Avation (AVAP)

[abtan]

Hi Carcosa

Where did the April 2024 presentation come from? I can't see one on the IR page.

Interestingly, I also noticed the difference in our charts, but as you say the discrepancy was minimal and I put it down to a possible switch between representing the data through financial and calendar years.

However, your observation from the last report (which I missed) of the next 2 leases expiring in September 2024 and 2026 respectively has confused me.

My understanding was that an ATR72-600 was leased to Air Tahiti for 2 years from March 2023 to March 2025, which is of course neither of the above dates.
https://www.avation.net/files/AVAP_RNS_ ... _feb23.pdf
https://www.avation.net/files/AVAP_RNS_ ... 200323.pdf

Has it been extended? Or cut short?
I appreciate that the difference is minimal, but I really don't like seeing something that should be straight-forward instead being inexplicable.

----

Thank you for providing your estimate of airplane valuations, much appreciated. I have a feeling that Avation might need to sell some of their assets come 2026 if they are unable to refinance older aircraft.

[Carcosa]

The April 2024 presentation is not on the IR page. Silly, I know. You can find it at the bottom of the home page.

Having taken a closer look and acknowledging the Tahiti aircraft that you mention plus going back and looking at the lease expiry dates of all three of the Mandarin ATR72's plus some of the Heavilift aircraft it seems to me the presentation charts are showing lease expiries later than expected from the the original RNS's.

Some of this might be explained by revised agreements arising from possibly re-negotiated terms stemming from COVID, but not all.

Maybe one day I'll 'audit' the RNS's and compare with the presentation charts and ask Avation for clarification but not now. If that's something you want to do then please share the results.

[abtan]

Hi Carcosa
I did try to go through the RNS' to keep my own record of expiry dates, but in the end it proved too complicated given the complexities of covid.

I only remembered Air Tahiti because it was relatively recent and on a very short lease.

Overall though, 2026/27 looks to be key and Avation's charts more or less tied in with what I was expecting for this time period.
A

[Carcosa]

May Corporate Presentation published

The 'Aircraft For Sale' section of the website has been uploaded dated to remove all aircraft I. E. No aircraft available for sale. Interesting since the only two aircraft that were listed for the past year were the two yet to be delivered ATR' s.

[Carcosa]

TrueNoord, a major player in the Regional Aircraft Leasing market, occasionally produce some interesting reports. Here are two relating to the Turboprop and Regional Jets aka as Cross-Over Jets. Investors don't really need to know this but anyone interested in the technicals of these aircraft types may find it of interest.

I'll drag out one piece of financial data as shown below:



These figures are bang in line with data from Avation's A220-300 fleet.

[Carcosa]

From today Aviation's ordinary shares on the London stock exchange are tradable via the SETS platform, which is the fully electronic market having moved up from the SETSqx. This will enable more international and US sophisticated investors to have access to Aviation's shares.

[Carcosa]

Boeing's Crisis: A New Normal?
It's been five years, and Boeing's struggles across their product range, from the B737 to the B777 and B787, are starting to seem less like a temporary setback and more like a concerning new reality. The company's challenges have persisted, casting a shadow over its once-dominant position in the aviation industry.


Asia-Pacific: A Narrowbody Powerhouse
The Asia-Pacific region has emerged as a powerhouse for narrowbody aircraft orders, with a staggering 5,468 orders as of April 1, 2024, according to data from CAPA - Centre for Aviation. This figure dwarfs the region's current total of 566 widebody orders, highlighting the region's insatiable demand for smaller, more efficient aircraft.


Recovering from the Pandemic
While the Asia-Pacific region boasts a sizable widebody fleet of 1,988 aircraft, with 1,692 dedicated to passenger operations, the numbers are still lower than the pre-pandemic levels of 1,800 in January 2020. The COVID-19 pandemic has taken a toll, with retirements outpacing new deliveries, underscoring the need for fleet replacement rather than pure growth in this market segment.


Airlines' Appetite for New Aircraft
It's almost impossible to name an Asia-Pacific airline that hasn't ordered new aircraft or isn't expected to do so this year. The region's airlines are actively seeking to modernize their fleets, driven by factors such as fuel efficiency, passenger comfort, and operational costs.


IMPLICATIONS FOR AVATION?
Given the demand for widebody aircraft in the Asia-Pacific region, Avation's B777-300 aircraft with Philippine Airlines and the A330-300 with EVA Air are likely to be in high demand as they come off lease in 2026 and 2027, respectively, despite their age. It's worth noting that large airlines operating widebody aircraft typically make their lease or release decisions well in advance, often a year or more, for planning purposes. Consequently, Avation should have a clear indication of airlines' intentions by 2025/2026.


--Capitalising on Market Dynamics
Given the resilience of commercial aircraft valuations and the anticipated reduction in US interest rates over the next 18 months, the current market conditions present an opportune time to participate in the secondary aircraft market. This favourable environment offers potential opportunities for strategic acquisitions and fleet optimization.


--Refocusing on Core Competencies
While having Boeing and Airbus widebody aircraft in Avation's fleet has been a feather in the cap, demonstrating the company's capabilities, it can be argued that these aircraft pose an outsized risk and may not align with Avation's core competencies. Divesting these widebody assets could be viewed as a positive move, allowing the company to streamline its operations and concentrate on its areas of expertise.


--Anticipated Market Activity
Given the prevailing market dynamics, it would not be surprising to witness some activity in the secondary market involving Avation before the end of the year. This could manifest in the form of strategic acquisitions from distressed sellers or the divestment of one or two of Avation's own aircraft. Such moves would enable the company to capitalize on market opportunities while optimizing its fleet composition.

By actively participating in the secondary market, Avation can leverage the favorable market conditions to strengthen its position, mitigate risks, and align its fleet with its core competencies. However, any such decisions should be carefully evaluated, considering factors such as aircraft age, market demand, and the company's long-term strategic objectives.

Ultimately, the current market environment presents an opportune time for Avation to reassess its fleet composition and explore opportunities that could enhance its competitiveness and long-term profitability.



Random fact of the day:
VH-FVP was the last ex-Virgin ATR72 aircraft to be transitioned. It's preservation programme and C-Check (647 Work Orders) was managed by Avtrac Pty Ltd.

[Clitheroekid]

An interesting interview with Jeff Chatfield - https://www.proactiveinvestors.co.uk/co ... 47398.html

I noticed he said that as demand for aircraft exceeds supply it had raised the values of the aircraft owned by them. However, although I can see that this would be a good thing from an asset value point of view I'd be interested to know whether that increased value is reflected in increased lease rates.

I've no idea how long a typical aircraft lease is. If it's only for 1 year then I can see that the company should be able to raise the rates to reflect demand on expiry of the lease, but if it's for 5 years then they would presumably derive no benefit - I'm assuming that aircraft leases don't contain rent review clauses!

[Carcosa]

Thanks for that link. Worth viewing. Proactive Investors provide a superior interview experience than that piece of garbage that joke that spews out of DirectorsTalk.

"I'd be interested to know whether that increased value is reflected in increased lease rates"

Short answer is a qualified yes. Whilst there are numerous inputs into the lease rates, cost of finance and aircraft value at the time of lease are primary factors. Airlines would argue that the lease cost basis should be the Base Value if it's less than Market Value. Finance leases would be more closely tied to the interest rates. However if the aircraft is in demand, than the pricing can be set to what the lessor demands.

"I've no idea how long a typical aircraft lease is. If it's only for 1 year then I can see that the company should be able to raise the rates to reflect demand on expiry of the lease, but if it's for 5 years then they would presumably derive no benefit - I'm assuming that aircraft leases don't contain rent review clauses!"

There is no way an aircraft lessor of aircraft younger than 20 years old would entertain the prospect of a one year lease. However, sub-leases can be for a few months, for example several UK airlines will wet-lease their aircraft for Hadj flights during the European Winter but the aircraft lessor would derive little or no benefit from this. Their only involvement would be to permit the sub-lease to occur; which is typically granted unless their are legal or safety (war) considerations although even then that may latter case can be granted provided appropriate insurance is in place if the airline could get it.

There are no review clauses in lease agreements but the agreement can and does get changed as was shown in the pandemic where airlines struggled to make payments and also the lessor can change the agreement as Doric Nimrod did with their return conditions of the A380 other things that can be amended is changing the lease to a finance lease, extending or reducing the lease period etc., but then the lessor tends to be in a strong position in such 'normal' renegotiations.

The general idea of aircraft leasing is for the first lease period to pay off the loan with the residual value and subsequent second and third lease effectively being pure profit. In the real world there are many complications though.

Typical first lease periods would be 12-15 years, with finance leases often around the 10 year period. With transitioned aircraft where the pandemic caused a number of aircraft to be prematurely returned the secondary lease periods tended to range around 6+ years.

"..raise the rates to reflect demand on expiry of the lease"

Whilst the Lease Rate Factor (LRF) will increase under current environment the quantum of the income derived from these aircraft can be considerably lower. To give a broad example, when A380's were initially leased they were based on aircraft valuations of say $480m and a LRF of 4%. When and if they get released they will be based on a value of around $50m and a LRF of 6%. So even if the LRF is higher on the re-lease the actual income received will be peanuts.

[Clitheroekid]

Thanks for a genuinely helpful reply - much appreciated.

[Carcosa]

Sale of Two ATRs

Three days ago I said:

"--Anticipated Market Activity
Given the prevailing market dynamics, it would not be surprising to witness some activity in the secondary market involving Avation before the end of the year. This could manifest in the form of strategic acquisitions from distressed sellers or the divestment of one or two of Avation's own aircraft. Such moves would enable the company to capitalize on market opportunities while optimizing its fleet composition...

Ultimately, the current market environment presents an opportune time for Avation to reassess its fleet composition and explore opportunities that could enhance its competitiveness and long-term profitability."

And today we get an RNS saying they have sold two of their forthcoming ATR72-600 aircraft of which the Purchase Rights were activated some time ago. That delay has resulted in a $5m 'profit' from each aircraft as a result of market demand, inflation and purchase rights agreement. Nice to get something right for a change!

Interestingly, it's a sale to an American airline which is one market that Avation would have huge difficulty in breaking into with a leased aircraft; but clearly selling aircraft is a realistic option for these and future exercises of Purchase Rights. It would be useful to know if the airline are going to refinance themselves or via another leasing company.


Other Avation Related News:

Taiwan's EVA Air is placing a new firm order with Boeing for four additional Boeing 787-10 aircraft. This follows on from a firm order with Airbus for the purchase of 18 long-range A350-1000s and 15 single-aisle A321neo

Vietnam Airlines (VNA) booked a $179 million net profit in the first three months ended 31 March 2024, ending 16 quarters of consecutive losses.

All efforts at Air Baltic now turn to preparing for and executing an IPO, which will be in the second half of this year at the earliest. Air Baltic hopes to raise €300m via that IPO, which will mean the government's stake dropping to at least 80%. The airline has sent a request-for-proposals to banks.

Cebu Pacific saw its first-quarter profit double as a jump in revenue – driven by strong passenger travel demand – outpaced an increase in costs. For the three months ended 31 March, the low-cost operator reported an operating profit of Ps2. 6 billion ($45.3 million)

Air Baltic has agreed to take nine Airbus A220-300s under long term lease agreements through 2026

The Fiji Airways Group posted a $131.8 million profit before income tax for the year 2023, returning to profitability for the first time since 2019, when it recorded a $61.2 million EBIT. The group accumulated $836 million EBIT losses between 2020 and 2023.

Aercap to issue it's first dividend.

BOC Aviation has received $500 million from a long five-year note that matures in January 2030, in a deal designed to improve its maturity management. The deal was priced at a spread of 87.5 basis points (bps) over US Treasuries.

Carlyle Aviation Partners has tripled its business in recent years, but chief executive officer Robert Korn said at last week's ISTAT conference in Hong Kong SAR that they expect to double again in five years.

[Carcosa]

(Too late to edit)
The airline is " based in the Americas".

It is difficult for ATR's to operate in USA but Canada followed by Brazil are the most likely choices.

[Carcosa]

ATR Sales
Have seen some investors claiming the Purchase Rights are worth more than the market cap of Avation. The maths seem to be based on the last RNS which indicated a $5m cash profit from delivering and selling the next two ATR's and multiplying that $5m by the number of remaining Purchase Rights. Some unfortunately forget to account for currency exchange rates but the premise remains.

Nice ideas but there are a few issues with that.

First of all the Purchase Rights vary in value depending on the assumed inputs and calculated using the Black-Scholes option pricing model. The principal factors being the appraised value of ATR 72-600 aircraft (quasi-inflation) and changes in the risk-free interest rates. Given interest and inflation rates are likely to decrease in the coming years then those PR's may devalue significantly.

The $5m cash profit has arisen from the price differential between Avation's purchase price and the selling price including the return on the Purchase Rights. Given there was presumably a desperate buyer, most likely one of the eight Canadian ATR operators, then it's not surprising a notable trade profit was to be had.

Avation initially acquired the ATR's for $18.812m each (although there was probably a small increase on that given the delayed delivery) against a current market price of $22.49m ('Factory' price $21.8m) each so presumably got about $23m each for them plus a gain on the Purchase Right of about $1.0m each to make the $5m cash profit, which is a bit rich and probably explains why Avation went ahead with the deal.

Nevertheless this latest deal appears to have highlighted the value that Avation has in the Purchase Rights.

ATR Pre-delivery payments
The $10m is scheduled for the next batch of pre-delivery payments (PDP's) on a further ten ATR 72-600s that are on order with the manufacturer for delivery from late 2025 to 2028. Thats a bit strange because if those 2025-2028 deliveries have actually been placed with ATR - rather than a 'desire' - then Avation would have paid the initial PDP's already. Note that PDP's are a staged payment process, first stage being to efectively aquire a production slot and does not cost 'that much'.

In addition, Avation has purchase rights yet to be exercised for a further 24 aircraft with an extended expiry date of June 2034.


Change of Name/Operator - Aerlink
It seems Hevilift (Avation has x3 ATR72-500 with them) have rebranded to Aerlink which is now the only Australian operator of the ATR aircraft type. Aerlink operates 68-passenger ATR72-500s, 48-passenger ATR42-500, and two ATR42-300 freighters. So look out for the new name on future Avation Presentation material. Avation's aircraft already have the new paint scheme.

Avation's Finances
Although analysts have pushed through material earnings upgrades and the sale of these two new aircraft highlights the value in the company it should be noted that Avation's share price, based on P/B is on a par within the industry. In other words I think the current share price is as good as it's going to get, outside of any corporate action.

From an earlier article from Air Finance Journal regarding Aircraft Leasing Companies (worth a read) I have extracted a couple of charts:

Avation are outside the Top 50 leasing companies in the world but within the Regional Aircraft sector they seem to be viewed as average risk when this chart was created.



Within the overall market this chart shows Avation being somewhat more riskier than most which should come as no surprise to anyone. Having said that they appear to be decreasing risk all the time.



Sustainable Aviation Fuels
I came across a report from the Institute for Policy Studies https://ips-dc.org/wp-content/uploads/2 ... -Skies.pdf which addresses the challenges of Sustainable Aviation Fuels in the Aviation Industry. I have no idea as to the political leanings of this organisation but it's essential arguments and concerns are something I can get behind.

The kernal is that SAF are impractical on the basis of quantity required and impractical massive subsidies required.

The reality is that customers desires and powerplant designs centre around reliability, safety, performance and cost of operation. Government legislation centres on the environment (first legislation commenced in 1968) that drives airframe and engine manufacturers longer term goals that often influences aicrafft residuals.


Shareholders:
IG Markets Limited have issued two RNS's recently showing a 3.06% and 4.06% holding. IG Markets Limited is otherwise known as the spread better http://www.ig.com who deal with CFD's spreadbets.

CFD holders do not benefit from voting rights so I assume this trade by IG is part of their risk management? If so, who on earth would be buying in such bulk as to warrant IG having to cover it with a 4.06% holding? Could add some volatility?

Milkwood Capital Limited have also increased their holding from below 3% to 4.7% recently.