Aircraft Investment Risk Management – What is Desired?
Transport capacity has come to be viewed as a commodity to be acquired and used with the greatest contractual flexibility and lowest unit cost. This approach relies on a continuing ability to refinance existing equipment, an available supply of capacity when needed, and the willingness of the financial markets to dissociate credit risk from equipment value risk. With an investment objective of short-term profit maximization and a long-term goal of creating value on a sustained basis equipment lessors play a constructive role in supplying capital for the expansion of the air transportation industry.
What are these lessor risks? The volatility of expected returns during an investment’s life, changing correlation among asset types, trends in fuel and labor cost, growth in passenger and freight demand, competition from other carriers, the impact of new technologies, government regulations (noise, emissions), changing tax regimes, and of course, the business cycle. Rather than ‘insuring’ the problem of risk away with a higher discount rate, investment planning and selection ought to make explicit estimates of the uncertainty of these specific parameters by prioritizing risks in asset acquisition and in subsequent management of investment portfolio alternatives. Assessing these uncertainties are best placed in the hands of those most capable of doing so. Airlines certainly do this as they can increase (or decrease) fleet capacity, alter fleet mix, delay new equipment deliveries and convert firm delivery slots to alternate equipment types.
Strategy, competition, geopolitics (i.e., currency fluctuations), demand dynamics, yield, fuel cost, aircraft aging factors, aircraft performance and the financing and regulatory environment are some of the uncertainties which should be estimated at the outset. For example, under reasonable fuel price and demand cycle uncertainty assumptions, single aisle aircraft families are preferable to the larger double aisle units, yielding a higher NPV with less downside risk (e.g., a larger, higher cost aircraft bears more risk than a smaller one). Aircraft are traded ‘over the counter’ meaning, between individual counterparties. Depending on the frequency of such secondary market activity, aircraft market value data points are at times unavailable. Different carriers may have unique strategic objectives, market share growth, fleet types, sizing, and tactical assignment and scheduling. In an increasing demand environment carriers will offer increased frequency rather than upsize their fleets (assuming airport slots and airspace permit). We define investment success in measurable terms. We do not mechanically rely on historical data, but with clear investment objectives in mind, base them on actual experience.
How to best ensure your entrepreneurial performance in Air (and Rail) transportation equipment investment? Strategic positioning and a potential to create value on a sustained basis is desired. Meeting this desire is an excellent reputation in originating, underwriting and managing Air and Rail assets. Together with experienced judgment and the ability to identify a target, efficiently complete due diligence regarding value (both today’s, and the future’s) sets the stage for investment success. Such success is realized through the ability to select and arrange best financing alternatives, ensuring tax and legal documents are managed and negotiated to contain the best available market terms and conditions.
Looking for active investment opportunities? Call the transport investment specialists. Call RESIDCO.
 Commercial Aircraft: Risk Adjusted Returns Versus Competing Investment Classes, Vincent Kolber, Journal of Equipment Lease Financing, Fall 2005, Vol. 23, No.3. ‘Commercial aircraft as compared to other investment classes ‘have provided an attractive option based on a relatively high absolute return and lower volatility’.
 ‘If you can’t measure it, you can’t improve it’, Peter Drucker.
* Get an next to you comment by visiting Gravatar.com and uploading a profile photo that links to your email address.