securities. Instead, they explore more predictable and long-term assets which generate stable returns for a number of years,” explains Tomas Sidlauskas, Vice-President at AviaAM Leasing.

A lucky investor will enjoy anticipated 7-12% returns if the aircraft is being successfully operated by its first and second lessees for the term of both contracts. From the investor’s side, this will require minimum engagement into technical processes (often, only during aircraft redelivery and delivery to the second lessee).

In some cases, a multiple aircraft finance deal foresees that the financing of separate assets may be transferred to third-party investors. This way a major bank like Deutsche Bank, Citibank or Goldman Sachs which already has certain experience on the aviation market secures the required multi-million funding for an airline (or a leasing company), and then sells some of the liabilities to other banks or investors. That is how new aircraft market entrants and smaller banks typically receive an asset which they know little about. Of course, primary banks did all required due diligence to ensure that the asset is liquid, but it doesn’t mean that together with the liabilities second-tier investors get precise instructions how to maintain and remarket the aircraft.

“Over the past 5-7 years, dozens of airlines went down all over the world thus suddenly leaving their financial partners with numerous aircraft. Are these aircraft in good or poor condition? What are the dos and don’ts for the bankrupting operators with regard to their assets before they fully seize operation? Will it be possible to re-market the aircraft ASAP in order to ensure that no-profit generation period doesn’t exceed a couple of months? That’s quite a set of time-sensitive questions for someone who has anticipated trouble-free monthly returns 15 years in a row,” shares Tadas Goberis, the CEO of AviaAM Leasing. “In other words, aircraft financing business requires you to have both technical competence and round-the-year communication with as many potential lessees as possible. This is the only way to prevent millions of dollars worth of losses in an unforeseen situation. Otherwise, look for someone who already holds the required knowledge and let them act on your behalf.”

Lockheed eyes overhead cuts of up to 30 percent

Lockheed Martin launched a review aimed at cutting corporate overhead costs by as much as 30 percent, according to two sources familiar with the initiative.

Lockheed would already reduce overhead substantially as part of an announced plan to sell or spin off an array of services businesses with revenue of $6 billion.

Lockheed this week confirmed plans to reduce 250 jobs at its Missiles and Fire Control division, on top of 500 lay-offs already announced for the Information Systems and Government Services division now under strategic review.

Lockheed and other U.S. arms makers have been consolidating facilities, laying off workers and streamlining operations in recent years to cut costs due to a downturn in U.S. military spending. Continued budget uncertainty is driving executives to dig deeper and look for more savings.

Northrop Grumman Corp this week said it would streamline its business sectors from four to three to better align with the U.S. Defense Department's changing needs.

Howard Rubel, defense analyst with Jefferies Group, said Lockheed also faced pressure from the Pentagon to offer price concessions in several billion-dollar contracts it is negotiating: a five-year contract for up to 83 C-130J transport planes, and two separate deals for about 160 F-35 fighter jets.

"They might as well use the impetus of (those contracts) to cut cost and offset the concessions they're being asked to make," he said.

Lockheed is also restructuring the Lockheed Martin International division it first set up in July 2013 to help the company win more international orders, according to three sources familiar with the matter.

Final decisions have not been made, but the business is being converted to a support function to make it work more efficiently, said one of the sources.

Airbus Beluga XL transporter will be powered by $700m worth Rolls-Royce Trent 700

Rolls-Royce has been selected by Airbus to provide Trent 700 engines and long-term TotalCare® engine service support, worth $700m for five new Beluga XL air transporter aircraft.

The aircraft will replace the current Airbus Beluga fleet, which is powered by engines from another provider.

The Beluga XL, based on the A330 design, was launched in November 2014 to address the A350 XWB ramp up and the transport capacity requirements for other programmes. Compared to the current Beluga, the Beluga XL will provide Airbus with an additional 30 per cent air transport capacity.

Bertrand George, Airbus Senior Vice-President, Head of Beluga XL programmes, said: "We look forward to the Trent 700 powering this important development in our air transport strategy. The engine has an excellent record on the A330 and is ideally suited to our requirements for this aircraft."

Simon Carlisle, Rolls-Royce, Executive Vice President, Strategy and Future Programmes – Civil Large Engines, said: "We welcome this decision to select an engine that is the clear market leader on the A330 and offers outstanding performance in terms of fuel burn, reliability, emissions and noise."

Source and image: Rolls-Royce

Etihad cargo increases freighter services to Africa

Etihad Cargo, the freight business of United Arab Emirates (UAE) flag carrier Etihad Airways, has increased its freighter services to Africa with the launch of a cargo only service from Abu Dhabi (AUH) to Maya Maya Airport, Brazzaville (BZV), in the Republic of Congo.

Operating twice weekly using a Boeing 777F freighter aircraft, the new service will fly from Abu Dhabi to Brazzaville via Lagos airport (LOS) in Nigeria. The freighter has a capacity of 100 metric tonnes and will transports tools, machinery, general cargo, electronics and project equipment.

Brazzaville is the Republic of Congo’s capital and largest city, and a key political, economic and transportation hub in Central Africa.

Kevin Knight, Chief Strategy and Planning Officer at Etihad Airways, said: “We are pleased to add the Republic of Congo to our growing network of cargo destinations. Our new freighter service will allow us to capitalise on trade between the Republic and the UAE, and better connect Africa with markets in Europe, the Middle East and Asia”

Etihad Cargo flies directly from Abu Dhabi to eight destinations in Africa, and this is extended to over 30 destinations across the continent through codeshare partnerships with Royal Air Maroc, Kenya Airways, South African Airways and Air Seychelles.

Etihad Cargo has consistently outperformed the global market during the last year with 17 per cent growth in freight tonne kilometres in 2014, over four times the industry average. Etihad Cargo is one of the largest cargo operators in the world and is continuing to forecast significant growth during 2015, driven by key initiatives to expand its capacity and scope, and to leverage equity and other partnerships.

Partnerships with other freighter operators, including Atlas Air and Avianca provide strong support to the main operation, and the division is continuing to explore opportunities for co-operation with like-minded cargo operators.

American Airlines will no longer transport animal 'trophies'

American Airlines is putting some teeth behind its response to the recent uproar over travelers who have illegally killed big game in Africa.

Effective immediately, the airline "will no longer transport buffalo, elephant, leopard, lion or rhino trophies," the company announced in a tweet Monday.The policy change comes amid the public outcry following the illegal killing of Zimbabwe's beloved Cecil the lion at the hands of a Minnesota dentist.

Walter Palmer allegedly paid about $50,000 to hunt the animal after it was lured from a national park into an unprotected area.

He says he thought the hunt was legal and was unaware Cecil was protected, but the killing triggered a huge online backlash.

On Sunday wildlife officials in Zimbabwe accused a second American of illegally killing a lion near a game reserve.

Delta Airlines announced a similar policy change earlier Monday.Both American and Delta name specific animal trophies they will no longer permit, leaving the door open to hunting trophies from other animals from around the world.

Delta would not answer questions from journalists as to why it made its decision on Monday, nor would it detail how many hunting trophies it has transported in recent years.

Embraer Executive Jets’ legacy 450 gains EASA certification

Embraer Executive Jets’ Legacy 450 yesterday has received type certification from the European Aviation Safety Agency (EASA).

The aircraft has met or surpassed all design goals, exceeding targets such as range, runway performance, hot-and-high takeoff distance and maximum payload. Conclusion of the process in Europe follows the recent certification granted by the Brazil and U.S. aviation agencies.

“This is a great achievement that paves the way for deliveries to begin in the member states of the European Union as well as in EASA-associated countries,” said Marco Tulio Pellegrini, President & CEO of Embraer Executive Jets. “The Legacy 450 is a revolutionary business jet that re-enforces our commitment to deliver true innovation to the market.”

With a range of up to 2,575 nautical miles (4,769 km), the mid-light Legacy 450 can fly nonstop from New York to Las Vegas, Dubai to Moscow and Jakarta to Hong Kong. The aircraft has the largest cabin in its class, comfortable seating for up to 9 passengers, and is the first jet in its category to replace conventional controls with full digital fly-by-wire technology.

Production of the Legacy 450 has already begun and the first delivery is scheduled for the fourth quarter of 2015.

Source and image: Embraer

Lufthansa pilots propose fresh talks with management

German pilots' union Vereinigung Cockpit has proposed fresh talks with Lufthansa management over early retirement benefits, a day after a court ruled a strike was unlawful because the union had overstepped its mandate.

The union and management have been locked in a long-running battle that has resulted in 13 strikes over 18 months. The dispute began over Lufthansa's plans to scrap a scheme that allows pilots to retire at 55 and keep 60 percent of their pay before regular state pension payments start at the age of 65, and tensions worsened when Lufthansa started a low-cost expansion drive through its Eurowings operation.

The union said it had offered three days next week for talks with management and that the negotiations would focus on the early retirement benefits.

"This agreement has the highest priority for us and we look forward to constructive talks," the union said on Thursday.

The focus on the retirement scheme comes after a judge at the federal state labour court in Frankfurt said on Wednesday that the union's reason for the latest strike was to fight low-cost expansion.

As the formal reason given by the union when it originally voted for strike action 18 months ago was the early retirement benefits, the judge said that Wednesday's walkout -- the second day of a two-day strike that forced the cancellation of more than 1,000 flights -- was not justified.

"We'll have a look to see if one of the proposed dates will work for us," a Lufthansa spokesman said.

Industry watchers have applauded Lufthansa, Germany's biggest airline, for standing its ground and pressing ahead with its plans despite the strikes.

The airline needs to lower costs to compete with fast-growing budget rivals such as Ireland's Ryanair (RYA.I). Aviation analyst CAPA estimates that Ryanair's costs are 60 percent below those of Lufthansa's main brand.

While strikes normally receive public backing in Germany, the pilot strikes have been criticised in the media, with accusations that the pilots are trying to hang on to outdated privileges to the detriment of the company and other employees that have already agreed to cost cuts.

"Fortunately for passengers and the other 115,000 employees, who don't enjoy the same benefits as the ladies and gentlemen of the skies, the judge sent the pilots back to the cockpit," German conservative daily Frankfurter Allgemeine Zeitung said in an editorial.