Airlines' risk analysis, the essential tool kit?
Shane Matthews
Head of Credit Risk, RBS Aviation Capital
October 2010
RBS Aviation Capital - today
Team
• 63 aviation professionals
• Global reach
Seattle
Dublin (HQ) London
Toulouse
New York
Portfolio Overview
• Top 4 operating lessor
• 217 owned, 36 managed aircraft
• 95 new aircraft on order with Boeing &
Dubai
Shanghai
Hong Kong
Singapore
Airbus
• Over 60 airline customers in over 40
countries
7 analysts dedicated to airline credit & risk management
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Strategy - Financial Services Approach to Risk Management
A holistic “3-pillar” framework approach promotes…
– Pro-active anticipation of issues
– Early initiation of corrective action
– Reinforced by cross-functional ownership for risk mitigation
This leads to….
– Timely exit from several troubled airlines
– Limited exposure to bankruptcies / defaults
– High asset and credit portfolio quality
Portfolio Risk Management
Credit Risk
Analysis
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Transaction
Quality
Analysis
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Asset Risk
Analysis
How do we look at an airline?
Franchise/business Plan
Competitive environment
Regulatory environment
Track record
Financial performance (cost and revenue)
Financial forecasts (are they realistic)
Management – expertise, track record and lock in
Ownership
Fleet profile – is it fit for purpose
These all combine to form a risk profile
We take a sum of the parts approach
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How we look at an airline?
Full Service
Carrier
Low Cost
Carrier
Hub and Spoke
Pt to Pt
Long Haul
Short Haul
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Future direction is more important than historic positioning
Financial Ratios
Cashflow
Loan to value/investment to value
ROCE/RWA
Interest cover
Debt/ Equity (including off balance sheet debt)
Liquidity Ratios
Margins
Key Sensitivities – these are company specific
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Shall we care how much the airline makes rather than can it
service it obligations?
Features of Asian Aviation Market
Large population base
Wide geographic spread with large bodies of water
Strong economic activity
High level of Government involvement
Growing personal wealth
Growing leisure market
Gradual deregulation
Fragmented Full Service market
Low LCC penetration
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Booming demand for aircraft and aircraft financing in Asia
Market Position
Hub and Spoke
Full Service
Carrier
SIA
Cathay
Pacific
Pt to Pt
Qantas PAL
ANZ
Virgin Blue
MAS
Jetstar
Tiger
AirAsia
Low Cost
Carrier
AirAsia
X
Long Haul
Short Haul
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Servicing your obligations
Fixed Charge Coverage
(EBITDAR/(I+R))
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8
7
6
5
4
3
2
1
0
-1
-2
Cathay
SIA
Air
Asia
Qantas
Air
China
PAL
Asiana
CSA
2010
2009
2008
Virgin
Blue
Tiger
Korean ANZ
CEA
MAS
ANA
2007
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Cash is King on a Rainy Day
Cash as %age of T/Over
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Tiger
SIA
ANZ Qantas Cathay
Air
Asia
MAS Virgin
Blue
ANA Korean CSA
2010
2008
2009
CAL
Air
China
PAL
CEA Asiana
2007
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Sources of information
Site Visit
Due diligence calls
Competitor visits
Formal briefings for PLCs
Internet
News services
Wary of consumer websites – there is a natural bias
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Constant process
Ongoing Monitoring
Our job does not end once the credit application is approved
Banks do not like surprises so we therefore continue to monitor your
performance
We have a policy of meeting each of customers at least once a year
We do a formal review of each of our clients annually
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Ongoing monitoring does lend itself to speeder decisions
Thank You
Q&A
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