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October 2010

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 Portfolio Overview Top 4 operating lessor 217 owned, 36 managed aircraft

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October 2010

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  1. Airlines' risk analysis, the essential tool kit? Shane Matthews Head of Credit Risk, RBS Aviation Capital October 2010

  2. RBS Aviation Capital - today • Team • 63 aviation professionals • Global reach • Portfolio Overview • Top 4 operating lessor • 217 owned, 36 managed aircraft • 95 new aircraft on order with Boeing & Airbus • Over 60 airline customers in over 40 countries London Dublin (HQ) Seattle Toulouse Shanghai New York Hong Kong Dubai Singapore 7 analysts dedicated to airline credit & risk management

  3. 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 Asset RiskAnalysis Credit RiskAnalysis TransactionQualityAnalysis

  4. 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

  5. How we look at an airline? Hub and Spoke Pt to Pt Long Haul Short Haul Future direction is more important than historic positioning

  6. 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 Shall we care how much the airline makes rather than can it service it obligations?

  7. 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 Booming demand for aircraft and aircraft financing in Asia

  8. Market Position Hub and Spoke Pt to Pt SIA Cathay Pacific Qantas ANZ PAL MAS Tiger AirAsia Virgin Blue Jetstar AirAsia X Long Haul Short Haul

  9. Servicing your obligations

  10. Cash is King on a Rainy Day

  11. 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 Constant process

  12. 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 Ongoing monitoring does lend itself to speeder decisions

  13. Thank You Q&A

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