2 Aircraft Valuation Airplane Investments As An Asset Class Palgrave

Aircraft
Valuation
Airplane Investments as
an Asset Class
David Yu
Aircraft Valuation
“This book fills a niche in the market. It not only delivers detailed information on
contemporary aircraft leasing methodologies and markets but also provides a com-
prehensive review of the impacts on the aviation industry from the COVID-19.
This is the best book for both academia and practitioners in the aircraft leas-
ing field.”
—Chris C. Hsu, Ph.D., Professor of Finance, Director of CUNY Aviation
Institute, York College, The City University of New York
David Yu
Aircraft Valuation
Airplane Investments as an Asset Class
David Yu, PhD. CFA, Senior ISTAT Certified Aviation Appraiser
New York University Shanghai
Shanghai, China
ISBN 978-981-15-6742-1 ISBN 978-981-15-6743-8 (eBook)

https://doi.org/10.1007/978-981-15-6743-8
© The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer
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This book is dedicated to my children Terry and Theresa so they can aspire
for greater knowledge.
Preface: In the News Today - On-going
Significance of the COVID-19 Impacts on
the Aviation Industry
Today, the world is in the midst of a vastly different environment than we

have known in recent times and it seems every day there is news that has
significant impact on the aviation industry, aircraft values and the global
economy. While there are a few exogenous economic shocks to compare
against, COVID-19 seems to have even worse effects than the most recent
cases of economic shocks including SARS and the great financial crisis.
Initially, at the start of the coronavirus outbreak in January 2020, it was
hoped by many that it might be contained within a few months but this
has proved to be overly optimistic as it has created even more uncertainty
globally. As of this publication, the author continues to be primarily at
home indoors in Shanghai, China for over 90+ days since late January
2020 and has been a keen observer and commentator while the entire
world has reacted to this ever evolving epidemic.
In the beginning of the viral epidemic in January and early February
2020, before the proliferation of the virus globally, the problem was
framed by many as a China or Asia market issue and the direct effects were
concentrated in those specific regional markets. To stop the spread of the
virus, the Chinese government imposed heavy restrictions on the city of
Wuhan on January 23, 2020 and then Hubei Province in its entirety on
January 27, 2020. From that point on, many provinces and major cities
like Beijing and Shanghai around China declared level 1 health emergen-
cies and neighborhoods put up restrictions of movement and travel (Caixin
2020). As of February 12, 2020, there were nearly 45,000 global cases
that have been confirmed and global fatalities have reached 1116, accord-
ing to Johns Hopkins University CSSE (2020).
vii
viii PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE…
The onset of the virus was in the middle of the Chinese New Year holi-
day which normally sees a large increase in travel as over 300 million peo-
ple move around the country and abroad to visit family and for leisure
(China Daily 2020). These quickly implemented restrictions of movement
also prevented some people from returning to their normal abode after
visiting their familial hometowns or taking vacations during the extended
New Year holiday. In addition, all tourist attractions and many public
spaces were shut down to prevent further outbreak and to contain the risk
of further spreading of COVID-19.
For the economy, and in turn the aviation industry, implications of the
outbreak quickly reached far and wide. Businesses and production facilities
were shut down due to either preventative measures, lack of workers or
disruptions in supply chain inputs. This not only heavily impacted the
Chinese economy, but it also affected other countries and the global econ-
omy as supply chains are integrated with the drivers of air travel supply
and demand.
The current aviation production manufacturers located in China are
the Airbus A320 and A330 completion facilities in Tianjin and the Boeing
737 MAX completion facility in Zhoushan in Zhejiang Province. Even
during normal times, production is slow the New Year holiday but the
virus has affected the normal ramp up back to full operations afterwards.
Airbus’ Tianjin completion facilities supplying about 10% of aircraft were
temporarily shut down and did not restart until February 11, 2020 (Alcock
2020) and were able to fully resume pre-virus production levels on March
25, 2020 (The Paper 2020). Meanwhile, Boeing’s 737 MAX completion
Zhoushan facilities were already shut prior to the outbreak due to the
grounding of the 737 MAX aircraft production.
Initial Responses to Covid-19: Phase I Virus Life

Cycle (Impact on China and Interlinked Countries
and Industries)
Initially, at the beginning of the response, economists slashed their forecast

of China’s 2020 GDP growth to as low as 4.5% from the ~6.0% previously.
This is despite the People’s Bank of China quickly initiating a large fiscal and
monetary stimulus along with other government aid packages to boost the
economy. The effects of the virus already rattled investors with China’s main
stock indices plunging more than 8% in the initial response on the reopen-
ing of the exchange following a 10-day break on February 3, 2020.
PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE… ix
On the demand side, the extent of the virus’ effects first became appar-
ent in late January when Chinese airlines’ domestic traffic fell 6.8% in
January, reflecting the impact of flight cancellations and travel restrictions
related to COVID-19. On an on-going basis, China’s Ministry of
Transport reported an 80% annualized fall in volumes in late January and
early February. Airlines took out capacity by 0.2% and passenger load fac-
tor plunged 5.4 percentage points to 76.7% (International Air Transport
Association 2020a).
International capacity was also initially slashed as the Chinese Big 3 air-
lines (Air China, China Eastern and China Southern) slashed international
capacity between 80% and 90% in mid-February. These figures were also
widely reflected by international airlines serving the Chinese market as well.
This international squeeze became more acute as the domestic markets also
fell, with 60% of Chinese airlines’ fleets being grounded in mid-February.
Domestic traffic fell 46.1% in February compared to the previous year (Civil
Aviation Administration of China 2020). The Chinese aviation industry is
expected to lose at least US$12.8 billion in revenue as a result of flight can-
cellations and weak demand among travelers in February according to the
earliest estimates by International Air Transport Association on February 20,
2020 (“IATA”) (International Air Transport Association 2020b).
With losses estimated to be around $3 billion in February alone, HNA
Group was in trouble even before the crisis with Beijing already promising
bail-outs to make up for their losses (The Economist 2020). They subse-
quently became the second implied airline causality of the virus stricken
environment after Flybe of the UK. The control of the firm effectively
changed to the newly appointed senior managers by the Hainan Province
(HNA 2020).
The losses of Chinese-based traffic reverberated throughout Asia with
IATA announcing a potential 13% full-year loss of passenger demand for
carriers in the Asia-Pacific region which translates into a $27.8 billion rev-
enue loss in Asia-Pacific for the full year 2020 (International Air Transport
Association 2020c). Hong Kong’s airlines took the brunt of the mainland
shutdown and saw more than 75% drop in passenger movement. The cor-
responding figures for South Korea are 46%, Taiwan 38%, Thailand 33%
and Singapore 32.8% in February (Heng and Yong 2020).
Global airlines that were exposed to routes with China directly or indi-
rectly through transit, tourist or business traffic were also affected but not
as severely at first. The earliest estimates by IATA were announced on
February 20, 2020, estimating airline revenue losses in China at $12.8
x PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE…
billion, Asia at $27.8 billion and globally at $29.3 billion. This was the
first of four revisions by IATA as the estimates became direr with the rami-
fications ever more apparent and global.
A side development which normally has a significant effect on aviation
is oil prices. In mid-March, Saudi Arabia, the world’s largest oil exporter,
announced its intention to significantly raise the production of oil as well
as lower the official selling price starting April 2020. This, in turn, caused
oil prices to plummet as it foreshadowed the flood of supply coming into
the market. Oil prices fell around 24%, the biggest weekly decline since
December 2008 and also represented a 48% fall from the peak in early
January, the start of the COVID-19 virus effects.
Despite the lower oil costs, no airline is celebrating these reduced costs.
First, lower oil prices are more apparently reflected in the operations when
there is higher utilization and oil is consumed. Second, many airlines had
oil hedges utilizing instruments such as swaps and options in place, which
were meant to lock in the price of the oil for the quantity they expected to
be consumed. These airlines had to mark to market the losses on the
hedges as the oil prices fell from the referenced price. This also meant that
as less oil was consumed, the hedges did not serve their function to coun-
ter the price of the oil used but rather became a speculative instrument
(Fig. 1).
$85.0
Brent Crude Oil Prices and Futures, US $ per Barrel
$80.0
$75.0
$70.0
Early-Jan futures curve
$65.0 (2020 ave. $63/barrel)
$60.0
$55.0
End-Feb futures curve
$50.0 (2020 ave. $50/barrel)
$45.0
$40.0
2017 2018 2019 2020 2021
Fig. 1 Fall in oil prices. (Source: Bloomberg 2020)

PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE… xi
Current Situation: Phase II Virus Life Cycle (More

Severe Global Impact)
After the initial alarm in China and Asia, the infection rates in Europe and
then the US reached significant numbers. Many governments have closed
borders and restricted movement inside countries by instituting manda-
tory or recommended social distancing programs and even more stringent
lockdown policies to stop the spread of the virus. Where borders are not
actually closed, governments have implemented many restrictions on their
borders, limiting international movement. Even with these measures, the
virus infection rates have continued to spread. This has resulted in all air-
lines grounding a large portion of their capacity and heavily reducing
scheduled flights.
The stock markets responded with aggressively downward movement
since the start of the year. The lessor index is down 65.4% and the airline
index is down 59.1% while the S&P 500 and MSCI World benchmarks are
down 13.9% and 15.7%, respectively, representing the changes from the
beginning of the year to April 24th, 2020 (Fig. 2).
As the virus became more widespread and the impacts more apparent,
IATA issued its second revised loss figures on March 5, 2020, which esti-
mated 2020 global airline revenue losses for the passenger business of
between $63 billion (in a scenario where COVID-19 is contained in cur-
rent markets with over 100 cases as of March 2) and $113 billion (in a
scenario with a broader spread of COVID-19). Asia Pacific airline revenue
losses were increased by 69.1% in the limited spread scenario with addi-
tional losses of 21.9% for the more extensive spread scenario (International
Air Transport Association 2020d).
These estimates were subsequently updated on March 23, 2020, when
the global revenue losses were estimated at $252 billion (losses increased
by 123.0%) comprising of $88 billion revenue losses in Asia Pacific, $76
billion revenue losses in Europe, and $50 billion revenue losses in North
America and the remaining amount from rest of the world. Asia Pacific
region losses were further increased by 53.6% (Fig. 3).
On April 14, IATA issued the fourth estimate with global airline reve-
nue losses at $314 billion (losses increased by 24.6%) comprising of $113
billion revenue losses in Asia Pacific, $89 billion revenue losses in Europe,
and $64 billion revenue losses in North America and the remainder from
the rest of the world. Asia Pacific losses were further increased by 28.4%
(Fig. 3).
xii PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE…
120
January 1st, 2020 = 100
100
80
60
40
20
Lessors Index Airlines Index S&P 500 MSCI World
Fig. 2 Airlines and lessors indexes stock performance compared with MSCI
World and S&P 500 Benchmarks since Jan 1, 2020. (Source: Bloomberg 2020.
Note: Lessor Index = Average of Amedeo Air Four Plus; Aerocentury Corporation;
AerCap; Aircastle; ALAFCO Aviation; Air Lease Corporation; Avation; AviaAM
Leasing; Avolon; BOC Aviation; China Aviation Leasing Group; CDB Leasing;
DP Aircraft 1; Doric Nimrod Air One; Doric Nimrod Air Two; Doric Nimrod Air
Three; FLY Leasing; Genesis Lease; and Willis Lease Finance Corporation. Airlines
Index = S&P 500 Airlines Total Return Index. See more details in Chap. 6)
March 5th
Feb. 20th Limited Spread Extensive Spread March 23rd April 14th
$0.0 1.69x
-$27.8 -$47.0 1.22x
-$57.3 1.54x
-$50.0 -$29.3 -$88.0 1.28x -$113.0
1.15x -$19.6
-$21.1
Revenue (billion USD)
-$100.0 -$63 -$43.9

1.79x -$50.0
-$150.0 -$113 -$64.0
-$76.0
-$200.0 2.23x
China: -$12.8 China: -$22.2 -$89.0
-$250.0
-$252
1.25x
-$300.0
-$314
-$350.0
Asia-Pacific North America Europe Middle East Africa Latin America
Fig. 3 IATA estimated COVID-19 impact on 2020 Airline revenue. (Source:

International Air Transport Association 2020c, 2020d, 2020e, 2020f. Note: Asia-
Pacific includes revenue losses from China)
PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE… xiii
Many airlines in the US and Europe also heavily reduced their capacity.
American Airlines said it would slash international flying by 70% until May.
International Airlines Group, the owner of British Airways and other air-
lines, said it was cutting capacity by 75% in April and May. Lufthansa
subsidiary Austrian Airlines indefinitely halted all flight operations while
the overall group reduced long-haul capacity by 90% and short-haul routes
by 80%. With these reductions on a sustained basis, airline businesses are
not sustainable. Even in normal times, a rough guide is that around 70%
load factor per aircraft is required to sustain breakeven profitability.
IATA and other industry groups and associations are advocating for
country support for the industry. The US airlines received $58 billion in
aid comprising of $29 billion in payroll grants and $29 billion in loans
from the $2 trillion stimulus bill, Coronavirus Aid, Relief, and Economic
Security Act, which was signed into law on March 27, 2020 (United States
Senate 2020). This economic stimulus bill was more than double the
amount of the previous highest stimulus which came during the financial
crisis and is now the largest in the history of the US. It is also the largest
percentage of global relief by countries to airlines thus far.
Asia has thus far committed state support of $12.7 billion making up
15.1% of global committed state support totaling $84.6 billion. On an
uncommitted state support basis, Asia has thus far $2.7 billion committed
state support comprising of 10.6% of global uncommitted state support
amounting to $25.4 billion. Combined, both committed and uncommit-
ted support, Asia represents 14.0% or $15.4 billion of state support based
on an overall global state support amounting to $110.1 billion (Figs. 4–6).
China, on March 4, initiated a funding scheme to incentivize the resto-
ration and ongoing performance of flight services, including a CNY0.0176
per seat kilometer reward for flights on routes served by multiple airlines,
and a CNY0.0528 per seat kilometer reward for a route served by a sole
operator. The incentives are available to both domestic and international
airlines serving these routes and are given on a cash grant basis through
June 30 (Civil Aviation Administration of China & Ministry of Finance of
the People’s Republic of China 2020) (Figs. 4–6).
In China, some initial signs of the air traffic bounce back have already
started to occur with strong demand from vacationers and visitors to their
ancestral villages who were initially stranded by the restrictions. Following
this initial increase, demand has subsequently slightly weakened and
changes continue in a yo-yo manner. Domestic and international sched-
uled flight traffic was off the most at −70% year over year (“YoY”) on the
xiv PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE…
Europe 16.1%, (USD Millions)

$13,597.5 million UK $740.0
France $7,600.0
Sweden $499.0
Denmark $170.8
European Air Navigation Service Providers (ANSPs) $1,190.0
Asia Pacific Finland $645.0
15.1%, Germany $2,200.0
Iceland $0.7
$12,737.6 million
Norway $552.0
Singapore $7,747.0
South Korea $1,528.0
Hong Kong $627.5
New Zealand $524.3
Taiwan $1,600.0
Somoa $0.4
Australia $710.5
Canada $200.0
US $58,000.0
Chile $0.0
Senegal $74.6
Total $84,609.7
North America 68.8%,
$58,200.0 million
Total: $84.6 billion
Fig. 4 Confirmed state support for Airlines as of April 26, 2020
Asia Pacific 10.6%, South America 7.5%,

$2,691 million $1,900 million
(USD Millions)
Brazil $1,900.0
UK $620.0
Italy $764.0
Estonia $21.5
Germany $9,000.0
Belgian $315.0
Austria $870.0
Netherlands $3,300.0
Switzerland $5,140.0
Latvia $164.3
Russia $308.0
Thailand $491.0
Malaysia $2,200.0
Israel $350.0
Total $25,443.8
Europe 80.6%,
$20,502.8 million
Fig. 5 Unconfirmed state support for Airlines as of April 26, 2020

PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE… xv
UK $1,360.0
Middle East 0.3%, Europe 31%, France $7,600.0
$350 million $34,100.3 million Sweden $499.0
Denmark $170.8
European Air Navigation Service Providers (ANSPs) $1,190.0
Finland $645.0
Germany $11,200.0
Iceland $0.7
Norway $552.0
Italy $764.0
Estonia $21.5
Belgian $315.0
Austria $870.0
Netherlands $3,300.0
Switzerland $5,140.0
Latvia $164.3
Russia $308.0
Singapore $7,747.0
South Korea $1,528.0
Hong Kong $627.5
New Zealand $524.3
Taiwan $1,600.0
Australia $710.5
Thailand $491.0
Somoa $0.4
Malaysia $2,200.0
Chile $0.0
Brazil $1,900.0
Asia Pacific 14.0%, Canada $200.0
$15,428.6 million US $58,000.0
Senegal $74.6
North America 52.9%, Israel $350.0
South America 1.7%,
$58,2000 million Total $110,053.5
$1,900 million
Fig. 6 Confirmed and unconfirmed state support for Airlines as of April 26, 2020
week of February 17 and subsequently bounced back with the traffic on

the week of March 23 being −36% YoY. From that date, the figures
regressed and further weakened with the week of April 20 figures at −42%
YoY (OAG 2020). The trend of global traffic and the other countries spe-
cifically has been steadily downward as the crisis has gone on (Fig. 7).
For domestic scheduled flights in China, the market had a low in sched-
uled flight traffic at −70% YoY in the week of February 17 and subsequent
high on the week of March 23 at −31% YoY. The current figures week of
April 20 are −36% YoY (OAG 2020). Volatility in demand is expected to
continue as the economy finds its footing and opens up more. Other than
South Korea with a current −24% YoY change figure and Malaysia with
−46% YoY for the week of April 20, the rest of the world and specific coun-
tries’ domestic scheduled flights are at their lowest point since the begin-
ning of January in terms of YoY change figures (Fig. 8).
For international scheduled flights in China, the market has steadily
worsened with the current −95% YoY on the week of April 20 in scheduled
flight traffic. This is the same for other all major countries and globally as
well with YoY change figures for the week of April 20 at −90%. These
xvi PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE…
20%
0%
-20%
Weekly YoY % Change
-40%
-60%
-80%
-100%
-120%
All Mainland China South Korea Japan Hong Kong SAR Australia
Singapore Indonesia Thailand Philippines Malaysia India
U.S. France Germany UK. Italy Spain
Fig. 7 International and domestic scheduled flights YoY changes by country.

(Source: OAG 2020)
figures are not anticipated to rebound until border restrictions start to be

lifted (Fig. 9).
Severe Acute Respiratory Syndrome (“SARS”)

2002/2003
Many comparisons have been made to the most recent global outbreak,
Severe Acute Respiratory Syndrome (“SARS”). SARS is a coronavirus that
first appeared in China and killed nearly 800 people in 2002 and 2003 and
this outbreak initially served as a reference point for the economic and
PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE… xvii
20%
0%
-20%
Weekly YoY % Change
-40%
-60%
-80%
-100%
-120%
All Mainland China South Korea Japan Hong Kong SAR

Australia Singapore Indonesia Thailand Philippines
Malaysia India U.S. France Germany
UK. Italy Spain
Fig. 8 Domestic scheduled flights YoY changes by country. (Source: OAG 2020)
cross-border impacts. As the current virus became a global pandemic, this

would become weaker as a direct historical case comparison.
SARS contributed to an estimated 3 percentage point decrease in
China’s real GDP growth of 5% in its worst-affected quarter. Historically,
the Chinese economy was more driven by investment and trade but has
gradually rebalanced to a model led by domestic consumption and ser-
vices. During the 15 years following SARS, the share of the service sector
compared to China’s total output rose to 52% from 40%, according to the
Asian Development Bank (2020).
During the SARS outbreak in 2003, foreign direct investment (“FDI”)
in China actually rose from March to June, but then dropped 57% to
approximately $32 million in July, the lowest monthly tally for the year.
The trend quickly reversed, however, once the outbreak was brought
under control. FDI inflows to China gradually picked up from December
2003 and quickly exceeded the pre-outbreak monthly high of $55 million
at the beginning of 2004, according to the Asian Development
Bank (2020).
xviii PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE…
40%
20%
0%
Weekly YoY % Change
-20%
-40%
-60%
-80%
-100%
-120%
All Mainland China South Korea Japan Hong Kong SAR Australia
Singapore Indonesia Thailand Philippines Malaysia India
U.S. France Germany UK. Italy Spain
Fig. 9 International scheduled flights YoY changes by country. (Source:

OAG 2020)
Globally, SARS cost airlines more than $10 billion in revenue and
caused a loss of 39 billion revenue passenger kilometers (“RPK”). In
North America, the loss to airlines was around $1 billion and RPK dropped
12.8 billion, or 3.7% of total international traffic, according to the
International Air Transport Association (2003). In May 2003, there was a
21% YoY drop in global passenger traffic and overall capacity, expressed as
available seat kilometers (“ASKs”), dropped 12.6% YoY. The global load
factor showed signs of improvement, rising to 64.6% from 63.5% recorded
one month prior in April. It is interesting to note that North American
airlines were also hit hard during SARS but the effects were minimal for
European airlines.
In terms of connectivity during SARS, airlines worldwide saw a decline
in traffic with those operating out of the Asia-Pacific region losing as much
as 8% on an annual basis. Asia saw similar decreased results as in China but
not as severe. At the height of the outbreak (May 2003), monthly RPKs
PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE… xix
Table 1 Global Airline performance by region

May 2003(Percentage change over Year to date results(Jan–May 2003
May 2002) over Jan–May 2002)
Carriers RPK% ASK% FTK% ATK% RPK% ASK% FTK% ATK%
Europe −5.5 −4.1 1.4 −2.8 −1.1 2.0 3.3 1.8

North America −20.6 −19.0 −5.9 −10.7 −10.8 −6.0 11.4 −2.2
South America 2.0 1.9 2.8 1.6 9.1 4.9 12.0 6.4
Asia Pacific −50.8 −30.7 0.9 −16.0 −11.9 2.3 10.0 6.9
Middle East −1.6 −11.6 20.9 15.6 4.6 13.4 17.9 15.8
Africa −0.1 7.7 15.0 8.5 0.2 6.3 11.1 8.4
Overall −21.0 −12.6 3.0 −7.7 −6.4 1.2 8.7 3.4
Source: International Air Transport Association 2003

Note: RPK = Revenue Passenger Kilometers, ASK = Available Seat Kilometers, FTK = Freight Ton
Kilometers, ATK = Available Ton Kilometers
of Asia-Pacific airlines were 50.8% lower than their pre-crisis levels (see
Table 1). Overall SARS in 2003 cost Asia-Pacific airlines $6 billion of rev-
enues and annual RPKs losses of 8% (International Air Transport
Association 2020b). This translates to a 50.8% YoY drop in passenger traf-
fic in RPK terms. June 2003 was the turning point when the YoY decrease
reversed (35.8% YoY drop in passenger traffic) and capacity cuts were
−27.2% (International Air Transport Association 2003) (Fig. 10).
In May 2003, passenger traffic in China dropped by 78% YoY while in
the second quarter it dropped by 48.9% YoY (Civil Aviation Administration
of China 2004). The Chinese major airlines showed similar changes but
recovered from June 2003 onward, which resulted in a 1.9% YoY growth
for the entire year (Civil Aviation Administration of China 2004).
What are the differences between this time and SARS? The current
COVID-19 outbreak has occurred in a different environment. China’s
current highly indebted economy had started to show signs of weakness in
2019, as it marked the slowest GDP expansion in nearly 30 years, standing
at 6.1%. These global uncertainties have already dampened Chinese out-
bound investment by 9.8% to $118 billion in 2019 (EY 2020).
Today, the Chinese economy accounts for 15% of global GDP in 2019,
compared to 4% in 2003. As the world’s largest trading nation, China
represents 11.4% of global goods trade. This economic slowdown creates
xx PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE…
120 SARS (2003) Avian Flu (2005) Avian Flu (2003)

North America RPKs to, from and Asia Pacifc Airlines RPKs
Airlines RPKs within South-East Asia
100
Index (crisis month=100)
80
MERS Flu (2015)
RPKs to, from and within
SARS (2003)
60 South Korea
Asia Pacifc Airlines RPKs
40
SARS (2003)
20 China Domestic RPKs
0
-3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12
Months before and after the start of the crisis
Fig. 10 Impact of past disease outbreaks on aviation. (Source: International Air

Transport Association 2020b)
more drag in the face of more uncertain global growth, while the domestic
economy continues to be dampened by declining consumer consumption
which is now a much higher portion of GDP. China is now the source of
38% of global household consumption growth from 2010 to 2016,
according to the World Bank (McKinsey & Company 2019).
The Chinese economy is also more integrated into the global economy
in 2019 than it was in 2003. Increased global connectivity has made the
Chinese tourism industry the main engine of growth for the global travel
market in recent years. During SARS, China’s tourist volume was merely
7 million, less than 10% compared to 2019 figures (Goldman Sachs 2015).
Meanwhile, the number of inbound visitors from the U.S. was around
160,000, compared to 3 million in 2018 (Statista 2020). The UN World
Tourism Organization estimated that Chinese tourists spent $277.3 bil-
lion overseas in 2018, up from around $10 billion in 2000 (RTE 2020)
and are spending more on average than any other nationality on their
trips, around $1850 per person per year (Smith 2019). China accounts for
12% of total worldwide available seat kilometers versus only 5% 15 years
ago (RTE 2020). International travel in and out of China is now more
than 10 times what it was in 2003, with 150 million foreign trips in 2018
(RTE 2020).
PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE… xxi
Immigration curbs and flight cancellations from COVID-19 will have a

significant impact on global growth. More than 60 countries have some
form of restrictions or quarantine protocols. The regions most exposed to
China airline traffic by available seat kilometers are Asia’s carriers with
30%, while North America is at 4%.
The SARS epidemic is the latest example of a major health outbreak.
While there were more parallels in the beginning to the current COVID-19
outbreak given its similarities in geographies, this is no longer as relevant
as a historical data point given the current global effects of the virus. SARS
only lasted for about 4 to 6 months. One positive outcome in the after-
math of the SARS epidemic was that it was only a temporary exogenous
shock to aviation, the economy and cross-border investments. It did not
have long-lasting impacts and the recovery was relatively fast with the total
outbound FDI recording a meteoric rise from $3 billion to $118 billion
between 2002 and 2019.
Great Financial Crisis (“GFC”) 2008/2009

Another historical example of an exogenous shock that is compared with
COVID-19 is the Great Financial Crisis (“GFC”) in 2008/2009. The
GFC had large international economic impacts and was triggered by the
collapse of Lehman Brothers investment bank in September 2008. This
event reverberated around the world as governments and policymakers
raced to secure the confidence in the global financial markets.
By September 2008, passenger travel demand had turned negative and
by December, international RPKs were down 4.6% YoY. This decrease in
business confidence caused business travel to fall even more and by
December 2008, premium traffic was down by 13% YoY. Full-service car-
riers geared towards premium level customers were hit especially hard and
resulted in an overall net loss of $10.4 billion for the whole year
(International Air Transport Association 2009). From the early 2008 peak
to the early 2009 trough, premium travel fell 25% while economy travel
fell relatively less at 9% (International Air Transport Association 2010).
From mid-2009, air travel began to turn upward, boosted by the mas-
sive fiscal and monetary stimulus measures taken by governments. By the
end of 2009, premium travel had recovered by 11%, while economy travel
also rebounded 7%. This was accompanied by a reduction in passenger
capacity in international markets of 5% and freight capacity decreasing
10%. For the full year 2009, global airlines’ net losses were $9.9 billion
(International Air Transport Association 2010).
xxii PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE…
In China, the 2008 passenger traffic increased by 3.3% but resulted in

net loss of RMB28 billion (Civil Aviation Administration of China 2009).
Asian airlines had net losses of $3.9 billion in 2008 and $2.7 billion in
2009. From Oct. 2019, RPK YoY growth was 0.9% and by September
2019 YoY growth was 2.1% (CAPA 2009). It is interesting to note that oil
prices also suffered a large decrease along with the global economy. The
oil bubble burst in late July 2008 and oil had fallen to $40 a barrel by the
end of 2008. This was less than half of the price at the start of the year and
represented a decrease of over 70% from the price’s peak in July.
While this is also one of the most recent global economic shocks, it is
not a direct comparison. The causes are man-made, a financial crisis of
confidence while the current COVID-19 is a health related shock. While
the GFC is more global in effect than during SARS, the global effects are
not as significant as COVID-19.
Preliminary Outlook Going Forward: Virus

Lifecycle Phase III (Global Peak and Virus
Regression and Beyond)
Going in time, there are not many direct historical cases that relate directly
to COVID-19. The most recent global shock that has the effects akin to
what is experienced today is the 1973 oil shocks. Like GFC, that was also
a manmade event. In that case, OPEC cartel in 1973 embargoed oil sales
to US, UK, Canada and Netherlands which brought life to a standstill
much akin to today. The most recent widespread global health pandemic
is the 1918 Flu Pandemic. This lasted more than 2 years and infected an
estimated 500 million people of whom 50 million were killed (Center for
Disease Control and Prevention 2019). This did not have much as an
effect on the budding but nascent aviation industry though, as the Wright
brothers’ first flight was just fifteen years before this time in 1903.
Today, as of April 26, 2020, there are over 2.9 million global cases that
have been confirmed and global fatalities have reached more than two
hundred thousand, according to Johns Hopkins University CSSE (2020).
This is clearly a global problem, with infection rates accelerating in Europe,
US and the rest of the world. With the initial outbreak shown in China,
today there are signs of early recovery. Many of the restrictions on the
hardest hit provinces have been lifted; Hubei Province’s lifted restrictions
on March 15 while Wuhan lifted its restrictions on April 8, 2020.
PREFACE: IN THE NEWS TODAY - ON-GOING SIGNIFICANCE… xxiii
This is still an ongoing story that is being played out. There will be
long-lasting impacts and the recovery lag period might be longer than
other recent economic shocks. As with other health pandemics, the first
priority is to control the spread of the virus and then keep an eye out for
recovery. The quicker the virus is controlled, the quicker people can return
to their normal routines and start the recovery process.
Shanghai, China David Yu, PhD. CFA,

April 26, 2020 Senior ISTAT Certified Aviation Appraiser
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Acknowledgments
This book is the culmination of many years of work and experience. There
are many people I would like to acknowledge in getting this book com-
pleted. First, I would like to express my gratitude to my Ph.D. thesis advi-
sors, Prof. Xiaoquan Liu and Prof. Weimin Liu who believed in my vision
and provided their words of encouragement throughout the Ph.D. jour-
ney which is the basis of this work. I would like to thank my close friends,
Prof. Steve Hanke and Tasos Michael, who have provided many years of
mentorship and friendship. I am also eternally grateful to the many people
who have provided their comments, suggestions or good debate as we all
continue to further the collective knowledge base. The list is too numer-
ous but a subset of these individuals include Cherry Zhang, Rodrigo
Zeidan, Brian Healy, Nils Hallerstrom, Stuart Hatcher, Phil Seymour,
Owen Geach, Gueric Dechavanne, Killian Croke, Bryson Monteleone,
Graham Deitz, Neil Whitehorse, Peter Morrell, Bijan Vasigh, Sunder
Raghavan, Vitaly Guzhva, Tom Conlon and Lili Zhou. I would also like
to thank the companies and their managers who provided the data which
form the basis of parts of these studies, and without which many of the
analyses would not have been possible. Particularly, these include the IBA
Group, Collateral Verifications LLC and BK Associates, Inc. Lastly, I
would like to also thank all of the numerous student research assistants
who I have mentored and worked with over the years, especially Franklin
Xu and Handong Xu who have gone above and beyond. I wish them all
the best in their young, budding careers.
xxvii
Contents
1 Introduction 1
2 Background Concepts and Definitions 7
3 Global Aircraft Leasing Industry Characteristics 33
4 China Aircraft Leasing Industry Characteristics 97
5 Empirical Aircraft Asset Pricing135
6 Comparative Examination Between the Aircraft and Other

Asset Classes207
7 Conclusion265
Appendix273
Bibliography313
Index327
xxix
About the Author
David Yu, PhD, CFA, Senior ISTAT Certified Aviation Appraiser Prof.
David Yu is a finance professor at New York University Shanghai and Stern
School as well as Chairman of Asia Aviation Valuation Advisors (CAVA)
and Asia Aviation Valuation Advisors (AAVA). Globally, he is one of about
20 Senior ISTAT (International Society of Transport Aircraft Trading)
Certified Aviation Appraiser and is the only one in North Asia & China.
He is a recognized expert in cross border finance, investing and valuation
and is a frequently invited speaker at conferences. His op-eds and analysis
articles have been published by Forbes, Nikkei Asian Review, Airline
Economics, Business Traveller, Airfinance Journal, among others. He is
also regularly interviewed by various top global TV, radio and print media
as a business and economics commentator. He is an advisor and is on the
board of directors of several companies and investment funds.
Prof. Yu is the External Thought Leader for Aviation Finance and
Leasing for KPMG Ireland. He is a Director of Inception Aviation, a fam-
ily investment office and previously was the Managing Director and Head
of Asia for IBA Group, a UK based aviation valuation advisory firm. He
was the China Chief Representative, VP Asia (Head of Asia) and Executive
Committee member at Libra Group, a large Greek family investment con-
glomerate, where he was responsible for all of Libra’s Asian interests
including aviation, shipping, energy, hotels and real estate. Prior to Libra,
Prof. Yu worked in investment banking with Bank of America Merrill
Lynch’s Global Industries Group, where he focused on M&A, debt and
equity transactions in transportation, aerospace and defense, and diversi-
fied industries.
xxxi
xxxii ABOUT THE AUTHOR
Prof. Yu is a CFA Charter holder and has a double major B.A. (full
honors) and an M.S. from Johns Hopkins University, where he is a Fellow
of the Applied Economics Institute. He has also studied at Peking
University and National University of Singapore. He has an M.B.A. from
New York University’s Stern School of Business and a Ph.D. in Finance
from University of Nottingham Business School.
List of Figures
Fig. 2.1 IAS 17 9

Fig. 2.2 Operating lease cash flow structure diagram 13
Fig. 3.1 Annual world traffic (trillion RPK) and external shocks 40
Fig. 3.2 World airline RPK growth and world GDP growth: 1971 to
2017F42
Fig. 3.3 Global traffic and nominal GDP correlation 42
Fig. 3.4 Relationship between passenger traffic and real GDP evolving
over time 43
Fig. 3.5 GDP growth by country income 44
Fig. 3.6 Aircraft and airline market cycle 45
Fig. 3.7 World airline capital expenditure as a percentage of operating
cash flow: 1979 to 2016E 46
Fig. 3.8 USD swap and LIBOR rates 46
Fig. 3.9 World economic growth and airline profit
margins: 1970 to 2011 47
Fig. 3.10 EBIT or operating margins and global GDP growth 48
Fig. 3.11 Jet fuel prices 49
Fig. 3.12 Airline (passenger) yield 51
Fig. 3.13 Growth of the world’s middle class 51
Fig. 3.14 Growth of urbanization 52
Fig. 3.15 Growth of bilateral air services agreements in the world 53
Fig. 3.16 OEM orders, cancellations, and backlog activity 55
Fig. 3.17 Airbus and Boeing delivery activity 56
Fig. 3.18 Brent crude oil and OEM gross orders:
May 2006–October 2016 57
Fig. 3.19 World aircraft deliveries and retirements as percentage of fleet
and fleet growth: 1971 to 2017F 58
xxxiii
xxxiv List of Figures
Fig. 3.20 Aircraft retirements: 1970 to 2015 59

Fig. 3.21 Average age of retirements in 2017 by aircraft class 59
Fig. 3.22 Share of Boeing delivery funding by capital source 61
Fig. 3.23 Percentage of Boeing deliveries funded by US EXIM 62
Fig. 3.24 Aircraft financing environment 63
Fig. 3.25 Growth of global operating lease market share 67
Fig. 3.26 New passenger narrowbody operating leases: 2015–2017 67
Fig. 3.27 New passenger narrowbody operating leases by type:
2015–201768
Fig. 3.28 New passenger widebody operating leases: 2015–2017 68
Fig. 3.29 New passenger widebody operating leases by type 2015–2017 69
Fig. 3.30 Passenger narrowbody secondary trading volume: 2015–2017 70
Fig. 3.31 Passenger narrowbody secondary trading volumes by type
2015–201770
Fig. 3.32 Passenger widebody secondary trading volumes 2015–2017 71
Fig. 3.33 Passenger widebody secondary trading volumes by type:
2015–201771
Fig. 3.34 USD versus various currencies 78
Fig. 3.35 Boeing global fleet: 2015–2035 78
Fig. 3.36 Boeing projected deliveries and market value
by type: 2016–2035 79
Fig. 3.37 Boeing projected deliveries and market value by region:
2016–203580
Fig. 3.38 Airbus global fleet projections: 2016–2035 81
Fig. 3.39 Boeing projected traffic by region: 2015–2035 81
Fig. 3.40 Airbus projected annual traffic per leg flow by region:
2015–2035 (billion RPK) 82
Fig. 3.41 M&A volume and value by segmentation 85
Fig. 3.42 China outbound M&A volume and value trends 86
Fig. 3.43 China outbound M&A volume and value by region 1H 2014
and 2015 87
Fig. 4.1 Free trade zones and jurisdictions in China 103
Fig. 4.2 China GDP and GDP per capita 105
Fig. 4.3 China private consumption growth 105
Fig. 4.4 Monthly China air domestic and international passenger
numbers111
Fig. 4.5 Monthly China air domestic and international RPKs 112
Fig. 4.6 Airbus’ China regional projected traffic growth over 20 years
(2016–2035 CAGR) 113
Fig. 4.7 Airbus-projected top traffic flows in 2035 113
Fig. 4.8 Boeing-projected top traffic flows in 2035 114
Fig. 4.9 Projected traffic growth by region (2015–2035) 115
List of Figures xxxv
Fig. 4.10 China air and rail passengers market share 116
Fig. 4.11 China air and rail passengers traveled distance market share 116
Fig. 4.12 China’s economic development 117
Fig. 4.13 China airport construction—actual and targeted 119
Fig. 4.14 China leasing company assets 126
Fig. 4.15 Current China fleet and future projections by type 128
Fig. 4.16 China fleet and Boeing future projections segmentation 129
Fig. 4.17 Current Airbus China 20-year projections 129
Fig. 5.1 Boeing mean list price growth rates 141
Fig. 5.2 Airbus mean list price growth rates 142
Fig. 5.3 Scatter plot of constant dollar resale prices as a percentage of
new price for jet aircraft collected: 1974–1998 143
Fig. 5.4 Relative constant dollar ascend CMV for earliest and last
vintage of MD-83 146
Fig. 5.5 Value change from maintenance consumption
and refurbishment 149
Fig. 5.6 Single aisle aircraft classifications by type 153
Fig. 5.7 Twin aisle aircraft classifications by type 154
Fig. 5.8 Aircraft types included in the study 155
Fig. 5.9 Index 1 MoM—6.1996–6.2017 170
Fig. 5.10 Index 2 MoM—6.1996–6.2017 179
Fig. 5.11 Index 3 MoM—6.1996–6.2017 180
Fig. 5.12 Index 4 MoM—6.1996–6.2017 181
Fig. 5.13 Index 5 MoM—6.1996–6.2017 182
Fig. 5.14 Index 1 MoM—6.1996–6.2007 183
Fig. 5.15 Index 2 MoM—6.1996–6.2007 184
Fig. 5.16 Index 3 MoM—6.1996–6.2007 185
Fig. 5.17 Index 4 MoM—6.1996–6.2007 186
Fig. 5.18 Index 5 MoM—6.1996–6.2007 187
Fig. 5.19 Index 1 MoM—6.2007–6.2010 188
Fig. 5.20 Index 2 MoM—6.2007–6.2010 189
Fig. 5.21 Index 3 MoM—6.2007–6.2010 190
Fig. 5.22 Index 4 MoM—6.2007–6.2010 191
Fig. 5.23 Index 5 MoM—6.2007–6.2010 192
Fig. 5.24 Index 1 MoM—6.2010–6.2017 193
Fig. 5.25 Index 2 MoM—6.2010–6.2017 194
Fig. 5.26 Index 3 MoM—6.2010–6.2017 195
Fig. 5.27 Index 4 MoM—6.2010–6.2017 196
Fig. 5.28 Index 5 MoM—6.2010–6.2017 197
Fig. 6.1 Ten-year 2006–2016 sharpe ratios of real assets
subclasses vs. stocks and bonds 211
xxxvi List of Figures
Fig. 6.2 Ten-year income and capital appreciation returns of real

assets subclasses 212
Fig. 6.3 Private fundraising breakdown as of August 2016 213
Fig. 6.4 Asset class rankings by alpha (real assets) over four time
segments236
Fig. 6.5 Asset class rankings by alpha (MSCI world) over four time
segments237
Fig. 6.6 Asset class rankings by sharpe ratios over four time segments 238
Fig. 6.7 Risk and return of aircraft and comparative asset classes
time 1–4 239
Fig. 6.8 Aircraft correlation versus covariance with comparative asset
classes time 1—6.1996–6.2017 251
Fig. A.1 Index 1 YoY—6.1996–6.2017 274
Fig. A.2 Index 2 YoY—6.1996–6.2017 275
Fig. A.3 Index 3 YoY—6.1996–6.2017 276
Fig. A.4 Index 4 YoY—6.1996–6.2017 277
Fig. A.5 Index 5 YoY—6.1996–6.2017 278
Fig. A.6 Index 1 YoY—6.1996–6.2007 279
Fig. A.7 Index 2 YoY—6.1996–6.2007 280
Fig. A.8 Index 3 YoY—6.1996–6.2007 281
Fig. A.9 Index 4 YoY—6.1996–6.2007 282
Fig. A.10 Index 5 YoY—6.1996–6.2007 283
Fig. A.11 Index 1 YoY—6.2007–6.2010 284
Fig. A.12 Index 2 YoY—6.2007–6.2010 285
Fig. A.13 Index 3 YoY—6.2007–6.2010 286
Fig. A.14 Index 4 YoY—6.2007–6.2010 287
Fig. A.15 Index 5 YoY—6.2007–6.2010 288
Fig. A.16 Index 1 YoY—6.2010–6.2017 289
Fig. A.17 Index 2 YoY—6.2010–6.2017 290
Fig. A.18 Index 3 YoY—6.2010–6.2017 291
Fig. A.19 Index 4 YoY—6.2010–6.2017 292
Fig. A.20 Index 5 YoY—6.2010–6.2017 293
Fig. A.21 Asset class excess return over risk free rate (US Treasuries
1-3M) over 4 time Segments 294
Fig. A.22 Asset class rankings by Beta (Real Asset) over 4 time segments 295
Fig. A.23 Asset class rankings by Beta (MSCI World) over 4 time segments 296
Fig. A.24 Asset class rankings by standard deviation over 4 time segments 297
Fig. A.25 Aircraft correlation vs. covariance with comparative asset
classes time 2—6.1996–6.2007 298
classes time 3—6.2007–6.2010 299
classes time 4—6.2010–6.2017 300
List of Tables
Table 4.1 China leasing company structures 100

Table 4.2 China urbanization and population figures 107
Table 4.3 China’s airlines long haul network since 2011 111
Table 4.4 Chinese finance leasing segment’s revenue, 2006–2015 125
Table 4.5 Chinese finance leasing company statistics by type in 2015 126
Table 5.1 Value definitions 139
Table 5.2 Various kinds of appraisals 140
Table 5.3 Representative A330-300 historical valuation snapshot as of
December 31, 1999 151
Table 5.4 Index 1–5, time scenarios 1–4 MoM summary statistics 160
Table 5.5 Index 1–5, time scenarios 1–4 YoY summary statistics 165
Table 6.1 2006–2016 correlations among real asset subclasses 211
Table 6.2 Various types of investment vehicles and attributes 213
Table 6.3 Baltic exchange vessel definitions 216
Table 6.4 Time 1–4 comparative indexes’ summary statistics. 228
Table 6.5 Time 1–4 asset class summary correlation statistics 246
Table 6.6 Index 1–5 MoM WA MV summary covariance statistics 248
xxxvii
CHAPTER 1
Introduction
The aircraft and aviation finance industry has seen large growth along with
the overall aviation industry since the 1950s. It has developed from US-
and European-centric origins to a more global and dynamic industry with
many factors affecting the overall development. With regard to global
growth, emerging markets stand out especially those of China and Asia.
There has been tremendous growth in China, which has seen significant
increases in all aspects of aviation financings, cross-border investment, and
leasing activity. Overall, aviation finance is now a significant industry where
global new aircraft deliveries worth well in excess of $126 billion are being
invested annually in addition to investments in the secondary markets
(Boeing Capital Corporation 2017).
Leasing, especially operating leasing, is a major driver in aircraft pricing
and the asset class given it accounts for 43% of all global Airbus and Boeing
and McDonnell Douglas aircraft as of 2017 (Ascend 2017). In Chap. 2,
the core terms, concepts, and differences are defined including operating,
finance leases, and their respective accounting and tax treatments under
US GAAP (Generally Accepted Accounting Principles) and international
accounting standards. The key difference between finance and operating
leases is who retains the risk of ownership and residual value of the asset.
There are further discussions of an example of operating lease cash flow
structure. Why leasing is better compared to owning and its advantages
and disadvantages from different perspectives and from practices are also
discussed. There are upcoming changes and amendments in the
© The Author(s) 2020 1

D. Yu, Aircraft Valuation,
https://doi.org/10.1007/978-981-15-6743-8_1
2 D. YU
accounting standards and treatments to leasing. These along with the

effects on leasing are discussed.
The academic literature for leasing is quite extensive since the start of
the academic discussions in the late 1950s and this is the basis of under-
standing for aircraft leasing and pricing. Academic arguments are based on
the broader buy or lease question with additional variations and forms of
the analysis including effects of leases, debt, and taxation on asset pricing,
the firm, and much broader economic implications. There are gaps in the
argument when it comes to an understanding of the driving factors deter-
mining aircraft pricing and leasing especially where it relates to character-
istics of the global market and its segments. These characteristics describe
the numerous drivers of the aircraft market and its effects on pricing.
While numerous articles focus on smaller sections, this chapter extends the
literature and ties together these different arguments.
While there are some early disagreements on theory and empirical
investigations, eventually a general consensus is reached on the lease ver-
sus buy question, of which the effects of tax- and other non-tax-based
influences are the main drivers, as shown by a long progression of article
arguments (Wyman 1973; Lewellen et al. 1976; Roenfeldt and Osteryoung
1973; etc.). The other line of conversation is whether leasing and debt are
complements or substitutes. While there are empirical findings supporting
both, the latest papers show that they are more partial complements as
there are circumstances that favor leasing (Bowman 1980; Ang and
Peterson 1984; Finucane 1988; Lewis and Schallheim 1992; Yan 2006).
While leasing is viewed initially as finance leases, there is a later trend to
address it through the operating leasing context but at times the term is
more ambiguously defined.
Asymmetric information has effects on leasing through tax differences
and residual value knowledge (Krahan and Meran 1987; Lease et al. 1990;
Edwards and Mayer 1991; Graham et al. 1998). Also, asymmetric infor-
mation costs drive preference to leasing and this preference for leasing
occurs if companies have better ratings and pay more dividends (Sharpe
and Nguyen 1995). Also, the sale and leasebacks case is tax benefit driven
and a method for companies to raise capital. Studies show that there are
abnormally positive returns and this is due to the lowered tax expectation
created by sale and leasebacks (SLBs) (Slovin et al. 1990; Handa 1991;
Ezzell and Vora 2001). Operating lease SLB also supports the notion of
expanded credit capacity (Schallheim et al. 2013).
Non-tax incentives for leasing are also investigated such as contractual
provisions, increasing the firm’s debt capacity, managing credit ratings,
1 INTRODUCTION 3
and bankruptcy costs (Smith and Wakeman 1985; Vasigh et al. 2014;
Eisfeldt and Rampini 2008; Lim et al. 2017; Krishnan and Moyer 1994).
Real options and mathematical programming techniques are used to
address different facets of leases and valuation. These include investigating
residual value guarantees, asymmetry relationships, and valuation of oper-
ating leases (Schallheim and McConnell 1985; Sharpe and Nguyen 1995).
There have been extensions of valuation methods for lease contracts and
aircraft fleet decision-making (Stonier 1998, 1999, 2001; Bellalah et al.
2002; Clarke et al. 2003; etc.). Utilizing mathematical programming
methods, airline decision-making in regard to buy, sale, and lease decisions
showed the use of operating leases specifically for different types of airline
business models (Hsu et al. 2011; Bazargan and Hartman 2012; Chen
et al. 2018).
Chapter 3 reviews the dynamics, drivers, and outlook of the aviation
finance and leasing landscape with respect to the global market. The over-
all drivers affecting the industry and aircraft pricing include demand, sup-
ply, and business model changes. Demand drivers include economic
factors, business cycles, exogenous shocks, fuel prices, and traffic flows
along with population demographics. Supply drivers include aircraft man-
ufacturers, parked or retired aircraft, operating leases, secondary trading of
aircraft, the financing environment along with current trends and seg-
ments such as commercial banks, capital markets, and export credit
financing.
In addition, an analysis of the drivers affecting cross-border mergers
and acquisitions in the industry is developed along with the characteristics
of the increased use of leasing, specifically aircraft operating leasing. There
are further discussions on the resurgence of sidecar joint ventures. The
major global jurisdictions of aircraft leasing including Ireland, Singapore,
Hong Kong, are also discussed. China is discussed in greater depth in
Chap. 4. Tax and government incentives are shown as major drivers as well
as other non-tax factors for leasing.
Chapter 4 is a more in-depth review of the Chinese market. This
includes a discussion about the various drivers of demand and supply spe-
cifically with regard to the Chinese market. The differences and similarities
between China and the other global jurisdictions are also discussed.
Chapter 5 focuses on the empirical data and the historical market char-
acteristics and analysis of aircraft asset pricing over different time segments
and across multiple cycles. The main question addressed is determining
the market characteristics of the aircraft asset class in terms of its returns,
volatility, and trends. This chapter fills in the gap in the academic literature
4 D. YU
by examining empirical analysis and looks into the economic shocks

through aviation asset pricing. This hand-collected dataset includes time
series of specific aircraft type valuation data from a collection of major
aircraft appraisers over a 21-year period from 1996 to 2017 representing
the entire range of the large commercial aircraft asset class.
The aviation asset class is then segmented into five different major air-
craft type groupings with different weighting construction effects includ-
ing all aircraft types, all narrowbody aircraft, all widebody aircraft, all
narrowbody classic aircraft, and all narrowbody next generation aircraft.
These groups are analyzed under four time segments that look at the over-
all picture and periods to see the effects of the great financial crisis.
After the establishment of the aircraft asset class and the market seg-
mentations, further comparative analyses are conducted in Chap. 6 to
deduce the implications to the other real asset classes and major investable
benchmarks. The main hypothesis is that the aircraft asset class has lower
stand-alone risk in terms of standard deviation and variance over the time
segments. This extends the academic conversation by expanding on
empirical portfolio theory and the effects of economic shocks.
The aircraft asset class characteristics are compared to the 20 other asset
classes including publicly listed aircraft lessors, infrastructure, shipping,
real estate, transportation, commodities, precious metals, agricultural
land, and timberland. Other comparables include common liquid bench-
marks and indices including US Treasuries 1-3 M, specific commodities
including crude oil and gold, and other interest rate indicators such as US
dollar-denominated floating to fixed swap instruments 10 Years and USD
three-month LIBOR. LIBOR (London Inter-bank Offered Rate) is the
most commonly used reference rate for short term floating rates. In addi-
tion to return, correlation, and covariance testing, regression and signifi-
cance testing are conducted to assess the aircraft asset class with the other
comparable asset classes to extend the academic knowledge.
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CHAPTER 2
Background Concepts and Definitions
1 Accounting and Tax Treatments

To understand aircraft and aviation valuation and leasing, one must under-
stand the dynamics between the ecosystem, namely, the owner, financier,
and user. The owner can be the airline or lessor and lessors account for
43% of all Airbus and Boeing and McDonnell Douglas aircraft in the world
as of 2017 (Ascend 2017). An airline or operator is the ultimate user of
the aircraft and one of the main stakeholders in the aircraft leasing indus-
try. To operate as an airline, it needs to buy or obtain the use of one or
multiple aircraft and other large fixed assets in addition to many smaller
items. The operator has a variety of options that are assessed to complete
this objective. After going through the various analyses and processes in
choosing the type of aircraft, the classic question of how to fund the acqui-
sition comes into play, where there are also a multitude of options at one’s
disposal.
Most conservatively and simply, the airline can buy the aircraft for all
cash or equity. In addition, they can raise debt financing in different
forms such as on a senior secured basis, where the aircraft asset is col-
lateral. Another option is to finance the acquisition by debt financing
that is unsecured or company-secured financing facility, which may or
may not be backed by specific pledged collateral from the company. The

https://doi.org/10.1007/978-981-15-6743-8_2
8 D. YU
other financing options can be funding the acquisition through mez-

zanine debt, capital markets, export financing, or manufacturer’s sup-
port, also known as seller financing. Instead of debt financing, the other
option is to lease the aircraft either by completing a sale and leaseback
or directly through the leasing company. Directly, this aircraft lease can
be either a finance (or capital lease) or an operating lease depending on
different classifications and can have significant differences in tax treat-
ments and financial ramifications for the company. Under a sale and
leaseback, the company buys the asset and then simultaneously sells the
asset to the leasing company but also leases it back for a certain period
and terms.
To fully understand leasing, one must understand the various tax and
accounting definitions and differences that exist for aircraft leasing.
Currently, the industry relies heavily on lease accounting guidelines as
governed by International Accounting Standards (IAS) 17 Leases, main-
tained by the International Accounting Standards Board (IASB). The
objective of the standard is to “prescribe, for lessees and lessors, the appro-
priate accounting policies and disclosures to apply in relation to leases”
(IFRS 2003). In aircraft leasing, the lessor is defined as the company that
owns or has title to the aircraft asset and grants the use of such assets or
aircraft to another party under a lease agreement. The party that obtains
the use of the aircraft asset is referred to as the lessee. While the “lease is
an agreement whereby the lessor conveys to the lessee in return for a pay-
ment or series of payments the right to use an asset for an agreed period of
time … A finance lease is a lease that transfers substantially all the risks and
rewards incidental to ownership of an asset. The title may or may not
eventually be transferred. An operating lease is a lease other than a finance
lease” (IFRS 2003). The main idea or the concept behind the classification
is “based on the extent to which risks and rewards incidental to ownership
of a leased asset lie with the lessor or the lessee” (IFRS 2003). The lease
itself can be quite flexible or standard as it is a negotiated agreement
between each of the two parties.
There are multiple, slightly different definitions of operating and
financial leases depending on the oversight body. It is important to
understand that the IASB, through the IAS and the International
Financial Reporting Standards (IFRS), only advises and influences each
country’s GAAP (Generally Accepted Accounting Principles) but does
2 BACKGROUND CONCEPTS AND DEFINITIONS 9
not have the power to set the rules, which lie with the respective coun-
try bodies. For example, in the US, the Financial Accounting Standards
Board (FASB) makes up the rules and regulations which become US
GAAP. The current leasing treatment standard under US GAAP is FASB
Number 13 or Accounting Standards Codification (ASC) Topic 840.
FASB Number 13 has been in existence since 1976. Currently, under
US GAAP (FASB 13 or ASC 840) and IFRS (IAS 17), the treatment of
leases is generally similar (Fig. 2.1).
The lease transfers ownership of the asset to the lessee by the end of the lease
term
The lessee has the option to purchase the asset at a price which is expected to
be sufficiently lower than fair value at the date the option becomes
exercisable that, at the inception of the lease, it is reasonably certain that the
option will be exercised
The lease term is for the major part of the economic life of the asset, even if
title is not transferred
At the inception of the lease, the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the leased
asset
The lease assets are of a specialized nature such that only the lessee can use
them without major modifications being made
Other situations that might also lead to classification as a finance lease are:
If the lessee is entitled to cancel the lease, the lessor’s losses associated with
the cancellation are borne by the lessee
Gains or losses from fluctuations in the fair value of the residual fall to the
lessee (for example, by means of a rebate of lease payments)
The lessee has the ability to continue to lease for a secondary period at a rent
that is substantially lower than market rent
Fig. 2.1 IAS 17. (IFRS 2003)

10 D. YU
• The lease transfers ownership of the asset to the lessee by the end of
the lease term
• The lessee has the option to purchase the asset at a price which is
expected to be sufficiently lower than fair value at the date the option
becomes exercisable that, at the inception of the lease, it is reason-
ably certain that the option will be exercised
• The lease term is for the major part of the economic life of the asset,
even if the title is not transferred
• At the inception of the lease, the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the
leased asset
• The lease assets are of a specialized nature such that only the lessee
can use them without major modifications being made
Other situations that might also lead to classification as a finance

lease are:
• If the lessee is entitled to cancel the lease, the lessor’s losses associ-
ated with the cancellation are borne by the lessee
• Gains or losses from fluctuations in the fair value of the residual fall
to the lessee (e.g., by means of a rebate of lease payments)
• The lessee has the ability to continue to lease for a secondary period
at a rent that is substantially lower than the market rent
The US GAAP is more specific in guidance than the IFRS. While the
IFRS refers to finance leases, the US GAAP defines this as a capital lease.
Leveraged leases treatment is defined in US GAAP while it does not exist
in IFRS.
2 Operating and Finance Lease

US GAAP under ASC 840 has ruled that a lease should be treated as a
finance or capital lease if it meets any one of the following four conditions:
(a) “if the lease life exceeds 75% of the life of the asset;
(b) if there is a transfer of ownership to the lessee at the end of the
lease term;
(c) if there is an option to purchase the asset at a ‘bargain price’ at the
end of the lease term;
(d) if the present value of the lease payments, discounted at an appro-

priate discount rate, exceeds 90% of the fair market value of the
asset.” (Financial Accounting Standards Board 1976)
Every lease that falls outside these criteria is considered an operating

lease, where the ownership of the asset is retained by the lessor, during and
after the period of the lease, there is no bargain price option by the lessee,
or the lease period is less than 75% of the life of the asset and the present
value of the discounted asset at an appropriate discount rate lease payment
is less than 90% of the fair market value of the asset. For accounting pur-
poses, under an operating lease for the lessee, the lease payments are con-
sidered an operational expense and flows through the income statement
while the asset does not appear on the lessee’s balance sheet nor can the
respective depreciation be claimed by the lessee.
For the lessor, the asset appears on its balance sheet along with any debt
finance associated with the asset. In the income statement, the lease pay-
ments made by the lessee are considered the lessor’s revenue, while depre-
ciation can be claimed and interest expense associated with the financing,
if any, can be deducted. The lessor retains the risk of ownership and in
aviation terms retains the residual value risks of the aircraft.
The opposite holds true for a finance lease where the ownership of the
asset might be retained by the lessor during but transferred to the lessee
after the period of the lease or there exists a bargain price option for the les-
see. The lease period can be greater than 75% of the life of the asset and the
present value of the lease payments, discounted at an appropriate discount
rate, is greater than 90% of the fair market value of the asset. For accounting
purposes under a finance lease, for the lessee, the lease is considered a loan
and the lessee is considered the owner of the asset. As such, the lessee’s pres-
ent value of the lease payments is treated as debt on the balance sheet and
the interest expense is calculated from this debt amount, which flows
through the income statement and its depreciation can be claimed.
For the lessor, the present value of the future cash flows is recognized
as a revenue asset and appears on its balance sheet along with any debt
finance associated with the asset. In the income statement, the lease pay-
ments by the lessee is considered revenue, while depreciation can be claim,
and interest expense associated with the financing, if any, can be deducted
(Damodaran 2017).
12 D. YU
3 Typical Operating Lease Structure

Some of the characteristics of a typical operating lease are that the lessor
acquires the aircraft directly from the manufacturer or by way of the airline
known as an SLB (sale and leaseback). If ordered directly from the OEM,
the lessor pays any deposits or advance payments such as pre-delivery pay-
ments (PDPs) and the lessor arranges for the delivery of the aircraft and its
financing such as senior secured bank debt. In the case of an SLB, the
airline would be responsible for any deposits and PDPs to the OEM but
the lessor would need to put up a form of security, such as a deposit, to the
airline. The lessee will sign the lease to the aircraft to commence at the
delivery of the aircraft. The typical lease term is 5–12 years for a lease with
narrowbody aircraft having a shorter tenor while widebody aircraft have a
longer tenor.
In the interim of the lease, the airline is responsible for rent and any
maintenance reserves if required. Ultimately, the airline is responsible
for any maintenance upkeep costs for the aircraft but qualified mainte-
nance tasks can be reimbursed through the maintenance reserves paid if
any (described in more detail below). After the lease ends, the lessee
returns the aircraft to the lessor in a technical condition that is pre-
negotiated. The return technical condition can be a minimum physical
redelivery condition with a monetary adjustment to a delivered techni-
cal condition or another predetermined benchmark. Usually, redeliver-
ies are timed to involve a heavy maintenance overhaul event for the
aircraft. At the end of the lease term, the lessee may have a lease embed-
ded option to renew the lease at a set price and term or the purchase of
the aircraft at a predetermined price. Practically, these options usually
exist but would need to be negotiated between the parties near the end
of the lease.
For a typical operating lease contract, the cash flows to the lessor can be
broken down into three main components—the actual lease rate costs,
maintenance reserves, and security deposits. Historically, the lease rate is
approximately 1.0% lease rate factor (LRF) or 1% of the purchase price of
an aircraft cost per month but this is dependent on a variety of factors
including aircraft supply and demand, among others. Maintenance reserves
are paid by the lessee to the lessor as the aircraft is used and wear-down is
accrued. This is usually accounted for by the actual time or flight usage on
pre-agreed metrics. As the cost of overhauls, especially major ones, are

expensive, these maintenance reserve funds are a support for the lessor and
lessee to ensure that the lessee has the funds to ensure adequate repairs.
The lessee is able to be reimbursed from this fund for completed qualified
maintenance. This is very similar to the sinking fund provisions for corpo-
rate bonds and other financings.
Security deposits are typically three months of lease cost but this can
vary depending on the lessee and market conditions. Also, maintenance
reserves and security deposits can be in the form of cash, letters of
credit, or a combination of both. These items are all the results of the
final negotiated document between the two parties and as such there are
cases where this differs from the norm where no maintenance reserves
or security deposits are required but this is usually reserved for compa-
nies with the highest creditworthiness or is supplemented by other
credit enhancements such as other forms of security that the lessee can
provide (Fig. 2.2).
Airline
Qualified
Lease
Maintenance Maintenance
5-12
Reimbursem Cost $
Years
ent (if any) $
Lease Rate and

Order +
Aircraft Maintenance
PDP (if any)
Reserve (if any)
in SLB case
$
Ownership
Debt Advance $
Lender or Capital
Aircraft Lessor
Markets
Debt Repayment
+ Interest $ Aircraft Order +
Purchase $ PDP (if any)
Aircraft
Manufacturer / OEM
Fig. 2.2 Operating lease cash flow structure diagram

14 D. YU
4 Why Lease?: Advantages and Disadvantages

to Operating and Finance Leasing from Practice
Operating leases are where the owner or lessor has retained the residual
risk of the asset and the investment nature of such versus a finance lease,
which is characterized more as a loan. Also, most of the world’s aircraft
leasing companies are focused on only operating leases while the minority
are involved with finance leases or other types of assets as well.
There are many advantages to operating leases from the user’s or les-
see’s point of view. Operating leases provide flexibility to the lessee espe-
cially those that need to update or replace their equipment frequently. The
flexibility though can go both ways, especially in jurisdictions with US
Chapter 11 bankruptcy style situations where the aircraft can be handed
back. As the lessee has no residual risk in the asset, they are protected from
the potential drop in value as well as the risk of obsolesce of the asset. As
the asset is not on the lessee’s balance sheet, the lease payments flow
through the income statement, which is fully tax-deductible and account-
ing is simpler. In this case, this is considered off-balance sheet financing,
which is one of the aims of new accountings discussed in later sections. In
terms of overall metrics, as there is no asset on the balance sheet, the
return on asset (ROA) metric is higher compared to a finance lease. While
airlines can be either scheduled operators or non-scheduled charter carri-
ers, there is a trend to introduce newer aircraft as it brings prestige, creat-
ing more demand for the companies’ products. These trends favor
operating leases.
The main advantage of a finance lease for the lessee is that the expenses
can be recognized faster and front weighted. The lessee can deduct the
depreciation of the asset along with the interest component of the lease
payment. Balance sheet-wise, the present value of the lease payments is an
asset that depreciates while there is a liability recognized as the debt and
this is reduced by the interest expense. All of the risks and rewards of the
asset lie with the lessee while the lessor holds on to the title and ownership
of the asset until the purchase option at the end.
One of the other considerations is that with operating leases, the lessee
may be exposed to lease rate fluctuation especially if it is on a floating rate
basis or on the renewal of the lease at the conclusion of the term. Another
drawback is that without exposure to the residual value of the asset, the
lessee does not gain equity with the appreciation of the asset but, at the
same time, the lessee is not taking on the risk of the fluctuating value of
the aircraft.
With regard to taxes, the lessee may have smaller tax benefits than in
the case of purchase or finance lease as depreciation cannot be claimed,
which is the major value of the asset in accelerated depreciation terms
especially at the beginning of the lease. There are extra costs that the lessee
must meet to fulfill lease contract requirements such as maintenance,
reporting, and administration. In addition, there may be restrictive cove-
nants placed on the lessee by the lessor in relation to the use of the aircraft
for certain types of activities such as for Haj flights or to different jurisdic-
tions, for example. The contract can also restrict sub-leasing arrangements
when the lessee temporarily has no use for the asset or restricts how the
asset is technically maintained in regard to procedures and usage of alter-
natives to the OEM produced parts such as parts manufacturer authorized
(PMA).1 Also, the contract can restrict the maximum control of the air-
craft’s configuration by the lessee as to when the asset is redelivered. In
most leases, the lessee pays for any additional withholding or other addi-
tional taxes relating to the rental payment can be especially acute for cross-
jurisdictional payments not covered by country-to-country double tax
treaties.
The disadvantages to a finance lease are that the lessee retains the risks
and the rewards of the asset, which could mean losses due to a decrease in
the value of the asset. Like an operating lease, the lessee is responsible for
the repairs and maintenance of the asset. As the lessee retains the risks and
the rewards of the asset, there could be losses due to a decrease in the
value of the asset. The finance lease while increasing the assets on the bal-
ance sheet will also increase the liabilities and may affect how analysts
analyze the lessee’s financial situation such as credit ratings. Again, com-
pared to an outright acquisition, the lessor will still have some control and
say over what can be done with the asset and hence the associated costs.
Due to these implications, the lessee’s ROA ratio will be lower than under
an operating lease.
One of the major advantages of operating leases for the lessee is that the
amount of capital for security deposit is very little relative to the asset
value. In this respect, it can be smaller than both finance and outright
loans. In finance leases, the lessee is required to put up typically 10–20%
1
The use of PMA parts versus OEM parts is controversial in the industry. The use of PMA
parts is frowned upon by OEMs and lessors due to the potential difficulties in transitioning
the aircraft, affecting values, among others; however, airlines, tend to view it more favorably
given their decreased operating costs.
16 D. YU
of the amount of the total asset price. Younger and aggressively growing
airlines tend to be not as well capitalized, thus utilizing operating leases
compared with better-funded mature airlines. This preference for operat-
ing leases might also be the case when the aircraft is different than the
existing fleet due to starting new business concepts and areas. In this case,
the operator is unsure about the cost characteristics and longevity of usage
of the aircraft and prefers to start with the lease option instead of purchas-
ing the aircraft outright.
There are also instances where the manufacturer’s order books are at
capacity in a given time and the only way to get the desired aircraft is to
lease it from a lessor with an existing order book slot or buy the asset sec-
ondhand. This is especially acute today when the manufacturer order
books stretch ten-plus years out for popular aircraft. The lease payments
can also be structured in fixed or floating terms depending on the lessee’s
requirements and lessor’s preferences.
5 Lease Versus Own or Debt from Practice

The airline’s selection of leasing or owning the aircraft will be driven by a
variety of drivers such as the legal considerations, tax considerations, avail-
ability of funding, cost of capital, flexibility of asset usage, its outlook, and
its own return projections. There is a lot of financial literature on this topic
based on various scenario analyses looking at questions focused on the
“lease versus own” or “lease versus buy” approach. More about the his-
torical literature can be found in the Literature Review in Sect. 2.2.
There are disadvantages to acquiring with debt and owning the asset
outright compared with operating leases. It requires a larger investment
and initial outlay such as a down payment or minimum equity required.
Like a finance lease, ownership entails the owner to retain residual value
risk and the rewards associated with this. The financing institution might
also place restrictions that are included in the loan covenants. It requires
the company to arrange for the financing. Ownership entails less fleet
planning flexibility than an operating lease. Instead of just handing the
aircraft back at the end of the lease, selling the aircraft that is owned entails
additional overhead on the company and might not create optimal solu-
tions given the need to dispose of assets that are not a core competency of
the airline.
Like all types of leases, valuation depends on a variety of factors, includ-
ing supply demand of aircraft, interest swap rates, how long one plans to
use the aircraft, leverage, and so on. These viewpoints change depending
on the long- and short-term point of view. Generally, the rule of thumb is
if the plan is to utilize the aircraft for a long time (i.e., longer than
~12 years, the longest length for a typical aircraft operating lease), then
owning the aircraft is more beneficial. Like long-dated assets such as real
estate, buying is cheaper than renting or leasing in the long term. So per-
haps given the popularity of aircraft leasing for airlines and its growth and
profitability as a business, this might be a reflection of how short term the
airline business has become.
6 Upcoming Amendments to Accounting Standards

for Leases and Its Effects
An update of the international accounting standards such as IAS 17 will be

replaced by IFRS 16 which comes into effect in January 2019. As noted,
as a result of the 2008 global financial crisis (GFC), there is a speedier pas-
sage of reforms (Bertomeu and Magee 2011; Kothari and Lester 2012).
The aims are put on the balance sheet recognition of lease liabilities by
lessees, and reduce opportunities for structuring and improve information
about lessor exposure to the retained risks in the underlying asset. For les-
sees, there is now only one choice for all lease classifications with two excep-
tions, low value assets and short leases.
The situation before incorporation of IAS 17 can potentially hide lever-
age through off-balance sheet footnote disclosures and result in the lack of
direct comparability. While this is true at face value, it has been common
for research analysts to adjust the balance of these companies to capitalize
these operating leases and bring them on the balance sheet for easier com-
parison (Damodaran 2017). This has become quite popular as “[off bal-
ance sheet] financing increased 745% as a proposition of total debt from
1980 to 2007” (Cornaggia et al. 2013). This new accounting rule effec-
tively does the job for researchers. The effect of these changes is $3 trillion
(Burgess et al. 2016).
For lessees, this change includes calculating and recognizing a “right of
use” (ROU) asset by a present value of the lease payments and this is
depreciated like before. As this ROU is an asset there is a corresponding
liability using the discount rate determined at lease start on balance sheet
and this reduces as payments are made. The effect of the new rules is that
interest and depreciation costs will replace lease costs as if the assets are
actually on the balance sheet and owned. The net effects on the income
18 D. YU
statement is that expenses are generally front-loaded (bigger early recogni-

tion). There are minimal effects to lessors.
One of the stated goals of the IFRS is for the convergence of US GAAP
and the global standard, but this has not fully materialized. One of the
main criticisms of the IFRS is that it is not adopted in the US, the largest
economy having outsized influence. The SEC (US Securities And
Exchange Commission) provided its own critic of the IFRS in 2012 and
the IASB responded by saying “while acknowledging the challenges, the
analysis conducted by the IFRS Foundation staff shows that there are no
insurmountable obstacles for adoption of IFRSs by the United States and
that the US is well placed to achieve a successful transition to IFRSs, thus
completing the objective repeatedly confirmed by the G20 leaders” (US
Securities And Exchange Commission 2012; IFRS 2012).
Comparing the US GAAP and the IFRS, there are many differences
between IAS 17 and US GAAP’s ASC 840 that apply to aircraft assets. In
terms of lease classification, the US GAAP classification of a lease depends
on whether the lease meets certain criteria while the IAS classification of a
lease depends on the substance of the transaction while specific indicators
and case examples are provided. Another is the lessee’s implicit rate in the
lease to discount minimum lease payments under the IAS but US GAAP
uses this implicit rate if it’s known and lower than the incremental borrow-
ing rate. Another is how and when to recognize a gain or loss on a sale and
leaseback transaction.
Given the large number and percentage of aircraft leasing community
based in Ireland, the Irish GAAP needs to be acknowledged. If Irish com-
panies have debt or equity listed on a regulated market of any European
Economic Area State, then they are required to prepare their group annual
financial statements using IFRS but an Irish company can elect for either
IFRS or Irish GAAP mainly under the Statement of Standard Accounting
Practice (SSAP) 21. IAS 17 and SSAP 21 have much in common but,
specifically for aviation, SSAP 21 includes lease and hire purchase contracts
while the former does not. SSAP 21 like US GAAP has a quantitative test
for a finance lease while only IAS 17 provides additional guidance. The
treatment of lease incentives accounting can differ due to the timing and
how it’s accounted for. The accounting of lease income by lessees under a
finance lease is a difference as SSAP 21 is more flexible on the methods on
how to recognize income. The last major difference is that the required
disclosures under IAS 17 are more detailed than under SSAP 21.
When analyzing tax issues, especially for cross-border aircraft leasing,

one needs to consider and understand the domicile and the tax home for
both the lessor and the lessee. Some other things to consider include taxa-
tion treatment of income for lessor, deductibility of the expenses for les-
see, tax depreciation eligibility, any withholding of taxes (if any), any tax
incentives offered by various jurisdictions (if any), exposures for “taxable
presence” (if any), coverage by the double tax treaty network, and any
indirect taxes such as VAT, GST, and so on.
Under US GAAP, FASB issued a revision in February 2016 known as
Lease Accounting Revision or ASC 842. The last effective date for imple-
mentation is the fiscal years beginning December 15, 2018, for public
companies and fiscal years beginning after December 15, 2019, for pri-
vate companies (Financial Accounting Standards Board 2016). The aim
of the update is to more accurately reflect off-balance sheet operating
leases onto companies’ balance sheets and be more closely aligned with
the IFRS.
Differences include clean-up such as renaming capital leases to finance
leases, which is to conform to IFRS terminology. Other costs that used to
be re-billed by the lessor such as taxes and insurance are now capitalized as
they qualify to be excluded. The test conditions which determine whether
the lease is a finance or operating lease remain pretty much unchanged.
One change in the addition of a criterion for finance lease classification is
that “the underlying asset is of such a specialized nature that it is expected
to have no alternative use to the lessor at the end of the lease term”
(Financial Accounting Standards Board 2016). In real-world situations,
this already meets the present value criterion test. Another change is that
the sale and leaseback accounting is not allowed anymore if the lessee still
has a “continuing right of control” to the asset. This is in the case of the
repurchase clause of the asset at a specific fixed price, which is not the
specific bargain price criteria used before. Otherwise, this is treated as a
financing transaction. Leveraged leases as a classification will also be
eliminated.
7 Brief Academic Literature Review: Leasing

The academic literature for aircraft leasing is quite extensive since the start
of the academic discussions in the late 1950s and this is the basis of under-
standing for aircraft pricing. Academic arguments are based on the
broader buy or lease question with additional variations and forms of the
20 D. YU
analysis including effects of leases, debt, and taxation on asset pricing, the
firm and much broader economic implications. There are gaps in the
argument when it comes to an understanding of the driving factors deter-
mining aircraft pricing and leasing especially where it relates to character-
istics of the global market and specifically the Chinese market. These
characteristics describe the numerous drivers of the aircraft market and its
effects on pricing. While there are numerous articles that focus on smaller
sections, this chapter extends the literature and ties together these differ-
ent arguments.
While there are some early disagreements on theory and empirical
investigations, eventually a general consensus is reached on the lease ver-
sus buy question of which the effects of tax- and other non-tax-based
influences are the main drivers as shown by a long progression of article
arguments (Wyman 1973; Lewellen et al. 1976; Roenfeldt and Osteryoung
1973; etc.). The other line of conversation is whether leasing and debt are
complements or substitutes. While there are empirical findings for both,
the latest papers show that they are more partial complements as there are
circumstances that favor leasing (Bowman 1980; Ang and Peterson 1984;
Finucane 1988; Lewis and Schallheim 1992; Yan 2006). While leasing is
viewed initially as finance leases, there was a later trend to address it
through the operating leasing context but at times the term is more
ambiguously defined.
Asymmetric information has effects on leasing through tax differ-
ences and residual value knowledge (Krahan and Meran 1987; Lease
et al. 1990; Edwards and Mayer 1991; Graham et al. 1998). Also, asym-
metric information costs drive preference to leasing and this preference
for leasing occurs if companies have better ratings and pay more divi-
dends (Sharpe and Nguyen 1995). Also, the sale and leasebacks case is
tax benefit driven and a method for companies to raise capital. Studies
show that there are abnormally positive returns and this is due to the
lowered tax expectation created by sale and leasebacks (SLBs) (Slovin
et al. 1990; Handa 1991; Ezzell and Vora 2001) Operating lease SLBs
also support the notion of expanded credit capacity (Schallheim
et al. 2013).
Non-tax incentives for leasing are also investigated such as contractual
provisions, increasing the firm’s debt capacity, managing credit ratings and
bankruptcy costs (Smith and Wakeman 1985; Vasigh et al. 2014; Eisfeldt
and Rampini 2008; Lim et al. 2017; Krishnan and Moyer 1994). Real
options and mathematical programming techniques are used to address
different facets of leases and valuation. Those include investigating resid-

ual value guarantees, asymmetry relationships, and valuation of operating
leases (Schallheim and McConnell 1985; Sharpe and Nguyen 1995).
There have been extensions of valuation methods for lease contracts and
aircraft fleet decision-making (Stonier 1998, 1999, 2001; Bellalah et al.
2002; Clarke et al. 2003; etc.). Utilizing mathematical programming
methods, airline decision-making with regard to buy, sale, and lease deci-
sions showed the use of operating leases specifically for different types of
airline business models (Hsu et al. 2011; Bazargan and Hartman 2012;
Chen et al. 2018).
There are also extensions of the literature, by directly examining
empirical analysis in regard to segmentation and economic shock timing
in aviation through the analysis of 21 years of the aircraft asset class
dataset from 1996 to 2007. There is also construction of five different
major aircraft type groupings with different weighting construction
effects from this dataset which differentiates the categories of aircraft.
In addition to the entire dataset, empirical tests are carried out on eco-
nomic shocks by examining the effects and characteristics before and
after the 2008 global financial crisis. Also, Chap. 5 expands on the aca-
demic conversation and analysis to contribute to further understanding
of the aviation asset class under the portfolio theory framework and the
effects of economic shocks.
8 Aircraft Values, Liquidity,

and Operating Leasing
Starting in 1998, more papers were published concerning observations

on the pricing of commercial aircraft and airlines, especially with regard
to the US market, along with different elements of the aircraft operat-
ing lease industry. “The question of valuing commercial aircraft has not
been explored in any great depth by researchers in academia” (Gorjidooz
and Vasigh 2010). With regard to airlines, Pulvino (1998) found that
fire sales do exist as these aircraft are sold at a 14% discount to the aver-
age market price by distressed airlines that have more asset sales than
under normal situations. Goolsbee (1998) concluded from his empirical
studies of the airline’s decision rationale for the sale or retirement of an
aircraft type specifically common at the time, the Boeing 707 type. The
study shows that the decision on a particular aircraft type is based on the
22 D. YU
airlines’ financials, its cost of capital, and the overall business cycle. This
is not a broad enough sample set and also this only focuses on the airline
itself and not aircraft traders or lessors who commonly are owners of
aircraft. Continuing the asset sales studies in distressed situations,
Pulvino (1999) studied the pricing effects caused by Chap. 11 reorga-
nization or Chap. 7 liquidation, both under US bankruptcy laws. The
study found that under both bankruptcy types, the asset prices are lower
than those for assets sold by non-distressed airlines, and there is no dif-
ference in obtaining higher prices or limiting the number of discounted
aircraft sold with either bankruptcy type. Looking at the determinates
of the liquidation value of assets, it is noted that in a liquidity event, an
asset is likely to be below the value of its best use as industry peers at
that time are also likely to be experiencing problems (Williamson 1988;
Shleifer and Vishny 1992).
Comparing types of leasing firms, Habib and Johnsen (1999) con-
cluded in their study that lenders with specialist knowledge have a
greater advantage compared to generalists. Given this advantage, they
postulate that generalists lend less and have a higher default rate than
specialized companies such as those who have “fully integrated redevel-
opment [functions] including asset valuation, monitoring, reposses-
sions and resale” (Habib and Johnsen 1999). They have an advantage
in the management and redeployment of specific assets. This summary
statement echoes the prevailing thoughts in the industry today. Eisfeldt
and Rampini (2008)’s empirical study shows that the leasing segment is
the largest external finance source especially for smaller, capital-
constrained companies.
Flipping the question around, Oum et al. (2000a) looked at the airline
or end user’s point of view of the optimal ratio of operating leases for air-
lines. Employing a two-step model, first, the airline profit maximization
function based on uncertain demand or revenues accounting for variable
costs and the different weighting of owned or long-term capital leases and
shorter operating leases to find the k capital constraint.
Given the k capital constraint, we get Eq. (2.1), which demonstrates
that one expects to have a higher risk premium on operating leases com-
pared to longer-term capital leases:
ò ( ws - wk ) f (t ) dt = E ( ws ) - wk > 0 (2.1)
R = revenue y(τ) = Z = capacity K = capital stock leased for longer term

demand of the (capital lease)
airline =
K+S
S = capital stock τ = future wk = costs Max π = R[y(τ), Z] − V[y(τ),

leased for shorter state of of Z] − wkK − ws(τ)S
time (operating nature long-term
lease) capital
ws = costs of short-term capital
This model was tested on a dataset of 23 major international airlines

between 1986 and 1993 and the empirical results showed that 40–60% is
the optimal ratio of operating leases for airlines. This chapter is an exten-
sion of Gritta (1974) and Gritta et al. (1994), which looks at the effects of
leases for airlines especially in their debt ratio and capital structure.
An updated empirical study by Bourjade et al. (2017) looked at the use
of only operating leases (not other types) and whether that improves the
global airline’s financial performance. The dataset was public data from 73
global airlines from 1996 to 2011 and the results showed that the impact
of operating leasing on the airline’s operating margin is concave. It also
shows that low-cost carriers by business model differentiation are more
affected by the benefits of leasing than full service carriers and that younger
companies are more profitable utilizing operating leasing. It was also
shown that the optimal percentage of leasing that maximizes the operating
profit is 53.4% with a 5% confidence interval of [0.468,0.601], which is
consistent with the empirical findings of Oum et al. (2000a).
Not all papers advocate operating leasing in aviation. One of the earliest
papers for leasing in aviation is Parrish (1970) and Gritta and Lynagh
(1973)’s “Aircraft Leasing—Panacea or Problem,” in which the authors
advocated for the cautious view of operating leasing in aviation and a
warning of its hidden charms but this view seems out of date compared to
the newer research.
In addition, more discussions spoke about liquidity and various charac-
teristics affecting aircraft valuation such as Vasigh and Erfani (2004).
Gavazza (2010) empirically studied aircraft liquidity specifically in the sec-
ondary markets to address the question of “leasing or owning”. He argues
that for commercial aircraft, more liquid assets are more likely to be oper-
ating leases instead of finance leases. His findings also suggested that these
24 D. YU
more liquid assets also tend to have shorter-term duration as operating

leases and longer-term duration as finance leases. In an extension of the
research, Gavazza (2011)’s empirical study on aircraft transactions in the
secondary market found that an aircraft that is leased is traded more often
and the usage is higher than in the case of owned aircraft. In addition, les-
sors, as capital reallocation intermediaries, have advantages with regard to
transaction costs and the redeployment of capital. Gorjidooz and Vasigh
(2010) studied liquid aircraft, especially Airbus A320-200, Airbus A330,
Boeing 737-700LR, Boeing 767-400, by observing FAA Form 41 quar-
terly data from 1995 to 2005. The authors created a model based on the
passenger and cargo revenues of the aircraft and also used Monte Carlo
simulations to test it.
In summary, even after numerous academic articles and studies that
have been written on leasing theory, its characteristics, its effects on the
capital structure or as a potential substitute for debt, different scenarios of
trading, and so on, there are currently still questions on why leasing is a
good option and also what are the drivers and characteristics of the mar-
ket. This research aims to fill in the holes for both the business economic
cycles, and it’s how the class fits in the portfolio theory for other asset
classes. As is noted, more literature needs to specifically address the avia-
tion industry and the operating leasing.
9 Economic and Business Cycles

There are many papers that have studied cyclicality in the economy and
various industries (Smith 1776; Robertson 1915; Meadows 1971). The
main general conclusion is that these cycles are caused by the failure to
grasp the delay feedback effects from managing the existing inventory and
product acquisition among other resources. There have been cycles in the
aviation sector in the US since the 1978 deregulation and Jiang and
Hansman (2004) shows that the average one full cycle period is approxi-
mately ten years with a long-run mean very close to zero. There have been
discussions of the cyclicality found in the aviation industry, which has been
addressed by Liehr et al. (2001) and Lyneis (2000) in system dynamics
literature. This has been expanded upon by Pierson and Sterman (2013)
to include an endogenous account of feedbacks omitted from some earlier
work, including price setting, wages, and air travel demand.
Another research article addressing the question of whether airline
capacity investment is efficient is Wojahn (2012), who examines the causes
of overinvestment in aircraft capacity. He empirically tests the subject
through a sample set of 69 global publically listed airlines. He concludes

that airlines in all regions over the last 30 years did not cover their cost of
capital and the returns have structurally declined, with airlines all the while
continuing to add to capacity. Also, the findings show that causes of this
include agency problems such as myopia and empire building, shifting
business models toward low-cost and existing Asian carriers, coupled with
remnants of capital in legacy airlines and economies of scale are all associ-
ated with overinvestment. While this chapter focuses on airlines, one
important area that is missing for adding aircraft capacity is the oligopoly
of aircraft manufacturers. This is addressed broadly in Brander and Lewis
(1986) where they argue that there are linkages of product markets and
financial market linkages, and limited liability effect of the corporation can
produce more debt-induced aggressive output, which leads to overcapac-
ity. Oum et al. (2000b) also support this argument that oligopolistic mar-
kets do not minimize the total social costs and thus lead to excess capacity.
Through their empirical studies of ten US airlines, they found that excess
debt load appears to lead to excess capacity in the relationship between an
air carrier’s debt and capacity.
There has also been an examination of the global financial crisis in rela-
tion to aviation. Franke and John (2011) described the differences between
the 2008 and 2001/2003 economic shocks and how this resulted in dif-
ferent effects by airline types, which further enhanced different and new
business models and operations such as the low-cost airline model in con-
tinental Europe. Pearce (2012) looks at the state of air transport markets
and the airline industry post the 2008 global financial crisis. He finds that
demand rebounded from the lows in 18 months and is still robust after
repeated exogenous shocks while the industry is still highly leveraged and
fragile. He finds that airlines cut capacity by underutilization of aircraft,
which was challenging given they had committed for aircraft deliveries
ordered at the peak of the previous cycle, which implies excess invested
capital.
Bjelicic (2012) focuses on the aviation finance market after the 2008
global financial crisis. He finds that capital became very scarce for airlines
with a greater emphasis on export credit agencies along with a decrease in
bank loans, and aircraft lessors became an important source of funding for
new airlines. He also notes that the availability of finance may be a barrier
to market entry. Mann (2009) agrees with Bjelicic with regard to the
retreat of capital availability in traditional areas of aviation finance after the
2008 global financial crisis and the expansion of export credit agencies in
financing.
26 D. YU
10 Real Assets Portfolio Theory

There has been much discussion of portfolio theory. Aviation is one of the
subsegments of the real assets asset class which also includes real estate,
infrastructure, agricultural land, timberland, commodities, and shipping.
Most academic literature specifically relates to real estate, commodities,
timberland, and its relation to portfolio theory. These asset classes are
considered the “traditional” real asset classes by institutional investors
who have been investing for decades while “new” real asset classes include
infrastructure, agricultural land, and so on (Martin 2010). Martin does
not consider other differentiated classes and considers shipping and avia-
tion as part of the real asset category. With the other subclasses, this can
be best summed up by this statement “little empirical work has been done
on infrastructure as an asset class despite increased allocations by institu-
tional investors” (Bird et al. 2014). There are no discussions of aviation in
relation to portfolio theory and this is a gap in the academic literature that
is aimed to be addressed in Chap. 5.
According to a review of the literature on infrastructure, based on the
initial arguments by researchers, infrastructure has characteristics similar
to those of real estate, with a long life, illiquidity, and the ability to hedge
inflation (Dechant and Finkenzeller 2010; Newell and Peng 2007, 2008).
Froot (1995) by empirically using a variety of real assets subclasses shows
that real assets are good hedging tools for portfolios with their negative
inflation correlation characteristics.
There has been more argument on infrastructure as a separate asset
class with its own characteristics, namely, natural monopolistic or oligopo-
listic elements due to restrictions of use or ownership and economies of
scale (Finkenzeller et al. 2010; Inderst 2009, 2010). Infrastructure which
exhibits these natural monopolistic characteristics is often government
regulated and a premium is needed for this regulatory risk.
Rothballer and Kaserer (2012) find that the empirical evidence on
infrastructure’s risk characteristics is still limited and they empirically
tested 1400 publicly listed firms worldwide and found that infrastructure
exhibit significantly lower market risk than MSCI World equities, which
confirms the portfolio diversification benefits. The article notes that the
class has idiosyncratic risks such as construction risks, operating leverage,
the exposure to regulatory changes, and the lack of product
diversification.
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Transport Management, 19, 1–8.
CHAPTER 3
Global Aircraft Leasing Industry

Characteristics
1 Background and History of the Aircraft

Leasing Industry
Leasing has been a key driver of the aircraft trading market. Lessors, espe-
cially relating to aviation, are both a source of financing and also one of
the market participants for aircraft trading that has increased in signifi-
cance over time. As noted in Chap. 2, there are finance and operating
leases depending on the classification of the lease. Finance leasing in avia-
tion has been in existence for a long time and the earliest mention is in the
“Report on Air Transportation of Aviation Securities Committee of
Investment Bankers Association of America” in 1949. It is not until the
late 1960s that aircraft operating leasing started to develop. The aircraft
operating leasing industry can be traced to the manufacturer McDonnell
Douglas Corporation (now part of the Boeing Company) and the found-
ing of its wholly owned subsidiary, McDonnell Douglas Finance
Corporation (MDFC) in 1968 (renamed Boeing Capital Corporation in
1997 after the merger). MDFC was set up for the explicit purpose of
assisting with the financing of new and used aircraft for the company and
industry. MDFC began by leasing two DC-9s to Air West and three
DC-8-63CFs to Flying Tiger Line. It was initially capitalized by a $200
million revolving credit from ten banks that also financed its parent

https://doi.org/10.1007/978-981-15-6743-8_3
34 D. YU
company (Smith 1968). This first wave of aircraft leasing were more of
finance leases than operating leases as the tenor of the leases ran usually
between 15 and 18 years and focused on US carriers by the manufacturers.
This first active period was between 1968 and 1972 and encompassed
deliveries of new DC-9s and Boeing 727s along with the first wide-bodied
aircraft (Dallos 1986).
After 1968, the aircraft operating leasing industry began with its ori-
gins by the founding of International Lease Finance Corporation
(ILFC) by Steve Udvar-Hazy in California, US in 1973. Not long after
that in 1975, in Europe, Guinness Peat Aviation (GPA) was founded in
Ireland by Aer Lingus executives lead by Tony Ryan and Guinness Peat
Group. Both of the founders come from humble beginnings, are the
pioneers of the industry, and have bigger than life reputations (“High-
flying Irishman” 2007). The importance of these two individuals in
aviation trading and leasing reflects the increasing role of operating les-
sors in terms of aircraft pricing. Udvar-Hazy is known as the “godfa-
ther” or “father” of the aviation leasing industry and Ryan is also a
legend in the Irish commercial community and is known as the founder
of GPA but is better known more universally for the biggest European
low-cost airline (LCC) that he subsequently founded bearing his
name—Ryanair. LCCs as an airline business model would have increased
penetration of the world airlines and have large effects on aircraft types
and pricing with most preferring to have single-aisle narrowbody air-
craft, all in economy-seating configuration and eschewing from other
types and configurations by the traditional airlines.
Udvar-Hazy founded ILFC with two partners in 1973 with $150,000
to buy a used DC-8 (Wayne 2007). ILFC started being traded over the
counter in 1983 and was later acquired by American International Group,
Inc., (AIG) in 1990 for $1.26 billion. At Udvar-Hazy’s retirement from
ILFC in February 2010, the company had an owned fleet of 933 with
managed aircraft pushing over 1,000 aircraft in total with a net book value
of $38.5 billion. He subsequently co-founded Air Lease Corporation
which later went public on the NYSE in 2011.
GPA was formed by Guinness Peat Group and Aer Lingus, where
Ryan was one of the executives in 1975. At its peak, it had a valuation
of €4 billion and 400 aircraft fleet. In 1992, it tried to go public by hav-
ing a public offering of €850 million which collapsed due to the lack of
3 GLOBAL AIRCRAFT LEASING INDUSTRY CHARACTERISTICS 35
demand given the bearish environment at the time due to the first Gulf
War (“High-flying Irishman” 2007). This failed IPO (Initial Public
Offering) created a liquidity crisis for the company as it had a very large
aircraft order book of 700 aircraft worth “$17 billion and not enough
capital to fund them” and started the downfall of the company
(Humphries and Hepher 2014).
By 1993, the liquidity crisis forced GPA to restructure and most of its
assets and employees were transferred to GE Capital under the GE Capital
Aviation Services (GECAS) subsidiary. GECAS built on this transaction is
still one of the heavyweights of the industry and to this day has been either
the top one or top two aircraft lessors globally. GECAS took over “about
60 percent of GPA’s fleet and 75 percent of its people” (Humphries and
Hepher 2014). It also included an option to buy a large portion of the
company.
After the GECAS transaction, GPA continued to have a large fleet
and own a substantial fleet and to innovate. In March 1996, GPA sold
229 aircrafts for $4.048 billion, which was the second-largest securitiza-
tion at that time. This was used to refinance its debts (Bowers 1998). In
November 1998, Texas Pacific Group (TPG) acquired 62% of the com-
pany and renamed it AerFi Group plc. They also restructured GECAS’s
option down to 23%. AerFi acquired Indigo Aviation, a Swedish aircraft
lessor in December 1999 and in November 2000 AerFi was acquired for
$750 million by debis AirFinance (owned by DaimlerChrysler AG). In
March 2005, debis AirFinance was acquired by Cerberus Capital. Debis
AirFinance was subsequently renamed AerCap, which later acquired
ILFC from its parent American Insurance Group. By 1990, GPA had
close to $17 billion order book for 700 new aircrafts spread out for the
future years.
At its peak, it had over 400 employees and many subsidiaries outside of
its mainline business including a helicopter leasing joint venture set up in
June 1990 with CHC Helicopter called GPA Helicopters Ltd (Reuters
1990). In addition, many of GPA’s employees have spread throughout the
industry and helped found some of the biggest players in the industry
including GECAS, CIT, AerCap (acquired ILFC and Genesis Lease),
Standard Charter (acquired Pembroke Capital), SMBC Aviation Capital
(renamed from RBS Aviation Capital and International Aircraft
Management Group previously), Aircastle, BBAM and Fly Leasing (from
36 D. YU
Babcock and Brown). GPA set up Ireland as the premier center of the
aircraft leasing industry that it enjoys today. The existence of specialized
personnel along with a relatively low corporate tax environment and the
supporting services industries has allowed the country to remain the cen-
ter of the aircraft leasing industry.
2 Jurisdictions for Leasing: Ireland, Singapore,

Hong Kong
In the aircraft leasing industry, the main country and hub of operation for
most of the industry is Ireland. Currently, Ireland is domicile to 50% of
the world’s aircraft fleet representing over €100 billion in assets and
Ireland has the overwhelming amount of the global top 15 lessors ranked
by fleet size (IDA Financial Services 2017). This is due to a couple of pri-
mary reasons, namely, government support, which results in a favorable
taxation regime in terms of tax incentives effectively resulting in low taxes
along with a large number of double tax agreements with other countries
that lower the friction costs of moving capital across jurisdictions. Double
tax treaties are treaties signed between two countries that avoid or miti-
gate the need to pay double tax—in both countries of domicile and coun-
try of incorporation.
These low taxes are the result of favorable governmental support in
terms of various policies to support the growth of the industry. The gov-
ernment has published a draft national aviation policy that specifically
endorses and advocates for the aircraft leasing industry. During 1980–2003,
the foreign tax rate was 10% and currently, the ‘trading’ status firms enjoy
a tax rate of 12.5% while a standard company tax rate without presence for
trading status is 25%. There are established, specific safe harbor rules for
the industry for what constitutes ‘trading company’ status. This is one of
the lowest corporate tax rates in the world. Generally, there are 0% with-
holding taxes on inbound and outbound lease payments as well as on
interest, dividends and royalties to the EU and tax treaty countries. In
2012, Ireland enacted unilateral credit relief on withholding taxes on lease
payments from non-double tax treaty countries. The extensive number of
double-tax treaties signed (72 have been signed) are in addition to the EU
Directives.
There are stamp duty exemptions and an effective 0% VAT regime.

For capital markets transactions such as asset backed securities (ABS)
and enhanced equipment trust certificates (EETCs), specific legislation
has been enacted to support these in addition to the existence of effi-
cient structures for these securitizations and other financings. Another
key in the favorable tax regime is the depreciation of the cost of the
aircraft that can be used to offset the rental income. The depreciation
policy is a straight line depreciation basis over eight years. As an EU
country, the country is not considered a ‘tax haven’, which has been an
increasing area of concern for companies and financing. The corner-
stones of this favorable tax regime were first enacted in the 1950s by the
launch of the International Finance Service Centre to support its
growth. While the industry is large in assets, it has been criticized for
paying just €23 million of Irish Corporation Tax in 2014 and €29 mil-
lion in 2013. Over the past five years as of 2015, it was confirmed by the
Ministry of Finance that the industry had paid only €123 million in
taxes (Deegan 2015).These figures reinforce the concept of low taxa-
tion for the industry.
Another important factor is the sound legal regime with Ireland’s use
of common law. This type of legal system is used extensively in the world
due to the spread of English law. Another important genesis is the birth
and demise of GPA as the experienced veterans then moved on to different
companies creating the entire value chain needed to sustain a healthy eco-
system and a hub of aviation leasing. The number and robustness of the
aircraft servicing industry in the country include general corporate ser-
vices such as banking, accounting, audit, and legal. As things have devel-
oped, these support services have specialized further and developed into
industry-specific focused firms and professionals including specific indus-
try consulting firms such as aircraft technical management, aircraft asset
management, placement of aircraft, remarketing of new and second-hand
aircraft, arrangers for various financings, third-party aircraft appraisal
firms, and so on.
Knowledgeable workers are also supported by local universities with
a focus on aviation and leasing that is a feedstock for new employees of
these companies. Geographically, the country is situated in between
continental Europe and USA which enhances its recruitment efforts.
The aircraft leasing industry employs more than 1200 people directly
38 D. YU
and indirectly through professional services firms linked to the industry

(IDA Financial Services 2017). It was noted by another source that the
industry employs 1000 people directly and 2000 staff indirectly and
spends over €135 million a year on professional services and infrastruc-
ture as of 2015.
In addition to Ireland, Singapore is another popular jurisdiction for
aircraft leasing. Again, the main drivers are governmental support
resulting in low taxation and numerous double tax treaties. Singapore
has 76 double tax treaties including three countries that have signed but
have yet to be ratified. The main government support scheme is the
Aircraft Leasing Scheme (ALS) which started in 2012. It provides a low
corporate tax of 5% or 10% on the profits for aircraft leasing companies
that fulfill certain requirements as compared with a statutory corporate
tax rate of 17%. For withholding taxes, there is an exemption on aircraft
purchase and automatically on payments for financing payments with
offshore lenders. For tax depreciation of the assets, approved companies
under the ALS have an irrevocable option to depreciate the aircraft over
any number of years from 5 to 20 years (EDB Singapore 2012). In
January 2017, ALS was recently renewed for another five years along
with the initial qualified party, Bank of China (BOC) owned BOC
Aviation.
In addition to the favorable government support, Singapore’s geo-
graphical location and climate is favorable for business. It is known as a key
hub for finance and a regional beacon for Southeast Asia and Asia itself
and is physically located closer in proximity to many locations in Asia giv-
ing it an advantage for some companies. It also has a sound legal environ-
ment that is also based on common law similar to Ireland. While there are
many experienced professionals in finance and related industries, there is
not the depth of experienced talent who are specialized in aircraft leasing
as compared to Ireland. The finance center is an active hub for capital
market and lending, among others. Industry-specialized and related pro-
fessional service firms have grown in the past few years but are not in
abundance as compared to Ireland.
Hong Kong is the new jurisdiction trying to become the leader and
hub for aircraft leasing with special emphasis in capturing outbound
Chinese capital flow. Similar to other jurisdictions, government support
through taxation regimes is an important point along with double tax
treaties. Historically, the tax laws in the 1990s were changed to clamp
down on the abuse of the popular Hong Kong leveraged leasing but it also
meant that there were fewer incentives for aircraft lessors to establish in
Hong Kong. Recently on January 18, 2017, in the Chief Executive’s pol-
icy address, he proposed in the Proposed Dedicated Tax Regime to
Develop Aircraft Leasing Business in Hong Kong that the tax rate for
qualified aircraft lessors and its profits will be half of the normal profits tax
rate for corporations, so 8.25% reduced from the 16.5% prevailing rate
(Hong Kong Legislative Council 2017). He also noted the taxable amount
of lease rental payments derived to a non-Hong Kong-based lessee will be
equal to 20% of the tax base which means the gross rentals less any deduct-
ible expenses. This is better than the previous gross rental taxation but did
not go as far as other competitor jurisdictions by including tax deprecia-
tion for aircraft leased to non-Hong Kong-based airlines and lessors
(Hong Kong Legislative Council 2016). These updated policies were
finally set into law under the Inland Revenue (Amendment No. 3)
Ordinance 2017 in July 2017 to mark the 20th anniversary of the hando-
ver of Hong Kong.
For double tax treaties, Hong Kong currently only has 36 signed dou-
ble tax treaties. Chief Executive Mr. C.Y. Leung first announced this
intention on January 14, 2015 and signed the updated double tax treaty
with China on April 1, 2015 to reduce withholding tax rate on aircraft and
ship leasing to 5% from 7%, which is the lowest double tax treaty signed by
China. This compares to 6% withholding tax rate for Ireland- and
Singapore-based companies from China (Hong Kong Inland Revenue
Department 2017). These are part of the continued efforts by Hong
Kong to act as the gateway for Chinese capital flowing outbound as main-
land China is also fast becoming one of the main regions for aircraft and
ship leasing.
Hong Kong also enjoys a sound legal system based on common law
similar to Ireland and Singapore. Hong Kong is viewed as a bigger
financial hub in Asia compared to Singapore but it lags even further in
terms of personnel and service firms to support the aviation industry.
There are current efforts to increase the government support through
more favorable taxation regimes of the jurisdiction along with other
characteristics that will make domiciling aircraft in Hong Kong more
competitive.
40 D. YU
3 Aircraft and Airline Market Drivers

Aircraft leasing is a complex business. There are so many moving pieces
and drivers that affect valuation, usage, and others. In this discussion, air-
craft technical aspects will be ignored and focus will be on the discussion
of the economic and financial drivers that affect this business. At the very
top level, the major stakeholders here are the original equipment manufac-
turers (OEMs), airlines, financiers, and governments. Each of these stake-
holder’s viewpoints contributes to the set and subset of drivers both on
the demand and supply side that contributes to the growth trend of the
aircraft leasing and its valuation.
4 Overall Demand Drivers

The global airline industry has been growing rapidly since the mid-1940s.
Overall traffic growth and the most referenced proxy for the health of the
industry is determined by the number of kilometers that passenger has
flown expressed by revenue passenger kilometers (RPKs). See Fig. 3.1 for
the tremendous world annual traffic growth from 0.4 trillion RPKs in
1965 to over 6 trillion RPKs in 2015.
This growth is resilient to temporary shocks of the various crises such
as the oil crisis, Gulf crisis, Asia crisis, World Trade Center crisis, SARS,
and the global financial crisis. There are many important drivers and
Oil Crisis Oil Crisis Gulf Crisis Asian WTC SARS Financial
Crisis Aack Crisis
7.0
6.0
5.0
Trillion RPK
4.0
3.0
2.0
1.0
0.0
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Fig. 3.1 Annual world traffic (trillion RPK) and external shocks. (Source:
International Civil Aviation Organization 2016; Airbus 2016)
metrics for this industry to understand the fundamental demand drivers of

the aircraft and airline market.
4.1 Economic Drivers
Generally, economics and finances of people and airlines are a major com-
ponent driving demand for the airlines and thus the aircraft leasing indus-
try. For a measure of general wealth and the economy, the most generally
used metric is gross domestic product (GDP). There are several ways to
view this, including nominal GDP, real GDP, and per capita GDP. Nominal
GDP can be derived by the expenditure approach, which is one of the
common approaches.
GDP=C (consumption) + I (investment) + G (government expenditures) +

(X (export) – M (imports) (net exports)
Real GDP takes into account inflation which is subtracted from nomi-
nal GDP and per capita nominal or real GDP is the respective figures
divided by the number of the population to obtain an average wealth per
person figure. Per capita GDP is a good gauge for comparison of relative
wealth between various countries and regions especially with adjustments
for population differences.
As GDP is broken down by its components, consumption by private
entities and non-government consumers is one of the main drivers for
aviation. While the other inputs in this model are also important to avia-
tion, they are more indirect and consumption is the most direct for
demand. Generally, economic output drives activity in business travel and
cargo services but also stimulates consumers for more leisure-type travel.
Both Holloway (1997) and Lenoir (1998) described cycles in the context
of the air transport industry and Lenoir (1998) found that nominal GDP
and air traffic growth were positively correlated (Fig. 3.2).
These growth rates are shown to be mostly correlated to each other
except for periods of crisis such as the oil crisis, Gulf crisis, WTC crisis, and
SARS. The period during the latest global financial crisis showed the
growth to be nearly identical compared with the other previous exoge-
nous shocks. While this correlation has been shown over long periods
historically, there have been some recent changes to this relationship.
Further work by IBA Group has shown that the correlation has continued
over 1985–2015 but the trends have shifted during the period of
42 D. YU
10.0% 16.0%
9.0% 14.0%
8.0%
12.0%
World GDP Growth (%)
World RPK Growth (%)

7.0%
6.0% 10.0%
5.0% 8.0%
4.0%
6.0%
3.0%
2.0% 4.0%
1.0% 2.0%
0.0% 0.0%
-1.0%
-2.0% -2.0%
-3.0% -4.0%
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015e
2017f
World GDP Growth % World RPK Growth %
Fig. 3.2 World airline RPK growth and world GDP growth: 1971 to
2017F. (Source: International Monetary Fund 2016; Airline Monitor 2016;
CAPA 2016)
1985-2009 1985-2015
8,000 8,000
7,000 7,000
6,000 6,000
5,000 5,000
RPK -
RPK-
4,000 4,000
3,000 3,000
2,000 2,000
1,000 1,000
0 0
25,000 35,000 45,000 55,000 65,000 25,000 35,000 45,000 55,000 65,000
GDP X 10^9 US$ GDP X 10^9 US$ 2005
Fig. 3.3 Global traffic and nominal GDP correlation. (Source: International Air
Transport Association 2016a; IBA Group 2017)
1985–2009 between RPK passenger growth and global nominal GDP as

compared to the steeper, correlation found during 2009–2015.
Figure 3.3 notes a recent observation of higher growth of air traffic per
increase of wealth as measured by nominal GDP. Airbus has also looked at
the relationship between real GDP and global traffic. As shown in Fig. 3.4,
16.0%
14.0%
12.0%
10.0%
8.0%
Growth Rate %
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
Real GDP
Air Traffic (RPKs)
Air Traffic Growth To Real GDP Economic Growth Rao
Fig. 3.4 Relationship between passenger traffic and real GDP evolving over
time. (Source: International Civil Aviation Organization 2017; IHS Economics
2016; Airbus 2016)
there is a decreasing ratio of the passenger traffic to real GDP as the dif-
ferent decades progressed. This decreasing relationship ratio has reverted
upwards back only in the latest decade.
In Fig. 3.5, emerging markets show signs of higher GDP growth
compared with advanced markets and the world average, which tends to
be correlated. Emerging markets do have more volatility than the other
two groups. In some of these high-growth emerging economies such as
China and India, Airbus has found that private consumption is more of
a specific main driver than just the broader GDP. Airbus’ yearly forecast
models have recently been adjusted in their 2016 version to reflect this
change. In the US market, while historically GDP and air traffic tracked
well, domestic US passenger growth has outpaced US real GDP growth
(Airbus 2016).
44 D. YU
30%
25%
20%
GDP Growth Rate %
15%
10%
5%
0%
-5%
-10%
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
World High Income Countries Middle Income Countries
Fig. 3.5 GDP growth by country income. (Source: World Bank 2017)
4.2 Business Cycles in Aviation and Industry Profitability

There has been much research conducted about general business cycles
since the founding of modern economics by Smith (1776) and his theories
of economic growth and how it is impacted by cycles. Robertson (1915)
noted that businesses have a cycle in relation to investments and are prone
to over-investment and then periods of underinvestment as too many
goods are in the market, thus creating a cycle. Eisfeldt and Rampini (2008)
show how capital reallocation is important especially during the stages of
the business cycle.
Like all types of business, the air transport industry is prone to business
cycles. These cycles of boom and recession are particularly acute and com-
mon in the airline industry. Figure 3.6 shows the various parts of the air-
craft and airline cycle from boom to bust and back to the growth stage.
Shearman (1992) notes that economic conditions regionally, nationally
and internationally affect the air transport industry. Goolsbee (1998)
showed the decision making of aircraft in business cycles. Liehr et al.
(2001) and Lyneis (2000) describe the dynamics of the aviation business
cycles through a systems dynamics problem. The industry is prone to
under- and over-investment like other businesses as evidenced by airline
2.Discounting of 4. Discriminating travelers choose best

fares by airlines deals, driving down yields and decreasing
to gain greater operating margins
market-share 5. Slowing of economic growth,
possibly influenced by external
factors such as political unrest or 11. Strong
global terrorism economics growth,
3. New aircraft which increases
orders in response 7. Overcapacity in the passenger demand
1. Strong to increased market due to falling
economic passenger traffic demand combined with
growth, which and airline service cutbacks to control
increases profitability 6. Poorer airline results costs
passenger coinciding with delivery 10. Stimulation
demand of aircraft ordered during packages begin to
‘boom’ times; falling re-energize
passenger demand economics
8. Fares
increasing to 9. Falling yields and
compensate for passenger demand; fleet
falling traffic renewals delayed; possible
demand airline bankruptcies
Fig. 3.6 Aircraft and airline market cycle
capital expenditures as a percentage of operating cash flows. Figure 3.7

shows there are only a few years (mid-1980s, 1990s, 2000) that the world
airlines are spending less on capital expenditures than operating cash flows
which is non-sustainable in the long run.
Interest rates set as part of monetary policy by the US Federal Reserve
and other national institutions globally have tremendous effects upon the
economy as well as the airline business due to the changes in business
financing costs as well as the overall business sentiment. Depending on the
surprise and expectation nature of the changes, different responses may
result. Interest rates along with interest swap rates, where floating rates are
fixed over a period of time of the contract, have a direct input into debt
cost of financing. For aircraft leasing, interest swap rates are a main indica-
tor of the direction the lease rates offered for aircraft on lease as it reflects
an underlying cost of capital for the transaction. Figure 3.8 shows the
historical trends of the various USD Swap and LIBOR rates tenors. The
bands between the different rates are much tighter in the preceding years
than the later years.
46 D. YU
450%
400%
World Airline CapEx / Operang CF %
350%
300%
250%
200%
150%
100%
50%
0%
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015e
Fig. 3.7 World airline capital expenditure as a percentage of operating cash flow:
1979 to 2016E. (Source: Airline Monitor 2016; International Air Transport
Association 2016b; CAPA 2016)
12.0%
10.0%
Swap or LIBOR Rate
8.0%
6.0%
4.0%
2.0%
0.0%
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
1 Yr Swap 2 Yr Swap 3 Yr Swap 5 Yr Swap

7 Yr Swap 10 Yr Swap 1M Libor 3M Libor
Fig. 3.8 USD swap and LIBOR rates. (Source: Bloomberg 2017)
Given the cyclical nature of the industry, cash flows and therefore prof-
itability is a key metric of sustainability and growth of the aviation industry
as well as with other industries and as shown, it tracks the global economy.
There are many important input factors that affect airline cash flows and
profitability and many studies have been conducted over the decades on
this subject (Kasper 1988; Pryke 1987; Doganis 1985; Laprade 1981;
Pearson 1976; Straszheim 1969; etc.).
As the correlation of passenger traffic and GDP growth is shown in
Fig. 3.2, it is not surprising that there is a correlation between GDP
growth and the airline’s financials as measured by net post tax profit
margin. This is seen in Fig. 3.9, which shows a weaker correlation
between these metrics, with the differences being more acute after the
WTC and SARS crises. On a further comparison historically, Fig. 3.10
shows the airline’s operating profit or EBIT margin is more correlated
to global GDP growth than the net post tax profit margin shown in
Fig. 3.9. Figure 3.10 also shows the extreme variances of the EBIT
margin as it is both larger and smaller than the growth in the vari-
ous cycles.
5.5% 7.0%
4.5% 6.0%
Net Post-tax Profits as % Revenues
3.5% 5.0%
World GDP Growth Rate %

2.5%
4.0%
1.5%
3.0%
0.5%
2.0%
-0.5%
1.0%
-1.5%
-2.5% 0.0%
-3.5% -1.0%
-4.5% -2.0%
-5.5% -3.0%
1971 1980 1990 1996 2005 2012
Net Post-tax Profit Margin World GDP Growth
Fig. 3.9 World economic growth and airline profit margins: 1970 to 2011.
(Source: International Air Transport Association 2012; International Civil Aviation
Organization 2012a; Haver Analytics 2012)
48 D. YU
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Airline Industry EBIT Margin Global GDP Growth
Fig. 3.10 EBIT or operating margins and global GDP growth. (Source:
International Air Transport Association 2016b; International Civil Aviation
Organization 2016; International Monetary Fund 2016)
4.3 Exogenous Shocks
In addition to normal business cycles, there have been many major
exogenous shocks to the economy which, therefore, in turn, have had
significant effects on the aviation market. These major shocks were usu-
ally major global economic events and have affected the aviation market
in terms of the significant reduction in traffic demand, aircraft values,
and the other drivers directly or indirectly inherent to aviation. These
major exogenous shocks to the system include the First Oil Crisis 1973,
Second Oil Crisis 1978–1979, Gulf War 1 Crisis 1990–1991, Asian
Financial Crisis 1997–1998, 9/11 World Trade Center Attack
2001–2002, Avian Flu or SARS 2003–2004, and Global Financial Crisis
of 2008–2009.
In addition to these very large events, there have been smaller and more
regional exogenous shocks that have also affected the air transport indus-
try and general economics—including the Swine Flu 2008, Icelandic Ash
Cloud 2010, Japanese Tsunami 2011, and Hurricane Sandy 2012. Going
forward, inevitability will be more of these exogenous shocks and smaller
regional events, and one that is still being played out is Brexit 2016. See
Fig. 3.1 showing the temporary negative effects of these exogenous shocks
to the overall world traffic. Franke and John (2011), Pearce (2012), and
Bjelicic (2012) all look at the state of affairs post the latest 2008 eco-
nomic shocks.
4.4 Fuel Prices
For airline’s cost breakdown, the historical rule of thumb is 50% for
direct operating costs including all costs relating to flight operations
like aircraft, fuel, maintenance, pilots; 30% for ground operation costs
including servicing the passenger and aircraft and landing fees, and sales
fees; and 20% for system operating costs including administrative, mar-
keting, and other general costs like in-flight services and group equip-
ment ownership (International Civil Aviation Organization 2017).
Given the high cost of fuel historically, this is the number one cost cat-
egory of around 30%, labor being 20%, depreciation 6%, aircraft rentals
4%, and everything else 38% according to International Air Transport
Association (IATA) in 2008. There is much volatility in the jet fuel
prices over time as seen in Fig. 3.11.
$5.0
$4.5
$4.0
$3.5
$3.0
$/Gallon
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Gulf Coast Jet Fuel Calendar Swap Price

NY Harbor 54-Grade Jet Fuel Spot Market Price
Fig. 3.11 Jet fuel prices. (Source: Bloomberg 2017)

50 D. YU
Fuel prices have large spikes with the global financial crisis. Currently
for US airlines, fuel has come down to the second largest cost compo-
nent representing about 16%, labor increasing to 33%, aircraft rentals
increasing to 7% of the cost (A4A 2017). Fuel cost is still an important
driver of the success of all airlines and the recent run up in prices from
the low point is having significant impacts on airlines. Specifically, the
fuel price and the financial state of airlines has direct correlation as air-
craft traffic consumes large quantities of fuel and even small cent changes
in the fuel price can result in millions of dollars to the bottom line
financially.
4.5 Traffic Flows and Population Demographics

Another significant metric is passenger yield which is a measure of the
average fare paid per kilometer or mile. Yield differs due to different
supply and demand and can show the differences between the market
segments, seat classes, seasons, and geographies. While generally the
higher the better, it should not be viewed only in isolation but in addi-
tion to the other metrics to be able to put the figures into the whole
market perspective. This can help the airline develop price discrimina-
tion and differentiation strategies. There can be varied movements in
the different sub-geographies and as Airbus notes, in the past year
“yield has played a significant role” specifically in the US domestic mar-
ket (Airbus 2016). Figure 3.12 shows the decrease of global yield based
on an actual and constant USD exchange rate basis over the past
few years.
Historically, besides business travel, only the upper class of the popula-
tion was a consumer of aviation travel. The global rise of the middle class
has become a large driver of aviation for leisure activities. According to
Airbus and McKinsey, there is a large growth in the middle class globally
and especially acute in the emerging economies compared with more sta-
ble projections of mature economies.
Shown in Fig. 3.13, Asia has 1284 million middle-class households
(46% of global total) with a total global middle class of 2793 million
(38%) compared to a global population of 7350 million. Middle-class
household is defined as households with annual income between
$20,000 and $150,000 (PPP constant 2014 prices). Another factor
0.130
0.125
USD Per RPK, Seasonally Adjusted
0.120
0.115
0.110
0.105
0.100
0.095
0.090
0.085
0.080
2011 2012 2013 2014 2015 2016 2017
Global Average Yield
Global Average Yield, USD Constant Exchange Rate (Jan 2011)
Fig. 3.12 Airline (passenger) yield. (Source: International Air Transport

Association 2016b; DIIO 2017; Thomson Reuters Datastream 2017)
6,000 (54.6% Tot.

(46.3% Tot. Populaon)
Populaon) 4,830
5,000
(38.0% Tot. 3,776
Populaon)
Populaon (Billions)
4,000
(28.6% Tot. 2,792
Populaon)
3,000 3,528
1,867 2,602
2,000 1,738
911
1,000 206 310 441
130
826 848 864 861
0
2005 2015 2025E 2035E
Mature Economies Other Economies Emerging Economies
Fig. 3.13 Growth of the world’s middle class. (Source: Oxford Economics
2016; Airbus 2016)
52 D. YU
10.0 80.0%
9.0
World Populaon And Share of Urban
70.0%
Agglomeraon Evoluon (Billion)
8.0
60.0%
7.0
Urban Share %
6.0 50.0%
5.0 40.0%
4.0 30.0%
3.0
20.0%
2.0
1.0 10.0%
0.0 0.0%
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Rural Urban Urban Share
Fig. 3.14 Growth of urbanization. (Source: UN Population Division 2016;

Airbus 2016)
that has contributed to increased wealth and consumption is the trend

for global urbanization as shown in Fig. 3.14. Currently, the urban
share of the global population is approximately 55% which is forecasted
to reach almost 70% on an overall population of nearly 10 billion people
by 2050.
Hand in hand in this globalization is the increased liberalization for
immigration including the simplification and lengthening the number and
duration of visits of visas including visa free, visa-on-arrival, and visa waiver
schemes. This has been evident by recent announcements of China and
USA, China and Australia visa schemes, Schengen visa-free area in Europe,
and others. These increased liberalizations have helped propel both busi-
ness and leisure-travel demand. Increased number of bilateral air agree-
ments and regional treaties and associations such as ASEAN, NAFTA, the
proposed TPP, and so on, have increased the demand. As shown in
Fig. 3.15, there is a significant growth of bilateral air service agreements
from 0 in 1945 to more than 2500 in 2010. All these trade agreements
3,000
Number of Bilateral Air Services Agreements
2,500
2,000
1,500
1,000
500
Fig. 3.15 Growth of bilateral air services agreements in the world. (Source:
International Civil Aviation Organization 2012b; Airbus 2016)
and regions further stimulate demand for aviation both for passenger and
cargo services.
5 Overall Supply Drivers
5.1 Manufacturers and Parked or Retired Aircraft

In addition to the demand drivers, there are a variety of supply drivers
including new orders, deliveries, parked aircraft levels, retirements, sec-
ondary trading activity, and useful economic life of aircraft. Starting with
the main manufacturers, there are currently two large commercial aircraft
manufacturers of significance—Boeing and Airbus—who dominate the
market as a roughly split duopoly. This discussion will focus on large air-
craft with greater than 100 seats. In the past several years, there has been
a renewed interest in new aircraft manufacturing, especially on the regional
and larger single aisle or narrowbody aircraft. Most of these new entrants
54 D. YU
are focused on the regional aircraft of up to 100 seats including Canada’s

Bombardier CS300 and CS100, Russia’s Sukhoi SSJ100, and Japan’s
Mitsubishi MRJ90 and MRJ70. The only narrowbodies in advanced
development and testing are Russia’s Irkut MC-21 and China’s COMAC
C919. The only widebody currently in conceptual design development is
the COMAC and Russian joint venture, the C929. In addition to these
manufacturers, there are also several other regional commercial and busi-
ness aircraft manufacturers such as Embraer.
As there are only two main manufacturers, they control the order book
and set the tone for the pricing of new aircraft. As is the norm in the indus-
try, manufacturers set list prices per model and update them yearly. There
can be discounts and other incentives depending on the buyer, geography,
quantity of aircraft, and a variety of other factors including strategic or
competitive aims. Traditionally, airlines stick with one manufacturer for
the entire fleet or a certain purpose such as short haul until they have a big
enough fleet to have multiple suppliers as changes are very sticky due to
the investment of not only the asset but the associated supply chain includ-
ing spare parts, crew and pilot training, certifications, and other things
that need to be changed as well. These days, more startup airlines diversify
earlier, utilizing both aircraft manufacturers. As seen in Figs. 3.16–3.17,
the gross and net orders, deliveries, cancellations, and backlogs of Airbus
and Boeing are shown. There can be large demand for popular aircraft and
the delivery times can be stretched out into the future stretching out over
ten years.
Most new aircraft orders include both firm and options that can be
declared by the buyer. In addition, there are options to convert to another
type of the same aircraft family such as Airbus A319, A320, A321 in the
A320 family or Boeing 737-700, 800, 900 in the 737 NG family. New
orders have a lot of customization as there are a lot of options that need to
be set per order such as weight certifications, crew training, spare parts,
and other various supports that can be provided. As part of these orders,
there are generally pre-delivery payments (PDPs) due to the manufacturer
representing roughly 30% of the total cost while the aircraft price has a
referenced base year and escalation to the delivery date based on a manu-
facturer inflation index representing inflation and other factors.
These orders have a variety of purposes for the buyers. They can be for
new routes and other new growth areas or replacement for retiring or old
aircraft. In addition, as shown in Fig. 3.18, oil pricing and new orders are
directionally correlated with a lag effect. Boeing and Airbus’ new orders
Fig. 3.16 OEM orders, cancellations, and backlog activity. (Source: Airbus 2017; Boeing Corporation 2017)
3 GLOBAL AIRCRAFT LEASING INDUSTRY CHARACTERISTICS
55
56
D. YU
Fig. 3.17 Airbus and Boeing delivery activity. (Source: Airbus 2017; Boeing Corporation 2017)
Fig. 3.18 Brent crude oil and OEM gross orders: May 2006–October 2016.
(Source: Bloomberg 2017; Airbus 2017; Boeing Corporation 2017)
are similar directionally with some differences shown. This lag effect is
acute with the drop in oil prices in 2008 and 2014. As order backlog can
stretch for many years, the availability of the latest order slots can be an
advantage for operating lessors or sellers when negotiating with airlines.
Another driver in the supply of aircraft is the number of aircraft parked
or stored. Aircraft which is not wanted can be parked in areas temporarily
or for longer periods in mostly desert locations such as Arizona and Europe
to prevent corrosion damage. In addition, these aircraft should be put on
specific short- or long-term aircraft maintenance packages for parked air-
craft that monitors for corrosion, test the engines periodically, and other
tasks to enable it to return to service and prevent more costly wear down.
When oil prices have been high, there have been more instances of older
and more heavy fuel consuming aircraft such as four engines instead of
two engines that have been parked. These older aircraft and heavy fuel
consuming aircraft generally have higher operating costs and less financial
viability than newer more efficient aircraft and are the first to be parked or
returned to the lessor.
58 D. YU
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Deliveries as % of Fleet Fleet Growth % Retirements as % of Fleet
Fig. 3.19 World aircraft deliveries and retirements as percentage of fleet and fleet
growth: 1971 to 2017F. (Source: Airline Monitor 2016; CAPA 2016)
Once an aircraft is deemed to be not wanted and retired, they can be

parked or sold. On a global scale, retirements are a small percentage of the
overall fleet while deliveries and fleet growth are highly correlated as
shown in Fig. 3.19 with the drops of the delivery percentage aligned with
the exogenous shocks.
The retirement and replacement decision analysis is done when the
costs of operating the aircraft are more than the revenues that can be gen-
erated as compared with other aircraft types. As discussed earlier in section
4.4, fuel is a large factor in the operating costs of an airline. As the percent-
age of fuel costs increase for an airline, there is need for more efficient,
newer aircraft to replace aging fuel inefficient aircraft and conversely this is
true as well in times of low fuel prices when airlines tend to extend the age
of their fleets by decreasing retirements as shown in Fig. 3.20.
There is a lag that occurs from the observation to decision and imple-
mentation. For 2017, the average overall retirement age was 23.6 years
with the most commonly retired aircraft being narrowbodies as the aver-
age retirement age was above the common 25 year retirement assumption.
While widebody aircraft were retired at an average age of 23.5 years, there
are noticeable differences between the different widebody models
(Fig. 3.21).
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Retirements % of Deliveries Fuel as % of Revenue
Fig. 3.20 Aircraft retirements: 1970 to 2015. (Source: Airline Monitor 2016;
CAPA 2016)
30.0
25.3
25.0 23.5 23.2
19.7
20.0
Aircra Age
15.0
10.0
5.0
0.0
Narrowbody Widebody Turboprop Regional Jet
Fig. 3.21 Average age of retirements in 2017 by aircraft class. (Source: IBA
Group 2017)
5.2 Financing Environment and Current Trends

Throughout the history of aircraft leasing, various financing trends have
come and gone while the industry has grown significantly to the current
$126 billion forecasted of new delivery funding requirements for 2017
60 D. YU
(Boeing Capital Corporation 2017). In addition to the various options for

funding, currently, there are more commercial banks than ever before
involved in the equity side of the business along with newer capital sources
such as insurance companies. These new players are additionally more
diverse in geographical breakdown by their funding sources as compared
between the traditional western players and newer eastern players. As
2017 further develops, this section will look at the upcoming trends espe-
cially in relation to geographical sources of the funding as well as a com-
parison of its characteristics.
5.3 Global State of Aircraft Funding

Airlines and aircraft have traditionally been financed by equity and bank
financing facilities. These sources have continued to evolve with the sup-
port of the aircraft manufacturers and other innovative structures by the
continued increase in demand from the users, mainly the airlines. These
innovative financing structures include the use of the operating lease by
capital sources such as commercial banks and leasing companies, both cap-
tive and non-captive to banks or manufacturers. The other sources of
funding include cash or equity (26% of 2017 funding); export credit agen-
cies (9% of 2017 funding); bank debt (34% of 2017 funding) by commer-
cial banks, institutional players such as private equity and hedge funds, and
tax equity; capital markets (31% of 2017 funding), including ABS and
EETCs; aircraft and engine manufacturer financings (0% of 2017 fund-
ing); and insurance financings (0% of 2017 funding) with a total of $126
billion of new aircraft funding requirements in 2017 (Boeing Capital
Corporation 2017). See Fig. 3.22 for a historical evolution of the percent-
age of the funding source for Boeing.
5.4 Export Credit Financing

Export credit agencies (ECAs) have been a significant source of funding,
especially during times of financial distress, but this has been trending
lower as capital markets financing has increased. In this case, development
banks, policy banks, and other governmental institutions are all consid-
ered ECAs as they support the domestic industries. Export credit support
by US Export-Import Bank (US EXIM) for domestic-built aircraft started
in the 1970s. The main beneficiaries in the aircraft manufacturer space
were Boeing and McDonnell Douglas. The recent low volume exhibited
45%
40%
% of Delivery Funding
35%
30%
25%
20%
15%
10%
5%
0%
Cash Capital Markets Airline Insurance

Lessor Bank Debt Export Credit Manufacturer
Fig. 3.22 Share of Boeing delivery funding by capital source. (Source: Boeing
Capital Corporation 2010, 2017)
in 2016 has been the uncertainty of US EXIM, given its large historical
support, especially to aircraft deliveries. After letting its charter expire in
July 2015, the US Congress reauthorized the bank in December 2015,
but it is still in a state of limbo because it is not able to conduct new busi-
ness given that it awaits Senate confirmation of members to reconstitute a
quorum. Only with a quorum can new funding decisions be made.
The Canadian, Brazilian, and other European export credit support
organizations are active in the aircraft segment as these are the areas where
active manufacturers are located. These specific ECAs include Export
Development Canada, Brazil Development Bank, Export Credits
Guarantee Department or UK Export Finance (UK), Federal Export
Credit Guarantees managed by Euler Hermes Aktiengesellschaft
(Germany), and Compagnie Francaise d’Assurance pour le Commerce
Exterieur (COFACE) (France).
Since the tail end of the financial recession, capital markets have seen a
significant rise in the number and magnitude of deals and it has risen to
represent about one-third of all new aircraft funding as shown in Fig. 3.22.
Figure 3.23 shows the elevated percentage of Boeing deliveries funded by
EXIM while post the global financial crisis, the funding share has decreased
significantly to 0%.These are represented by various securitization transac-
tions, including ABSs and EETCs. During this period, the vast majority of
the capital markets deals have been completed in the West but, in Asia, the
62 D. YU
35.0%
30.0%
Percentage of Boeing Deliveries
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Fig. 3.23 Percentage of Boeing deliveries funded by US EXIM. (Source: Boeing

Capital Corporation 2017)
market has only just started. There are more innovative financing struc-
tures now being completed in onshore China and Hong Kong.
The author views the continued trend to continue due to more capital
markets deals being completed globally in 2017 but not by much in rela-
tive terms to other sources. The number of capital markets transactions in
Asia will increase substantially, along with the expanding interest by finan-
cial players as described below, but as a percentage of the overall global
market, this will not move the needle much in 2017. Boeing’s view of
historical sentiment of the different financing types is found in Fig. 3.24.
5.5 Capital Markets
Capital markets is a significant portion of the aircraft financing market
with 30% of 2016 global funding and 31% projected for 2017. Airlines can
tap the capital markets for syndicated unsecured debt or equity for the
company itself. They can also issue syndicated senior secured debt that is
backed by aircraft or other assets such as securitizations. In addition, they
can issue EETCs which are tranche debt secured by aircraft or other avia-
tion assets. EETCs are generally created tax reasons as they have higher
ratings than the airline issuing the security, thus decreasing the cost of the
borrowings. It also creates more security for the owner in the event of
bankruptcy as it is secured by the equipment asset such as aircraft. These
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E
Leasing Companies
Capital Markets
Commercial Banks
Export Credit Agencies
Private Equity & Hedge Funds
Tax Equity
Insurance
New Sources Of Funding
Airframe and Engine Manufacturers
Major Concern Major Concern / Cautionary Cautionary Cautionary / Satisfactory Satisfactory
Fig. 3.24 Aircraft financing environment. (Source: Boeing Capital Corporation

2010, 2017)
were first developed in the early 1990s. The differences between an equip-
ment trust certificate (ETC) and EETC is a liquidity facility attached to
the EETC to support the credit rating and the tranched nature of an
EETC similar to the securitization.
ABS is similar to EETC but is issued by a special purpose vehicle man-
aged by a lessor or investor instead of airlines. The major difference
between EETC and ABS is EETC is issued by one airline while ABS
spreads the risk with many underlying airline credits. The structure was
first brought to market in 1992 by GPA and Citicorp with ALPS 92-1
with 14 aircrafts valued at $521 million. ABS usually contains a spread of
manufacturers, lessees, geographies, and narrowbody and widebody types
of aircraft. GPA continued to use this structure to finance its aircraft until
its demise through ALPS 94-1, Airplanes 96, and ALPS 96-1 (to refinance
the original ALPS 92-1). The market was nascent until the relaunch of the
structure by other lessors including Aercap, ACG, and Aircastle starting
in 2005.
Both of these structures have tranches including, senior, various more
junior tranches and equity which all have varying amounts and interest
rates. This provides optimal matching of the desired credit exposure at the
lowest cost. These structures also have retained outside servicers and con-
sultant providers such as technical and appraisals to monitor the transac-
tions. This might create an increased burden on the underlying airline
lessees. These structures have been popular in USA especially the Chapter
11 bankruptcy regime, and especially Section 1110, overseeing the
64 D. YU
repossession of a bankruptcy lessee and possible replacement of the air-

craft. Some of the other benefits of these capital markets transactions are
the ability to move large amounts of assets off-balance sheet at lower bor-
rowing costs, while retaining the management of the portfolio (still pro-
viding fees) or still retaining the equity tranches.
5.6 Commercial Banks: Financiers and Re-Entering

as Investors
Commercial banks have always played a significant role in the aviation
finance market. They have traditionally provided financing facilities, both
secured and unsecured term or revolving credit facilities. Recently there
have been more unsecured term loan facilities completed at the lessor
company level where traditionally the commercial banks have focused on
the senior secured financing of specific aircraft assets. In addition, more
commercial banks have again reentered the equity investment in the indus-
try and have acted as lessors and equity players.
One of the subtrends is in the change of the overall mix in terms of
geography. In the late 1980s and early 1990s, banks such as Morgan
Stanley not only arranged but also used their balance sheets to become
equity investors. Dean Witter was one of the original founding sharehold-
ers of Aviation Capital Group (ACG) in 1986. The merged Morgan
Stanley Dean Witter combined their aircraft portfolios into the acquired
AWAS in 2000. The end of this era came when John Mack took over as
chief executive officer and almost immediately sold AWAS to Terra Firma
once it was determined to be a non-strategic asset.
Today in USA, Bank of America Merrill Lynch and CIT are still active
as bank-owned lessors through their mainly Irish subsidiaries. CIT will
soon be removed from this list when the expected closing of the sale to
HNA Group is completed in the first quarter of 2017 because it too has
been deemed a non-core asset. Wells Fargo too entered the space through
a joint venture with Avolon in 2013.
In Europe, DVB, Santander, and Standard Chartered, through its acqui-
sition of Pembroke in 2007, are still active as investors. It is interesting to
note that Standard Chartered is now in a joint venture with an undisclosed
Chinese investor for a separate aircraft leasing investment entity. The once
active HSH Nordbank, through its formation of the Amentum platform,
has since been sold to its management in an management buy-out (MBO).
This was because the bank has downsized as a result of the problems with
its shipping portfolio.
The story of Boullioun Aviation Services, Inc. (Boullioun) is interesting
because it was bought from Sumitomo Trust and Banking by Deutsche
Bank in 1998 and subsequently sold to WestLB, another German bank, in
2001. WestLB, once quite active as an equity investor, also had a 35.5%
shareholding in Singapore Aircraft Leasing Enterprise (SALE) until its sale
to Bank of China in 2006 which later renamed it to BOC Aviation, when
it decided these were noncore assets and refocused on its traditional
European banking business. WestLB too had issues in its shipping portfo-
lio and has further retrenched and this could be said about many of the
European banks in the space. The shipping problem story will continue to
be an impact, especially for European banks.
In Russia, VEB, Serbank, and VTB banking groups have also been
active through their leasing subsidiaries. Lately, they have encountered
difficulties with sanctions and currency issues. All of the above has hap-
pened as the East and the Middle East have seen large increases in activity
in the sector. Japan originally had a lot of interest in aircraft leasing—for
example, with Sumitomo Trust and Banking Company’s acquisition of
Boullioun in 1994 from the lessor’s namesake founder and its subsequent
sale to Deutsche Bank in 1998 as a result of the financial crisis of Japan
Inc. This interest in aviation was resurrected post-2010 and was high-
lighted by Sumitomo Mitsui Banking Corporation (SMBC)’s acquisition
of RBS Aviation Capital in 2012, among other merger and acquisition
transactions by other local parties. Australia’s Macquarie, Commonwealth
Bank of Australia, and Investec have all been active principal investors.
Middle Eastern banks have now joined in the mix including the National
Bank of Abu Dhabi.
Another driver rationale for this trend is the increased implementation
of higher reserve capital requirements on global banks by Basel III regula-
tions enacted by the global financial crisis and set for implementation
shortly. These proposed amendments to the final Basel III even before its
implementation, unofficially Basel IV, has even more stringent require-
ments that standardize risk models and do away with internal risk ratings
that have been discussed in depth previously. ECAs, on the other hand,
have a cover effect on this standardized higher risk rating and lower the
costs. These areas requiring large capital requirements such as aircraft leas-
ing and private equity may propel banks to reexamine and restructure
further or leave these investments.
66 D. YU
In addition, the industry is seeing more insurance companies come into

the space. Insurance companies with their large investment mandates have
traditionally invested in public equities, capital markets, and alternative
investments such as hedge funds. Through these asset classes, insurance
companies have had exposure to the aircraft leasing companies through
one or multiple streams. Some insurance companies have direct invest-
ments in aircraft leasing assets, such as ILFC when it was acquired by AIG
in 1990. Subsequently, AIG sold its ILFC subsidiary after the global finan-
cial crisis to AerCap and took a large shareholding in the new combined
entity in 2014.
Other large notable direct investments by insurance firms include
Pacific Life Insurance Company in ACG in 1996. The group has contin-
ued to expand, including acquiring Boullioun in 2005 and embarking on
a new joint venture with NWS Holdings Limited (NWS) in 2016. Other
mid-sized insurance companies in Europe have also started to invest
directly into aircraft leasing assets. Generally, these firms have invested in
similar profiled investments such as infrastructure or real assets through
ABS, EETC or other public and non-public equity and debt.
5.7 New Aircraft Operating Leases and Aircraft

Secondary Trading
Another finance composition driver is the growing amount of operating
leases as the percentage of all global Airbus, Boeing, and McDonnell
Douglas aircraft has grown from 22% in 1997 to 43% as shown in Fig. 3.25
(Ascend 2017).
Current global operating leases are around 50%. New operating leases
and the secondary trading levels of leased aircraft are strong drivers con-
tributing to the financing. All of these are drivers that affect the number of
aircraft produced and the sustainability of aircraft in use by the airlines.
New operating leases increased in 2017 for the Airbus A320-200 and
Boeing 737-800, by 32% and 20% respectively after a flat growth year in
2016 as shown in Fig. 3.26.
In the circa 150-seat segment, the A319-100 is outperforming the
Boeing 737-700 in terms of new operating leases while new operating
leases of 737-700s have declined in each of the last two years. The most
popular narrowbodies—Airbus A320-200 and Boeing 737-800 models—
show increased demand year on year. While there is still demand for
Boeing 737 classic aircraft, they now represent a smaller share of the
18,960
20,000
14,804
15,000
Global Aircra Fleet
12,760
10,712
9,123
10,000
5,000 43%
22%
0
1997 2002 2007 2012 2017
Leased Fleet Owned Fleet
Fig. 3.25 Growth of global operating lease market share. (Source: Ascend 2017)
800
688 688 719
700
Number of New Narrowbody
600
Operang Leases
500
400
300
200
100
0
2015 2016 2017
Fig. 3.26 New passenger narrowbody operating leases: 2015–2017. (Source:

IBA Group 2017)
leasing market. A321 operating lease demand peaked in 2016 but showed
a 19% year-on-year decrease in 2017 as shown in Fig. 3.27.
For new operating leases of widebodies, the market has been different
than the narrowbodies with a growth year in 2016 and then a down year
in 2017 as shown in Fig. 3.28.
68 D. YU
250
Number of New Narrowbody
200
Operang Leases
150
100
50
2015 2016 2017
Fig. 3.27 New passenger narrowbody operating leases by type: 2015–2017.

(Source: IBA Group 2017)
160 148
136
140 129
Number of New Widebody
120
Operang Leases
100
80
60
40
20
0
2015 2016 2017
Fig. 3.28 New passenger widebody operating leases: 2015–2017. (Source: IBA
Group 2017)
The Airbus A330-300 has seen an increase in the number of new leases.
New Airbus A350-900 leases have increased as a result of increased deliv-
eries and the aircraft is becoming more established in the market. Boeing
767-300ER passenger new leases are down. There were no new leases for
the Boeing 787-8 in 2017; the market is clearly favoring the Boeing 787-9
40
35
Number of New Widebody
30
Operang Leases
25
20
15
10
5
0
2015 2016 2017
Fig. 3.29 New passenger widebody operating leases by type 2015–2017.

and operating lease demand continues to grow for this type which is
attractive for widebody lessors. There were also no new operating leases
for the A380. All leased A380s so far have been completed through sale-
leaseback transactions (Fig. 3.29).
Secondary trading volumes include aircraft sales with or without leases
attached and sale-leaseback transactions. Overall, secondary trading vol-
umes for narrowbodies have increased slightly in 2017 compared to 2016
as shown in Fig. 3.30.
Airbus A319-100 and Boeing 737-700 types have shown increased
trading levels since 2015 as investors diversify from the more popular, and
often highly priced, A320-200 and B737-800 models. Trades involving
Airbus A320-200 and A321-200 aircraft declined in 2017 compared to
2016. The 2015 A320 trade total was bolstered by AWAS’ sale of a subset
of its portfolio which included 50 A320 aircraft. Boeing 737 classic air-
craft show the vast majority of trades (88%) involving off-lease aircraft as
shown in Fig. 3.31.
Some will be converted to freighters, however many face retirement.
All of these observations exclude the large Avolon/CIT and DAE/AWAS
M&A deals which distorts the market data.
Secondary trading volumes for widebodies have remained flat over the
past two years as shown in Fig. 3.32. Although there are some differences
70 D. YU
1,400
1,069 1,083 1,148
1,200
Number of Narrowbody
1,000
800
Aircra
600
400
200
0
2015 2016 2017
Fig. 3.30 Passenger narrowbody secondary trading volume: 2015–2017.

350
300
Number of Narrowbody
250
200
Aircra
150
100
50
0
2015 2016 2017
Fig. 3.31 Passenger narrowbody secondary trading volumes by type 2015–2017.

based on the various aircraft models with the most popular type to trade is
the 767-300ER as shown in Fig. 3.33.
Boeing 787-9 aircraft is growing in popularity with lessors and inves-
tors with sale-leaseback transactions driving increased secondary trades.
The 787-9 now accounts for the majority of current 787 production.
Secondary trades of the smaller 787-8 have declined as a result.
300
277 267 275
250
Number of Widebody Aircra
200
150
100
50
0
2015 2016 2017
Fig. 3.32 Passenger widebody secondary trading volumes 2015–2017. (Source:

IBA Group 2017)
70
60
Number of Widebody
50
40
Aircra
30
20
10
0
2015 2016 2017
Fig. 3.33 Passenger widebody secondary trading volumes by type: 2015–2017.

Sale-leaseback demand for the A380 remains strong for new and nearly
new aircraft. Boeing 767-300ER aircraft continue to trade readily in the
secondary market along with strong demand for freighter conversions.
Boeing 777-200ER transactions have declined since 2016 with increased
storage levels in 2017 compared to 2016 (Fig. 3.33). All of these
72 D. YU
observations exclude the large Avolon/CIT and DAE/AWAS M&A deals

which distorts the market data.
6 Sidecars and Joint Ventures

There has been large growth recently in the number and the sizes of “side-
cars” or joint ventures (JVs) in the aviation investment space. While these
structures are not novel and have been in existence for a long time, it has
now become a structure that is in vogue and has industry insiders and
observers taking note. A sidecar or JV is an agreement to create a separate
entity where the parties can coinvest with contributions that include cash,
assets, other knowhow, or a combination of these. These JV entities gener-
ally run in parallel with the existing business scope of one of the partners,
hence the sidecar analogy. This is very different from JVs with airlines on
aircraft that are operated by the airline partner which has been around for
some time.
Currently, there is a large supply of new capital with little or no experi-
ence entering the aircraft leasing industry looking for experienced person-
nel or partners to do deals with. This has created an environment where
lease rate factors and returns have steadily been compressed over the last
few years. Given this dynamic, established lessors rightly as risk managers
have been happy to raise additional capital through sidecars to pursue
more opportunities on a hedged basis. Sidecars enable established lessors
to monetize their experience by putting down little equity while retaining
benefits such as upside on the sale of the leased aircraft, having more stable
cash flows, and operating leverage of their staff through servicing
arrangements.
6.1 Parties Involved in Sidecars and Joint Ventures

In the case of the aircraft leasing industry, sidecars are generally formed
with an established lessor and a financial party. While the terms of each
agreement differ for each JV, for the most part, the operating lessor pro-
vides a combination of asset management, technical advice, and their net-
work of established relationships to source and finance the deals while the
financial party contributes equity, debt, or other means to fund the JV and
the transactions. The financial party generally provides the majority of the
equity capital while the operating party is a minority investor (generally
10–40% but more skewed to the smaller side).
The financial party tends to be investors such as investment funds, com-

panies including pension, credit, hedge funds, private equity and family
offices. Other types include large conglomerates with aviation interest,
other financial institutions, and trading houses. By and large, these inves-
tors are risk averse and focus predominantly on more modern types and
younger aged aircraft.
Usually, the financial party forms one JV while others take a more diver-
sified approach with many sidecars with different established lessors. The
latter includes Chow Tai Fook Enterprises Limited and NWS Holdings,
which invested along with Investec in Goshawk Aviation and more recently
both investing with Aviation Capital Group through Bauhinia Aviation
Capital Limited. In the first case, Investec sold its entire 20% stake in
Goshawk to its two partners. Sometimes the financial party is also a lessor
in its own right such as Tokyo Century Leasing (TCL). They had a JV in
aircraft leasing, TC-CIT, formed with CIT (TCL subsequently bought
out CIT along with the sale of CIT to Avolon) and another JV focused on
engine leasing with GA Telesis. Financial investors sometimes also have
minority ownership stakes in the lessor partner such as the case with TCL’s
20% equity ownership in GA Telesis and IBJ Leasing’s association with
Aircastle. IBJ Leasing and Marubeni are both members of the Mizuho
keiretsu and through Marubeni own 15.25% stake in Aircastle.
6.2 Benefits Of Sidecars and Joint Ventures

In theory, sidecars sound simple and have benefits for both parties. They
enable the established lessor to monetize their know-how and buy and
manage assets that they might not have done themselves. It also provides
the lessor a platform to become more of a servicer than an asset owner
which is more stable. Owners, as the equity holders of assets, inherently
have more risk and volatility on their returns due to unforeseeable events
that might happen during the course of ownership and the lease. For
example, at its most severe, this unforeseeable event can be an airline
bankruptcy. During these periods, negative expected cash flow occurs due
to additional investment capital required due to the stoppage of lease rev-
enues from the operator, or other scenarios. Instead of these more volatile
cash flows, in sidecars structures, established lessors have more certainty
because cash flows are derived from servicing agreements with the finan-
cial investor. These sidecars also enable the established lessor to become
more asset-light vehicles. This is one of the main considerations for
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GECAS who have formed a sidecar, Einn Volant Aircraft Leasing, with
Caisse de dépôt et placement du Québec. The new senior management of
GE is more focused on an asset-light model and instead prefer more stable
servicing model.
In addition, established lessors retain certain upside for transactions
usually based on some hurdle rates. These hurdles might include a pre-
ferred initial return to the financial investor partner and then some subse-
quent split of profits afterward. These profit percentages are generally not
the same as the equity ownership percentages. The cash flow waterfall
sometimes includes other variations such as catchups where after the pre-
ferred return, the lessor gets all the cash flow until they arrive at the pre-
determined profit split percentages.
For the financial player, this structure provides for know-how from the
operating partner that they cannot replicate themselves. It can take advan-
tage of the operating partner’s geographical presence and more seasoned
personnel. It is arguable whether it is faster in time to form a sidecar versus
starting a new lessor company from scratch with a sole party. While most
sidecars takes less than a year to establish, a new lessor can be established,
when funding is available, within three to six months. While there are
many benefits, there are many pitfalls that need to be considered.
6.3 Controls and Restrictions

There are restrictions on one or both parties which protect the JV from
competition with the parent companies. In some instances, the operating
party provides other types of comfort such as guarantees including debt or
hurdle rates for the JV entity and partner. As with any partnership, finding
these mechanisms for the alignment of interests is very important. There
will be natural conflicts such as the desire for a continued stable manage-
ment fee versus finding the optimal time to divest an asset which creates
an upside for the manager. Sometimes, this is not addressed fully just
through the construction of the investment committee or board of direc-
tors of the JV. In most cases, the financial investors control the JV entity
as they are the majority investor.
6.4 Issues and Conflict Management

In addition, thought needs to be put into on how to properly value the
contribution of new or older aircraft. Is it contributed at cost or some sort
of current market value especially as the initial batch of aircraft in a JV is

generally bought from the established lessor partner’s portfolio? Third
party appraisers are often brought in to solve this question. As with any
venture, the mechanisms of the management are important. Will the JV be
staffed with full-time seconded management from the lessor or will it have
its time split with the continued responsibilities of the parent lessor? Other
conflicts that warrant consideration such as cherry-picking the best assets
as well as conflicts over lease initiation, renewal, or sales, especially if the
established lessor parent has existing aircraft at the same carrier.
Outsourcing is very much part of the aircraft leasing landscape as there are
opportunities for every single facet of the business. While most parties
tend to retain only the most important services or where they are best
suited along with outsourcing, others tend to do all the services in house.
The logical follow-up question comes up as to whether the operating part-
ner is the most suited in terms of costs, delivery timing, and quality versus
outsourced options.
6.5 Exits and Trends

As with any joint venture, the management of the dynamics between
two parties generally lends itself to the eventual exit between the two par-
ties. Over time, partners change strategic directions. Some exits include
selling the entire company to one of the partners, an initial public offering,
through an asset-backed securities structure, or trade sale to another party
either individual aircraft or wholesale. A prime example is Waha Capital’s
sidecar with AerCap in AerVenture. This stake along with all of Waha’s
aviation interests and $105 million cash were sold for a 20% stake in
AerCap. There are numerous examples of these sidecar structures with
almost every major aircraft leasing player including AerCap, Airlease Corp,
Avolon, and others. The continued growth for more sidecars is analogous
to that of other asset-heavy industries such as hotels, real estate, shipping
among others which have gone towards a more asset-light service model
with the distinct separation of the owner and the manager.
76 D. YU
7 Airline Business Model Changes

and Foreign Exchange
7.1 Airline Business Model Changes

Airline business models and the changes to it are another driver of the
industry. Historically, most airlines were full service operators. Recently
there has been a major shift away from full service to low cost in the busi-
ness model. A low cost or LCC model is where the price for the customer
is partitioned so that the airline can offer low cost for the consumer.
Because of the desire of low cost, airlines have historically been based in
non-main stream airports but this has slowly been changing. The conse-
quences of these changes have many effects on the aircraft itself. Many
low-cost carriers operate a single type of aircraft, originally a narrowbody
such as a 737 or A320 and operate aircraft insignificant in numbers glob-
ally. These aircraft are generally higher density configuration and have low
amenities, such as in-flight entertainment systems if any. Higher utiliza-
tion and wear is another consequence as the goal is for low turnaround
time and more flying time of the aircraft per day to maximize revenues.
Low-cost carriers have slowly started to both diversify and expand their
product offerings. Some have focused on long haul, while others have
started to add premium seats with many of the same benefits as full service
operators.
In many ways, the industry has gone through multiple models of opera-
tion over history. Originally the main business model is where the owner
of the aircraft and the operator is the same, who commonly acquires air-
craft by paying cash, raise debt, or a combination of the two. The business
model has slowly evolved such that the roles of an owner and leasing
company and the operator company, the airline, are split. This is very
much like the evolution of the hotel business where one firm is the inves-
tor and owner that has a core focus on maximizing its investments while
another company, the operator, specializes in maximizing the profits of
operating such assets. The major difference as compared with hotels and
other real estate is that the asset is movable and it is easier to repossess
aircraft than hotels especially under distressed scenarios. Through this cur-
rent model, both types of businesses can totally focus on what they know
best in their core business and competencies.
While there are a lot of complexities surrounding this including busi-
ness cycles, tax, structures, financing elements, at the very root of the
fundamentals of the industry, aircraft leasing can be boiled down to how

good the company is at managing the value and residual value of the air-
craft. There is a wide range of business models which have different tar-
geted end customers producing different returns. These business models
can utilize aircraft differently which allows the more astute lessor players
to select lessees more wisely.
7.2
Foreign Exchange
Another driver is the foreign exchange exposure. This is both a demand
and supply side driver. On the demand side, the consumer-derived deci-
sions and revenues are in the currency of the international country which
can be different than the home currency. For the supply side, the cost of
many inputs such as the cost of the aircraft (purchase or lease costs), fuel,
maintenance, as well as some financings (export financing) is in US dollars
while other costs are in home or other currencies. These changes in for-
eign exchange can drive corporate decision making for the current and
long term which all flows back to the financial accounts. These are cur-
rency differences that are generally expressed in the annual reports through
currency change gains or losses and can be quite significant and would
depend on the scope of the airline’s operations and corporate strategy.
Since 2000, against the USD, Russian ruble and Brazil real have changed
the most while the EUR and other currencies have fluctuated but not as
much as shown in Fig. 3.34.
8 Current and Future Market Outlook

Boeing notes as shown in Fig. 3.35 from the 2016 Current Market
Outlook, the fleet size at the end of 2015 consists of 22,510 passenger and
freighter aircrafts in service globally. Fig. 3.35 also shows that at the end
of 2035, there are 45,240 projected aircrafts of which 39,620 are new
deliveries during the 20-year span. Fig. 3.36 shows that 71% of these
39,620 new deliveries are narrowbodies and 51% of the total list price of
the total delivered aircraft. Fig. 3.37 shows in Asia, Boeing predicts that
there are 15,130 narrowbody passenger aircrafts (38%) delivered by end of
the 20-year projection in 2035 and there will be 40% by list value of all
new deliveries (Boeing Corporation 2016).
78 D. YU
350
300
250
Index as of 1/3/2000
200
150
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
USD-EUR USD-CAD USD-JPY USD-BRL USD-RUB
Fig. 3.34 USD versus various currencies. (Source: Bloomberg 2017)
50,000
Number of Aircra in the Global
45,000
40,000
35,000 Growth,
30,000 57% , 22,730
Fleet
25,000
20,000
15,000 Replacement,
Retained fleet, 43%, 16,890
10,000 22,510
Retained fleet,
5,000
5,620
0
2015 2035
Retained fleet Replacement Growth
Fig. 3.35 Boeing global fleet: 2015–2035. (Source: Boeing Corporation 2016)
Deliveries By Type
30,000 28,140
Number of Projected Deliveries
25,000
20,000
15,000
10,000
5,100
5,000 3,470
2,380
530
0
Regional Jets Single-aisle Small Wide- Medium Wide- Large Wide-
body body body
Market Value By Type

Regional Jets Single-aisle Small Wide-body
Medium Wide-body Large Wide-body
4% 2%
21%
51%
23%
Fig. 3.36 Boeing projected deliveries and market value by type: 2016–2035.
(Source: Boeing Corporation 2016)
Airbus notes as of the 2016 Global Market Outlook, the fleet size in
2015 is 18,019 passenger aircrafts and 1564 freighter aircrafts in service
globally for a total of 19,580 aircrafts.
Figure 3.38 shows that Airbus predicts that there would be 39,819
aircrafts by the end of their 20-year projection in 2035 of which 33,074
would be new deliveries. In Asia, as of the end of 2015, there are 5659
passenger aircrafts (31%) and 302 freighter aircrafts (19%) resulting in a
combined total of 5961 aircrafts in total (30%). Airbus forecasts that there
80 D. YU
Fig. 3.37 Boeing Deliveries By Region

projected deliveries and
market value by region:
2016–2035. (Source: 3% 3%
8% Asia
Boeing
8% North America
Corporation 2016) 38% Europe
Middle East
Lan America
19% C.I.S.
Africa
21%
Market Value By Region
2% 3%
6% Asia
North America
13%
40% Europe
Middle East
Lan America
19% C.I.S.
Africa
17%
will be 14,685 passenger aircrafts (39%) by end of the 20-year projection

in 2035 during which there are 13,239 (41% total new deliveries) new
aircraft deliveries. For freighter aircraft, Airbus predicts that there are 778
freighter aircrafts (37%) by end of their 20-year projection in 2035 during
which there are 219 (34% total new deliveries) new deliveries. In total,
Airbus forecasts that there are 15,463 aircrafts (39%) by end of their
20-year projection in 2035 during which there are 13,458 (41% total new
deliveries) new deliveries (Airbus 2016).
In both Airbus and Boeing points of view, the current aircraft in use
and traffic both globally and in Asia is quite significant as shown in
Figs. 3.39 and 3.40. Both sources have projections within China and Asia
as the top growth areas for traffic which are reflective of the demographic
changes in the world. The differences between the two major
45,000
40,000
35,000 6,750
30,000
25,000 12,830
20,000
15,000
10,000 19,580 20,240
5,000
0
Beginning 2016 Ending 2035
Growth Replacement Stay in service
Fig. 3.38 Airbus global fleet projections: 2016–2035. (Source: Airbus 2016)
Annual Growth (%)

Within Asia 6.1%
Within China 6.2%
Within North America 2.6%
Within Europe 3.2%
Middle East - Asia 6.9%
Europe - Asia 4.7%
North Atlantic 2.9%
Transpacific 4.5%
North America-Latin America 5.4%
Within Latin America 5.6% World Traffic Growth: 4.8%
Within/to CIS World GDP Growth: 2.9%
4.1%
Europe - Latin America 4.8%
Africa - Europe 4.7%
*Excludes Within China 0 500 1,000 1,500 2,000 2,500 3,000 3,500
RPKs (Billions)
2015 Traffic Added Traffic 2016-2035
Fig. 3.39 Boeing projected traffic by region: 2015–2035. (Source: Boeing

Corporation 2016)
manufacturers reflect each OEM’s view on the future of airline traffic with
Boeing more focused on point-to-point traffic growth while Airbus is
more focused on the more classical hub and spoke model. These thoughts
reflect the continued development and sales of new aircraft currently in
production.
82 D. YU
Domestic PRC x3.7

Domestic USA x1.5
Western Europe - USA x1.7
Infra Western Europe x1.7
Western Europe - Middle East x2.6
Domestic As emerging x3.5
Middle East - USA x4.7
Indian sub-continent - Midcle East x3.4
Domestic India x5.6
PRC - USA x3.5
Asia emerging - Middle East x3.4
Asia emerging - PRC x3.8
Western Europe - PRC x2.3
Western Europe - South America x2.1
Central Europe - Western Europe x2.6
Domestic Brazil x2.6
South America - USA x2.4
Asia advanced - Asia emerging x2.5
Asia advanced - PRC x3.0
Intra Middle East x3.1
0 500 1,000 1,500 2,000
Billions RPK(legs)
2015 2035
Fig. 3.40 Airbus projected annual traffic per leg flow by region: 2015–2035
(billion RPK). (Source: Airbus 2016)
9 Participants Characteristics

The international aircraft industry is made up of different participants
including investors, lessors, airlines, traders, or a mix of multiple catego-
ries. The backgrounds and investors, promoters of the companies include
high-net-worth individuals and families, public and private corporate,
financial institutions, insurance, institutional investment companies such
as private equity and hedge fund firms. The diverse variety of participants
and geographies represented in the industry is driven by the multiple
options that are available.
Not surprisingly, these are evidenced by the top 50 leasing companies
which comprise of aggregate $260 billion of aircraft value including both
owned and managed aircraft with the top ten leasing companies globally
comprising of $158 billion or 61% of the top aircraft investors. Of the top
ten, four are controlled by China-based investors representing $42 billion
or 26% of the top ten and 16% of the overall respectively. Of the top 50
aircraft lessors, 11 Chinese lessors have $61 billion, representing 23% of
the global top 50 lessors and 23% of the top 50 lessors, respectively.
Including Japanese and other Asian investors, five are in the top ten Asian
investors which increased to $57 billion, 36% of top ten and 22% of top
50. Overall in top 50, 20 Asian investors represent $97 billion or 37% of
the top 50 lessors’ total value. Interestingly, public companies represent
five of the top ten investors representing $105 billion or 66% of the top
ten and 40% of the top 50 respectively. When looking at top 50, 11 are
public companies representing $120 billion representing 46% of top 50
lessors’ aircraft assets. Interestingly the other big regions represented are
seven Western Europe and three Middle Eastern investors representing
$51 billion, 20% of top 50 and $7 billion 3% of top 50 respectively. These
current diverse representations shows the nature of the global aviation
market along with the global economy as the historical American and
European dominance starting to fade as entrants from new emerging
economies such as Russia, Middle East, China, and other parts of Asia
have started to have a greater representation in the top 50 list (Airfinance
Journal 2016).
10 Characteristics and Review of M&A and Cross

Border Trends of the Aircraft Leasing Industry
In recent years, the number and volume of cross-border investments has
increased significantly across all industries and especially in aviation. While
there have always been cross-border investments between countries, such
deals are now more prominent in the news given their increasing size and
frequency, as well as the profile of the targets.
One of the major themes has been the explosive growth of Chinese
outbound deals over the past five years which saw outbound mergers and
acquisitions (M&A) volume rise 33% per annum from $49 billion to $227
billion in 2016 according to McKinsey. While this growth has been more
publicized, some other important facts might not be as acute. While
Chinese companies were involved in ten of the largest deals worldwide in
2016, most deals were in the middle market with the median being
approximately $30 million deal size. While the absolute volume has
increased, there is arguably further room for growth as this volume as a
percent of GDP is smaller for Chinese companies (0.9%) than its counter-
parts in Europe (>2.0%) and USA (1.3) in 2015.
While this trend has been the case up until this year, the latest figures as
year-to-date third quarter 2017 show that the number of Chinese
84 D. YU
company M&A deals has decreased 14.8% to 572 compared the previous
year while the overall value has decreased 38.9% to $97.7 billion according
to PWC. These figures represent a decrease in the share of overall invest-
ment in Europe and USA from 77% for calendar year 2016 to 50% for the
latest figures. It is noted that this decrease follows an almost 300% increase
in the value of transactions to $214.9 billion for 2016.
Overall, according to law firm Baker and McKenzie, there have been
1320 cross-border deals in the second quarter of 2016, worth $214 bil-
lion. The breakdown is 798 deals were concluded, worth $137 billion
across two different geographic regions versus 522 deals worth $77 billion
within one geographic region. During this latest Q2 2016, a sizeable por-
tion included Chinese acquirers, who completed 97 transactions worth
$40.7 billion, compared to the previous year of $17.5 billion or
132% growth.
In a review of the recent activity in the aviation industry, most of the
deals in 1H 2016 were in the aerospace sector and there have been a sig-
nificant number of aircraft and airline acquisitions in terms of volume
(~$3.5 billion) and number (~15) according to MergerMarket/ICF as
shown in Fig. 3.41. In terms of cross-border investments in the aircraft
space not originating from Asia, Nordic Aviation Capital’s announced
acquisition of Aldus Aviation and Jetscape, along with its purchase of 25
E-Jets from Air Lease, confirms the company’s cross-border roll up acqui-
sition1 strategy in 40he regional aircraft space.
In the airline sector, there have been multiple deals by Middle Eastern
carriers such as Qatar Airways, which announced the acquisition of a 49%
stake in Italy’s Meridiana, completed purchase of a 10% stake in LATAM,
and purchased additional shares in IAG, bringing its holding to 20%. This
trend is similar to Etihad’s “equity alliance” strategy of investing in stakes
in foreign operated airlines. Etihad is expected to increase its sharehold-
ings in Jet Airways from 24% to 49% (the maximum amount of foreign
investment allowed in Indian airlines) due to the relaxation of regula-
tions. During the first half of 2016, CEFC China Energy Company exer-
cised its option for additional 39.92% shares of Czech Travel Service
Airlines to bring its stake to 49.92% after the initial investment in 2015.
In addition, Nanshan Group and HNA Airlines separately invested
1
Roll up is a specific M&A strategy that means companies acquire competing businesses
with the goal growing bigger and also decrease competition and in this particular case comes
with a cross-border point of view.
M&A Volume by Segmentaon

30
25
20
Volume
15
10
0
Aircra Airlines Aerospace Airport Tourism
Q1 2016 Q2 2016
M&A Value by Segmentaon

4,000
3,500
3,000
Vaule (US$m)
2,500
2,000
1,500
1,000
500
0
Aircra Airlines Aerospace Airport Tourism
Q1 2016 Q2 2016
Fig. 3.41 M&A volume and value by segmentation. (Source: MergerMarket and
ICF 2016)
$198 million for a 20% stake and $114 million for a 13% stake, respec-
tively, in Virgin Australia. This continues the acquisition expansion of
both groups in the aviation sector domestically and abroad. In Southeast
Asia, Thailand’s King Power Group bought 39.83% of Asia Aviation for
$225 million.
In light of all the cross-border investment activity, there has been a
growing and significant number of global outbound investments from
Chinese investors. In Figs. 3.42 and 3.43, this can be partially attributed
86 D. YU
Chinese Outbound M&A Volume

200 +25%
180
160
140
120
Volume
100
80
60
40
20
0
H1 2013 H2 2013 H1 2014 H2 2014 H1 2015
Chinese Outbound M&A Value

$60
Hutchison Whampoa acquired Telefonica
UK for US$15.3B in H1 2015 56.8
$50 Cheung Kong Holdings acquired

82.54% stake in Envestra
Australia for US$3.7B in H1 +70%
$40
33.4
Value (US$B)
$30
28.6
$20 Large volum of small -

sized transacons in
H2 2014
$10
$0
H1 2005
H2 2005
H1 2006
H2 2006
H1 2007
H2 2007
H1 2008
H2 2008
H1 2009
H2 2009
H1 2010
H2 2010
H1 2011
H2 2011
H1 2012
H2 2012
H1 2013
H2 2013
H1 2014
H2 2014
H1 2015
Fig. 3.42 China outbound M&A volume and value trends. (Source:
Deloitte 2015)
$200 $20,000
Outbound M&A Value
$150 $15,000
GDP (US$ Billions)

(US$ Billions)
$100 $10,000
$50 $5,000
$0 $0
United Germany Japan Greater United
Kingdom China States
Outbound M&A Value (US$B) H1 2014
Outbound M&A Value (US$B) H1 2015
GDP (US$B)
Fig. 3.43 China outbound M&A volume and value by region 1H 2014 and
2015. (Source: Deloitte 2015)
to the global economy and is highlighted by the fact this is a reversal of

inbound investment flows that have occurred in the past few decades.
What are some of the drivers of the increased outbound investments
from China? Some of the volume is reflective of the slowdown of the
domestic market. While China’s GDP has slowed from strong double dig-
its for the past decade and more to a current target of 6.5–7% per annum
growth, this slowdown has contributed to further desire for higher growth
outside of China. Some points to note are that while some traditional
industries are under pressure, the tourism, aviation, and transportation
sectors are still attractive as the overall demographics of the population
continue to improve and people have become wealthier with more dispos-
able income to spend on discretionary travel. This has, in turn, increased
interest in travel and related services especially abroad which has precipi-
tated the increase for international acquisitions due to the investment
strategy of “following the customer.” In addition, there is a trend for
increased vertical integration among Chinese companies, many of whom
are conglomerates.
In addition, with low yields in traditional banks, much of the capital is
moving towards higher yielding products. This demand is not being fully
met by the slower domestic economy and has also driven investments
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internationally for higher growth and yielding deals as there are less and
less attractive investment opportunities domestically. The continuing con-
trolled depreciation of the RMB by the PBOC over the past few years
compared to other major economies has reversed the one-way trade of
appreciation since the relaxing of the official peg with the USD. Aircraft
and other real assets denominated in USD or other major currencies are
prime examples of this flow. This has also affected airline companies as
costs and revenues are mismatched and no hedging is allowed by Chinese
airlines. While there is a continued push by the authorities to restrain this
outflow effect by restricting foreign exchange conversion per person per
trip, shutting down grey channels, and so on, this trend continues. Another
ramification of depreciating currency is more deals are being denominated
in local RMB versus the US dollar.
Also, the slowing growth and the push for increased efficiencies have
also driven the encouragement of consolidation and the creation of
“national champion” companies to look for more expertise both domesti-
cally and internationally. One recent example is the state-owned enterprise
(SOE), Aviation Industry Corporation of China (AVIC), which finalized
the consolidation merger of all of its aircraft engine businesses worth RMB
129 billion ($19.71 billion) as part of the overhaul of China’s SOEs.
Other national champion businesses are also being formed in other strate-
gic industries such as $21.9 billion shipping merger of COSCO and China
Shipping Group. One such recent SOE news is that Air China is rumored
to be behind an investment interest for 49% of LOT Polish Airlines. More
activity from this segment should come in the future.
It is also important to note that the Chinese state can act as an investor,
financier, or both in certain situations. Development banks, such as China
Development Bank, China Export-Import Bank, and Agricultural
Development Bank of China, have been the main drivers of policy-related
lending. Also, SOE banks such as the big four—ICBC, China Construction
Bank (CCB), Agricultural Bank of China (ABC), and BOC—have also
contributed to this expansion overseas especially through their worldwide
branch system in addition to provincial and quasi non-governmental orga-
nizations. Funding also comes from various sovereign funds including
China Investment Corporation (CIC) and many other entities such as
China’s SAFE which manages the state foreign exchange reserves.
Another driver is government and regulation as this is always an impor-
tant factor in the Chinese business. There are many points in the current
five-year plan by the central government that encourages the
transportation and tourism sector domestically, especially in the western

growth regions. There have been multiple signals for the encouragement
of companies to grow by going abroad for technology and resources. This
has been an important part of the growth driver for cross-border activity.
One prominent example of this policy is President Xi Jinping’s One Belt,
One Road policy and twenty-first century Maritime Silk Road which aims
to rebuild the ancient Silk Road trade route between China and Europe
and all the intermediate countries and sea routes along with South and
Southeast Asia. With the purpose of driving economic development, this
will inevitably be a driver for more overseas deals by Chinese companies
and investors. One example of this resultant investment and development
in airlines is in Georgia by the Hualing Group.
Chinese outbound investment and M&A have been generally focused
on the pursuit of technology, expertise, and natural resources. This is over-
laid upon normal expansion and acquisition growth strategies such as ver-
tical or horizontal integration as well as conglomerate building activities.
Acquirers come from a broad spectrum of backgrounds from private- and
state-backed companies, both having existing industry experience and
others diversifying their existing holdings. Cross-border investments come
in all shapes and forms whether wholly, majority, or minority investments.
While there are many factors that affect the size of the cross-border invest-
ment, the main drivers include the acquirer’s strategy, existing shareholder
desires, as well as other external regulatory factors such as specific country
regulation. The rationale for minority interests is both strategic and forced
upon by local regulation such as the 49% maximum foreign interest in
European airlines.
While cross-border appetite, foreign direct investment, and minority
purchases are generally welcomed worldwide, there are instances where
this has created tensions among stakeholders including existing sharehold-
ers, labor unions, governments, or local populations. Tensions from these
stakeholders have arisen by the acquisition of minority shareholdings in a
few instances in the past few years including Etihad’s 24% purchase of Jet
Airways by the Indian regulators and its 33.3% stake in the Swiss carrier,
Darwin Airline, both of which was finally approved. There are also
instances of resistance from strong labor unions of state companies. An
example of sustained large acquisition growth strategy is HNA Group, a
quasi-private entity, which has had a strong continued appetite for acquir-
ing companies both domestically and internationally in recent years in the
aircraft leasing, airline, and other tourism-related industries. These include
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airline investments of $114 million for 13% of Virgin Australia, $450 mil-
lion for 23.7% of Azul, 100% acquisition of Avolon for $6.4 billion, along
with related investments in airline catering (Gategroup), ground/cargo
handling (Swissport), and hotels (Carlson Rezidor Hotel Group and NH
Hotel Group). In addition, there are rumors and announcements in the
pipeline including Air France’s Servair (airline catering), CWT (logistics),
among others. In the aircraft space, HNA has also completed the acquisi-
tion of Allco Aviation, later renamed to Hong Kong Aviation Capital,
in 2010.
There are also many lessons that can be learned from these recent cross-
border deals. One recent board drama saw all of the HNA’s board repre-
sentatives at NH Hotels voted out due to shareholder-perceived conflicts
of interests of its significant minority holdings given the announced acqui-
sition of Carlson Rezidor Hotel Group. This holds further lessons in
minority interest investments where companies are active compared with
passive minority investments especially in the same competing industry
and overlapping geographic areas. It is important to understand and
appreciate the specific regulatory approvals for foreign exchange and
approval of large overseas deals. This has in some instances taken a lengthy
period and has been onerous on the investment process as it comes par-
ticularly in the way of auction-style sale processes where there are specific
timeline targets for each round of bidding and deposits. This has been a
particularly sensitive issue to be overcome as it has affected some of the
recent industry sales. Another lesson is to know as much as possible about
the counterparty. Not only does one want to know how the investment
will be funded, other background information on their existing businesses
and reputation is key in any potential transaction. While there is never
100% information available, some leap of faith is required. This is not only
important for the transaction but also a telling indicator of the post invest-
ment integration and marriage afterward, if any. An example is the recent
failed sale of Frankfurt-Hahn Airport to a mystery Chinese buyer by sell-
ing German federal state owners, Rhineland Palatinate and Hesse. After
the failed sale, the airport owners ultimately sold the property to the
HNA Group.
Like all acquisitions, prudent due diligence, post acquisition integra-
tion, and business planning is necessary whether done in-house or by
experienced third-party advisors—one such aviation advisory group is IBA
Group. There have been multiple examples of cross-border investments
that quickly went bust as the expected turnaround situations or synergies
were not realized as a lack of understanding of local culture and regula-

tions proved to be too difficult of a barrier for the acquirers to overcome.
Even with some of these sensitivities, it is en vogue to mention prospective
Chinese buyers as this may be to drum up interest and valuation expecta-
tions in company sales. There have been several instances of this occurring
recently. One thing is certain: there is more activity in cross-border invest-
ment activity, especially from China. Transactions will have a much more
successful path if past lessons are learned and are the most prepared. All in
all, signs are pointed to what seems to be a new “Aviation Silk Road” plan
for the aviation industry similar to the back of the One Belt One
Road policy.
11 Conclusion
The global aircraft leasing and aviation industries continue to grow as the
overall global demographics and the drivers are positive for the industry.
In addition, there is room for further uplift. Aircraft and the airline indus-
try are intertwined. Globally, the demand drivers like general economics
contribute to the increase to general wealth and fueled by the growth of
the middle class, urbanization, liberalization of visas, and trade have con-
tributed to the increase in leisure and business travel. There has been evi-
dence of business cycles that are evident in the aviation industry along
with large and small exogenous shocks that periodically affected the
growth of the industry. These along with industry profitability which are
particularly sensitive to interest rates, and fuel pricing have contributed to
the traffic flows dynamics. Supply drivers are also significant drivers of the
industry as the availability of various forms of aviation finance go hand in
hand with the few global aircraft manufacturers who hold a duopoly in the
ability to make and deliver new aircraft.
There are many types of aircraft financing available including equity or
cash, commercial debt, capital markets, and manufacturer’s support. In
addition to the financing environment, the lease rates and the residual
values of these aircraft have significant effects on the use of aircraft by air-
lines and factors in the number of parked and stored aircraft. Intertwined
throughout is the effect of foreign exchange rates specifically with the US
dollar being used in conjunction with local currencies which has effects on
the demand and supply side. There have also been changes to the existing
industry structures and traffic dynamics due to the evolution and change
of the airline business models to more LCC players instead of the tradi-
tional full service airlines.
92 D. YU
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CHAPTER 4
China Aircraft Leasing Industry

Characteristics
1 Background and History of Aircraft Leasing

in China
Historically, aircraft leasing in China has been by foreign lessors leasing

aircraft for the Chinese market. In the beginning, airlines owned the air-
craft outright with financing from local banking institutions. Local airlines
also leased a small number of aircraft, mainly the aircraft of ILFC and
GPA, the founders of the industry, but now all airlines lease aircraft and
these aircraft are leased by all major global aircraft leasing firms. These
developments have propelled the government to enact new legislation to
encourage the development of the local financial leasing industry and later
on more specifically aircraft leasing.
In July 1979, China passed the Law on Sino-Foreign Equity Joint
Ventures, which had wide-ranging effects, including allowing a legal
context for foreign investment into China, and spurred the formation of
China International Trust and Investment Corporation (CITIC) in
August 1979. They very soon established a leasing department. The
first dedicated leasing company, China Orient Leasing Company Ltd.,
was set up in February 1981 by CITIC (20% equity), Beijing Machinery
and Equipment Corporation representing the Beijing government (30%
equity) and Orient Leasing Company (50% equity) from Japan later
renamed ORIX jointly as a Sino-Japanese foreign joint venture and

https://doi.org/10.1007/978-981-15-6743-8_4
98 D. YU
approved by the People’s Bank of China (PBOC) (Russell 2014).

Formal ordinary leasing definitions were established in July 1982 in
Article 23 of the Economic Contract Law of the People’s Republic of
China. As the country evolved, the government provided further guide-
lines and regulations that were helpful for more practical regulations
and guidelines through the Contract Laws of the People’s Republic
of China.
From this time on, many leasing companies were established through
joint ventures licensed either by the PBOC or by the Ministry of Trade
and Economic Cooperation, especially with Japanese and European
groups. In the 1980s, leasing capital represented about 10–20% of all for-
eign capital in China (Shi 2005). Most of the projects during the
1980–1990s were with state-owned companies or local governments.
These were guaranteed by state-owned financial institutions such as the
Bank of China or local governments. In September 23, 1980, the Civil
Aviation Administration of China (CAAC), which was at that time both
the regulator and the airline, signed the first Chinese aircraft lease agree-
ment with the Manufacturers Hanover Leasing Corporation subsidiary of
Manufactures Hannover (one of the largest banks in the US then and now
a part of JP Morgan) for two Boeing 747 aircraft for a 15-year term. This
was a leveraged lease (Li 2010; Ding et al. 2014). Tax exemptions and
reductions were granted to CAAC for leased aircraft from 1980 and 1984
(Eaton 2016).
From 1980 to 2001, foreign investment represented about $30.3 bil-
lion in the aviation industry according to Mingchi YAN, Director of Policy
Division of the CAAC, as disclosed in 2002. Breaking this down further,
$1.879 billion was foreign government or preferred loans, 606 million
foreign direct investment, and $1.77 billion capital from public listings;
437 aircraft were from leasing representing $26 billion of asset value
(“Chinese Civil Aviation Set to Take Off” 2002). In addition, during this
period, the CAAC also imported 117 aircraft through operating leasing
(Ding et al. 2014). After strong growth in the early 1990s, many lessees
defaulted due to the poor economic and political conditions and the guar-
antees by local governments were hard to enforce, which led to many
going bankrupt including the first, China Orient Leasing. By the
mid-1990s American and European multinationals entered the market but
4 CHINA AIRCRAFT LEASING INDUSTRY CHARACTERISTICS 99
these overall negative events led the government to suspend the issuance
of new licenses for more than ten years.
The growth in leveraged leases in the 1980s and 1990s was also
driven by the tax incentives structures. These tax-driven and optimized
leveraged lease structures were very popular from different jurisdictions
in Japan, the US, Europe, and among others, which fluctuated with the
changes in the respective country tax codes. Given the Japanese back-
ground of the joint venture partners, the strong growth of Japanese-
optimized tax and Hong Kong-leveraged leases were the most preferred
as a result of the changes. By November 1990, Hong Kong amended its
tax laws to prohibit non-Hong Kong leases the tax benefits, which
caused the structure to be unattractive. The 1990s saw a very poor
Japanese economy, because of which there was a lack of investors for the
Japanese optimized leverage lease structure, which resulted in the shift
to other forms of leasing in China.
This suspension of new licenses did not change until preparations were
under way for China to enter the World Trade Organization (WTO).
These included government-provided pledges to open the local financial
markets to foreign players. One of the goals of the government was to
diversify financing sources for local companies, especially for small and
medium-sized enterprises organizations. These considerations are all driv-
ers and factors that initiated changes in the local regime to better promote
the financial leasing industry. The year 2004 saw the start of leasing law
formulations by the National People Congress through the formation of a
legislation steering committee, which established a working group to
solicit opinions from all stakeholders to draft the outlines of the leasing
laws. MOFCOM also made it clear in 2004 that foreign capital can estab-
lish wholly owned foreign enterprises in leasing, not just joint ventures as
previously required.
The Leasing Law official draft was published in 2005, which was then
submitted to the Finance and Economic Commission for further evalua-
tion, resulting in the final law in the Measures for Administration of
Financial Leasing Companies, which became effective as law in March
2007. This is a big step forward as the legislation allowed commercial
banks, both local and overseas, to set up financial leasing companies which
were at first regulated by the China Banking Regulatory Commission
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(CBRC) and this officially saw banks reenter the leasing industry after the
ban post the Asian Financial Crisis. The legislation required that banks,
big leasing companies, established manufacturers, and other authorized
business entities be eligible for being the “major shareholders” or share-
holders holding more than 50% of shares. Table 4.1 is a summary of the
regulatory requirements for financial leasing companies.
The first batch of financial leasing licenses were governed by the CBRC
and are considered the real restart of the local leasing regime. Like the
regulatory name suggests, the CBRC is also the regulator for banks and
this first batch of licenses were subsidiaries or affiliates of large banking
groups. Groups are more likely to be government- or state-owned enter-
prises. The other batch of leasing companies that have grown is regulated
by the Ministry of Commerce (MOFCOM). MOFCOM-regulated leas-
ing companies have both SOE company groups and private enterprises.
The barriers of entry for a license regulated by MOFCOM are less oner-
ous and easier to obtain than for CBRC-licensed leasing companies.
The major differences are that leasing companies regulated by the
CBRC have high barriers of entry and generally higher capitalization
requirements. They are generally to be under more rigorous management
and oversight by regulators. These companies are also more likely to be
state-owned and banking groups. Because of this, there are a large number
Table 4.1 China leasing company structures

Local banks Local leasing Leasing companies associated
companies with manufacturers
Capital adequacy Not less than 8%

ratio
Total assets Not less than Not less than Not less than RMB5 billion
RMB80 billion RMB10 billion
Profitability Achieved profit successively for 2 years
% of leased assets/ Not less than 30%
Total assets
% of leased income/ Above 80%
Total income
Minimum registered RMB 100 million
capital
Source: National Development and Reform Commission of China 2016; Ministry of Commerce of the
People’s Republic of China 2016; China Banking Regulatory Commission 2016
of companies incorporated under MOFCOM rather than CBRC but the

total capitalization is roughly equal.
While leasing companies could be formed under the MOFCOM,
bank- owned financial leasing proved even more popular as new
Administrative Measures for Financial Leasing Companies (Order of
China Banking Regulatory Commission No. 3) were issued in 2014
that lowered the barriers even more for entry into the bank-owned
financial leasing industry (China Banking Regulatory Commission
2016; Ministry of Commerce of the People’s Republic of China 2016).
See Fig. 4.14 for more data about asset growth in the two different
types of leasing companies.
In addition, due to the regulation, most of the leasing companies are
financial leasing companies and the leases for multiple industries are not
by stand-alone aircraft leasing companies as compared with counter-
parts globally. There are many reasons for this as leasing has been viewed
mostly akin to debt but this view is slowly evolving with more operating
leases. In addition, the capital requirements for aircraft are still quite
high compared to other assets such as medical equipment, which have
asset sizes of under $1 million. These leasing companies view aircraft as
one segment within the overall company but constitute a large percent-
age of overall activity.
2 China Jurisdiction: Tax and Regulations

Since the start of leasing in China in the late 1970s, the vast majority of
aircraft leasing transactions have been using the international leasing
structure. This was especially true in the first decades of existence. In
2000, there was the emergence of domestic private capital using domes-
tic leasing companies in aviation with Xinjiang-based Delong
International Group’s two leasing companies, New Century Financial
Leasing Co., Ltd., and Xinjiang Financial Leasing Co., Ltd., launching
their aircraft leasing businesses in May (“Private Sector’s Flying
Dream” 2002).
Then in November 2000, Shenzhen Financial Leasing Co., Ltd., signed
an order contract of 60 MA-60 regional passenger turboprops worth
Chinese renminbi (RMB) 4 billion with AVIC subsidiary, Xian Aircraft,
which were subsequently leased to domestic airlines including Sichuan
Airlines, marking the official start of the domestic aircraft leasing business
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(“Xian Aircraft Wins” 2000). This marked the start of the domestic air-
craft leasing business.
As a further enhancement of the promotion of the leasing industry in
China from the restart in 2007, MOFCOM issued the Guidance on
Promoting the Development of Financial Leasing Industry during the
12th five-year plan at the end of 2011. This encouraged the development
and formation of the leasing industry centers and it also enhanced the
functions of financial leasing in free trade zones (FTZs), namely, Qianhai
in Shenzhen, Shanghai and Tianjin and Hong Kong were mentioned, as
shown in Fig. 4.1. It also opened up the factoring business in Shanghai
Pudong, Qianhai, Guangzhou, Tianjin Binhai, and Beijing. Another new
jurisdiction that is attracting aircraft leasing special purpose vehicles (SPVs)
is the Henan Zhengzhou Airport Economic Zone. This zone is like the
other special zones set up to attract aircraft assets. This jurisdiction landed
its first aircraft leasing SPVs in January 2018 and looks to attract other
aviation activity to the Zhengzhou area.
With respect to the jurisdiction, China as of 2017 had 105 signed
double tax treaties (Deloitte 2017). Shanghai has risen to become a
finance hub in Asia. One of the major issues is that any foreign exchange
transactions require State Administration of Foreign Exchange (SAFE)
approvals such as all transactions involving aviation (there have recently
been a few transactions in RMB). This additional hurdle has raised
some concerns for some international investors. In addition, the coun-
try lacks specialized personnel and service firms to support the industry.
This is especially acute as personnel and service providers with both
domestic and international experience are lacking. Currently, tax depre-
ciation allowance is ten years. The tax on profits is the statutory 25%
corporate tax rate. There are current efforts to increase the desirability
of the jurisdiction on a competitive basis for aircraft leasing
(Deloitte 2017).
The FTZ zones each separately provide enhanced benefits that are
negotiated on a bilateral basis with the leasing company. Some factors
that affect the benefits include the size and scope of the leasing com-
pany. As these are negotiated terms, while the agreements all differ,
some included aspects can be lowered or outright absent in terms of
things such as duties, rebates on local or total taxation, personnel
Shijingshan,
Beijing
Tianjin FTZ
Shanghai
FTZ
Sichuan
Chongqing
Fujian FTZ
Shenzhen
Qianhai
Guangdong FTZ Hong Kong
4 CHINA AIRCRAFT LEASING INDUSTRY CHARACTERISTICS
Fig. 4.1 Free trade zones and jurisdictions in China. (Source: PWC 2012)
103
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income tax abatement, ease of foreign exchange and other regulatory

matters, among others. There are also significant reforms to taxation
regulations so this is something to watch out for. In addition, some
aspects to be aware of is that sales within each FTZ zone can have ben-
eficial tax effects and this has been established but sales to other FTZ
zones can create tax liabilities that are not defined. As such, there have
been very few instances of buying and selling and there has been trading
intra-FTZ zone but not cross-zone; nor has there been cross-border
trading activity with other international jurisdictions. Given that the
taxation regime is still constantly changing and there is continued dom-
inance by Ireland and Singapore, this has yet to be factored in signifi-
cantly for the global aviation leasing community. This will change as
investors and leasing companies better understand the local regulatory
and tax regime.
3 Drivers
There are many drivers for the tremendous growth and diversification in the
aircraft and aircraft leasing business in China. While all of the global drivers
for aviation as described previously apply to the Chinese market, there are
several main drivers specific for the Chinese market for aviation leasing.
3.1 Economics (Urbanization, Growth of the Middle

Class, Globalization)
3.1.1 Economics
The state of the economy and the growth dynamics driving the economy
are important considerations for any jurisdiction.
Chinese GDP was $11.2 trillion as of 2016, which has grown from
$92.6 billion in 1970, representing a 120× increase. In GDP per capita
PPP constant USD terms, in 2016 China’s GDP was $15,397.39 while it
was $309.96 in 1980, representing a nearly 71× increase, as shown in
Fig. 4.2 (World Bank 2017; IMF 2017; Bloomberg 2017). This repre-
sents a large growth in the wealth measure of the nation as a whole.
Figure 4.3 shows that real GDP measures are increasing while one
component, private consumption, has kept relatively steady and projected
forward percentage, thereby creating a larger amount of capital for private
consumption including more opportunities and demand for air travel.
$12,000 $18,000
$16,000
$10,000
$ GDP Per Capita (PPP Constant USD)

$14,000
$8,000 $12,000
GDP ($ Billions)
$10,000
$6,000
$8,000
$4,000 $6,000
$4,000
$2,000
$2,000
$0 $0
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
World Bank China GDP index in Current USD
IMF China GDP Per Capita (PPP Constant USD)
Fig. 4.2 China GDP and GDP per capita. (Source: World Bank 2017;
International Monetary Fund 2017; Bloomberg 2017)
$18.0 45.0
Share of Private Consump on in GDP (%)

$16.0 40.0
China Real GDP (in Trillions)
$14.0 35.0
$12.0 30.0
$10.0 25.0
$8.0 20.0
$6.0 15.0
$4.0 10.0
$2.0 5.0
$0.0 0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Real GDP Private Consumpon Share
Fig. 4.3 China private consumption growth. (Source: IHS Economics 2016;
Airbus 2016)
106 D. YU
3.1.2 Urbanization and Globalization

Wealth creation and the increased demand for air travel have been brought
on by certain dynamics. First, urbanization has created many wealthy citi-
zens. In China, the eastern coastal cities and provinces are the powerhouse
economic drivers. They include Beijing, Shanghai, Tianjin, Jiangsu,
Zhejiang, Hebei, Shandong, Guangdong, Fujian, and Hainan. The east-
ern zone represents roughly 1/3 of the population (525 million out of
1.375 billion) but represent 51% of the economy and wealth (National
Bureau of Statistics of China 2016). The eastern region’s GDP per capita
basis was $10,903 with a foreign exchange rate of 6.5138 CNY/USD
(Exchange-rates.org 2015; National Bureau of Statistics of China 2016).
From 13.3% in 1953 to 56.1% in the 2015 urbanization rate, the overall
urban populations have also grown at a much faster CAGR of 3.7% com-
pared to the overall population CAGR of 1.4% from 1953 (National Bureau
of Statistics of China 2011). Table 4.2 contains additional urbanization and
population figures. The target is 60% urbanization rate by 2020. In com-
parison, in the US roughly 80% of the population lives in cities.
Urbanization is very much linked to the hukou system, which is a local
household registration. This conveys local benefits and rights such as edu-
cation (important for families), healthcare, housing, and other social ben-
efits. This hukou system and conversion of rural to urban cities has a direct
impact on urbanization rates. There are currently 260 million migrant
workers who are urban residents. To help achieve the urbanization rates,
reforms have continued and the 2020 target is to convert 100 million
rural workers to an urban hukou (An 2013). Progress is slow as large cities
need to invest in more infrastructure and the funding to accommodate
these new citizens is in an already stretched budget environment.
This trend has been continuing as there has been a strong increase in
the population in the coastal mega cities that are dominated by migrant
workers. Historically, migrant workers come from more rural counties for
factory jobs and they have propelled the growth of the economy since its
opening in 1989 by Deng Xiaoping. These trends will also increase the
demand for aviation.
3.1.3 Growth of the Middle Class

In addition, the leisure market has also grown heavily due to the growth
of the middle class in China. According to McKinsey, this middle class is
represented by an annual income of RMB60,000 to RMB229,000 ($9000
to $34,000) and will number more than 400 million or more than 75% of
Table 4.2 China urbanization and population figures
1953 1964 1982 1990 2000 2010 2015 2020Ea
Urbanization rate 13.26% 18.30% 20.91% 26.44% 36.22% 49.68% 56.10% 60%
Urban population (10,000 people) 7726 12,710 21,082 29,971 45,844 66,557 77,116 88,292
Total population 58,260 69,458 100,818 113,368 126,583 133,972 137,462 147,154
CAGR from 1953 urban 4.2% 3.4% 3.6% 3.8% 3.8% 3.7%
CAGR from 1953 pop 1.5% 1.8% 1.8% 1.6% 1.4% 1.4%
Source: National Bureau of Statistics of China 2011, 2016

a
2020 target of 60% urbanization rate based on the same total population growth rate
4 CHINA AIRCRAFT LEASING INDUSTRY CHARACTERISTICS
107
108 D. YU
urban consumers by 2020. This middle class has grown from 4% of

Chinese households in 2000 to 68% in 2012 (Barton et al. 2013). These
factors along with the growth of working-age populations have driven
private consumption growth further. These statistics and growth have pro-
pelled aviation in terms of both leisure activity and business travel, which
in turn have driven up demand for both domestic and international travel.
3.1.4 Visas
One trend is the relaxation and liberalization of visa free or light mea-
sures toward Chinese citizens. Traditionally there have been strict policies
due to the country’s developing and low-income status compared with
other more established countries such as those of the OECD. These
updated policies have included the lengthening of terms, relaxation of
return air tickets, employment and financial abilities, and have even pro-
vided visa waivers or free status.
3.1.5 Passports
As of November 2016, there were 120 million passports issued out of
China’s population of 1.411 billion people, which represents only 8.5% of
the population (Ministry of Public Security of the People’s Republic of
China 2016). This growth in the issuance of passports is quite fast given
that there were only 38 million passports issued in 2012 (“38 Million
Chinese Citizens” 2012). However, this is low compared with other
OECD countries; for example, the US has 136.1 million passports in cir-
culation based on a population of 327.0 million, which represents 41.6%
of the population (US Census Bureau 2018; US State Department 2017).
In the UK, 83% had passports as of 2011 (Office of National Statistics
2013). Some caveats about this figure are that not everyone is eligible for
a passport. This number is distorted as certain government bureaucrats
and employees of SOEs need to get permission before applying for a pass-
port. The trend is toward upward growth and higher penetration.
3.2 CAAC, CAAC Airlines, and the “Big 3”

State-Owned Airlines
3.2.1 CAAC
In China, airlines are both intertwined and strongly influenced by the
CAAC. The CAAC’s history has been very different compared to other
regulators globally such as the US’s FAA or Europe’s Aviation Safety
Agency (EASA). The frameworks which became the CAAC were estab-
lished in 1949 with the founding of China and, initially, it was set up not
only as a regulator but as a regulator of all non-military aviation as well as
a provider of general and commercial services as an operator. Only about
20% of the current airspace in China is available for civil aviation while the
rest is still controlled by PLAAF (Wang 2010). It is not surprising that the
CAAC was controlled by the PLAAF from its founding to 1980.
3.2.2 CAAC Airlines and the “Big 3” Airlines

CAAC Airlines, the airline component, started domestic service from the
onset and started international services in 1962. It was not until 1980 that
the management and control of the airline component was transferred to
China’s State Council. Then in 1988, the airline operations were split into
six separate independent airlines (Air China, China Eastern Airlines, China
Southern Airlines, China Northern Airlines, China Northwest Airlines,
and China Southwest Airlines) with different geographies. The CAAC has
acted as the sole aviation regulator since 1988. In 2008, the Ministry of
Transport was created and the CAAC became its subsidiary and the
CAAC’s status was downgraded from a previously held ministry-
level agency.
The six original airlines are the predecessors of the dominant SOE air-
line players (Air China, China Southern, and China Eastern) in existence
today, which resulted from a CAAC administrative action in July 2000 to
combine ten airlines into three major groups. The state-owned airlines are
still the main drivers and have a dominant market share (greater than 80%
of traffic) of the aviation market in China (Ballantyne 2017).
3.2.3 China Airspace and Delays

Only about 20% of the current airspace in China is available for civil avia-
tion (Wang 2010). Due to the low amount of airspace, there are conges-
tion issues especially high-traffic areas corresponding to large metropolitan
areas. The amount of airspace available to civil aviation in the US is 80%
(Hsu 2014). During peak times such as the Chinese New Year, the PLAAF
might open some additional airspace temporarily (M. Yu 2013). There
also times when the PLAAF temporarily closes civilian airspace on short
notice for its air exercises. “Other” or military exercises contributed to
more than a quarter of all delays in 2016 according to the CAAC (Civil
Aviation Administration of China 2016b). There are policies in place for
further liberalization, especially for low-altitude general aviation.
110 D. YU
China’s airlines and airports have been in the bottom ten for punctual-
ity in international surveys. This is compared with US airports and airlines,
which are in the top 20 of punctuality. The total passenger traffic in China
is only about 30% of the US. The small airspace results in delays in air
travel when congestion is an issue. Overall, in 2016, the CAAC notes that
on-time performance was 76.8%, which was higher by 8.4% compared
with 2015. Other factors both locally and in other regions that could
affect delays include congestion of airspace, at or near capacity airports,
weather, smog, and efficiencies of the air traffic control. These factors are
in addition to the normal airline and airport operational issues that occur
such as lack of staff, appropriate aircraft, and so on. Increasing air traffic
efficiencies by allowing for additional aircraft that can safely take off and
land is important coupled with the expansion of existing airports, and
construction of new ones is imperative. Airlines have also increased the
estimated time to take into account more delays compared with the actual
flight time.
3.3 Traffic Flows, Business Models, High-Speed Rail,

and Foreign Exchange
The growth in the number of airlines and airline traffic both intra and inter
China has contributed to the growth of aviation in China. Of the top 50
airlines in the world by fleet size, 7 Chinese carriers now represent 13.1%
and 12 airlines based in Asia ex-China represent 19.7% of the top 50 air-
lines and together Asia carriers represent 33% of the top 50 world fleet. It
was not until the mid-1980s that non-CAAC airlines were established. In
the following decades, many types of new airlines were introduced includ-
ing joint venture airlines with CAAC, airlines owned by various regional
governments, and independent airlines, some of which had collaborations
with regional governments.
This demand for air travel has created many new airline entrants and
they have, on average, grown 27% since 2011 according to Innovata.
There were 46 airlines operating in China as of 2016; of these 20 are new
airlines that were approved from 2011 to 2015. In the previous periods
such as the one in 2000, there was a consolidation of the regional airlines
into what is now known as the “Big 3” Airline Group. In this new way,
many regional governments have been new players both in establishing
their own airlines and in partnering with existing airline groups. The
growth in domestic travel driven by new airlines resulted in increased
competition among existing players.
In addition to higher domestic travel demand, there has been a signifi-

cant increase in the number (over 150%) and frequency (over 140%) of
international destinations on offer by the Chinese airlines since 2011
(Table 4.3).
Also, international passenger growth, as well as the ratio compared with
domestic passengers, has grown steadily. These statistical trends are aligned
with the share of new international routes versus domestic routes.
Figure 4.4 shows the growth of passengers for domestic and international
routes. While domestic passengers have grown significantly in absolute
terms, international passengers have grown but not in the same absolute
Table 4.3 China’s airlines long haul network since 2011

Year Nonstop markets Weekly frequencies Marketshare
2011 46 350 36%

2016 114 830 48%
Growth +150% +140% +12%
Source: Innovata 2016
60
50
Passengers (Millions)
40
30
20
10
0
2.2006
10.2006
6.2007
2.2008
10.2008
6.2009
2.2010
10.2010
6.2011
2.2012
10.2012
6.2013
2.2014
10.2014
6.2015
2.2016
10.2016
6.2017
2.2018
Domesc Passengers Int'l Passengers Total Passengers
Fig. 4.4 Monthly China air domestic and international passenger numbers.
(Source: Civil Aviation Administration of China 2018)
112 D. YU
1,00,000
90,000
80,000
70,000
RPK (Millions)
60,000
50,000
40,000
30,000
20,000
10,000
0
1.2010
7.2010
1.2011
7.2011
1.2012
7.2012
1.2013
7.2013
1.2014
7.2014
1.2015
7.2015
1.2016
7.2016
1.2017
7.2017
1.2018
Domesc RPKs Int'l RPKs Total RPKs
Fig. 4.5 Monthly China air domestic and international RPKs. (Source: Civil
Aviation Administration of China 2018)
terms. Figure 4.5 shows the same route breakdown in terms of RPKs and
air traffic terms. It shows a similar breakdown as the passenger demo-
graphics relationships in Fig. 4.4.
Like the changes in the global business model mix, there has been the
addition of the Chinese version of LCCs in the market with the formation
of Spring Airlines in 2004, and airlines now include Lucky Air, Colorful
Guizhou, West Air, 9 Air, and the reformulation of existing airlines such as
China United Airlines. As the CAAC has the authority to manage the
creation of new airlines and the management of existing ones such as the
routes and number of airlines that can be inducted into the airline, there
has now been a control of the growth in new airlines and routes. This has
been due to an increased emphasis on safety and tightening of manage-
ment of the airlines after such a period of explosive growth.
Airline traffic is expected to continue growing very rapidly. Airbus proj-
ects a 6.8% per annum domestic growth and 6.2% per annum inter-China
traffic growth over 20 years, as shown in Fig. 4.6. Overall, this equates to
a 6.9% per annum increase in overall traffic to, from, and within China. In
9.0%
2016-2034 O&D Traffic CAGR
7.9%
8.0%
7.1% 6.9% 6.8%
7.0% 6.2% 6.5% 6.2%
6.0%
5.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
North Lan Europe Africa Middle CIS Domesc Asia
America American East Pacific
& The
Caribbean
Fig. 4.6 Airbus’ China regional projected traffic growth over 20 years
(2016–2035 CAGR). (Source: Airbus 2016)
Domestic PRC x3.7

Domestic USA x1.5
Western Europe - USA x1.7
Infra Western Europe x1.7
Western Europe - Middle East x2.6
Domestic As emerging x3.5
Middle East - USA x4.7
Indian sub-continent - Midcle East x3.4
Domestic India x5.6
PRC - USA x3.5
Asia emerging - Middle East x3.4
Asia emerging - PRC x3.8
Western Europe - PRC x2.3
Western Europe - South America x2.1
Central Europe - Western Europe x2.6
Domestic Brazil x2.6
South America - USA x2.4
Asia advanced - Asia emerging x2.5
Asia advanced - PRC x3.0
Intra Middle East x3.1
0 500 1,000 1,500 2,000
Billions RPK(legs)
2015 2035
Fig. 4.7 Airbus-projected top traffic flows in 2035. (Source: Airbus 2016)
addition to this projected high growth, domestic China traffic is projected

to increase 3.7× from slightly over 400 billion RPKs to over 1500 billion
RPKs and become the most trafficked area in the world in 2037, as shown
in Fig. 4.7. Other international routes out of China rank lower in terms of
114 D. YU
Annual Growth (%)

Within Asia 6.1%
Within China 6.2%
Within North America 2.6%
Within Europe 3.2%
Middle East - Asia 6.9%
Europe - Asia 4.7%
North Atlantic 2.9%
Transpacific 4.5%
North America-Latin America 5.4%
Within Latin America 5.6%
Within/to CIS 4.1%
Europe - Latin America 4.8%
Africa - Europe 4.7%
*Excludes Within China 0 500 1,000 1,500 2,000 2,500 3,000 3,500
RPKs (Billions)
2015 Traffic Added Traffic 2016-2035
Fig. 4.8 Boeing-projected top traffic flows in 2035. (Source: Boeing

Corporation 2016)
growth (Airbus 2016). Boeing also forecasts 6.2% growth per annum
within China over 20 years and it is lower than that for the larger Asian
continent in absolute terms, as shown in Fig. 4.8. Likewise, the industry
association IATA concurs that China is in the top growth traffic area with
similar projections of 5.2% growth over the 20-year timeframe, as shown
in Fig. 4.9.
3.3.1 China Aircraft Leasing Industry Characterist

HSR is a passenger rail service with a travel rate greater than 250 km per
hour. The service was introduced in April 2007. By the end of 2016, the
country had more than 22,000 km of HSR with the overall rail network
covering 124,000 km. The HSR network will increase to 30,000 km by
2020, which will connect more than 80% of the big cities (“China to Start
Construction” 2017).
This service can be viewed as a competitive threat as well as a comple-
ment to air travel. This can be a threat since travelers can consider this for
fast and reliable service when compared to domestic air traffic. Some of
the factors that are considered are the convenient location of the station
(usually in the city for rail versus outside for air), security delays, and the
Corresponding CAGR
China 5.2%
United States 2.6%
India 6.7%
Indonesia 3.5%
Vietnam 8.2%
Turkey 5.2%
Brazil 2.6%
Philippines 6.0%
Australia
3.0%
Mexico 4.2%
0 100 200 300 400 500 600 700 800
Change in Domestic O-D Markets (Millions, 2015-2035)
Fig. 4.9 Projected traffic growth by region (2015–2035). (Source: International

Air Transport Association 2016)
potential travel delays which are more prevalent with air travel. Of course,
price is another factor where the HSR has static pricing and with lower
number of comparative cabins while the pricing for air travel is more
dynamic and higher. The total time is a factor especially for long distance
travel where air travel still has the advantage. As a complement, there are
more rail and air combination offers especially from smaller cities or loca-
tions that do not have as many routes.
Even with the rise of HSR, there has been no evidence of rail eroding
air travel’s share of overall travelers. The portion of air travel has gained
share versus rail. The proportion of rail passengers to airplane passengers
was 88:12 in 2007 while in 2016 it was 85:15 as the rail passengers’ per-
centage has decreased in this period, as shown in Fig. 4.10. If distance
travel is compared, the same trend as in the case of passenger numbers is
evident where the share of air travel has gradually increased from 28% to
40% from 2007 to 2016, as shown in Fig. 4.11.
3.3.2 Foreign Exchange in China

The RMB is not a fully convertible currency such as other global curren-
cies like the US dollar or euro. The conversion is regulated by SAFE and
this has significant effects on airlines as a lot of the aviation industry is
denominated by US dollars.
116 D. YU
100.0%
12 15
75.0%
50.0%
88 85
25.0%
0.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Rail Passenger KM Air Passenger KM
Fig. 4.10 China air and rail passengers market share. (Source: Haver
Analytics 2017)
100.0%
90.0%
28
80.0% 40
70.0%
60.0%
50.0%
40.0%
72
30.0% 60
20.0%
10.0%
0.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Rail Passenger KM Air Passenger KM
Fig. 4.11 China air and rail passengers traveled distance market share (Source:
Haver Analytics 2017)
$250 $5,000
$200 $4,000
China Foreign Reserves ($Bn)

China Exports ($Bn)
$150 $3,000
$100 $2,000
$50 $1,000
$0 $0
1.1996
6.1997
11.1998
4.2000
9.2001
2.2003
7.2004
12.2005
5.2007
10.2008
3.2010
8.2011
1.2013
6.2014
11.2015
4.2017
China Exports China Foreign Reserves (Monthly)
Fig. 4.12 China’s economic development. (Source: People’s Bank of China

2017; State Administration of Foreign Reserves of China 2017; Bloomberg 2017)
As shown in Fig. 4.12, China’s foreign reserves have expanded along-

side China’s export volumes since 1996 and have risen considerably.
Chinese airlines also have a significant percentage of their cost structure in
US dollars such as aircraft purchasing, rental, debt, fuel, and other ser-
vices. While there is income in dollars and other foreign currency through
ticket sales, this is small in comparison to the costs along with the mis-
match in other costs such as labor paid in local RMB. While the RMB
currency became an official IMF reserve currency in 2016, and there is an
increase in the use of the RMB in aviation contracts that was previously in
US dollars, this is a slow adoption trend and is still very small compared to
the use of US dollar in aviation contracts. This foreign exchange rate can
create significant swings in the profitability of the airlines as demonstrated
by SOE Chinese airlines that have gone public in Hong Kong.
These drivers have created additional demand for leasing companies by
supplying the growth of domestic aviation but also the growth of interna-
tional airlines globally. On top of these drivers are the increase in China’s
foreign reserves and the growth of the banking sector.
118 D. YU
3.4 Local Government Policies Affecting Aviation

In this ever-changing world, there are constantly changing policies and
other drivers that have an impact on aviation. While some changes have a
more direct impact than others, the main drivers analyzed below are the
ones to watch out for going forward.
3.4.1 One Belt One Road (OBOR)

There are many broad themes and subthemes behind these impressive
figures. One of the major Chinese policy drivers is President XI Jinping’s
One Belt One Road economic investment initiative in infrastructure and
increased trade, which aims to bridge the countries that comprise the
route, land and sea, along the old Silk Road. While this concept was first
announced in 2013, the real traction kicked off in earnest in 2015 and was
developed alongside the founding and backing of the Asian Infrastructure
Investment Bank in 2013 and the Silk Road Fund in 2014. This focus on
trade has driven a lot of cross-border and outbound investment to coun-
tries along the routes. This has amounted to $33 billion in 68 countries
this year as of August compared with $31 billion in 2016 according to
Thomson Reuters with $124 billion pledged at the May 2017 summit. In
the aviation space, there has been a surge of investment in tourism activi-
ties, airlines, airports, and aircraft leasing.
3.4.2 Supply Side Structural Reforms

Another major theme and driver are the series of supply side reforms that
have been implemented since 2015. All of these different components are
the overarching policy directions which have large effects on aviation and
cross-border investments. The main subcategories include cutting excess
industrial capacity, deflating real estate inventory and bubble, corporate
deleveraging, lowering corporate costs (taxes, fees, etc.), and Made in
China 2025.
Some of these subthemes are aimed at realigning the domestic econ-
omy and transforming it from old to new while making the sources of
growth more sustainable. This includes cutting excess older industrial
capacity and encouraging more clean energy projects. This goes hand in
hand with overall deleveraging and control of the growth of the credit
exposure in China as well as deflating the real estate bubble and excess
inventory especially outside of top tier cities. This desire includes slowing
down the credit growth due to normal and shadow banking activities and
thus far has focused on larger private companies and smaller banks and has
now moved on to local municipal and provincial SOEs. Credit growth has
intensified since the 2008 global financial crisis and infrastructure spend-
ing and borrowing has been a key method to drive economic growth by
local governments but lately initiatives such as for new subways in farther
out regions, and so on, have wound up due to the concern for the amount
of additional debt required.
3.4.3 Airports Infrastructure and Construction

These policies, however, do not dampen the growth of airports and related
aviation infrastructure especially in more Western and more underdevel-
oped regions in China which have continued to see steady growth. Airports
are another domain regulated by the CAAC. There were 218 airports as
of 2016. Historically, China planned to build about six airports per year
from 2011 to 2016. In the 12th 5 Year Plan unveiled in 2011, the stated
target was 230 constructed airports while only 207 were built. In the
updated 13th 5 Year Plan unveiled in 2016 the target was construction of
260 new airports by 2020 and 136 by 2025 with the largest in Beijing and
Chengdu, currently under construction, each handling over 90 million
passengers annually as shown in Fig. 4.13 (Ge 2017). These figures don’t
include the general aviation airports, which currently stand at 310 with
300
Target=260;
42 Needed
250
42
200
# Airports
150
202 207 218 218

100 193
180 183
50
0
2011 2012 2013 2014 2015 2016 2020E
Fig. 4.13 China airport construction—actual and targeted. (Source: Civil

Aviation Administration of China 2016a, b)
120 D. YU
the goal of reaching 500 by 2020 or the targeted 139 expansion projects
at existing airports (Civil Aviation Administration of China 2016a).
The lowering of corporate costs has not been a big point of emphasis.
The focus so far has been on reducing fees and bureaucracy rather than
major tax cuts while trying to stimulate the economy through encourage-
ment of “mass entrepreneurship” by Premier LI Keqiang. This has espe-
cially been true of the free trade zones which are considered the policy test
regions including the Tianjin Dongjiang Free Trade Port zone (DFTP)
and Shanghai FTZ. These two jurisdictions are home to the most active
jurisdictions for aircraft leasing in China.
The Made in China 2025 initiative is also part of the overall supply side
reforms that have their roots in 2013, which focuses on the upgrade of the
Chinese industry similar to the “Industry 4.0” initiative by Germany. This
initiative increases the competitiveness of industry and encourages invest-
ments in high-technology sectors and has recently been given a renewed
push. In the aviation world, this focuses on new biofuels, clean technolo-
gies implemented for airlines, aircraft, and airports. This theme is some-
times combined with the OBOR initiative. This is the case of domestic-made
COMAC C919 and ARJ21 and aircraft leasing, both of which are being
rolled out under both initiatives.
As a result of these initiatives and the desire for more offshore assets
due to the exchange rate and the perceived difference in regional invest-
ment returns, these have driven up cross-border investments in aviation
and tourism with the Wanda and HNA Group, which among others have
been among the most acquisitive groups. These high-profiled deals have
caused the CBRC to review the credit exposures for “systematic risk” to
these four outbound groups including the aforementioned and Anbang
and Fosun. In addition, the government has stepped up scrutiny of both
the convertibility of RMB to other liquid currencies and the transfer of
funds to offshore locations. The aim has been to slow down and dampen
the more frivolous offshore investments that are outside the scope of the
main business competencies and refocus on more core policy-driven
investments that still have government backing. These actions also help
support the RMB exchange rate and total foreign reserves which have
steadily grown from the 1980s to their all-time high of $4.0 trillion, which
was reached in June 2014 but has since receded to its recent low of $3.0
trillion in January 2017 to the current levels of $3.1 trillion in December
2017 (People’s Bank of China 2017).
3.4.4 Opening Up of the Domestic Economy

Recently, there have been more policies relating to the opening up of the
domestic economy to foreign capital, which includes publications of a
national unified negative list of industries for inbound investments that
were previously under more locally administered policies as well as a pledge
for the opening up of investments in the financial institution space along
with asset management companies. This provides more stability for for-
eign investors especially in aircraft leasing and airlines and also prevents
retroactive unraveling of deals due to unanticipated policies. This has seen
more foreign lessors establish local onshore subsidiaries in China to attract
more local customers. These newer policies go hand in hand with the
opening of the Hong Kong jurisdiction as a base for foreign and Chinese
capital investing in aircraft leasing.
While some of these policies and drivers can seem a bit contradictory at
times, what is certain is the encouragement of technologies and growth
platforms that enhance the sources of GDP growth and composition,
especially as China continues to emerge as a leading driving force in the
global integrated economy. Aviation, including airports, leasing, technol-
ogy, and tourism, is still a much favored industry that is promoted not
only because of the policy considerations but also because of the strong
underlying stability and economics. There will be continued challenges as
these policies and drivers evolve to changing the global economy and
industry, which bodes well for more opportunities for nimble and creative
players.
4 Financing Environment and Current Trends

Similar to the global mix, locally in China, there are a variety of financing
sources for aircraft with manufacturers’ support, cash or equity, export
credit agencies, bank debt by commercial banks, institutional players such
as private equity and hedge funds, tax equity, and capital markets. The
market is mostly funded by cash and commercial debt, while export credit
agencies and manufacturers’ support having some small market size. There
are also very few capital markets transaction as these types of transaction
are just starting to pick up in the market.
122 D. YU
4.1 Export Credit Financing

In comparison to a long history in the West, China’s history of a formal
export credit bank is far shorter as the Exit-Import Bank of China
(CEXIM), one of the three policy banks under the State Council, was
founded more recently in 1994 with the mission to implement state poli-
cies to promote the export of Chinese products and services. Unlike US
EXIM, CEXIM funds projects directly instead of through guarantees or
insurance, which is akin to what US EXIM did in its early years.
After the gradual reduction of tax benefits in the 1990s, the preference
for tax-driven leveraged leases changed with an increased interest for
export credit-backed lease structures. The year 1996 saw the first US
EXIM-guaranteed deal with China on McDonnell Douglas MD-11 s val-
ued at nearly $900 million (Export-Import Bank of the US 2018).
European ECAs also started to see increased activity after the first
A300-600R was completed for China Eastern Airlines on October 22,
1993. European ECAs provided support for Airbus-manufactured
products.
As these structures evolved, creative structures such as a package of
Japanese-optimized leveraged lease with an ECA guarantee emerged.
This, of course, had both advantages and some disadvantages but the main
point was to lower the overall borrowing cost compared with using a sin-
gle structure alone.
Another structure was the securitization of US EXIM-guaranteed
leases, which provides a credit enhancement for a normal securitization
product. This form of financing first appeared in Asia in early 1994, but
Chinese airlines keenly seized this form. For example, China Southern
Airlines acquired seven B737-300 aircraft in April 1994 using this form of
business securitization, with financing amounting to 201 million US
dollars.
While direct aggregate funding numbers are not published, the author
has seen a significant rise in new financings by CEXIM especially over the
past few years. This increase in funding is in line with the continued
increased share of China’s new deliveries in the global aviation market.
CEXIM will continue to have a larger impact with respect to the global
ECAs and the overall global aircraft financing market. This in addition to
the hopeful resolution of the quorum issue at US EXIM will have global
ECAs play a larger role in the overall aircraft finance market to come.
While direct aggregate funding numbers are not published, the author
has seen a significant rise in new financings by CEXIM especially over the
past few years. This increase in funding is in line with the continued
increased share of China’s new deliveries in the global aviation market.
CEXIM will continue to have a larger impact with respect to the global
ECAs and the overall global aircraft financing market. This, in addition to
the hopeful resolution of the quorum issue at US EXIM, will have global
ECAs play a larger role in the overall aircraft finance market.
4.2 Capital Markets, Sidecar, and Joint Ventures

Another change is the sources of the funding in aviation and aircraft leas-
ing. Newer entrants providing both equity and debt capital have emerged
such as large private, regional, and SOE conglomerates, insurance compa-
nies, and more creative onshore ABS like financing structures. These inno-
vations will continue to drive the changing dynamics of the industry.
In addition, the trend toward the creation of new dedicated equity
funds and the resurgence of sidecars and joint ventures has been a signifi-
cant portion of growth especially involving Chinese companies. Sidecars
are a form of joint venture which involves a capital source in a joint ven-
ture along with a more established aircraft leasing company, which creates
benefits for both parties. These new funds include committed and
announced from JVs constitute more than $26 billion in the aviation space
since 2008 (D. Yu 2017). The latest example is Standard Chartered with
their SDH Wings International Leasing Limited JV with Sichuan
Development Holding and separately their establishment of an onshore
China leasing platform in Tianjin DFTP.
4.3 Differences Between Domestic Onshore

and International Structures
There are many differences between domestic onshore China structures
and more international offshore structures as described previously. With
each option, there are multiple jurisdictions that one can choose from.
These develop further observations and reasons why each developed.
One of the biggest challenges is the short period in which the domestic
jurisdiction has been in existence compared to its international counter-
parts. China’s market is roughly 20 years behind the US market. The
Chinese market has not caught up with older markets. In addition,
124 D. YU
historically there have only been few, smaller players who have lower pen-
etration rates, resulting in this immature market.
Government policies and regulations, especially in terms of taxation,
play an important role in the development of the leasing business in any
country. The passing of the Investment Tax Credit Law in 1962 was
instrumental in the US that enabled a tax credit for interest and dividend
payments. With the enacted advancements in tax policies and regulations,
the US, Europe, and Japan all enable leasing transactions to recognize
interest deductions, depreciation of the asset (including accelerated depre-
ciation), and other tax credits and allowances. China’s policies and regula-
tions advancements with regard to leasing, not counting one-off
company-specific benefits, however, have fallen far behind especially as a
result of slow depreciation, non-deductibility and other allowances for
trading, and capital gains as compared to other jurisdictions. In addition,
the taxation is quite high as well; also, other fees associated with employ-
ees have resulted in high taxation on leasing transactions. These result in
lower returns on investment compared with other jurisdictions, making
the jurisdiction not as competitive on a global basis.
In addition, the domestic financial markets have historically not been
well developed and where the financing channels require increased cost of
funds or interest as compared to other markets. In addition, the market is
less flexible in terms of financing higher-cost assets as well as long-term
liquidity. There is still the preference for shorter-term financings. As with
all foreign-denominated assets, SAFE strict controls and regulations also
exist. While the domestic circumstances are changing quite rapidly, inter-
national financing markets, especially the capital markets, are more mature
and flexible to handle these transactions.
China’s aircraft leasing market consists mainly of finance leases rather
than operating leases. In part, this is due to history as this was first intro-
duced and it accounted for the majority of leasing transactions for the first
few decades. Especially in the first ten years of leasing aircraft, all leasing
methods used by China’s civil aviation were financial leasing. From the
1980s to 2001, China introduced 437 aircraft using leases representing
$26 billion of asset value. Of these, 320 aircraft used financial leasing or
73% and 117 aircraft used operating leasing or 27 aircraft. China’s operat-
ing leasing did not begin in earnest until 1990 with China Southern
Airline’s first package of ten aircraft consisting of five Boeing 737-300 and
five Boeing 737-700 aircraft with the GPA Group, then the largest aircraft
leasing company in the world. In addition, the package included the sale
of ten older Boeing 737-200 aircraft (Unsworth 1990). This set a prece-
dent for not only the largest operating leasing in China but also a familiar
structure still used today for packing the lease of new aircraft along with
the sale of older aircraft from the airline’s inventory.
In addition to finance or operating leases, there are a variety of struc-
tures that utilize local tax benefits that have become popular. These include
various forms of tax-optimized leveraged lease structures in the US,
Germany, Netherlands, Sweden, Hong Kong, France. China has adopted
many of these innovative leasing structures.
5 Current and Future Market Overview

Since 2007 when legislation allowed banks to invest in leasing, leasing has
boomed. Turnover has increased from 8 billion RMB in leasing in 2006 to
4.4 trillion RMB in 2015 and all aspects of financial leasing, domestic
financial leasing, and foreign financial leasing have shown similar growth.
In addition, the number of leasing companies now totals 44,400 nation-
ally with almost an equal number distributed between the three different
types mentioned, with an astonishing growth rate of 12,400% (Yang 2016).
See Table 4.4 for a more detailed Chinese leasing segment revenue
breakdown. In addition, the total assets under management in both types
of leasing companies have grown quite rapidly as well, with 68% CAGR
from 2008 to 2014 under both of their respective regulators. See Table 4.5
Table 4.4 Chinese finance leasing segment’s revenue, 2006–2015

Chinese finance leasing segment’s revenues 2006 to 2015 (in 100 million RMB)
Year National Financial Domestic financial Foreign financial

turnover leasing leasing leasing
2006 80 10 60 10
2007 240 90 100 50
2008 1550 420 630 500
2009 3700 1700 1300 700
2010 7000 3500 2200 1300
2011 9300 3900 3200 2200
2012 15,500 6600 5400 3500
2013 21,000 8600 6900 5500
2014 32,000 13,000 10,000 9000
2015 44,400 17,300 13,000 14,100
Source: Yang 2016

126 D. YU
Table 4.5 Chinese finance leasing company statistics by type in 2015

Chinese finance leasing company statistics by type in 2015
Number of Business volume (billions Growth rate Ratio

enterprises RMB) (%)
Finance lease 17,300 13,000 4300 33.08

Domestic finance 13,000 10,000 3000 30
lease
Foreign finance 14,100 9000 5100 56.7
lease
Total 44,400 32,000 12,400 38.8
Source: Yang 2016
600
500
Volume (in Billion USD)
400
300
200
100
0
2008 2009 2010 2011 2012 2013 2014
Total Assets Financial
Leasing Company 11 23 46 77 116 146 200
Total Assets Leasing

Company 14 23 61 66 122 162 277
Fig. 4.14 China leasing company assets. (Source: China Banking Regulatory
Commission 2016; Ministry of Commerce of the People’s Republic of China 2016)
for statistics on types of Chinese leasing companies. Figure 4.14 shows the
substantial increase of both leasing companies and financial leasing com-
panies in terms of asset growth over the 2008 to 2014 timeframe.
As of 2015, there were 2880 large commercial aircraft in China, with
narrowbody aircraft representing more than 80% of the fleet mix.
According to Airbus, the current breakdown of the 2711 aircraft in China
is 49% and 51% market share by Airbus and Boeing, respectively. This fig-
ure comes to 2377 or 88% overall narrowbody aircraft and the market
share is broken down to 48% and 52% for Airbus and Boeing, respectively.
Widebodies represent 334 aircraft or 12% overall mix and the market share
breakdown is 55% and 45% for Airbus and Boeing, respectively. Ascend’s
data on China’s current fleet shows similar breakdowns with 2800 aircraft
as at the end of 2016. These figures are similar to that of the global mix;
both manufacturers have an almost equal share of the aircraft market in
China. Given the aircraft on order and under LOI, we can conclude that
the majority of the aircraft are narrowbodies and a large number are next
generation new technology aircraft.
While there are many thoughts about the growth of the market by
either party, what is agreed is that there will be tremendous growth in the
Chinese market in the next 20 years. Boeing projects in its 20-year forecast
that there will be 7720 large commercial aircraft in China as of 2035 and
narrowbody aircraft will represent 75% of the aircraft mix, as shown in
Fig. 4.15.
There will be 6810 deliveries in the 20 years representing $1.025 bil-
lion of market value with an average of $150 million per aircraft as shown
in Fig. 4.16 (Boeing Corporation 2016).
While a bit more conservative than Boeing, Airbus still forecasts a very
large market size of 5970 new aircraft being delivered, representing $945
million of market value in their 20-year projections, as shown in Fig. 4.17.
Airbus differs slightly from Boeing in the market projections and shows
that 71% of new deliveries over 20 years are narrowbody aircraft.
6 Industry Participants’ Characteristics

The Chinese leasing landscape is changing quite rapidly given the encour-
agement of the industry by the government. There are many new trends
being witnessed by industry participants. In China, almost all of the top
15 banks by assets are active as investors through their owned leasing com-
panies, except for Postal Savings Bank of China and Agricultural Bank of
China, a policy bank (Relbanks.com 2016a). With the exception of Bank
of China through its acquisition of SALE in 2006, all the other banks’
activities are newly formed financial leasing entities created after the 2007
creation of financial leasing entities owned by banks.
Top Chinese lessors are among the top 20 globally, according to
Airfinance Journal’s Top Lessors 2016 by aircraft: BOC Aviation is at
128 D. YU
Delivery Units By Type
1%
9% 2%
Regional Jets
13%
Medium Wide-body
Single-aisle
Large Wide-body
Small Wide-body
75%
Share of Fleet By Type

100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2015 fleet 2035 fleet
Regional Jets Single-aisle Small Wide-body
Large Wide-body Medium Wide-body
Fig. 4.15 Current China fleet and future projections by type. (Source: Boeing
Corporation 2016)
eighth place with 267 aircraft; ICBC Leasing at 12th place with 218 air-
craft; and CDB Leasing at 17th place with 148 aircraft. Meanwhile,
Minsheng Financial Leasing is at 46th place with 39 aircraft. Looking at
the top 50 lessors by value (2016), BOC Aviation is at 6th place ($11.4
billion), ICBC Leasing is at 8th place ($10.2 billion), CDB Leasing is at
13th place ($6 billion), Bocom Leasing is at 19th place ($4.2 billion), and
Fig. 4.16 China fleet and Boeing future projections segmentation. (Source:
Boeing Corporation 2016)
4,500
4,230
4,000
3,500
3,000
Number of Aircraft
2,500
2,000
1,425
1,500
1,000
500
315
0
100-210 seater 250-400 seater >400 seater
passenger aircraft passenger aircraft 10- passenger aircraft
80 tonne freighter >80 tonne freighter
aircraft aircraft
Fig. 4.17 Current Airbus China 20-year projections. (Source: Airbus 2016)
130 D. YU
Minsheng Financial Leasing is at 41st place ($900 million) (Airfinance

Journal 2016). This trend for increasing number of Chinese leasing com-
panies in the global top 50 lessors list and higher assets under manage-
ment by these companies will continue to develop as the demand for
aircraft in the region increases.
In addition, there is a new trend that is emerging in aircraft leasing of
global commercial banks, which is that of downsizing their investments.
RBS Bank sold its aviation division to SMBC of Japan. Investec, for exam-
ple, recently sold its 20% share of Goshawk Aviation to Hong Kong-based
co-shareholders Chow Tai Fook Enterprises (CTFE) and NWS, both of
which now have 50% shareholding. Goshawk is Investec’s third aircraft
leasing platform, along with Global Aircraft Fund and Aircraft Syndicate
Limited. It is also interesting to note that Goshawk was originally set up
with backing from Investec, CTFE, and Cheung Kong (CK), but CK sub-
sequently sold its stake in the lessor to NWS. CK has since established
Accipiter and several other joint ventures with global aircraft lessors. This
trend also shows the interest of Hong Kong-based aircraft lessors in CTFE,
CK NWS, along with China Aircraft Leasing Group, which listed in Hong
Kong along with newer entrants such as Asia Pacific Aviation Leasing
Group backed by Hong Kong-based private equity interests.
Increased interest in the sector from large insurance companies in
China has also emerged. Like its compatriot banks, most of the major
insurance firms in China have created financial leasing companies under
China’s Ministry of Finance regulations and have primarily focused on
finance leases, although some have started specific aviation divisions and
others have diversified into operating leases. Insurance companies are also
a growing force in terms of financing and investments as they are being
allowed to diversify their holdings by the various regulators, mostly China
Insurance Regulatory Commission (CIRC), CSRC, and
PBOC. Traditionally, insurance groups have invested, and still have a bulk
of their assets, in conservative fixed income such as local bonds and have
expanded to equity as well as more alternative investments such as real
estate and financial leasing. Examples include the formation of aviation
leasing arms at Ping An, China Life, and Taiping insurance groups (the
latter in a JV with Sinopec, an SOE oil major).
Some reasons insurance companies globally and regionally are attracted
to aircraft leasing assets include the benefit of depreciation of the aircraft
assets, which offsets other earnings from a tax perspective; the fact the
investment is backed by physical assets with long life and stability of cash
flows is attractive. Insurance companies try to increase their investment

returns as well as match the duration of their liabilities. In addition, one
can deploy sizable amounts which can be significant for the insurance
groups. All of these rationales apply to Chinese insurance groups as they
are also backing the expansion of their financial leasing activities in China
and abroad to find higher-yielding and lower-risk returns. Aircraft leas-
ing’s structural characteristics are similar to real estate with large transac-
tion sizes backed by physical assets, and debt, which is optional, and
involves rental returns and the potential of asset appreciation for operat-
ing leases.
These new Chinese insurance players are big including Ping An
Insurance ($753 billion in assets in 2015 and ranked the number 5 top
global insurance company), China Taiping Insurance ($63 billion in assets
in the financial year 2015) through its joint venture with Sinopec (by itself
a large company ranking 4th in the Global Fortune 500 rankings in 2016),
and China Life ($378 billion in assets in 2015 and the number 20 top
global insurance company) through its joint venture entity (Relbanks.com
2016b). It will not be a surprise if over the next few years most of the top
insurance players will have leasing arms and will be invested in aviation.
This is not a surprising trend given that most financial groups and large
conglomerates have joined the bandwagon in investing directly in aircraft
leasing assets. As the industry continues to grow in 2017 and beyond,
even more players from insurance companies and other sectors will be
entering the industry. These new capital sources will continue to change
the composition of finance capital globally and increase weight toward
insurance companies and Asian-based companies along with the contin-
ued growth of the global aircraft leasing industry.
7 Conclusion
The Chinese aircraft leasing and aviation industries continue to grow at a
rapid pace compared with the overall global perspective. The demograph-
ics and the drivers are positive for the industry in China and there is signifi-
cant room for further uplift. Aircraft and the airline industry are
intertwined. The rapid changes and growth in China are affecting the
global economic state. Specifically, the rapid growth of China-based air-
lines and aircraft leasing companies has had significant effects on the global
aviation and leasing space. These drivers in China have also contributed to
the increased significant volume and activity in cross-border M&A and
investment trends in the aviation industry.
132 D. YU
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CHAPTER 5
Empirical Aircraft Asset Pricing
1 Introduction and Research Questions

It has been a long-established thought and rumor of the industry that
aircraft asset investment returns are moderate with lower volatility com-
pared with other asset-backed classes. No systemic, rigorous comprehen-
sive empirical study with real historical data has been done to substantiate
this mere hypothesis and this research intends to fill that gap through the
hand-collected data set. Previous thoughts have been incomplete based on
sample sets too small, short, biased, or based on non-publically available
proprietary data sets that have not been conducted with the scientific rigor
to make convincing augments and conclusions. There are gaps in the aca-
demic literature that can be filled by examining empirical analysis espe-
cially in regards to aviation through analysis of 21-year historical
representation of the aircraft asset class and construction of various indexes
to test the current theories on shocks and examine the effects and charac-
teristics before and after the 2008 global financial crisis.
To put things in perspective in terms of the relative size of the aviation
industry, there are currently 6350 and 22,510 aircrafts in Asia and glob-
ally, respectively, as of the end of 2015. Deliveries of new aircraft over
30 years as of 2035 is projected to be 15,130 and 39,620 aircrafts in Asia
and globally, respectively, representing market values of $2.35 trillion and
$5.93 trillion in Asia and globally, respectively, based on list prices (Boeing
Corporation 2016). This is a very big market and also has general

https://doi.org/10.1007/978-981-15-6743-8_5
136 D. YU
significance to the overall economy and it does not to have any significant
robust academic research relating to asset pricing and its dynamics.
The basis of the empirical study is the unique data set that has been
hand collected from a significant subset of the world’s foremost aircraft
appraisal firms. This subset group of aircraft appraisers has specifically
agreed to provide the aircraft historical appraised data and value projec-
tions for this research. While not every single source data is available for
the entire time frame, the overall time period comprises aircraft pricing
data by various types from June 1996 to June 2007. This empirical
research is novel in that the data has never been systemically provided by
so many of the world’s aircraft appraisers, who represent the bulk of the
aviation market and industry. While the actual historical transaction data
is the ideal, this is not available due to its competitive, proprietary trade
secret characteristics so this is the closest proxy to actual real market
aircraft pricing. None of the appraisers providing data has previously
contributed data towards any group-based research project nor have
they contributed to such an encompassing collective study on the aircraft
industry.
The main question addressed is determining the market characteristics
of the aircraft asset class in terms of its returns, volatility and trends. In
this empirical study, several indexes were created to group the various
aircraft types, namely, Index: (1) all aircraft types, (2) all narrowbody
aircraft, (3) all widebody aircraft, (4) all narrowbody classic aircraft, and
(5) all narrowbody next generation (NG). A more thorough discussion
is in Methodology Sect. 4.5. Aircraft pricing data is also segmented into
four time segments. For each of these five aircraft type groups, Index
1–5, the four time periods analyzed are Time: (1) all available historical
information 6.1996–6.2017, (2) pre-Global Financial Crisis (pre-GFC)
period 6.1996–6.2007, (3) during the GFC period 6.2007–6.2010, and
(4) post-GFC period 6.2010–6.2017. To clarify the data time series
throughout, 6 denotes June throughout the book. The time segments
were chosen to analyze the effects and trends by the GFC on aircraft
asset pricing.
The main hypothesis is that the aircraft market, represented by all air-
craft types (Index 1), will have higher value depreciation compared to the
accounting depreciation and low standard deviation throughout the four
time segments.
5 EMPIRICAL AIRCRAFT ASSET PRICING 137
The second hypothesis is that narrowbody aircraft, represented by

Index 2, will have lower value depreciation and standard deviation
throughout the four time segments than widebody aircraft, represented by
Index 3.
The third hypothesis is that NG narrowbody aircraft, represented by
Index 5, will have lower value depreciation and standard deviation
throughout the four time segments than classic narrowbody aircraft, rep-
resented by Index 4, as well as all narrowbody aircraft, represented by
Index 2.
The fourth hypothesis is that the five aircraft market segments, repre-
sented by Index 1–5, will have lower value depreciation and standard devi-
ation in the pre-GFC period, Time 2, than during and post the GFC in
Time 3 and Time 4, respectively. Conversely, compared to other time seg-
ments, all the aircraft market segments, represented by Index 1–5, will
have higher value depreciation and standard deviation during the
GFC Time 3.
The fifth hypothesis is that there is a slight to moderate correlation
between market value (MV) and base value (BV) for all the aircraft types,
represented by Index 1–5, throughout the four time segments, while the
highest relative correlation occurs in pre-GFC Time 2 and the lowest
occurs during the GFC Time 3.
In addition to the five hypotheses, both cross aircraft type and cross
time subset characteristics are analyzed. These empirical studies add on
both the academic conversation about the subject but also show that there
are many potential applications of the study results. One example is that
investors can have an accurate view of the historical returns and volatilities
of the aircraft asset space as well as public market pure-play aircraft leasing
companies. This might enable the investors to decrease, hold, or increase
their overall exposure to the asset space given their understanding of other
compared asset classes. Another example of a possible implication of the
results is that the investors can adjust their percentage allocation holdings
of different types of aircraft given the findings, that is, single-aisle versus
twin-aisle aircraft or commercial versus regional aircraft. Any, even a small,
potential movement of attitudes based on the proposed research results
might have significant dollar size ramifications and impact given the size of
the market sizes.
138 D. YU
2 Aircraft Asset Values and Valuation

Methods Discussion
Aircraft is a major asset for an airline and/or the owners such as lessors,
and managing this asset with the goal of maximizing its value is a complex
process with many factors as discussed in Chap. 3.
2.1 Types of Aircraft Values

The main categories of values are theoretical, market, and relative values.
In commercial aviation, the most widely recognized and accepted industry
organization is the non-profit International Society of Transport Aircraft
Trading (ISTAT) and the standards of valuation are governed by its ISTAT
Appraisers’ Program (IAP). Not only does it have the gold standard certi-
fication program, of which this author is one of the approximately 50
certified appraisers, the IAP has created common value definitions, which
are generally accepted by most of the industry. The most common ISTAT
definitions of values are Base Value (BV), Market Value (MV or CMV or
FMV), Residual Value (RV), Distress Value (DV), Securitized Value or
Lease-Encumbered Value (LEV), and those are found in Table 5.1.
The BV definition is a somewhat idealized aircraft and viewed under
long-term market trends and conditions while MV has some similarities to
BV but differs in the relaxation of the reasonable supply and demand equi-
librium constraint and reflects the market at the specified time. DV is
lower than BV and MV and assumes harsher counterparty conditions
according to the definition. With LEV, this is the equivalent of a simplified
discounted cash flow value where the lease cash flow streams along with a
terminal future RV are present valued with an appropriate discount rate.
This approach is the most suited analysis from an aircraft lessor or owner’s
approach to value. There has been much academic literature on discount
rates to use (Beechy 1969; Johnson and Lewellen 1972; Bower 1973;
Harris and Pringle 1985, etc.). The drawbacks of this approach is that the
valuation appraiser may not have all the facts as to the credit risks with the
lessee and parties involved nor all of the side provisions of the lease, some
of which can have significant value impacts such as security deposits, return
conditions, repossession rights, term extensions, sublease rights, reserve,
and other payments.
Salvage Value is the part out value and is appropriate with older aircraft
as well as during times when the secondary parts market is very robust as
Table 5.1 Value definitions

• Base Value, the appraiser’s opinion of the underlying economic value of an aircraft in
an open, unrestricted, stable market environment with a reasonable balance of supply
and demand and assumes full consideration of its “highest and best use.” An aircraft’s
Base Value is founded in the historical trend of values and in the projection of value
trends and presumes an arm’s-length, cash transaction between willing, able and
knowledgeable parties, acting prudently, with an absence of duress and with a
reasonable period of time available for marketing. In most cases, the Base Value of an
aircraft assumes its physical condition is average for an aircraft of its type and age and its
maintenance time status is at mid-life, mid-time (or benefiting from an above-average
maintenance status if it is new or nearly new, as the case may be).

• Market Value, or Fair Market Value or Current Market Value if the value pertains to
the time of the analysis, is the appraiser’s opinion of the most likely trading price that
may be generated for an aircraft under the market circumstances that are perceived to
exist at the time in question. Market Value assumes that the aircraft is valued for its
highest, best use, that the parties to the hypothetical sale transaction are willing, able,
prudent and knowledgeable and under no unusual pressure for a prompt sale and that
the transaction would be negotiated in an open and unrestricted market on an
arm’s-length basis, for cash or equivalent consideration and given an adequate amount
of time for effective exposure to prospective buyers.

• Residual Value is the value of an aircraft, engine or other item at a future date, often
used in connection with the conclusion of a lease term.

• Distress Value, Forced Sale Value, Liquidation Value are terms to describe the
appraiser’s opinion of the price at which an aircraft (or other assets such as an engine or
spare parts) could be sold in a cash transaction under abnormal conditions—typically
an artificially limited marketing time period, the perception of the seller being under
duress to sell, an auction, a liquidation, commercial restrictions, legal complications, or
other such factors that materially reduce the bargaining leverage of the seller and give
prospective buyers a significant advantage that can translate into heavily discounted
actual trading prices. Depending on the nature of the assignment, the appraiser may be
asked to qualify his opinion in terms of disposition within a specified time period, for
example 60 days, 90 days, or six months as the needs may be. Apart from the fact that
the seller is uncommonly motivated, the parties to the transaction are otherwise
assumed to be willing, able, prudent, and knowledgeable, and negotiating at arm’s-
length, normally under the market conditions that are perceived to exist at the time—
not an idealized balanced market.

• Securitized Value or Lease-Encumbered Value is the appraiser’s opinion of the value of
an aircraft, under lease, given a specified lease payment stream (rents and term) and
estimated future residual value at lease termination and an appropriate discount rate.

• Salvage Value is the actual or estimated selling price of an aircraft, engine, or major
assembly based on the value of marketable parts and components that could be
salvaged for reuse on other aircraft or engines. The value should be determined and
stated in such a way to make it clear whether it includes adjustment for removal costs.

• Scrap Value is the actual or estimated MV of an aircraft, engine, or major assembly
based solely on its metal or other recyclable material content with no saleable reusable
parts or components remaining. The scrap value is usually expressed as net of removal
and disposal costs. In some cases scrap value could be zero if the dismantling and
disposal costs are high, as for example hazardous materials or composite assemblies that
might be impossible to recycle.
Source: International Society of Transport Aircraft Trading 2013

140 D. YU
the sum of the salvageable parts can be higher than the MV of the whole
aircraft. Salvage Value differs from Scrap Value as there are no more reus-
able parts left and is based on the metal or recyclable contents. These valu-
ation terms and approaches are used more towards the end of life as
Salvage Value and Scrap Value are compared to the valuation of the aircraft
as a rental producing asset.
Appraisal values are asset values that are generally provided by a third
party and should be independent. These are the definitions of values fol-
lowed by the large valuation consultancy firms and stated compliance
these conditions are written in the reports. There are some points to note
about appraisal values. The purpose or objective of the appraisal is impor-
tant as there can be many reasons to undertake an aircraft appraisal. Some
objectives and the various types of appraisals listed by ISTAT are found in
Table 5.2.
The most public figures are the manufacturer’s published list prices,
which are published yearly for each of the models for current production
aircraft available for sale. For a historical view of Boeing and Airbus’ list
price growth, see Figs. 5.1 and 5.2 which are hand collected data from
Boeing and Airbus.
These figures are usually in the form of minimum, average, and high list
prices as each aircraft can be customized based on airline, lessor, or inves-
tor, requirements. Some of these include the engine type, thrust, different
certified maximum aircraft weights such as maximum take off weights
(MTOW), seat manufacturer, number of seats, and so on. As part of these
negotiations, the aircraft original equipment manufacturer (OEM) can
provide various forms of incentives and concessions that are written in the
form of various support letters when acquiring an aircraft. These support
letters can describe discounts to the delivered list price, pre-delivery
Table 5.2 Various kinds of appraisals

1. To determine the value of the aircraft for sale or lease;
2. To determine present and future aircraft value for loan collateral;
3. To determine future value of aircraft for establishing residual insurance premiums;
4. To determine future value of aircraft as a basis for lease rates;
5. To determine airline fleet values to support equity stock offerings, values in mergers,
bankruptcies, and so on;
6. To determine aircraft values as a basis for state and local property taxes;
7. To determine values acceptable to the IRS [Internal Revenue Service or tax
authorities] of contributions to entities such as aviation schools and museums.
Source: International Society of Transport Aircraft Trading 2009

20.0%
15.0%
10.0%
List Price Growth Rates %
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
737-300 737-400 737-500 737-600
737-700 737-800 737-900 737-900ER
747-400 747-8 757-200 767-200ER
767-300ER 777-200ER 777-200LR 777-300ER
Fig. 5.1 Boeing mean list price growth rates. (Source: Boeing Corporation 2017)
payment terms and conditions, caps on escalation rates, special terms for
training, spare parts, and other technical assistance.
The list price is just a starting point for the negotiation and the final
delivery price depends on a variety of factors with some examples such as
the customer profile, number and type of aircraft, OEM’s order book,
market conditions, competitive and strategic dynamic, and so on. These
list values can be different from the realized and also appraisal values. The
list prices of aircraft by both Boeing and Airbus are generally set every year
with an upward trend. They have historically increased every year with a
few exceptions as noted in the Figs. 5.1 and 5.2. The year-to-year increase
percentage is independent of the set yearly escalation rate.
2.2 Valuation Methods
There are several ways to value an aircraft. This is a complex process, given
that there are many different factors that can be included in the valuation
model. The basic concept like all valuations is to determine the direct rev-
enue net of the total operating costs that can be derived from the aircraft.
142 D. YU
20.0%
15.0%
List Price Growth Rates %
10.0%
5.0%
0.0%
-5.0%
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
A319-100 A320-200 A321-200 A300-600R
A330-200 A330-300 A340-300 A340-500
A340-600 A380-800
Fig. 5.2 Airbus mean list price growth rates. (Source: Airbus 2017)
From this basic form, many adjustments are made, both internal and
external to the aircraft itself. Some of these internal factors include the
manufacturer, aircraft type, specifications, age, the useful life of the asset,
seating capacity, size, maintenance, and technical status. Some of these
external factors include market supply and demand, number of airlines and
their stage of development, fuel price, and aviation policy factors.
Figure 5.3 is an example of a scatter plot of a dataset of about 4000 various
aircraft resale values from 1978 to 1998 with a regression curve based on
the percentage of cost to estimate the life span depreciation of air-
craft assets.
There are many similarities and differences in aircraft asset valuation
compared with traditional company-level corporate valuation techniques.
These corporate valuation techniques, such as the discounted cash flow
method (DCF), adjusted present valuation method (APV), the sum of the
parts valuation, liquidation or bankruptcy valuation, and relative value
approaches including comparable companies’ multiples analysis, precedent
transactions analysis, can be combined and adjusted for corporate-level
Fig. 5.3 Scatter plot of constant dollar resale prices as a percentage of new price
for jet aircraft collected: 1974–1998. (Source: Hallerstrom 2013. Note: The data-
set contains about 4000 data points. Some sales may have had leases attached to
the aircraft.)
application and can also be adjusted for asset valuation (Myers 1974;
Myers et al. 1976; Gibson and Morrell 2004, 2005).
The most traditional valuation method is the DCF approach (Gibson
and Morrell 2004, 2005; etc.). In the company valuation method, one
calculates the present value of the projected free cash flows from both
operations as well as the accounting effects with an appropriate discount
factor. In the aircraft asset valuation approach, one envisions a basic single-
aircraft charter company. A cash flow approach can be derived with the
effects of the net sources of revenue or yields including passenger, freight,
and ancillary components and total costs including direct operating, indi-
rect operating, and nonoperating costs. Some examples of direct operating
costs are crew, fuel, maintenance, ownership, and landing fees while indi-
rect operating costs include cargo and baggage handling, passenger ser-
vice, sales, and reservation systems. Nonoperating costs mainly consist of
items administrative in nature such as general management. Both revenue
and costs can be fixed or variable costs. Some examples of fixed costs are
salaries and insurance. Some examples of variable costs are fuel,
144 D. YU
maintenance, and landing fees. Some examples can either be direct or

variable are crew and ownership costs (fixed or benchmarked leased or pay
by amount utilized).
FCF1 FCF2 FCFn RVn

DCF = + +…+ +
(1 + r ) (1 + r ) (1 + r ) (1 + r )
1 2 n n
FCF = free RV = residual or terminal r = discount rate n = number of

cash flow value (WACC) periods
FCF for Company = FCF for aircraft = TR – TC.

TR = total revenue TC = total cost
FCF for Aircraft Asset from Lessor’s Point of View

=TR–TC=gross aircraft lease
payments – maintenance-crew-fuel-insurance
FCF for Aircraft Asset from Operator’s Point of View = TR–TC
TR=Revenuepassenger+ Revenuecargo+ Revenueancillary
TC=Costdirect operating + Costindirect operating+ Costnon-operating
Company and Aircraft Asset Cost of Capital
WACC = wdebt1kdebt1(1-t) +…+ wdebtnkdebtn(1-t) +wequitykequity
k = cost of equity or debtn w = weight of equity or debtn n = type of debt number
These valuation techniques can also be combined with other techniques

and incorporate adjustments to account for market dynamics, and so on.
While the traditional company DCF approach takes into account debt,
this asset approach does not and is considered the all equity or asset
approach similar to the data. To incorporate the debt effects, the modifica-
tion of the APV method for aircraft assets is more suitable from academic
literature. The APV approach is the summation of the value of all equity
or unlevered asset with the incremental value of the debt effects on the
asset. The debt effects can be further separated for each tranche or type of
debt such as senior debt, mezzanine debt, and so on.
Asset Price = Unlevered Asset Value + (T1 – C1) + (T2 – C2) +... +
(Tn – Cn)
T = tax benefit of debt type n C = cost of debt type n N = different types of debt
There are other valuation techniques that are similar between company
valuation and asset value. Other than comparable companies’ multiples
analysis, precedent transactions method, sum of the parts valuation, and
liquidation or bankruptcy valuation can all be adjusted to suit the asset.
Distress Value is similar to liquidation or bankruptcy value while Salvage
Value is analogous to the sum of the parts value for companies. A similar
relative value-based method, precedent transactions approach, can also be
used for asset valuation based on the adjusted maintenance status and
price of the aircraft. As there is not a similar public comparables that are
easily accessed, this is not a useful method for asset valuation. A reason for
this is similar to that of academic research due to the lack of data available.
2.3 Aircraft Depreciation and Economic Useful Life

As the aircraft is used and age, there is real, book, and market deprecia-
tion. Real depreciation happens as physically the aircraft costs more man-
hour repairs, downtime, and financial cost in maintenance as the aircraft is
used and life limited parts are replaced and flight cycle and flight hour
limits items are reached. This causes operating costs to increase over its
lifetime. An aircraft is similar to other machines like an automobile whereas
older cars are more expensive to maintain than newer ones.
Book depreciation is the accounting depreciation of the aircraft. An
aircraft’s accounting or economic useful life is 25 years with a 15% residual
for value recapture. This accounting depreciation happens as the aircraft is
depreciated on a straight line basis but actual market depreciation is much
more volatile from the study. Figure 5.4 is an example of the actual market
depreciation curve of two different vintages (one early and one late) of the
MD-83 type aircraft which can be seen to have very different depreciation
from a straight line accounting framework.
Market depreciation is based on many things such as real and account-
ing depreciation but it also takes into more market-based pricing inputs
such as market dynamics. These market dynamics include the relative per-
formance of the aircraft and the relative supply and demand of the aircraft.
It also includes the technological competitiveness of the specific aircraft
type relating to other types. As technology advances and the aircraft type
146 D. YU
100.0%
90.0%
CMV in % of New (Constant $)
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
0 1 2 3 4 5 6 7 8 9 10
Age (years)
MD-83 First Vintage MD-83 Last Vintage
Fig. 5.4 Relative constant dollar ascend CMV for earliest and last vintage of
MD-83. (Source: Hallerstrom 2013. Note: Relative constant dollar Ascend CMV
for the earliest and last vintage of the MD-83. Note that the early vintage has sub-
stantially better value retention)
technologically depreciates and along with the competitive nature of mar-

kets creates the introduction of a new replacement type and technology.
This is in relation to the life cycle of the product and technology. For
example, the Boeing 737 classic series of aircraft are replaced by the newer
Boeing 737 NG series, which are then replaced by the Boeing 737 MAX
series. As a duopoly of the aircraft manufacturers exists, especially for large
aircraft, this competitiveness in technology is alive and well (Oum
et al. 2000).
Aircraft assets have a finite economic useful life. This is due to a couple
of factors. One is the technology time and use constraints of its parts for
safe operation. In theory, the useful life of an aircraft is as long as there is
economic benefit and the technical requirements and regulatory certifica-
tions can be maintained. This time of useful life is reached when big com-
ponents of the aircraft such as airframes have reached their limits either
due to absolute time, flight hour, or cycle limits, or a combination. While
some can be continuously repaired safely and restored such as engines,
others such as the airframe would not be economically feasible which
forms the basis of economic useful life. The other factor for finite life is the
technological cycle and its competitiveness aspect where the future newer
generations would accelerate the retirement of older technologies. With
this economic useful life constraint, more visibility is needed in cash flows
to account for both depreciation and an adequate return. There is a lot of
debate in the industry as to whether this 25-year economic useful life is
still a good metric or is the useful life less than 25 years, given the increas-
ing speed of technology cycles and replacement, among other factors.
2.4 Salvage and Scrap Value

At all points of the aircraft life cycle, owners can elect to salvage the parts
and scrap the remaining aircraft for its part out value. While this is histori-
cally at the later end of the life cycle when it is difficult to find lessees or
consideration of other market forces, this option always exists in the entire
life cycle of the asset. Salvage Value differs from Scrap Value as there are
no more reusable parts left and is based on the metal or recyclable con-
tents so there is a need to consider the removal costs for Salvage Value.
The equation for considering continued use versus scrapping is below,
whereas MPa represents the expected value of the aircraft and its cash flow
as described in Section 5.2.2.
MPa = DCF (SUM (Revenues1, Costs1) + …+ SUM (Revenuesn,
Costsn)+ Residual Value) ≥SV – RC + SCV
MPa = market price of aircraft SV = salvage SCV = scrap RC = removal

a value value costs
This consideration can also be viewed to the highest limiting large part
which is the closest to needing repairs as the cost for major restorations
such as the engines is significant and the investment is more than the
expected value afterward. As aircraft type families have many interchange-
able parts and components, this can result in increased demand where the
summation of the part values can be more than the entire aircraft sold as
is. Likewise, this case also produces instances where lessors acquire a func-
tional aircraft for the purpose of parting out the aircraft where they view
that the total value of the parts minus costs is more than the acquisi-
tion cost.
148 D. YU
2.5 Inflation
Inflation has effects on valuation. First, the OEMs set yearly escalation
rates for the pricing of delivered new aircraft. This escalation is an approxi-
mation of the inflation in the cost of the production of aircraft. While the
exact formula is undisclosed, it is said to be based on a basket of metrics
such as consumer price index inflation, labor, and other factors. For new
aircraft with a long future anticipated delivery period, the escalation com-
ponent of the price is a significant portion of the increased price from the
base year period reflected in the contract. Secondly, there can be inflation
in the components and subcomponents parts which all have inflation pric-
ing reflecting the increases in production cost. These do not account for
market increases due to higher margins requirements for OEMs or others.
In turn, these inflation costs are reflected in the cost of the aircraft—both
new and used. Given that aircraft and its components are priced in US
Dollars, aircraft can be viewed as a movable US Dollar based real asset.
Real assets like real estate can act as inflationary hedges (Froot 1995).
2.6 Maintenance Condition Value

The US Federal Aviation Authority’s definition of an aircraft is a “device
used or intended to be used for flight in the air” while an airplane is defined
as an “engine-driven fixed-wing aircraft heavier than air, that is supported
in flight by the dynamic reaction of the air against its wings” (Federal
Aviation Administration 2018). The basics of a commercial airplane is an
airframe that is supported by engines—normally two or four—and various
critical parts such as landing gears and the auxiliary power unit (APU).
Each component, assemblies, subassemblies, and parts have specific usage
regulations in terms of absolute time, flight hour or cycle limits, or a com-
bination. When an aircraft is delivered brand new from the OEM, all of
the components are at full life. Each of the components has an absolute or
relative time or utilization, in-flight hours or cycles, limitation, or both. As
the aircraft is used and the parts are in use, each of these components,
assemblies, subassemblies, and parts’ technical life counts down. Some of
these items are repairable and can be repaired and restored as if new, oth-
ers are expendable, where no repair procedures exist and some items are
life limited.
The main cost components of a whole aircraft are the airframe, engines,
APU, and landing gears. Airlines maintain different types of approved
maintenance schedules. The most commonly used maintenance checks are
the letter checks—A Check, C Check, and D check or the heavy mainte-
nance check. For each aircraft type and depending on the utilization, the
intervals for the light and major checks are different. Airframe has time
limitations for this heavy maintenance check. For engines, it is made up of
many components and there are many life limited parts (LLP) that need
to be replaced after certain limits are achieved. The engine also needs to
be overhauled for the performance restoration. The time interval between
every subsequent performance restoration after the first will be less as the
overhaul will not be as effective. Theoretically, the overhaul repair is where
the engine is removed when all of the aircraft LLPs reach zero life but in
practice, as each of the parts has different limits, the need for repair is
based on the lowest common denominator or the first LLP to reach zero
life as the cost to remove and the downtime of the engine is costly. The
total cost of each of the LLPs and the refurbishment can be significant
amounts of capital. Aircraft maintenance evolution is more geared towards
less removal of engines for heavy checks and towards more smaller, fre-
quent checks. Landing gears have specific time and cycle limits to overhaul
and similar to APUs. Figure 5.5 is an illustrative example of the negative
value changes over time of an aircraft based only on its maintenance con-
sumption and refurbishment from the lessor’s point of view.
$0.0
-$2.0
Maintenance Status (Millions)
-$4.0
-$6.0
-$8.0
-$10.0
-$12.0
-$14.0
-$16.0
-$18.0
Time
Fig. 5.5 Value change from maintenance consumption and refurbishment

150 D. YU
All of the maintenance cost items have a significant impact on the

value of the aircraft asset as each part costs significant sums as well as
downtime for the replacement. Each of these items needs to be adjusted
from the full life status in the valuation to reflect the current condition
in the aircraft. Forecasting and estimating future maintenance costs are
both a science and an art form. One of the main information required is
the aircraft route and utilization assumptions. While some items are rela-
tively easy to forecast and model such as the airframe heavy check, APU,
landing gears, and engine LLPs, other things such as engine perfor-
mance restoration and even the different maintenance programs can
make projections challenging. In terms of the valuation, the industry
standards for comparison purposes are full time/life, half time/life and
zero time/life.
2.7 Sensitivity of Inputs and Variables

There are many inputs and variables that would have some effect on the
valuation of the aircraft. These items include both demand and supply
items which some of them include revenue yield, cost items such as fuel
price, maintenance, and capital cost. These along with the business cycle,
produce volatility for the value. Overall Demand Drivers Section 5.4 and
Overall Supply Drivers Section 5.5 discuss many of these variable inputs
in more detail as they have some effect on the valuation on the air-
craft asset.
3 Data and Methodology

The author collected data from selected top appraisal firms around the
world and other publically available sources. Most of the top appraisal
firms for commercial aviation are physically located in USA or Europe
with London being the location with the highest concentration. Each
appraisal firm provides worldwide estimates and future projections of
aircraft valuation globally on a published basis for some periodical
time frame.
Each appraiser provides for each particular aircraft type, a current BV
and MV for each of the different yearly vintages and a forward series of
projected values in the future for each dated issue. Table 5.3 below is a
representative snapshot of the type of datasheet available.
Table 5.3 Representative A330-300 historical valuation snapshot as of December 31, 1999
Manufacturer Engines Hush EFIS FADAC MTOW Thrust Other
Airbus CF6- 478,400

80E
Manufacturer Type Model Engine(s) TOW

(lbs.)
Airbus A330 −300 CF6-80E1A1,PW4164/4168 or Trent768/772 478,400
Year. of build Current Distressed Base

market value values
value
1999 1999 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
1992 xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx xx.xx
Note: where xx.xx represents $ in millions

152 D. YU
This example presents an Airbus A330–300 type aircraft with its cur-
rent and future pricing values set for each aircraft manufactured vintage
year from 1992 to 1999. All of the current and future values represent the
values as of the historical snapshot issued on December 31, 1999. For
each of the data sources, there is a snapshot for each type of aircraft for the
various years of built available. This data snapshot is available every year or
half year, depending on the appraiser, for every particular type of aircraft
that is included in the sample set. Each subsequent snapshot date also
includes similar information incremental of the current production year so
it would include all the manufactured vintage years available up to that
snapshot date, that is, at the end of the year 2000, 2000 vintage data is
included. For clarity, this is only an example data subset from one appraiser
of one particular aircraft type at one point in time.
There are multiple appraisers providing data on multiple aircraft types
with the information as the type found in Table 5.3. For the Table 5.3
example, this particular aircraft only started to be manufactured in 1992
hence the vintage data started in 1992 and not earlier. The total dataset
timeframe analyzed is from June 1996 to June 2017, covering 21 years of
data. During this time, not all aircraft types will have existed or still being
manufactured for the entire timeframe with the replacement of older tech-
nology aircraft by newer aircraft happening in the later stages of the time
series. This time series represents a robust data set both in terms of current
snapshots and also their predictive thoughts in the future which can be ana-
lyzed. While the predictive nature of the future values is not the objective of
this research, this can be considered for additional subsequent studies.
The data consists of figures from the following aviation appraisal firms—
Avitas, Back, BK Associates, Inc., Collateral Verifications LLC, and IBA
Group. BK data is partial type data that is provided and Avitas data is also
partial as the sources are in the public domain. Together, the data from
these firms, while not totally complete, represents the most complete set
of data assembled of the top aircraft appraisal firms in the world and con-
stitutes continuous data from 1996 to 2017 with data from aircraft manu-
factured back to the 1980s.
3.1 Methodology
There are several methodologies that have been incorporated in this over-
all study. Figure 5.6 shows the single isle classification by manufacturer
and type while Fig. 5.7 shows the widebody classification by manufacturer
Aircraft
Categorized by
Type
Single Aisle
Twin Aisle Aircraft
Aircraft
Boeing /
Airbus McDonnell
Douglas
Classic Engine McDonnell

Nex Generation
Option (CEO) Aircraft Classic Aircraft Douglas
(NG) Aircraft
(Boeing)
A319-100
737-300 737-600
A320-200 MD 82
737-400 737-700
A321-100 Key
737-500 737-800 Airbus Aircraft
A321-200 Boeing / McDonnell Douglas Aircraft
Current/out of production aircraft
737-900
737-900 /
ER
Fig. 5.6 Single aisle aircraft classifications by type
and type. In this case, the research will focus on both commercial narrow-
body and widebody jet aircraft larger than 100 seats and manufactured by
Boeing and Airbus. As there is little historical data available for new gen-
eration technologies such as Airbus NEO and Boeing MAX aircraft due to
the low number of actual deliveries, this is excluded from the study. Also,
regional jets and propeller aircraft are not a part of this study as they are
smaller than the seat capacity threshold. These could be possible continu-
ation and extension empirical studies conducted in the future.
For the first part of the analysis, taking into account all of the various
types as shown in Figs. 5.6 and 5.7, a subset of aircraft types is selected to
create the overall index which is shown by classification by manufacturer
and type in Fig. 5.8. Then a subsample of these aircraft types would be
used to create more specific indexes by characteristics.
These particular aircrafts were chosen as given the possible aircraft type
data available, many aircrafts not selected have very limited production num-
bers and therefore low usage by airlines. The remaining selected aircrafts are
154 D. YU
Fig. 5.7 Twin aisle aircraft Aircraft

classifications by type Categorized by
Type
Twin Aisle Aircraft
Boeing /
Airbus McDonnell
Douglas
A300-600R 747-400/8
A330-200/300 757-200/ER
767-
A330-200/300
200ER/300ER
A340- 777-
300/500/600 200ER/300ER
A380 787-8/9
MD11
Key
Airbus Aircraft
Boeing / McDonnell Douglas Aircraft
Current/out of production aircraft
Planned/very newly production aircraft
more commonly prevalent and used aircraft types which become the focus in
the study. This selected aircraft subset includes both narrowbody and wide-
body aircrafts and comprise the following: Boeing aircraft 737–300,
737–400, 737–500, 737–600, 737–700, 737–800, 737–900, 737-900ER,
747–400, 747-8I, 757–200 (ETOPS and non-ETOPS), 767-200ER,
767-300ER, 777-200ER, 777-200LR, 777-300ER, 787–8, 787–9;
McDonnell Douglas aircraft MD-82 and MD-11; and Airbus aircraft
A300–600, A300–600R, A319–100, A320–200, A321–100, A321–200,
A330–200, A330–300, A340–300, A340–500, A340–600, A380–800.
All of the data snapshots (Table 5.3 is a representative example) are
sorted and collated into a standardized format. Each data point includes
the Appraiser, Date of Observation, Manufacturer, Year of Build, Type,
Sub-type, Narrowbody or Widebody, Current MV, Current BV, and any
Key
Airbus Aircraft Aircraft
Boeing / McDonnell Douglas Aircraft Categorized by
Current/out of production aircraft Type
Single Aisle Twin Aisle

Aircraft Aircraft
Boeing / Boeing /
Airbus McDonnell Airbus McDonnell
Douglas Douglas
Classic Engine Nex McDonnell

Option (CEO) Classic Aircraft Generation Douglas A300-600R 747-400/8
Aircraft (NG) Aircraft (Boeing)
A330-200 / 300 757-200/ER
A319-100 737-300 737-600
MD-82 A340- 767-
A320-200 737-400 737-700 300/500/600 200ER/300ER
777-
A321-100 737-500 737-800 A380
200ER/300ER
757-200 /
A321-200 737-900 787-8/9
ER
737-
900ER MD-11
5 EMPIRICAL AIRCRAFT ASSET PRICING
Fig. 5.8 Aircraft types included in the study

155
156 D. YU
Future Base Values. Standardization of the data enables the creation of

multiple indexes that will be used as the inputs for the statistical models to
be used and analyzed. These statistical methods have been employed for
analysis of other asset classes such as real estate (Quigley 1995).
Each data point in the sample set represents a specific source, historical
date, specific aircraft type, manufactured vintage year, and historical asset
BV and MV. Using different combinations and subsets of this data, mul-
tiple indexes are created to be used as the inputs for further multiple analy-
ses. These indexes represent the whole of the aircraft asset market and
particular descriptive subsets such as single-aisle or twin-aisle aircraft in
order to make conclusions based on the analyses.
In this particular research, the five indexes are created which include:
(1) all aircraft types, (2) all narrowbody aircraft, (3) all widebody aircraft,
(4) all narrowbody classic aircraft, and (5) all narrowbody next-generation
aircraft. The types of aircraft in the indexes are indicated with Indexes 1–3
being self explanatory while Index 4—all narrowbody classic aircraft—
includes Boeing aircraft types 737–300, 737–400, 737–500, 757–200
(ETOPS and non-ETOPS); McDonnell Douglas aircraft types MD-82;
and Airbus aircraft types A320–200 with CFM 5A/IAE V2500-A1
engines (1988 to 2003 year of built), A321–100 as these are considered
the “classic” aircraft generation by technology. Index 5, all narrowbody
NG aircraft, includes Boeing aircraft types 737–600, 737–700, 737–800,
737–900, 737-900ER and Airbus aircraft types A319–100 with CFM
5B/IAE V2500-A5 engines, A320–200 with CFM 5B/IAE V2500-A5
engines (1988 to 2003 year of built), A321–200. While A320–200 air-
craft has been in existence since 1988, the upgrade of the engines differ-
entiates the first and second generation of the aircraft. These are all
considered aircraft types in the “next generation” based on its technology.
Indexes 4 and 5 are created to gauge the differences between the older age
and technology aircraft or the “classics” compared with the newer age and
“next generation” technology aircraft. Some items to note about the
data—Index 3 widebody data starts from 2.1997 and Index 5 NG nar-
rowbody aircraft type data starts from 10.1999.
With each of the aircraft types, both MV and BV are observed and uti-
lized in the study. For the index composition, a simple arithmetic average
(SA) and a weighted average (WA) approach using both MV and BV val-
ues are utilized to calculate the respective indexes. This weighted average
approach takes into account the smaller weighting of the smaller values,
such as the older and smaller aircraft, versus the larger values with larger
weighting for the newer or large aircraft. The simple arithmetic average
approach treats all aircraft values equally.
Month Over Month (MoM) Simple Average Calculations
 1  i =0
SimpleAveraget =   ∗ ∑ AircraftReturni ,t
n n
MarketValuei ,t BaseValuei ,t
where AircraftReturni ,t = − 1 OR − 1.
MarketValuei ,t −1 BaseValuei ,t −1
i = specific aircraft type and vintage
t = time, month, and year of the valuation date (in months)
Month Over Month Weighted Average Calculations
i =0
WeightedAveraget = ∑ AircraftWeighti ,t XAircraftReturni ,t
n
MarketValuei ,t
where AircraftReturni ,t = − 1 OR
MarketValuei ,t −1
BaseValuei ,t
= −1
BaseValuei ,t −1
MarketValuei ,t OR = BaseValuei ,t
AircraftWeighti ,t =
∑ n
i =0 MarketValuei ,t ∑ n
i =0 BaseValuei ,t
i = specific aircraft type

t = time, month, and year of the valuation date (in months)
Year Over Year (YoY) Calculations for Both Simple Average and
Weighted Average
Use MoM Weighted Average Calculations and MoM Simple Average
Calculations and replace with
MarketValuei ,t BaseValuei ,t
AircraftReturni ,t = − 1 OR = −1
MarketValuei ,t −12 BaseValuei ,t −12
158 D. YU
As each data source is given as of the month and year of issuance and
can be different, a straight line approach is used for the intermediate
months in between the data points for each data source. In addition, two
types of return calculations are utilized. The first technique utilized is a
month-over-month return where the percentage difference month is cal-
culated compared with the month prior. The second technique utilized is
a year-over-year return where the percentage difference month is calcu-
lated compared with the same month the year prior. This YoY method
reduces the seasonality of the data if it exists. All data is calculated and
derived based on monthly figures.
For each of the different indexes comprising different weighting, return,
and value types, different time scenarios are performed to see if there are
differences due to major economic events such as the global financial crises.
The time series scenarios (Times 1–4) selected are as follows: Time 1)
6.1996–6.2017; Time 2) 6.1996–6.2007; Time 3) 6.2007–6.2010; and
4) Time 6.2010–6.2017. For each index under the different conditions,
statistical analyses are performed including mean, median, standard devia-
tion, and correlation to understand the characteristics.
4 Results and Analyses

While all four scenarios (MoM, YoY, weighted, and simple averages) have
been calculated, the most relevant case is the weighted average on a MoM
basis. While YoY is useful to adjust for data that is seasonally driven which
compares the same month year on year such as comparing January 2016
to January 2017, and so on. This is not the case with aircraft values as the
value of the aircraft are not dependent on a particular month or season.
Thus, MoM is a more appropriate form of calculating the differences
directly from the previous month and is the focus of the analysis. For com-
paring weighted average versus simple average, the case of simple averages
results in larger, newer, or higher valued aircraft with the same weighting
as smaller, older, or lower valued aircraft. Utilizing the weighted average
method, this decreases the natural bias towards smaller, older, and lower
valued aircraft by weighting each case according to its value. As such, the
weighted average case is the focal point of analysis.
In terms of time frame segments, the data is carved out into four time
groups (Times 1–4). Time 1 encompasses all of the historical time data
available (6.1996–6.2017), Time 2 represents the pre-GFC time period,
Time 3 represents the period during the GFC, and Time 4 represents the
time after the GFC. This is segmented to show explicitly whether or not
the GFC had any effect on aircraft values. With each of the four time peri-
ods, the five indexes represented the five different types of aircraft, namely,
(1) all aircraft types, (2) all narrowbody aircraft, (3) all widebody aircraft,
(4) all narrowbody classic aircraft, and (5) all narrowbody next generation
aircraft. The different indexes are chosen as they each represent distinct
categories for aircraft types in terms of characteristics. This is used by
industry as a general categorization of the aircraft type. These are also the
categories that are used by both the asset investors and end users for air-
craft. In each of these Indexes, both MV and BV are examined as having
differing definitional context.
In addition to the Index 1 and Time 1 baselines, the accounting defini-
tion of aircraft depreciation is also used as a baseline for comparison. The
definition states that accounting book depreciation provides for a useful
life of 25 years with a 15% residual scrap value at the end terminal. That
results in 3.4% depreciation per year or 0.283% deprecation per month on
a straight line depreciation basis. The full MoM summary statistics for
Index 1–5 are found in Table 5.4 while the full YoY summary statistics for
Index 1–5 are found in Table 5.5. Figures 5.9–5.28 provide a graphical
view of the weighted and simple average market and base values of each of
the MoM Indexes 1–5 over the four different time scenarios.
4.1 Baseline Index 1 (All Aircraft Types) and Time 1

(6.1996–6.2017)
First, the Index 1 and Time 1 case is analyzed to establish the baseline for
other comparisons. Looking at the all data encompassing scenario with the
entire historical timeframe, Time 1, along with Index 1 (all aircraft types)
on a MoM basis, the weighted and simple average MV means are respec-
tively −0.6327% and −0.4861% and the MV median is −0.3724% and
−0.0288%, respectively. The corresponding standard deviations are
2.6313% and 2.8609% respectively. For the BV, weighted and simple aver-
age mean are respectively −0.4689% and −0.3919% and the median is
−0.1245% and −0.2930%, respectively. The corresponding standard devi-
ations are 2.2450% and 2.7458% respectively. As values for aircraft are
decreasing for the most part as an aircraft ages, a decreasing monthly
return figure whether mean or median is not uncommon as a lower num-
ber means a higher decrease in value and vice versa from the previ-
ous month.
Table 5.4 Index 1–5, time scenarios 1–4 MoM summary statistics
160
Index 1—All aircraft MoM summary statistics
Time scenario 1 2 3 4
D. YU
Time 6.1996–6.2017 6.1996–6.2007 6.2007–6.2010 6.2010–6.2017
Weighted ave Simple ave Weighted ave Simple ave Weighted Simple ave Weighted ave Simple ave
ave
n 40,507 40,507 12,015 12,015 7243 7243 21,249 21,249

MV:
Min (10.2745%) (9.8618%) (10.2745%) (9.8618%) (5.2569%) (4.9216%) (8.0354%) (7.9413%)
Mean (0.6327%) (0.4861%) (0.4730%) (0.3223%) (0.7875%) (0.7920%) (0.8094%) (0.5861%)
Standard 2.6313% 2.8609% 2.6050% 2.0581% 1.5157% 1.2822% 2.9732% 4.1209%
deviation
Median (0.3724%) (0.0288%) (0.0241%) 0.0077% (0.4361%) (0.1351%) (0.8896%) (1.3562%)
Max 11.8712% 11.0411% 11.8712% 9.8277% 3.1365% 0.4146% 9.1773% 11.0411%
BV:
Min (8.8619%) (10.1799%) (8.8619%) (8.5110%) (6.7726%) (5.8450%) (6.8954%) (10.1799%)
Mean (0.4689%) (0.3919%) (0.3864%) (0.3451%) (0.2164%) (0.2765%) (0.7084%) (0.4966%)
Standard 2.2450% 2.7458% 2.0497% 1.6668% 2.3571% 1.5952% 2.4174% 4.1405%
deviation
Median (0.1245%) (0.2930%) (0.0742%) (0.0340%) (0.0890%) (0.1047%) (0.3877%) (0.8605%)
Max 9.8949% 22.4800% 6.2668% 6.6671% 4.2472% 3.0909% 9.8949% 22.4800%
Correlation 0.5408 0.5978 0.6006 0.7012 0.6313 0.5198 0.4759 0.5767
MV_BV
Index 2—All narrowbody aircraft MoM summary statistics
Time 6.1996–6.2017 6.1996–6.2007 6.2007–6.2010 6.2010–6.2017
ave
n 21,684 21,684 6817 6817 3738 3738 11,129 11,129
MV:
Min (7.5487%) (7.7940%) (7.5487%) (6.9535%) (6.3823%) (6.1923%) (7.4076%) (7.7940%)
Mean (0.3375%) (0.3858%) (0.2752%) (0.2163%) (0.8314%) (0.9820%) (0.2381%) (0.3932%)
Standard 2.9181% 2.7268% 2.9154% 2.4050% 2.3214% 2.1042% 3.0994% 3.3071%
deviation
Median (0.1830%) (0.0839%) (0.0219%) 0.1259% (0.8414%) (0.3793%) (0.3739%) (0.8072%)
Max 18.9991% 17.7589% 18.9991% 17.7589% 3.8151% 4.0366% 10.8101% 10.2017%
BV:
Min (11.1762%) (11.5597%) (11.1762%) (9.6318%) (9.0393%) (8.1191%) (7.6968%) (11.5597%)
Mean (0.1783%) (0.3050%) (0.1504%) (0.2394%) 0.3198% (0.3083%) (0.4455%) (0.4248%)
Standard 2.9292% 3.2875% 2.7586% 1.9589% 4.0798% 2.8496% 2.4942% 4.7483%
deviation
Median (0.0334%) (0.3553%) 0.0118% (0.0437%) 0.5892% (0.4355%) (0.3570%) (0.7230%)
Max 18.9991% 22.1773% 15.5275% 11.2055% 8.9263% 6.0484% 8.9147% 22.1773%
Correlation 0.5071 0.3779 0.6172 0.6322 0.6097 0.5624 0.3553 0.2472
MV_BV
(continued)
161
Table 5.4 (continued)
162
Index 3—All widebody aircraft MoM summary statistics

D. YU
Time 6.1996–6.2017 6.1996–6.2007 6.2007–6.2010 6.2010–6.2017
ave
n 18,820 18,820 5199 5199 3506 3506 10,115 10,115
MV:
Min (11.9864%) (13.9115%) (11.9864%) (13.9115%) (5.1791%) (4.3236%) (8.8526%) (11.4233%)
Mean (0.8324%) (0.5698%) (0.6489%) (0.4111%) (0.8677%) (0.6317%) (1.0697%) (0.7313%)
Standard 3.0276% 3.6371% 2.8309% 2.4281% 1.9170% 1.4201% 3.5095% 5.3533%
deviation
Median (0.5709%) (0.1340%) (0.1555%) 0.0482% (0.6655%) (0.3335%) (1.3975%) (1.5799%)
Max 13.8674% 17.7728% 8.1385% 3.7627% 3.7196% 1.4257% 13.8674% 17.7728%
BV:
Min (9.0328%) (10.2729%) (9.0328%) (10.2729%) (5.8542%) (4.2397%) (7.8620%) (9.1632%)
Mean (0.6348%) (0.4581%) (0.5358%) (0.4249%) (0.5373%) (0.2492%) (0.8168%) (0.5513%)
Standard 2.3332% 2.8982% 2.0459% 1.8016% 2.2498% 1.5230% 2.6986% 4.3063%
deviation
Median (0.2503%) (0.1328%) (0.0958%) (0.1325%) (0.5292%) 0.1618% (0.3710%) (0.8063%)
Max 11.9264% 22.7030% 4.6610% 2.4313% 4.7332% 2.0859% 11.9264% 22.7030%
Correlation 0.6039 0.7690 0.6794 0.8257 0.7413 0.7671 0.5204 0.7550
MV_BV
Note: Index 3 data starts from 2.1997
Index 4—All narrowbody classic aircraft MoM summary statistics
Time 6.1996–6.2017 6.1996–6.2007 6.2007–6.2010 6.2010–6.2017
ave
n 14,309 14,309 5154 5154 2575 2575 6580 6580
MV:
Min (10.4857%) (11.8900%) (8.6975%) (8.4228%) (9.4386%) (10.5345%) (10.4857%) (11.8900%)
Mean (0.6287%) (0.5985%) (0.3074%) (0.4001%) (1.7808%) (1.3630%) (0.6832%) (0.5829%)
Standard 3.8874% 3.6736% 3.8871% 3.4704% 3.1797% 2.9790% 4.0363% 4.1408%
deviation
Median (0.1769%) (0.2379%) (0.0427%) (0.0333%) (0.4436%) (0.4284%) (0.5869%) (0.9381%)
Max 27.6055% 27.5382% 27.6055% 27.5382% 2.3868% 3.4204% 11.9470% 12.2305%
BV:
Min (11.8045%) (19.5453%) (11.8045%) (8.9755%) (9.3996%) (7.4767%) (9.1816%) (19.5453%)
Mean (0.1705%) (0.4434%) (0.0701%) (0.3918%) 0.4505% (0.4211%) (0.6101%) (0.5512%)
Standard 3.5723% 5.1710% 3.3171% 2.3003% 4.3606% 2.4066% 3.4892% 8.2787%
deviation
Median 0.0255% (0.3053%) 0.0675% 0.0139% 0.4801% (0.5750%) (0.6027%) (1.3671%)
Max 20.6740% 42.8158% 20.6740% 12.3700% 9.6904% 4.7192% 11.8196% 42.8158%
Correlation 0.3207 0.2856 0.4906 0.5272 0.0571 0.2878 0.2307 0.2522
MV_BV
(continued)
163
164
Index 5—All narrowbody NG aircraft MoM summary statistics

D. YU
Time 6.1996–6.2017 6.1996–6.2007 6.2007–6.2010 6.2010–6.2017
ave
n 8054 8054 1511 1511 1134 1134 5409 5409
MV:
Min (8.8196%) (8.5707%) (8.8196%) (8.3554%) (5.4493%) (4.3414%) (7.7395%) (8.5707%)
Mean (0.2426%) (0.1775%) (0.3512%) (0.0287%) (0.3842%) (0.5844%) (0.0708%) (0.1528%)
Standard 2.6168% 2.4663% 2.2615% 1.8520% 2.6127% 1.9534% 2.9245% 3.1208%
deviation
Median (0.2028%) (0.0623%) (0.1081%) 0.3006% (0.4164%) (0.5290%) (0.2082%) (0.5708%)
Max 10.4915% 12.6543% 6.9616% 6.5970% 5.6921% 3.4005% 10.4915% 12.6543%
BV:
Min (9.2265%) (8.9584%) (9.2265%) (8.7541%) (9.0960%) (8.9584%) (8.5839%) (7.1403%)
Mean (0.3834%) (0.1433%) (0.4552%) (0.0466%) (0.2383%) (0.1954%) (0.3693%) (0.2346%)
Standard 2.6670% 2.3600% 2.4419% 2.0655% 3.6603% 2.9645% 2.3358% 2.3449%
deviation
Median (0.1551%) 0.1091% (0.3276%) 0.1901% 0.0180% (0.2186%) (0.1253%) (0.1703%)
Max 7.9271% 7.8473% 7.8990% 7.8473% 7.9271% 7.6919% 7.5810% 7.0396%
Correlation 0.6765 0.6010 0.8738 0.8247 0.8592 0.8319 0.4345 0.4389
MV_BV

Table 5.5 Index 1–5, time scenarios 1–4 YoY summary statistics
Index 1—All aircraft YoY summary statistics
Time 6.1996–6.2017 6.1996–6.2007 6.2007–6.2010 6.2010–6.2017
Weighted ave Simple ave Weighted ave Simple ave Weighted ave Simple ave Weighted ave Simple ave
n 40,507 40,507 12,015 12,015 7243 7243 21,249 21,249

MV:
Min (17.3111%) (18.8734%) (17.3111%) (18.8734%) (16.2065%) (17.8841%) (11.8674%) (16.6675%)
Mean (4.6253%) (6.9297%) (3.1340%) (4.4320%) (5.3550%) (7.6586%) (6.3532%) (9.9548%)
Standard 4.8758% 6.1592% 5.4652% 6.7955% 6.0326% 6.9198% 1.6679% 1.9222%
deviation
Median (5.2979%) (8.1317%) (1.2845%) (3.8370%) (3.7718%) (8.0994%) (6.3455%) (9.9207%)
Max 9.0681% 10.3204% 9.0681% 10.3204% 2.7579% 2.0513% (1.9148%) (3.1984%)
BV:
Min (12.2702%) (23.9187%) (11.8897%) (13.9475%) (7.9701%) (7.6087%) (12.2702%) (23.9187%)
Mean (4.0264%) (6.4089%) (3.2444%) (4.4503%) (2.8184%) (4.3712%) (5.5289%) (9.7813%)
Standard 3.1222% 4.8583% 3.6353% 4.5709% 2.4031% 2.1161% 1.7758% 4.3018%
deviation
Median (4.3978%) (6.4455%) (3.1484%) (4.8020%) (2.9180%) (4.5624%) (5.4899%) (9.3150%)
Max 3.8214% 7.1757% 3.8214% 7.1757% 2.2831% 0.9983% (1.3479%) 0.6955%
Correlation 0.6583 0.6727 0.7074 0.8101 0.6540 0.6578 0.2135 0.1709
MV_BV
(continued)
165
166
Index 2—All narrowbody aircraft YoY summary statistics

D. YU
Time 6.1996–6.2017 6.1996–6.2007 6.2007–6.2010 6.2010–6.2017
n 21,684 21,684 6817 6817 3738 3738 11,129 11,129
MV:
Min (19.7040%) (24.6568%) (17.0013%) (17.1006%) (19.7040%) (24.6568%) (9.6532%) (14.2838%)
Mean (3.7641%) (5.5932%) (2.6685%) (3.2420%) (7.3208%) (10.0338%) (3.7271%) (6.9795%)
Standard 6.0675% 6.8598% 6.4345% 7.0816% 8.0421% 8.5649% 3.2106% 3.5688%
deviation
Median (2.5346%) (5.1346%) (0.3461%) (1.7752%) (8.1164%) (10.2096%) (3.4241%) (6.4820%)
Max 13.4889% 14.9066% 13.4889% 14.9066% 4.3860% 2.4284% 4.0900% 0.6943%
BV:
Min (12.2077%) (27.2727%) (12.2077%) (15.4005%) (10.1388%) (12.9394%) (10.2257%) (27.2727%)
Mean (3.6421%) (5.5566%) (2.6927%) (3.3729%) (3.5531%) (5.6633%) (4.9158%) (8.5340%)
Standard 3.7596% 5.2345% 4.3850% 4.7236% 3.2739% 3.1068% 2.3513% 5.1726%
deviation
Median (3.6069%) (5.7479%) (1.1376%) (2.3847%) (3.1376%) (4.9966%) (4.9133%) (7.4739%)
Max 6.8807% 6.6489% 6.8807% 6.6489% 2.0000% 0.8029% 1.5731% 3.3517%
Correlation 0.5911 0.5628 0.7792 0.7925 0.5130 0.6018 (0.0129) 0.0968
MV_BV
Index 3—All widebody aircraft YoY summary statistics
Time 6.1996–6.2017 6.1996–6.2007 6.2007–6.2010 6.2010–6.2017
n 18,820 18,820 5199 5199 3506 3506 10,115 10,115
MV:
Min (17.4847%) (20.8570%) (17.4847%) (20.8570%) (14.7894%) (16.6772%) (14.2527%) (19.4176%)
Mean (5.1748%) (8.1521%) (3.6372%) (5.7133%) (4.7038%) (5.6780%) (7.3515%) (12.1135%)
Standard 4.8201% 6.5133% 5.4278% 7.2330% 5.4965% 5.8825% 1.9476% 2.6131%
deviation
Median (6.0310%) (9.8114%) (2.6659%) (5.3409%) (2.8035%) (5.3173%) (7.3089%) (12.0341%)
Max 6.8679% 14.3537% 6.8679% 14.3537% 2.0680% 1.8426% (1.1832%) (2.8446%)
BV:
Min (14.1344%) (21.4474%) (10.7984%) (17.6005%) (7.3023%) (8.0740%) (14.1344%) (21.4474%)
Mean (4.2523%) (7.2642%) (3.5668%) (5.6565%) (2.5691%) (3.3177%) (5.7581%) (10.6810%)
Standard 2.9977% 5.0509% 3.3536% 4.9333% 2.5090% 2.0180% 1.8847% 4.1995%
deviation
Median (4.8217%) (7.0698%) (4.1027%) (6.5418%) (2.2102%) (3.8709%) (5.6341%) (10.5951%)
Max 3.0421% 10.2264% 3.0421% 10.2264% 2.3909% 1.1592% (1.3296%) (1.3703%)
Correlation 0.6739 0.7711 0.6773 0.8267 0.7186 0.6777 0.3589 0.5235
MV_BV
(continued)
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168
Index 4—All narrowbody classic aircraft YoY summary statistics

D. YU
Time 6.1996–6.2017 6.1996–6.2007 6.2007–6.2010 6.2010–6.2017
n 14,309 14,309 5154 5154 2575 2575 6580 6580
MV:
Min (28.3734%) (35.1805%) (22.5717%) (28.3124%) (28.3734%) (35.1805%) (13.4787%) (23.1088%)
Mean (5.1532%) (8.3287%) (3.7789%) (5.3564%) (9.7495%) (13.8659%) (5.0869%) (10.0660%)
Standard 7.9603% 9.8426% 8.1589% 10.6748% 11.1611% 11.8628% 4.3405% 4.8333%
deviation
Median (3.3424%) (7.3913%) (1.2413%) (3.8728%) (12.8931%) (14.4737%) (4.6902%) (10.3711%)
Max 18.4992% 22.0899% 18.4992% 22.0899% 8.1947% 4.8758% 7.0261% (0.1473%)
BV:
Min (19.0100%) (42.1959%) (15.0495%) (21.8834%) (12.4543%) (14.5092%) (19.0100%) (42.1959%)
Mean (5.1085%) (8.2198%) (3.7419%) (5.3438%) (4.7390%) (7.7013%) (7.0454%) (12.3878%)
Standard 4.9318% 7.6476% 5.3426% 6.8665% 4.0469% 3.4019% 3.9145% 8.0722%
deviation
Median (4.8938%) (7.9038%) (1.5747%) (4.3447%) (4.7949%) (8.8994%) (6.8089%) (9.9513%)
Max 6.3555% 6.1150% 6.3555% 6.1150% 3.2876 (0.0445%) 0.4133% 1.1509%
Correlation 0.5806 0.5515 0.7632 0.8253 0.5726 0.7304 0.2368 0.0381
MV_BV
Index 5—All narrowbody NG aircraft YoY summary statistics
Time 6.1996–6.2017 6.1996–6.2007 6.2007–6.2010 6.2010–6.2017
n 8054 8054 1511 1511 1134 1134 5409 5409
MV:
Min (14.7959%) (15.1182%) (10.7362%) (13.0318%) (14.7959%) (15.1182%) (9.9627%) (0.4946%)
Mean (2.5340%) (2.9162%) (1.0661%) (1.3456%) (5.1985%) (5.4933%) (2.7204%) (3.3270%)
Standard 4.8176% 4.8490% 5.1684% 5.1209% 5.7332% 5.8341% 3.2119% 3.4254%
deviation
Median (1.5050%) (2.1652%) (0.0150%) (0.6411%) (4.1046%) (4.6045%) (2.2565%) (3.6227%)
Max 8.3003% 7.6125% 8.3003% 7.6125% 3.4902% 2.6689% 3.9466% 5.0818%
BV:
Min (7.9454%) (9.8625%) (7.3660%) (8.7727%) (7.9454%) (9.8625%) (6.7911%) (9.7981%)
Mean (2.3981%) (2.7402%) (1.2705%) (1.3340%) (2.1158%) (2.7673%) (3.5260%) (4.0625%)
Standard 2.7899% 3.3539% 3.2710% 3.7247% 2.5693% 2.7203% 1.7489% 2.6594%
deviation
Median (2.8309%) (3.1083%) (1.4714%) (1.9320%) (1.5467%) (2.6689%) (3.8750%) (4.0713%)
Max 7.1148% 7.1622% 7.1148% 7.1622% 3.8669% 3.2484% 1.8971% 6.2021%
Correlation 0.4975 0.5186 0.7685 0.7159 0.4746 0.4449 (0.1611) 0.2092
MV_BV

169
170
D. YU
Fig. 5.9 Index 1 MoM—6.1996–6.2017

The monthly MV and BV mean from the resultant analysis of the data
set are higher than compared with the baseline accounting book deprecia-
tion method of 0.283%. The weighted average MV median is higher but
BV is lower and vice versa for simple average where MV median is lower
and BV median is slightly higher. The accounting method is intended to
approximate the depreciation but clearly, the data shows that for the mean
figures the 0.283% is not enough but needs to be increased or faced with
higher write downs during the term of the asset life.
4.2 Cross Index Comparisons (Time 1—6.1996–6.2017): Index

2 (All Narrowbody Aircraft)
Having the baseline Index 1 established, the analysis will move to cross
index comparisons for the other Indexes 2–5 under the Time 1, all histori-
cal time scenarios. For Index 2 (all narrowbody aircraft) on an MoM basis,
the MV mean for the weighted and simple averages are respectively
−0.3375% and −0.3858% and the median is −0.1830% and −0.0839%,
respectively. The corresponding standard deviations are 2.9181% and
2.7268% respectively for MV. For the BV, weighted and simple averages
are respectively −0.1783% and −0.3050% and the median is −0.0334%
and −0.3553%, respectively. The corresponding standard deviations are
2.992% and 3.2875% respectively.
Focusing on the weighted average case, narrowbody aircraft, repre-
sented by Index 2, have lower monthly mean and median compared with
the total population in the Index 1 dataset for both MV and BV cases. The
standard deviation is slightly higher for both BV and MV cases in Index 2
compared with Index 1. It can be deduced from the data that with the
lower monthly mean and median numbers, narrowbody aircraft values
depreciate less than the entire population including both narrowbody and
widebody aircraft in Index 1. The standard deviation is slightly higher in
Index 2 compared with Index 1 which means higher volatility in price
deviations for narrowbody aircraft alone compared with a population set
of both narrowbody and widebody aircraft.
set are all higher than compared with the baseline accounting book depre-
ciation method of 0.283% except for weighted average BV mean. The
median is all lower except for the weighted average BV case. Even so, it
172 D. YU
seems from this that for narrowbody aircraft, the accounting method
needs to be adjusted upward or faced with higher write downs during the
term of the asset life.

3 (All Widebody Aircraft)
For Index 3 (all widebody aircraft) on an MoM basis, the weighted and
simple average MV means are respectively −0.8324% and −0.5698% and
the median is −0.5709% and −0.1340%, respectively for MV. The corre-
sponding standard deviations are 3.0276% and 3.6371% respectively. For
the BV, weighted and simple averages are respectively −0.6348% and
−0.4581% and the median is −0.2503% and −0.1328%, respectively. The
corresponding standard deviations are 2.3332% and 2.8982% respectively.
Focusing on the weighted average case, widebody aircraft, represented
by Index 3, have higher monthly MV and BV mean and median compared
with the total population Index 1 dataset. The standard deviation is higher
for BV and MV cases with Index 3 compared with Index 1 as well. It can
be deduced from the data that with the higher monthly mean and median
numbers, widebody aircraft values depreciate faster on average than the
population of aircraft in Index 1. The standard deviation is slightly higher
in Index 3 compared with Index 1 which means higher volatility in price
deviations compared to Index 1.
Comparing widebody aircraft Index 3 with the narrowbody Index 2
case, Index 3 has significantly higher MV and BV mean and median which
results in higher price differences. The standard deviation differences in
MV are higher with Index 3 while BV standard deviation is higher with
Index 2. This means that widebody aircraft represented by Index 3 have
slightly higher volatility in the MV which takes into account market
demand considerations compared with the BV definition which has the
opposite effect.
set are all higher than compared with the baseline accounting book depre-
ciation method of 0.283%. Like the narrowbody Index 2 case, the MV
median is higher except for the BV median. With the differences that are
significant for widebody aircraft, again the accounting method needs to be
adjusted upward or faced with higher write downs during the term of the
asset life.

4 (All Narrowbody Classic Aircraft)
For Index 4 (all narrowbody classic aircraft) on an MoM basis, the
weighted and simple average MV means are respectively −0.6287% and
−0.5985% and the MV median is −0.1769% and −0.2379%, respectively.
The corresponding standard deviations are 3.8874% and 3.6736% respec-
tively. For the BV, weighted and simple averages are respectively −0.1705%
and −0.4434% and the median is 0.0255% and −0.3053% respectively.
The corresponding standard deviations are 3.5723% and 5.1710%,
respectively.
Focusing on the weighted average case, older narrowbody classic air-
craft, represented by Index 4, have lower monthly MV and BV mean and
median compared with the total population in Index 1. The standard devi-
ation is significantly higher for BV and MV cases with Index 4 compared
with Index 1. It can be deduced from the data that with the lower monthly
mean and median numbers, older narrowbody classic aircraft values depre-
ciate slower than the population of aircraft types in Index 1. This is a sur-
prising result given that the age of the aircraft types in Index 4 is higher
than the average of those in the population Index 1. The standard devia-
tion is significantly higher in Index 4 compared with Index 1 which means
higher volatility in the price deviations. This is logical as expected given
the older age and technological profile of the Index compared with the
aircraft types included in the other Indexes.
Compared with the all narrowbody aircraft Index 2, the data analysis is
a bit more mixed. Older narrowbody classics Index 4 MV has a signifi-
cantly higher mean but the median figures slightly lower. Similarly, for the
BV comparisons, Index 4 mean is slightly lower and the median is higher
than Index 2. These results in mixed signals for older narrowbody classic
aircraft compared with the subset of narrowbody aircraft and conclusions
cannot be easily attributed. There exists a large difference in MV mean
figures which infers that market demand dynamic differences are very
large for Index 4 versus Index 2. The standard deviations are higher for
Index 4 than Index 2 for MV and BV which means higher volatility in the
price movements.
Compared with the all widebody aircraft Index 3, older narrowbody
classics Index 4 MV and BV mean and median are all lower. The standard
deviations are higher for Index 4 than Index 3 for MV and BV which
means higher volatility in the price movements. While the lower mean and
174 D. YU
median figures for Index 4 comparatively is not surprising, what is inter-

esting is that the standard deviations for older classic narrowbody aircraft
are even greater than those of widebody aircraft.
The monthly MV mean is higher than compared with the baseline
accounting book depreciation method of 0.283% but all other metrics
including BV median and BV mean and median are lower. With the differ-
ent mixed indicators, it is hard to infer any adjustments to the accounting
methods in this case.

5 (All Narrowbody NG Aircraft)
For Index 5 (all narrowbody NG aircraft) on an MoM basis, the MV mean
for the weighted and simple averages are respectively −0.2426% and
−0.1775% and the median is −0.2028% and −0.0623%, respectively for
MV. The corresponding standard deviations are 2.6168% and 2.4663%
respectively. For the BV, weighted and simple averages are respectively
−0.3834% and −0.1433% and the median is −0.1551% and 0.1091%,
respectively. The corresponding standard deviations are 2.6670% and
2.3600%, respectively.
Focusing on the weighted average case, newer narrowbody NG aircraft
Index 5 has lower monthly MV and BV mean compared with the total
Index. The Index 5 median figure is lower for MV and slightly higher for
BV. The standard deviation is higher for the BV case and slightly lower in
the MV case for Index 5 compared with Index 1. It can be deduced from
the data that with the lower monthly mean numbers, newer age and tech-
nology profiled narrowbody NG aircraft values depreciate slower than the
population in Index 1. The standard deviation results are mixed compar-
ing Index 5 with Index 1, which means lower market volatility in price
deviations from a BV definition point of view.
Compared with all narrowbody aircraft Index 2, newer narrowbody
NG Index 5 has lower MV mean, higher BV mean, and higher MV and
BV median figures. These have conflicting signals to make any significant
inferences in terms of price depreciation. The standard deviations for MV
and BV are all lower with narrowbody aircraft NG Index 5. The volatility
for newer profiled narrowbody aircraft can be inferred to be lower than
the all narrowbody aircraft Index 2.
Comparing Index 5 with older classic types of narrowbody aircraft in

Index 4, Index 5 has much lower MV mean and slightly higher BV mean.
Similarly, Index 5 has higher MV median figures and the opposite for the
BV case. The standard deviations are also much lower with Index 5 for the
MV and BV cases. While the conflicting information is difficult to infer in
terms of a price depreciation view, it can be inferred that Index 4 has
higher volatility which is in line with current thinking that older assets are
more volatile than newer assets controlled by aircraft type.
Finishing the comparison analysis with widebody aircraft Index 3,
Index 5 has much lower MV and BV mean and median cases. The stan-
dard deviations are lower for MV and higher for BV for Index 5. It means
that narrowbody NG aircraft Index 5 has slower depreciation than wide-
body aircraft Index 3 but standard deviation under the MV market
dynamic case is in line with the industry thinking but the increased volatil-
ity in the BV case is surprising.
The monthly MV mean and median and BV median are lower than
compared with the baseline accounting book depreciation method of
0.283%. The majority is lower than the accounting depreciation standard.
It is recommended that the accounting method needs to be adjusted
downward or faced with a higher RV at the terminal of the asset life.
4.6
Cross Time Comparisons Groups: Index 1 (All
Aircraft Types)
There are some interesting observations that arise from further analyzing
the time subsets data. Comparing the different periods, Time 2–4, with
the entire period, Index 1’s MV mean and median shows a lower figure
than Time 1 in Time 2 (6.1996–6.2007) before the GFC and higher one
for Time 3 during the GFC before increasing still for Time 4
(6.2010–6.2017). The standard deviation in decreased significantly in
Time 3 and increased in Time 4 above Time 2. This infers that pre-GFC
Time 2 had lower volatility than the historical figure in Time 1 and also
had increased volatility after the GFC in Time 4.
BV moved differently where the MV mean decreased in Time 3 and
increased significantly in Time 4 above Time 1 and 2. The standard devia-
tion only slightly increased for Time 3 and Time 4. While there is no one
clear signal, this does show that increased volatility during the GFC in BV
176 D. YU
and the increased MV and BV volatility in Time 4 compared to pre-GFC

Time 2 and historical Time 1. In addition, the depreciation increased post
the GFC in Time 4 than the period before GFC in Time 2.
4.7
Narrowbody Aircraft)
Comparing across the 4 time subsets for Index 2’s MV and BV mean,
median, and standard deviation for Time 2 are all less than the entire his-
torical period (Time 1). In Time 3, all the metrics increased significantly
except for standard deviation MV where it decreased slightly. In Time 4,
the mean and median decreased for all scenarios except for BV mean which
decreased. Standard deviation in Time 4 increased for MV but decreased
for BV. During GFC Time 3, price depreciation increased significantly.
Volatility only increased for MV while BV decreased. Post GFC, there is a
price depreciation and volatility divergence between MV and BV.
Compared to Index 1 in Time 3, both MV mean and median increased
in Time 2 but divergence in Time 4 where Index 1 increased while Index
2 decreased. Volatility acted similarly in Index 1 and 2 with a decrease in
Time 3 and increase in Time 4. BV acted similarly between Index 1 and 2
with BV mean decreased and increased in Time 3 and 4 respectively.
Volatility diverged where after the increase in Time 3, Index 1 increased
while Index 2 decreased in Time 4.
4.8
Widebody Aircraft)
except for standard deviation MV where it decreased. In Time 4, the mean
and median increased for all except for BV median which decreased.
Standard deviation in the Time 4 increased for MV and BV. During GFC
Time 3, price depreciation increased significantly. Volatility decreased for
MV while BV increased slightly. Post GFC, there is increased price depre-
ciation and increased volatility as well.
The trends are very similar in Index 3 compared to Index 1 including
mean, median, and volatility. Compared to Index 2, the MV price devia-
tion is similar to Index 3 in Time 3 but while Index 3 increased further in
Time 4, Index 2 decreased. Volatility is less for Index 3 than Index 2 in

Time 3 and it is reversed in Time 4. BV behaved differently com-
pared to MV.
4.9 Cross Time Comparisons Groups: Index 4 (All Narrowbody

Classic Aircraft)
except for standard deviation MV where it decreased. In Time 4, MV
median, BV mean, and median increased while the MV mean decreased.
Standard deviation in Time 4 increased for MV but decreased for
BV. During GFC Time 3, price depreciation increased significantly.
Volatility decreased for MV while BV increased. Post GFC, there is a price
depreciation and volatility divergence between MV and BV as MV price
depreciation slowed and volatility increased and vice versa for BV.
Compared to others, the price depreciation and volatility is the highest
for Index 4 in Time 3 as well as the price depreciation difference between
Time 2. During Time 4, price depreciation contracted towards the mean
in Time 1 but volatility increased similarly to Index 1. The trends are simi-
lar to Index 2 but all the figures are more pronounced.
4.10 Cross Time Comparisons Groups: Index 5 (All

Narrowbody NG Aircraft)
median, and standard deviation for Time 2 are all higher than the entire
historical period (Time 1) except for MV median and standard deviation.
In Time 3, MV mean and median increased while BV mean and median
decreased. Volatility in Time 3 increased for MV and BV. In Time 4, MV
mean and median decreased while BV mean and median increased.
BV. During GFC Time 3, price depreciation increased only slightly.
Volatility also only increased slightly for MV and more for BV. Post GFC,
there is a price depreciation and volatility divergence between MV and BV
as MV price depreciation slowed and volatility increased and vice versa for
BV. Compared to others, the price depreciation is the lowest for Index
4 in Time 3 but for volatility, the lowest is Index 1.
178 D. YU
4.11 Correlations Between MV and BV

The correlation between MV and BV varies between the different index
and time groups. For the Time 1 case, the correlation is 0.5408 for the
Index 1 weighted average case. Index 2 decreases slightly to 0.5071 and
widebody aircraft Index 3 shows 0.6039. Breaking down the narrow-
body subsets, classic narrowbody aircraft Index 4 is low at 0.3207 while
Index 5 is higher at 0.6765. Comparing Index 1 among the time subsets
Time 2–4, it increases to 0.6006, 0.6313, and 0.4759 respectively. This
similar trend of slightly increased correlation in Time 3 while a decrease
in Time 4 is exhibited in Index 1–5 but Index 3 has a higher peak with
its correlation increasing to 0.7413 in Time 3. This peak is similar to
Index 5 which exhibits the highest correlation among the Indexes both
in Time 1 and also the highest among the Indexes in Time 2–4, where
Time 2 correlation is 0.8738, Time 3 is 0.8592, and Time 4 falls to
0.4345. Index 4 is the lowest correlations among the Indexes in each of
the Time scenarios.
Index 5 is the new and the newer generation of aircraft where the MV
and BV tend to be similar in many cases which partially explain some of
these observations. The opposite is viewed in regards to Index 4’s older
aircraft and low correlation between MV and BV. While there is some cor-
relation among the different Indexes in the entire term, they do not exhibit
high degrees of correlation between the two value definitions. Time 3
exhibits the highest correlations compared to the other Time groups.
5 Conclusion
Through these analyses, there are many observations. To establish the
baseline case, this consists of all aircraft mean and median numbers means
entire time frame, Time 1 (6.1996–6.2017). The MoM weighted average
MV mean is −0.6327%, the median is −0.3724%, and the standard devia-
tion is 2.6313%. The MoM weighted average BV mean is −0.4689%, the
median is −0.1245%, and the standard deviation is 2.2450%.
5.1 Cross Index Comparisons (Time 1—6.1996–6.2017)

Index 2 MoM weighted average MV mean is −0.3375%, the median is
−0.1830%, and the standard deviation is 2.9181%. The MoM weighted
average BV mean is −0.1783%, median is −0.0334%, and standard
Index 2 MoM—6.1996–6.2017
Fig. 5.10
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D. YU
Fig. 5.11 Index 3 MoM—6.1996–6.2017. (Note: Index 3 data starts from 2.1997)
Fig. 5.12 Index 4 MoM—6.1996–6.2017

182
D. YU
Fig. 5.14 Index 1 MoM—6.1996–6.2007

184
D. YU
Fig. 5.15 Index 2 MoM—6.1996–6.2007

185
186
D. YU
Fig. 5.17 Index 4 MoM—6.1996–6.2007

187
188
D. YU
Fig. 5.19 Index 1 MoM—6.2007–6.2010

Fig. 5.20 Index 2 MoM—6.2007–6.2010

190
D. YU
Index 4 MoM—6.2007–6.2010
Fig. 5.22
192
D. YU
Index 1 MoM—6.2010–6.2017
Fig. 5.24
194
D. YU
Fig. 5.25 Index 2 MoM—6.2010–6.2017

195
196
D. YU
Fig. 5.27 Index 4 MoM—6.2010–6.2017

Fig. 5.28 Index 5 MoM—6.2010–6.2017

198 D. YU
deviation is 2.992%. The data suggests the lower monthly mean and
median numbers means that narrowbody aircraft values depreciate less
than the entire population including both narrowbody and widebody air-
craft in Index 1. The standard deviation is slightly higher in Index 2 com-
pared with Index 1 which means higher volatility in price deviations for
narrowbody aircraft alone compared with a population set of both nar-
rowbody and widebody aircraft.
average BV mean is −0.6348%, median is −0.2503%, and standard devia-
tion is 2.3332%. It can be deduced from the data that with the higher
monthly mean and median numbers, widebody aircraft values depreciate
faster on average than the population of aircraft in Index 1. In addition,
volatility in price deviations is slightly higher in Index 3 compared with
Index 1. Compared with the narrowbody Index 2 case, widebody aircraft
Index 3 also depreciate faster while there is a divergence in volatility which
is higher in MV while for BV it is lower than Index 2. The MV which takes
into account market demand considerations compared with the BV defini-
tion which has the opposite effect.
average BV mean is −0.1705%, median is 0.0255%, and standard devia-
tion is 3.5723%. It can be deduced from the data that with the older nar-
rowbody classic aircraft Index 4 values depreciate slower and have higher
volatility than the population of aircraft types in Index 1. This is a surpris-
ing result given the age of the aircraft types in Index 4 is higher than the
average of those in the population Index 1 while its logical result that
standard deviation is higher.
When Index 4 is compared with the all narrowbody aircraft Index 2,
the data analysis is a bit more mixed. Index 4 MV mean depreciates signifi-
cantly faster while with median depreciates slower and the vice versa for
the BV case. These result in mixed signals for older narrowbody classic
aircraft compared with the subset of narrowbody aircraft and conclusions
cannot be easily attributed. It can be inferred that market demand dynamic
differences are very large for Index 4 versus Index 2 due to the large dif-
ferentials in MV mean figures. Volatility is found to be higher for narrow-
body classic aircraft Index 4 than all narrowbody aircraft Index 2.
Index 4 has slower depreciation along with higher volatility compared

with the all widebody aircraft Index 3. While the lower mean and median
figures for Index 4 comparatively is not surprising, what is interesting is
that the even greater volatility for older classic narrowbody aircraft com-
pared to widebody aircraft.
Index 5 MoM weighted average MV mean is −0.2426%, median is
−0.2028%, and standard deviation is 2.6168%. The MoM weighted aver-
age BV mean is −0.3834%, median is −0.1551%, and standard deviation is
2.6670%. It can be deduced from the data that with the lower monthly
mean numbers, newer age and technology profiled narrowbody NG air-
craft values depreciate slower than the all aircraft types in Index 1. The
volatility figures have mixed results with Index 5 having a higher BV figure
and slightly lower MV volatility.
Compared with all narrowbody aircraft Index 2, newer narrowbody
NG Index 5 has lower MV mean, higher BV mean, and higher MV and
BV median figures. These have conflicting signals to make any significant
inferences in terms of price depreciation. The volatility for newer profiled
narrowbody aircraft Index 5 can be inferred to be lower than the all nar-
rowbody aircraft Index 2.
Index 5 has mixed results of lower MV mean and higher BV mean
compared with older classic types of narrowbody aircraft in Index 4.
While the conflicting information is difficult to make price depreciation
conjectures with, it can be inferred that Index 5 has lower volatility than
Index 4 which is in line with the thinking that older assets are more vola-
tile than newer assets controlled by aircraft type. It means that narrow-
body NG aircraft Index 5 has slower depreciation than widebody aircraft
Index 3 but volatility under the MV market dynamic case is in line with
the industry thinking but the increased volatility in the BV case is
surprising.
The accounting definition of aircraft depreciation is also used as a base-
line for comparison. The definition represents 3.4% depreciation per year
or 0.283% deprecation per month on a straight line depreciation basis.
For all aircraft types Index 1, MV and BV value depreciation is mostly
higher than this standard and needs to be adjusted higher depreciation or
there is a higher likelihood of write downs during the term of the asset
life. This is the case for all narrowbody aircraft Index 2 and all widebody
aircraft Index 3 as well. For narrowbody classic aircraft Index 4, the
200 D. YU
results provided mixed indicators that could provide any recommenda-

tions on adjustments while Index 5 results showed a need to adjust down-
ward the monthly depreciation rate. Overall, Index 1–3 show the need to
have a higher depreciation standard for aircraft assets to better match the
actual movements of pricing over time. This data suggests that deprecia-
tion is higher overall and that the useful age of aircraft assets are less than
25 years.
The results suggest that the main hypothesis is correct that the aircraft
market represented by All Aircraft Types Index 1 MoM WA MV has
higher value depreciation compared to the accounting depreciation of
0.283% per month. Index 1’s respective MoM WA MV mean in Time
1–4 is −0.6327%, −0.4730%, −0.7875%, and −0.8094%. In terms of the
second part of the main hypothesis, the data also suggests this is correct
as the standard deviation is less than 3% throughout the four time
segments.
The data suggests some mixed results for the second hypothesis.
Looking at the MoM WA MV case, narrowbody aircraft Index 2 has lower
value depreciation throughout the four time segments than widebody air-
craft. In analyzing the standard deviation, narrowbody aircraft is lower for
all the time segments except for the Time 3 case. While there is one devia-
tion in Time 3 standard deviation, the data suggests that most of the sec-
ond hypothesis is correct.
The data suggests mixed results for the third hypothesis. Looking at
the MoM WA MV case, narrowbody NG aircraft has lower value depre-
ciation than narrowbody classic aircraft as well as narrowbody aircraft in
all the periods except for Time 2. For standard deviation, narrowbody
NG aircraft is lower in all time segments compared with narrowbody clas-
sic aircraft. In comparison to narrowbody aircraft, narrowbody NG has a
lower standard deviation in all the periods except for Time 3. While there
are deviations in Time 2 for the value depreciation for both narrowbody
classic and narrowbody aircraft and Time 3 standard deviation for nar-
rowbody aircraft, the data suggests that most of the third hypothesis is
correct.
The data suggests mixed results for the fourth hypothesis. For the first
part looking at the MoM WA MV case, the five aircraft market segments
have lower value depreciation in the pre-GFC period Time 2 than during
and post the GFC in Time 3 and Time 4, respectively for Indexes 1, 3,
and 4 while for Index 2 and 5, Time 4 is lower than Time 3. As for
standard deviation, Time 2 is the lowest for Index 5 while for Index 1–4,
Time 3 is lower than Time 2. This suggests the data partially support the
first part of the fourth hypothesis. Looking at the Index 1 results, the
overall aircraft market has lower value depreciation in Time 2 than the
other times while for most Indexes, in Time 3 the standard deviation is
the lowest.
For the second part of the fourth hypothesis, Indexes 2, 4, and 5 have
higher value depreciation during the GFC in Time 3 than the other peri-
ods but Time 4 is higher for Index 1 and 3. For standard deviation, Time
3 is not the highest relative figure as Time 4 is the highest for all Index
1–5. The data does not support the second part of the fourth hypothesis.
Looking at the Index 1 results, the overall aircraft market has a higher
value depreciation in Time 4 than the other times while for all Indexes,
Time 4 also has the highest standard deviation.
5.2
Aircraft Types)
There are some interesting observations that arise from further analyzing
the time subsets data. Before the GFC, represented by Time 2, is generally
a period of lower price depreciation and lower volatility. During the GFC
as represented by Time 3, there is increased price depreciation for MV and
lower for BV while volatility decreased significantly for MV and increased
slightly for BV. Post GFC, represented by Time 4, price depreciation
increased significantly especially compared to Time 2 and 1. Volatility
increased during Time 4. This infers that pre-GFC Time 2 had lower vola-
tility than the historical figure in Time 1 and also had increased volatility
after the GFC in Time 4.
5.3
Narrowbody Aircraft)
Comparing across the time subsets for Index 2 in Time 3, price deprecia-
tion increased while volatility decreased slightly while rebounding in Time
3. Post GFC there is a price depreciation and volatility divergence between
MV and BV. Compared to Index 1 in Time 3, MV price depreciation
increased in Time 2 but diverged in Time 4 where Index 1 increased while
Index 2 decreased. Volatility acted similarly in Index 1 and 2 with a
202 D. YU
decrease in Time 3 and increase in Time 4. BV acted similarly between

Index 1 and 2 but volatility diverged where after the increase in Time 3,
Index 1 increased while Index 2 decreased in Time 4.
5.4
Widebody Aircraft)
Index 3 cross time comparison results are similar to Index 2. During GFC
MV while BV increased slightly. Post GFC there is increased price depre-
ciation and increased volatility as well. The trends are very similar in Index
3 compared to Index 1 including mean, median, and volatility. Compared
to Index 2, the MV price deviation is similar to Index 3 in Time 3 but
while Index 3 increased further in Time 4, Index 2 decreased. Volatility is
less for Index 3 than Index 2 in Time 3 and it is reversed in Time 4. BV
exhibited and behaved differently compared to MV.
5.5 Cross Time Comparisons: Index 4 (All Narrowbody

Classic Aircraft)
Index 4 cross time comparison results are similar to Index 2. During GFC
MV while BV increased. Post GFC there is a price depreciation and volatil-
ity divergence between MV and BV as MV price depreciation slowed and
volatility increased and vice versa for BV. Compared to others, the price
depreciation and volatility are the highest for Index 4 in Time 3 as well as
the price depreciation difference between Time 2. During Time 4, price
depreciation contracted towards the mean in Time 1 but volatility
increased similarly to Index 1. The trends are similar to Index 2 but all the
figures are more pronounced.
5.6 Cross Time Comparisons Groups: Index 5 (All Narrowbody

NG Aircraft)
Comparing across the time subsets for Index 5’s MV and BV mean,
median, and standard deviation for Time 2 are all higher than the entire
historical period Time 1 except for MV median and standard deviation. In
Time 3, MV mean and median increased while BV mean and median
decreased. Volatility in Time 3 increased for MV and BV. In Time 4, MV

mean and median decreased while BV mean and median increased.
BV. During GFC Time 3, price depreciation increased only slightly.
Volatility also only increased slightly for MV and more for BV. Post GFC
there is a price depreciation and volatility divergence between MV and BV
as MV price depreciation slowed and volatility increased and vice versa for
BV. Compared to others, the price depreciation is the lowest for Index
4 in Time 3 but Index 1 volatility is the lowest.
5.7 Correlation Between MV and BV

The correlation between MV and BV varies between the different index and
time groups. While there is some correlation among the different Indexes in
the entire period, the data does not exhibit high degrees of correlation
between the two value definitions in general except for Index 5—the high-
est correlation among the indexes. Time 3 exhibits the highest correlations
compared to the other Time groups while a decreased correlation is exhib-
ited in Index 1–5 in Time 4. Index 4 exhibited the lowest correlation
between the Indexes in the Time groups. Index 5 is the new and the newest
aircraft where the MV and BV tend to be similar in many cases which par-
tially explain some of these observations. The opposite is viewed in regards
to Index 4’s older aircraft and low correlation between MV and BV.
The data suggests mixed results for the fifth hypothesis. For the first
part of the hypothesis that there is slight to moderate correlation between
MV and BV for the aircraft types throughout the four time segments is
found to be supported for all the Index and Time scenarios except for the
high correlation found in Index 5’s Time 2 and 3. The data mostly sup-
port the first part of the hypothesis.
For the second and third parts of the hypothesis, the highest relative
correlation occurs during pre-GFC Time 2 while the lowest is during the
GFC Time 3. The data suggests that Time 2 is the highest relative cor-
relation for all Indexes except for Index 3, where Time 3 is the highest
relative correlation. The data suggests that Time 4 is the lowest relative
correlation for all Indexes except for Index 4 where Time 3 is the lowest
relative correlation. The data does not support the third part of the
hypothesis. The lowest correlation between MV and BV is after the
GFC Time 4.
204 D. YU
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CHAPTER 6
Comparative Examination Between

the Aircraft and Other Asset Classes
1 Introduction and Research Questions

In Chaps. 3 and 4, the drivers and dynamics of aviation finance on aircraft
asset pricing has been discussed. In Chap. 5, the construction of the
indexes representing the aircraft asset and was empirically tested to show
its characteristics. The extension to the main hypotheses is to test the simi-
larities and differences between the baseline aircraft asset class indexes and
the comparable asset classes to fill in gaps in the conversation found
through the academic literature review.
These comparable asset classes include publicly listed aircraft lessors,
other real asset subclasses such as shipping, infrastructure, real estate,
commodities, agricultural land, timberland, as well as general interest
rates, and representative indexes such as airline, transport, and the broader
debt and equity markets. Analyzing the relationships between the aircraft
asset classes and these benchmarks will be able to deduce many observa-
tions in the context of portfolio construction and risk along with the risk
adjusted returns of the asset classes in a portfolio context.
Analyzing the comparative asset classes to the aircraft asset class seg-
ments will yield many interesting observations. The main emphasis of the
analysis is on the aircraft asset classes represented by Index 1–5 and 20
comparative asset classes including the public aircraft lessor index. The
listed aircraft lessors are the first investors who have the most exposure to
the aircraft asset class. While they can take on leverage through financing

https://doi.org/10.1007/978-981-15-6743-8_6
208 D. YU
structures as well as buy and sell aircraft, the first empirical study is to ana-
lyze their performance over time compared to the performance of the
overall aircraft asset classes. The second part is to analyze the aircraft asset
classes to other real asset subclasses. Third, the correlation and covariance
between each of the main investigative and various comparative indexes
are derived along with a regression model and significance testing. With
these derived statistic characteristic information, the inclusion, or not, of
the aircraft asset class and public aircraft lessor asset class in portfolio con-
struction and management can be determined. The time period in the
analysis is similar to the Chap. 4 analysis (Times 1–4) and is as follows: (1)
all available historical sample set information 6.1996–6.2017; (2) pre-
GFC period, 6.1996–6.2007; (3) GFC period, 6.2007–6.2010; and (4)
post-GFC period, 6.2010–6.2017. A more in-depth discussion of the
index and time periods construction are found in Data and Methodology
Sect. 5.4. The main question is how do the aircraft asset class segments
compare in terms of various returns and volatility metrics against other
real asset-backed classes and benchmarks in the four time segments?
The main hypothesis is that aircraft asset class as represented by Index
1–5 MoM WA MV have a lower standalone risk in terms of standard devia-
tion and variance over the historical time periods compared with public
aircraft lessors and other real asset-backed segments (such as shipping, real
estate, commodities, precious metals, agricultural land, timberland, air-
lines, transportation index), specific commodities (such as gold, crude
oil), leading indicators, rates (such as USD 3M LIBOR, USD 1–3M trea-
suries, USD ten-year swap rates, US Consumer Price Index (CPI)) and
broad debt and equity indexes.
Making an extension of the main research question, the second hypoth-
esis is that the aircraft asset classes have a lower relative volatility in terms
of beta or β, covariance and correlation compared with the other compara-
tive asset classes including publicly listed aircraft lessors in the four time
segments.
Continuing in the same line of questioning, the third hypothesis is that
the publicly listed aircraft leasing companies generate higher excess returns
or α relative to the risk free rate, Real Assets and MSCI World compared
to the aircraft asset class in the four time segments.
Combining return and volatility concepts, the fourth hypothesis is that
the publicly listed aircraft leasing companies generate higher Sharpe ratios
than the aircraft asset class in the four time segments.
6 COMPARATIVE EXAMINATION BETWEEN THE AIRCRAFT AND OTHER… 209
2 Comparative Asset Classes Discussion
2.1 Publicly Listed Aircraft Lessors

One of the main comparative asset classes is the public aircraft lessor index.
While many aircraft lessors are privately held entities or subsidiaries of
larger groups, there is a handful of leasing companies that are publicly
listed. Most of these are listed in 2006 and after. Publicly listed pure-play
or aircraft leasing companies are the most directly comparable set to the
aircraft asset class. The companies primarily own and lease aircraft while
some have a small amount of aircraft that is managed on behalf of third
party investors and owners. The public pure-play large commercial aircraft
leasing companies that are still active as public entities include AerCap
Holdings N.V. (AerCap), Aircastle Limited (Aircastle), Air Lease
Corporation (ALC), Avation PLC (Avation), Avolon Holdings Limited
(Avolon), China Aircraft Leasing Group Holdings Limited (CALC), FLY
Leasing Limited (FLY), AviaAM Leasing (AviaAM), China Development
Bank Financial Leasing Co., Ltd (CDB Leasing), and ALAFCO Aviation
Lease and Finance Company K.S.C.P. (ALAFCO). While Genesis Lease
Limited (GLS) and Avolon were once publicly listed and subsequently
merged into Aercap and taken private by HNA Group, respectively. The
pricing data available from the period when the companies were listed are
included in the comparative dataset.
While CDB Leasing is not a pure-play aircraft lessor, it is included due
to the significant percentage of the company’s revenues and assets are
aircraft which stand at 51.5% and 37.7%, respectively, for the 2016 figures.
Also by that logic, GECAS, one of the top two lessors globally and an
indirect subsidiary of General Electric, as well as other bank-owned
Chinese leasing subsidiary companies are not included as they do not rep-
resent a significant amount of the listed company’s total assets and reve-
nues. There are other similar companies who are also included such as
regional aircraft leasing players such as AeroCentury Corp. (ACY) and
specialized public engine leasing players such as Willis Lease Finance
Corporation (WLFC).
The majority of the companies is or was listed on the New York Stock
Exchange while CDB Leasing and CALC are listed on the Hong Kong
Stock Exchange, AviaAM is listed on the Warsaw Stock Exchange, Avation
is listed on the London Stock Exchange, and ALAFCO is listed on Boursa
Kuwait. There are also special purpose vehicle aircraft leasing fund
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corporations which are listed on the Specialized Funds Market including

DP Aircraft 1 Limited (DP1), Doric Nimrod Air One Limited (DNA1),
Doric Nimrod Air Two Limited (DNA2), Doric Nimrod Air Three
Limited (DNA3), and Amedeo Air Four Plus (AAFP). These companies
are all included in the data set index. These funds are special purpose
vehicles and its size is smaller than the other public aircraft leasing compa-
nies listed above. One example is DNA1, which consists of a single Airbus
A380-800 leased to Emirates while DNA2 contains three aircraft, while
the other securities are larger in composition. The index created is an
equal weighted total return index (including dividends) consisting of these
companies. The listed public lessors generally utilize debt financing while
the aircraft asset class is an asset price or 100% equity and contains no debt.
2.2 Real Assets Overview

Real assets are a broad range of hard, physical assets that derive value from
their substance and properties. They have intrinsic value and can both be
tangible or intangible which includes precious metals, commodities, real
estate, land agricultural land, timberland, infrastructure, mining land and
rights, machinery, and intellectual property (copyrights, trademarks, pat-
ents, trade secrets, etc). Real assets are not financial assets such as stocks
and bonds. Some investors have slightly different definitions of the asset
class such as including sustainable investments. Aircraft is a subset of this
asset class and used as one of the market approximations in calculating
excess return and beta. (More in the data collection and methodology in
Sect. 5.4).
There are many benefits of the asset class. These include having many
subclasses that have lower volatility compared to equities. They also have
low correlations to traditional financial assets such as equity and fixed-
income products. When combined with traditional financial assets, this
low correlation makes them ideal for a diversified portfolio according to
modern portfolio theory. See Table 6.1 for correlations between the asset
classes during the 2006–2016 timeframe. Figure 6.1 shows the various
subclasses’ Sharpe ratios (more on the definition in Sect. 5.4 Data
Collection and Methodology), which are higher compared to global
bonds and stocks over the period 2006–2016.
Many of the elements of the real assets class are inputs into end-
consumer products which often are leading indicators for inflation. Also,
Table 6.1 2006–2016 correlations among real asset subclasses
Real Infrastructure Timberland Agriculture Global Global
estate bonds stocks
Real estate 1.00 0.55 0.23 0.12 0.19 (0.10)

Infrastructure 0.55 1.00 0.17 0.08 0.64 0.37
Timberland 0.23 0.17 1.00 0.64 (0.11) 0.07
Agriculture 0.12 0.08 0.64 1.00 0.09 (0.15)
Global bonds 0.19 0.64 (0.11) 0.09 1.00 0.23
Global stocks (0.10) 0.37 0.07 (0.15) 0.23 1.00
Source: NCREIF 2017; Cambridge Associates 2017; Bloomberg 2017; Brookfield Asset Management 2017
Note: Data as of June 30, 2016. Real Estate is represented by the NCREIF Property Index, Infrastructure
is represented by the Cambridge Associates Infrastructure Index (available only through 3/16),
Timberlands is represented by the NCREIF Timberland Index, Agriculture is represented by the NCREIF
Farmland Index, Global Bonds is represented by the Barclays Global Aggregate Bond Index, and Global
Stocks is represented by MSCI World Index
10 Year Sharpe Raos of Real Assets

Sub-Classes Vs. Stocks and Bonds
(2006-2016)
2.5
2
Sharpe Raos
1.5
0.5
Fig. 6.1 Ten-year 2006–2016 sharpe ratios of real assets subclasses vs. stocks and
bonds. Note: Data as of June 30, 2016. Sharpe Ratio based upon ten-year average
annualized total returns and standard deviations of performance; assumes a risk-
free rate of 1.7%. Agriculture is represented by the NCREIF Farmland Index,
Timberlands is represented by the NCREIF Timberland Index, Real Estate is rep-
resented by the NCREIF Property Index, Infrastructure is represented by the
Cambridge Associates Infrastructure Index, Global Bonds is represented by the
Barclays Global Aggregate Bond Index, and Global Stocks is represented by the
MSCI World Index. (MSCI 2017; Bloomberg 2017; NCREIF 2017; S&P Dow
Jones Indexes 2017; Brookfield Asset Management 2017)
212 D. YU
10 Year Income and Capital Apprecia on Returns of Real Assets

Sub-Classes (2006-2016)
16%
14%
12%
Return %
10% 6.39%
8%
6% 1.64% 5.87%
4% 3.69% 7.36% 1.37% 2.28%
2% 5.69%
3.25% 2.63% 3.21% 2.74%
0%
Income Return Capital Appreciaon
Fig. 6.2 Ten-year income and capital appreciation returns of real assets sub-
classes. (Source: MSCI 2017; Bloomberg 2017; NCREIF 2017; S&P Dow Jones
Indexes 2017; Brookfield Asset Management 2017. Note: Data as of June 30,
2016. Index data represent ten-year average annual returns for each index. Real
Estate is represented by the NCREIF Property Index, Infrastructure is represented
by the Dow Jones Brookfield Infrastructure Index, Timberlands is represented by
the NCREIF Timberland Index, Agriculture represented by the NCREIF
Farmland Index, Global Bonds is represented by the Barclays Global Aggregate
Bond Index, and Global Stocks is represented by the MSCI World Index.)
there is potential for capital appreciation as many of these are supply con-
strained such as limited in quantity and scarce by nature (Fig. 6.2).
Inelastic demand properties of the asset class create stable and predict-
able income streams and growth. The duration and viewpoints of these
assets are long term and are generally characterized as international by
nature. Other macroeconomic drivers that contribute to the asset class
include a growing global population, demographic change, rising wealth
in emerging countries, climate change, and lack of resources. For the pur-
pose of this study, the real asset class is represented by the S&P Real Assets
Total Return Index.
Along with the main drivers, there are also risk elements that are associ-
ated with the asset class. These include economic downturns, and politi-
cal- and weather-related risks. These risks are also found in some financial
assets as well. Exposure in the asset class can come in different forms as
there are different types of entities involved. An overview of these
Table 6.2 Various types of investment vehicles and attributes

Various Types of Investment Vehicles and Attributes
Open-End Mutual
Direct Investment Club Deal Closed-End Fund Fund Public Equity ETF
Control Over the Asset
Customization
Lever of In-House Expertise Required
Liquidity
Min. Investment
Diversification Within Vehicle
High Scale Low
Fig. 6.3 Private Private Fundraising Breakdown as of

fundraising breakdown August 2016
as of August 2016.
Secondary Venture
(Source: Bloomberg 4% 2%
2017; Brookfield Asset Fund of Funds
Management 2017) 5% Buyout
Growth 33%
8%
Debt
17% Real Assets
31%
different types of funds include private and public funds and investment
vehicles, direct investments, public securities, real estate investment trusts
(REITs), master limited partnerships (MLPs), public and private operat-
ing companies, exchanged listed futures, commodity futures and exchange
traded funds (ETFs). See Table 6.2 for a more detailed breakdown by
investment vehicle type. With these properties, real assets as an asset class
represent 31% of all private funds raised as of August 2016 which repre-
sents the second largest category after buyouts (Fig. 6.3).
2.3 Shipping
A ship is a large ocean going vessel used to carry goods or passengers. The
comparative context to large commercial aircraft is large commercial ships.
These large commercial ships include cargo bulk carriers, container ships,
214 D. YU
roll on roll off (RoRo) carriers, tankers, and passenger and off-shore ves-
sels. There are many similarities and differences between shipping and air-
craft as an asset class. This is considered the most direct comparison to
aircraft as an asset class. In both instances, the asset can transport passen-
gers or cargo (the “Carriage”) from one point to another and is a movable
asset. It also creates value for the owner from the operations of the opera-
tor either itself or a third party. Similarities end in terms of the market
characteristics including the larger volatility of the shipping asset class
compared to aircraft. In terms of the supply base, shipping has multiple
shipyards and new shipyards enter the market as there are lower barriers to
entry. Large commercial aviation, on the other hand, has two main OEM
(original equipment manufacturer) suppliers Boeing and Airbus with
larger barriers to entry.
There are three main types of charters or leases. The first type is time
charter, which is chartered for a specific time and analogous to the spot
market. The length is usually shorter than the second type, a bareboat
charter. The owner, or the lessor, still manages the ship but the charterer,
or the lessee, has to pay for all the fuel, port charges, commissions, and
the daily hire rate. The second type of charter is a bareboat charter or
demise charter. This is similar to an aircraft operating lease where no
administration or technical maintenance is carried out by the lessor. The
charterer, or the lessee, has to pay for all the operating expenses including
fuel, crew, port expenses, and insurance. This type of charter has a typi-
cally long lease period. The third type of charter is a voyage charter. This
is for a single voyage between ports and the cost is determined on a lump-
sum basis or more precise per-ton basis. With a voyage charter, the owner
has to pay for the port, fuel, and crew costs. This is typically the shortest
charter period.
The Carriage is dependent on the type of ship but can be general com-
modities, crude oil, liquid products, or others. The cost of moving the
Carriage from one point to another is based on the charter type discussed
above. Freight Forward Agreements (FFA) are financial derivative instru-
ments that are used to measure the cost of a time charter for a specific
route or an average of routes on a particular type of ship. FFAs are con-
structed as swaps, are net cash flow settled as there are no physical deliver-
ies and are generally used by end-users and suppliers for hedging and/or
investment speculation. Currently, these are traded over the counter or
exchange-cleared contracts (such as SGX, LCH, Nasdaq, CME, ICE,
EEX). As FFAs are instruments, there is no need to own a ship, employ

staff and crew, fuel, food, and so on.
Clean and dirty tankers are liquid carriers. Dirty tankers contain prod-
ucts with heavy or dirty residuals such as crude oil, vacuum gas oil, heavy
fuel oil, and unrefined condensates. Clean tankers are products that do not
contain those heavy or dirty residuals such as product or chemical tankers.
While a tanker can be converted from clean to dirty or vice versa to take
financial spread advantage of pricing between the two, it is best to note
that the cargo hold is not thoroughly cleaned in between cargo products
and remaining residuals can affect the next product. This can produce
combustible conditions so it is best not to be repeated.
Baltic Dry Index represents dry bulk carrier costs including multiple
routes of three component ship types including 40% Capesizes’ five routes,
30% Panamaxes’ five routes, and 30% Supramaxes’ ten routes with a mul-
tiplier starting March 2018 after historically equal weighting between
Capesizes, Panamaxes, Supramaxes, and Handymaxes with another multi-
plier for consistency purposes. This change to more weighting for bigger
ships is due to a low volume of Handymax derivatives being traded and the
desire for ETFs to be created. The specific vessel definitions used by the
Baltic Exchange for the various indexes can be found in Table 6.3. It is
noted that the routes and vessels that are contained in the index have
changed over time and long consistency of the data is cautioned.
For this study, an equal weighted shipping index is created between dry
bulk, liquid carriers, and containers. Dry bulk is represented by the Baltic
Dry Index including Capesize, Panamax, and Supramax vessels and cover-
ing 20 global routes. Liquid carriers are an equal weight between Baltic
Dirty Tanker Index covering 15 major routes and Baltic Clean Tanker
Index covering nine major routes. Liquid carriers indexes include four
ship classes including VLCC, Suezmax, Aframax, and Panamax. Container
freight cost is represented by an equal weight of 12 Freightos Index routes
which are the costs to ship 40-foot containers on ocean freight for those
respective routes.
2.4 Real Estate
The real estate asset class is one of the largest segments with approximately
$217 trillion of value with 13% in commercial real estate according to
Savills.com’s 2016 Around The World in Dollars and Cents. It is an
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Table 6.3 Baltic exchange vessel definitions
• Capesize 2014 vessel:

– Basis 180,000 mt dwt on 18.2 m SSW draft
– Max age ten yrs
– LOA 290 m, beam 45 m, TPC 121
– 198,000 cbm grain
– 14 knots laden/15 knots ballast on 62 mt fuel oil (380 cst), no diesel at sea
• Panamax vessel:
– 74,000 mt dwt on 13.95 m SSW draft
– Max age 12 yrs
– LOA 225 m, beam 32.2 m
– 89,000 cbm grain
– 14 knots on 32 mt fuel oil (380 cst) laden/28 mt fuel oil (380 cst) ballast, no diesel
at sea
• Supramax vessel:
– Standard “Tess 58” type
– Max age 15 yrs
– LOA 189.99 m, beam 32.26 m
– 72,360 cbm grain, 70,557 cbm bale
– Five holds, five hatches
– 4 × 30 mt cranes with 12 cbm grabs
– 14 knots laden on 33 mt fuel oil (380 cst), no diesel at sea
– 14 knots ballast on 32 mt fuel oil (380 cst), no diesel at sea
– 12 knots lade on 24 mt fuel oil (380 cst) no diesel at sea
– 12.5 knots ballast on 23 mt fuel oil (380 cst), no diesel at sea
• Supramax vessel:
– Standard “Tess 58”
– Max age 15 yrs
– LOA 189.99 m, beam 32.26 m
– 72,360 cbm grain, 70,557 cbm bale
– Five holds, five hatches
– 4 × 30 mt cranes with 12 cbm grabs
– 4 knots laden on 33 mt fuel oil (380 cst), no diesel at sea
– 14 knots ballast on 32 mt fuel oil (380 cst), no diesel at sea
– 12 knots laden on 24 mt fuel oil (380 cst) no diesel at sea
– 12.5 knots ballast on 23 mt fuel oil (380 cst), no diesel at sea
Source: Baltic Exchange Information Services Ltd, 2018a
established global asset class on its own and includes many subsegments.
These include office, multifamily residential, retail, hospitality, and indus-
trial real estate. The office segment has grades from AAA in major cities
downward. The length of the leases is normally 5 to 20 years. The key
driver is job creation and growth. Multifamily residential are rental
buildings with multiple units. The main drivers are main economic factors
such as employment, demographics, competitive supply of rental housing,
and availability of single-family housing available for sale. The typical
length of the lease is one year and as such is more volatile and sensitive to
economic factors. Industrial segment includes warehouses, logistics, distri-
bution, and light manufacturing facilities. The leases are generally long.
The demand is mainly derived from overall global commercial growth and
activity. This facilitates the need for product inventory and the flow of
goods from one location to another. Hospitality segment is more opera-
tional in nature. It includes hotels, motels, vacation rentals, and executive
rental housing and the drivers are business and leisure travel where busi-
ness travel accounts for more of the traffic but leisure activity has grown.
To represent this asset class, an equal weighted of three indexes, the S&P
Global REIT USD Index, S&P Corelogic Case Shiller U.S National Price
SA Index, and NCREIF Property Index is used.
2.5 Infrastructure
The infrastructure asset class tends to provide essential products or ser-
vices. These include transportation and energy which can be divided into
utilities and renewable energy. These assets are also long term in nature
with associated stable cash flows and tend to benefit from inelastic demand.
This is an area where public-private partnerships (PPPs) are common,
where the government partners with private capital investors to build and
operate an infrastructure asset.
The transportation subclass includes infrastructure networks utilized to
move passengers or cargo such as toll roads, railroads, ports, airports,
bridges, and tunnels. Machinery such as aircraft, ships, and railcars are also
sometimes included in this category. Generally, these concessions or leases
are 10–99 years or more and pricing is linked to inflation or other volume
measures and maintenance capital expenditures that are required for
upkeep. Given the long-term concession structure of the projects, these
tend to have high barriers of entry.
The energy subclass consists of power generation, distribution and sup-
port systems, and renewable power sources. Utilities represent the electric
power generation aspect of infrastructure and also include water genera-
tion and wastewater treatment systems. Renewable power includes solar,
wind, hydro, geothermal, and biomass sources which are both environ-
mentally friendly and seek to reduce the carbon footprint. The substitutes
218 D. YU
are more traditional coal, gas, and nuclear power plants. To represent this
asset class, an equal weight index consisting of the Dow Jones Brookfield
Global Infrastructure Composite Index and S&P Global Listed
Infrastructure Index is used.
2.6 Commodities
The definition of a commodity is a primary agricultural or raw material
product which can be bought and sold in a transaction. There are many
types of commodities and they can be categorized as soft and hard com-
modities. Hard commodities are mined such as precious materials like
gold and oil. Examples of soft commodities would be agricultural prod-
ucts. Commodities can be used for hedging by suppliers and end-users as
well as investors and speculators. Some commodities such as gold and oil
have been indicators of the economy, while others are used for hedging
purposes. There are many types of instruments used to get exposure to the
space including physical or financial delivery. Some of these investment
instruments include ETFs (exchange traded funds), futures, forwards,
swaps, or listed or private companies. Many types of commodities have
both industrial uses and intrinsic values such as those commodities used in
the manufacturing of electronics. To represent the Commodities asset
class, the Thomson Reuters/CoreCommunity CRB Commodity Index
is used.
Specific commodities are used as comparative set by themselves. Specific
commodities of interest are crude oil as it is a major direct input for aircraft
operations and also gold. Gold has also been classically used as an infla-
tionary hedging tool and is represented by the gold spot price per troy
ounce. Crude oil is represented by an equal weighted average of WTI spot
crude oil price (representing the US market) and Brent crude oil spot
price (representing the European market). Precious metals is another sub-
class of general commodities and is represented by the S&P GSCI Precious
Metals Spot Index.
2.7 Agricultural Land and Timberland

Agricultural or farmland and timberland are the biggest category for sus-
tainable resources. These assets are naturally self-reproducing. With proper
management, the harvest rate must be below the regeneration rate or else
the resource risks depletion over time. Agricultural land is essential land
for the production of food and is scarce in nature. Investments focus on
productive land and returns are based on the growth of the crops, live-
stock, and land appreciation. This became an investable class by institu-
tional investors starting in the 1970s. US Farmland as a major asset class
has over $1.9 trillion in total asset value according to the United States
Department of Agriculture (USDA). Of that, approximately $300–400
billion is institutional-quality farmland according to Hancock Agricultural
Investment Group. National Council of Real Estate Investment Fiduciaries
(NCREIF) Farmland Index stands at $2 billion as of December 31, 2009.
These include three types, namely, (a) row crops such as annual crops like
corn, soybeans; (b) permanent or perennial crops such as fruits trees and
nuts; and (c) livestock which includes pasture land for grazing, dairy, and
livestock farms for meat. The main type of farmland usage is bulk com-
modity crops that have efficiencies of scale, storable crops, and livestock
which enable large scale production.
Timberland produces wood-based raw materials used for many indus-
tries. With the growing population, there is increasing demand for these
essential raw material assets. The export markets are an important source
of output. Timberland became an investable class by institutional investors
starting in the 1980s. The assets under management have doubled in the
last ten years according to the Timberland Investment Management
Organizations, who are invested in the asset class. There is some debate as
to the actual investable universe. On the high end, Professor Michael
Clutter of the University of Georgia estimated in 2004, the investable
timberland asset size to be US$400 billion while Brookfield Asset
Management estimated the value to be US$120 billion. While others
think the overall market size is higher. The International Woodland
Company in its 2009 Timberland Investable Universe paper noted that
there is over US$120 billion invested in timberland as an asset class for
institutional investors (Acquila Capital 2015).
Both agricultural land and timberland can either be owned and directly
managed or leased to operators. Different risk profiles exist as direct oper-
ations versus leasing the land. Some of the risks for direct operations
include both skill and nature related such as weather and disease. The
rewards, on the other hand, can be higher for direct operations than leas-
ing the land to an operator as the annual crop and livestock sales can be
based on managing supply and demand elements optimally. That said,
220 D. YU
institutional investors are not the best suited to manage the direct opera-
tional end of the business. From this perspective, the answer is no from the
author’s perspective. Capital, management, and technological improve-
ments and advancement can also improve the yield from the land. On the
other hand, if the land is leased to an operator, the lease rate is normally a
fixed amount over a moderate to long tenor and the main risk entailed is
the credit risk of the operator. Either way, specialty property management
is needed to look after timberland and farmland assets like all asset-backed
asset classes. To represent the Agricultural land asset class, the NCREIF
Farmland Total Return Index is used while Timberland is represented by
an equal weighted average of the S&P Global Timber & Forestry Index
and NCREIF Timberland Index.
2.8 Interest Rate Products

Interest rates are very important to any financial asset and hedging tool.
Aircraft are predominately denominated in US dollars. Also, aircraft have
long residual, useful lives and as such, similar financing can match the
longer length tenors. Usually, the longer tenor floating debt is set to match
its floating nature and the fixed nature of the rental cash flow stream. This
mismatch is fixed by implementing a USD swap rate. The rental stream is
usually a function of the competitive supply and demand environment, the
base risk-free and benchmark financing rates allowing for various premia
including credit, geographic, and structural, among others. The airline or
end-user does have the option to evaluate whether leasing or owning out-
right with debt is more appropriate. In addition, both rental stream and
debt is benchmarked on the risk-free rate and three-month USD LIBOR
rate. As such 1–3M US Treasuries is the set risk-free rate and represented
by Bloomberg-Barclays US 1–3 Month T-Bills Total Return Index. USD
3M LIBOR rates and USD ten-year interest rate swap rates are included
in the comparative data sets. As aviation travel demand is correlated to
GDP, US CPI is also used as a comparative set as well.
2.9 Sector-Specific and Broad Equity and Debt Indexes

Airline- and transportation-specific industry indexes are also examined to
get a better comparison viewpoint for similar asset profiles as aircraft val-
ues. To represent the Airlines asset class, the S&P 500 Airlines Total
Return Index is used while an equal weighted average of the Dow Jones
Transportation Average and Nasdaq Transportation Index is used to rep-
resent the Transportation asset class. Both broader equity and debt indexes
are included in the comparative set. For equity, S&P500 and MSCI World
Index individually are used to represent equity indexes in USA and world-
wide. The broader global debt index is represented by the Bloomberg-
Barclays Global Aggregate Bond Total Return Index Value Unhedged.
3 Data and Methodology

The baseline empirical data sets and index construction are derived and
extended upon from the methodologies described in Chap. 4. Again, all
data and calculated returns are calculated and monthly values and return
figures are derived. A subset of the sample set is calculated through various
Index 1–5 to represent the various aircraft asset types. Index 1–5 repre-
sents the value of the aircraft assets by type and its associated depreciation
profile. They do not have associated lease or cash flow thus the compari-
son directly to other comparative asset classes as later specified is not a
likewise comparison. Given the lack of actual return cash flow data, the
monthly negative returns or depreciation of aircraft value, as depicted by
market value (MV), is sign inversed and considered positive returns for
comparative purposes. The associated historic aircraft lease cash flows data
by type and vintage from each of the various sources are ideally available.
Unfortunately, this is not publicly available nor are there any other suitable
substitutes.
Similar to Chap. 4, Index 1–5 are used as the baseline comparative
indexes to represent the different segments and these indexes are as fol-
lows: (1) All aircraft types, (2) all narrowbody aircraft, (3) all widebody,
(4) all narrowbody classic aircraft, and (5) all narrowbody next generation
aircraft. For this comparison with other asset classes, only the weighted-
average approach on MV for each index is considered and sign inversed as
discussed previously. This weighted average approach takes into account
the differences between the smaller values such as the older and smaller
aircraft and the larger values with larger weighting for the newer or larger
aircraft. The simple arithmetic-average approach treats all aircraft as equal
weighting. Again, month-over-month calculation is the focus instead of
the year-over-year approach given the lack of seasonality in the figures.
222 D. YU
3.1 Month over Month Simple or Equal Weighted Average

Index Total Return Calculations
 1  j =0
Asset ClassSimple Average Return i ,t =   ∗ ∑ Asset Class Return i , j ,t
n n
where
Asset ClassValue i , j ,t + Asset ClassDividend Value i , j ,t

Asset ClassReturn i , j ,t = −1
Asset ClassValuei , j ,t −1
i = specific asset j = subset member of t = time, month, and year of the valuation
class asset class i date (in months)
The overall time frame of the dataset is 6.1996–6.2017, in addition,

segmentation of the time periods which are the same as in Chap. 4 are
analyzed to see if there are observations that can be postulated due to the
major economic event, the Global Financial Crisis, in Time 3. The time
scenarios (Times 1–4) selected are as follows: (1) all available historical
information 6.1996–6.2017; (2) pre-GFC period, 6.1996–6.2007; (3)
GFC period, 6.2007–6.2010; and (4) post-GFC period, 6.2010–6.2017.
Again, these are the same time segments as in Chap. 4 and chosen for ease
of comparison purposes. For each index under the different conditions,
after the sign inversion, statistical analyses are performed including mean,
median, standard deviation, variance, correlation, and covariances with
the comparative data sets. Utilizing these figures, both return and volatil-
ity metrics are calculated. The return metrics include the following: excess
return to the risk-free rate, α relating to Real Assets, α relating to MSCI
World, volatility metrics (including β relating to the market as Real Assets,
β relating to the market such as MSCI World) and Sharpe ratios (which
combines both excess return and volatility concepts).
α is the excess return to the market returns. α and β’s market is calcu-
lated under two market scenarios—Real Assets and MSCI World—as avia-
tion is within the real assets market and is global in nature so the S&P 500
is not used. The risk-free rate throughout the study is set as the US
Treasuries 1–3M Index’s respective time scenario mean. Excess return

compared to the risk-free rate, Real Assets and MSCI World returns, is
used to observe the comparative performance of the asset classes.
( Alpha ) α i = ( ri − rm )
ri= return of index i rm = mean return of i = index m = real assets or MSCI

(our case mean) market index number world index
Excess Return Over rf = ( ri − rf )
ri = return of index i (our rf = risk free rate (represented by US i = index

case mean) Treasuries 1–3M) number
There are several measurements for volatility that are analyzed such as
standard deviation, the variance, and beta. While standard deviation for
each asset class is focused on each on a standalone basis, variance is the
square of standard deviation and beta measures the volatility on a com-
parative basis relative to the market index proxies, like alpha, include Real
Assets and MSCI World.
Var ( x ) = E ( x − µ )  = σ 2
2
 
cov ( x,y ) = E ( x − E [ x ]) ( y − E [ y ]) 
cov ( ri ,rm ) σ i,m

βi = =
Var ( rm ) σ m2
σi, m = covariance of between index i and market σ m2 = variance of i = index

index index i number
224 D. YU
β is also part of the capital asset pricing model (CAPM) which uses risk-
free rate, excess market returns, and beta volatility to calculate the return
expectations for an asset.
3.2 Capital Assets Pricing Model
Expected return E ( ri ) = rf + β i ∗ ( E ( rm ) − rf )
rf = risk-free rate (represented by E(rm)= expected market βi = beta of i = index

US Treasuries 1–3M) return (mean) index i number
Combining the concepts of asset class excess return over the risk-free
rate and adjusted for the asset standalone volatility or standard deviation,
is the Sharpe ratio.
rp − rf
Sharpe Ratioi =
σp
rp = expected mean rf = risk-free rate (represented σp= standard i = index

portfolio return of by US Treasuries 1–3M) deviation of index number
index i i
The comparative sets are the monthly returns and compared against the
baseline Indexes 1–5 MoM WA MV as well as to each other. The compara-
tive data includes historical trading data from Bloomberg, Reuters, respec-
tive company information. and other publicly available information. Each
of the different comparative data sets represents a different asset class and
thus different indexes are created.
For the public pure-play aircraft leasing company index, the compo-
nents include AAFP, ACY, AerCap, Aircastle, ALAFCO, ALC, Avation,
AviaAM, Avolon, BOC Aviation, CALC, CDB Leasing, DP1, DNA1,
DNA2, DNA3, FLY, GLS, and WLFC. See Publicly Listed Aircraft Lessors
Section 5.2.1 for a fuller discussion. The overall time frame for this index
is from 6.2006 to 6.2017 while companies are added to the index when
they are taken public and when companies are acquired or taken private,
they are removed from the index. As such, GLS was acquired and Avolon
was taken private after their initial public offering; only the data from their
time as public companies are used. For the other companies, all data while
the respective companies are public are used which do not encompass the
entire duration of the sample historical data time frame 6.1996–6.2017
and noted as such.
The comparative data set contains 20 asset classes including Aircraft
Lessors that are compared with the five aircraft type indexes from Chap. 4.
Some of the data members and asset classes’ historical pricing do not go as
far as 6.1996. These are noted and all available historical figures are used
for computation. These comparative asset classes and their respective
members are the following:
1. Aircraft Lessors—(a) AAFP; (b) ACY; (c) AerCap; (d) Aircastle;

(e) ALAFCO; (f) ALC; (g) Avation; (h) AviaAM; (i) Avolon; (j)
BOC Aviation; (k) CALC; (l) CDB Leasing; (m) DP1; (n) DNA1;
(o) DNA2; (p) DNA3; (q) FLY; (r) GLS; and (s) WLFC (Source:
Bloomberg)
2. Shipping—(a) Baltic Dry Bulk Index; (b) Liquid Carriers (Dirty
and Clean) Route Indexes; and (c) Average of 12 Freightos Baltic
Container Route Indexes (Source: Bloomberg; Baltic Exchange
Information Services Ltd)
3. Real Estate—(a) S&P Global REIT USD Index; (b) S&P Corelogic
Case Shiller U.S National Price SA Index; and (c) NCREIF Property
Index (Source: Bloomberg)
4. Agricultural Land—NCREIF Farmland Total Return Index
(Source: Bloomberg; NCREIF)
5. Timberland—(a) S&P Global Timber & Forestry Index; and (b)
NCREIF Timberland Index (Source: Bloomberg; NCREIF)
6. Commodities—Thomson Reuters/CoreCommunity CRB
Commodity Index (Source: Bloomberg)
3.2.1 Commodities—Specific Individual

7. Crude Oil—(a) WTI spot crude oil price; and (b) Brent crude oil
spot price for Europe market (Source: Bloomberg)
8. Gold—Gold Spot Price per Troy Ounce (Source: Bloomberg)
226 D. YU
9. Precious Metals—S&P GSCI Precious Metals Spot Index (Source:

Bloomberg)
10. Airlines—S&P 500 Airlines Total Return Index (Source:
Bloomberg)
11. Transportation—(a) Dow Jones Transportation Average; and (b)
Nasdaq Transportation Index (Source: Bloomberg)
12. Infrastructure—(a) Dow Jones Brookfield Global Infrastructure
Composite Index; and (b) S&P Global Listed Infrastructure Index
(Source: Bloomberg)
13. Real Assets—S&P Real Assets Total Return Index (Source:
Bloomberg)
3.2.2 Specific Interest Rates

14. U
S Treasuries 1–3M—Bloomberg-Barclays US 1–3 Month
T-Bills Total Return Index (Source: Bloomberg)
15.
USD Swap Rate10Y—USD Swap Rate Ten Year (Source:
Bloomberg)
16.
USD 3M LIBOR—USD Three-Month LIBOR (Source:
Bloomberg)
17. US CPI—US CPI Index (Source: Bloomberg)
3.2.3 Specific Broad Equity Indexes

18. MSCI World—MSCI World (Equity) Index (Source:
Bloomberg; MSCI)
19. S&P 500–S&P 500 Equity Index (Source: Bloomberg; S&P
Dow Jones Indexes)
20. Broad Debt—Bloomberg-Barclays Global Aggregate Bond Total
Return Index Value Unhedged (Source: Bloomberg, Barclays)
For the NCREIF Property Index, NCREIF Farmland Total Return

Index, and NCREIF Timberland Index, the indexes’ data is quarterly so
for the immediate months in between are smoothed out and calculated on
a straight line basis. The respective comparative indexes are created by
calculating the simple or equal weighted average of each of the subsets’
monthly total returns. These returns are total returns which include either
the price appreciation (or depreciation) and any dividends if there are any.
The results of the analysis of these 20 comparative indexes representing
different asset classes are compared with the baseline aircraft data repre-
sented by Index 1–5 MoM WA MV for the same time period (Time 1–4)
and conclusions are postulated from the analysis.
4 Results and Analyses
4.1
Return and Volatility Comparative Analysis
Summary statistics of Index 1–5 and the comparative asset classes for Time
1–4 can be found in Table 6.4. Figures 6.4, 6.5, and 6.6 show the ranking
summaries by asset class for Alpha (Real Assets), Alpha (MSCI World),
and Sharpe Ratios while Fig. 6.7 shows the mean and standard deviation
breakdown for Time 1–4.
4.2 Return and Volatility Comparative Analysis: Time 1

(6.1996–6.2017)
In the all historical period Time 1, return and volatility of Index 1–5 MoM
WA MV is compared to the 20 comparative asset class benchmarks. The
return analysis is focused on mean figures for the asset class and compara-
tive excess returns over the risk-free rate and market proxies, Real Assets
and MSCI World. By these return measures, Index 1–5 is ranked 12, 13,
7, 19, and 20, respectively, out of 25. Aircraft Lessors index is ranked in
second in 25 comparative sets. The top ranked is the Shipping asset class.
The mean for all datasets is positive except for the USD 3M LIBOR and
USD Swap Rate Ten Yr.
In terms of excess return over the risk-free rate are shown to be all posi-
tive for all the indexes except for Commodities index and rates data (US
CPI, USD 3M LIBOR, and USD Swap Rate Ten Yr) with the US Treasuries
1–3M as the risk-free benchmark, ranked 21. Index 1 MoM WA MV excess
return over risk-free rate is 0.4526% and ranked 12. For alpha or excess
returns over MSCI World, MSCI World is ranked 11 so more than half of
the asset sets are negative. Index 1 MoM WA MV alpha over MSCI World
is −0.0157%. Real Assets is ranked below MSCI World at 17 with Index 1
and 4, while Precious Metals, Real Estate, and Gold is ranked in between.
Index 1 MoM WA MV alpha over Real Assets is 0.0529%.
The Sharpe ratio tells a bit of a different story, where Indexes 3, 1, and
4 moved up and are ranked third, sixth, and 11th respectively. Indexes 2
and 5 did not move in rankings and Aircraft Lessors moved down from 2
to 12. Sharpe ratios adjust the excess return to the risk-free rate to take
into account the individual volatility and standard deviation. Ahead of
Index 3 in the ranking are Agricultural Land and Real Estate asset classes.
Index 1 MoM WA MV’s Sharpe ratio is 0.1720%.
In terms of standalone volatility with standard deviation and variance,
Index 1–5 is ranked in the third quartile. In terms of relative volatility or
Table 6.4 Time 1–4 comparative indexes’ summary statistics.
Time scenario 1—6.1996–6.2017 summary statistics
n Min (%) Max (%) Median Mean Std. Var β (Real β (MSCI Mean α (Real α (MSCI Sharpe
(%) (%) Dev asset) world) over RF assets) world) ratios
(%)1 (%) (%) (%)1
Index 1 MoM 12,015 (11.8712) 10.2745 0.3724 0.6327 2.631 6.9239 (0.0788) (0.0262) 0.4526 0.0529 (0.0157) 0.1720
WA MV
Index 2 MoM 6817 (18.9991) 7.5487 0.1830 0.3375 2.924 8.5493 (0.1430) (0.0582) 0.1574 (0.2423) (0.3109) 0.0538
WA MV
Index 3 MoM 5199 (8.1385) 11.9864 0.5709 0.8324 3.034 9.2039 (0.0490) (0.0136) 0.6524 0.2527 0.1840 0.2150
WA MV2
Index4 MoM 5154 (27.6055) 10.4857 0.1769 0.6287 3.895 15.1720 (0.1470) (0.0418) 0.4487 0.0490 (0.0197) 0.1152
WA MV
Index 5 MoM 1511 (6.9616) 8.8196 0.2028 0.2426 2.623 6.8799 (0.1345) (0.0860) 0.0625 (0.3372) (0.4058) 0.0238
WA MV3
Aircraft lessors4 2508 (35.7439) 43.4109 0.9766 1.2407 9.781 95.6756 1.4329 0.8995 1.0606 0.6609 0.5922 0.1084
Real estate 396 (11.4848) 6.2830 0.7373 0.6105 1.526 2.3272 0.5035 0.2072 0.4305 0.0308 (0.0379) 0.2822
Shipping 132 (46.6789) 52.9171 1.6946 1.5879 13.081 171.1027 0.8431 0.3615 1.4079 1.0082 0.9395 0.1076
Agr. land 132 (0.0033) 7.5933 0.6524 0.9759 1.070 1.1439 (0.0148) 0.0246 0.7958 0.3961 0.3275 0.7441
Timberland 264 (14.2696) 13.6359 0.7384 0.6513 2.599 6.7528 0.7738 0.4059 0.4712 0.0715 0.0029 0.1813
Commodities 132 (22.3251) 13.7866 0.2053 0.1149 4.791 22.9495 1.1257 0.4343 (0.0651) (0.4648) (0.5335) (0.0136)
Crude oil 264 (33.2646) 40.2353 1.4434 0.8397 9.760 95.2632 1.5859 0.5784 0.6596 0.2599 0.1913 0.0676
Gold 132 (16.8896) 16.8453 0.1383 0.5862 4.841 23.4387 0.6108 0.1070 0.4062 0.0065 (0.0622) 0.0839
Precious metals 132 (18.6736) 15.1079 (0.0375) 0.6166 5.120 26.2124 0.7248 0.1679 0.4366 0.0369 (0.0318) 0.0853
Airlines 132 (26.5725) 24.2940 0.4430 0.7020 8.768 76.8696 0.9667 1.0175 0.5219 0.1222 0.0536 0.0595
Transportation 264 (20.8783) 17.0595 1.2737 0.9241 5.616 31.5438 1.0068 0.9232 0.7441 0.3444 0.2757 0.1325
Infrastructure5 67 (14.4816) 10.6156 1.1467 0.8671 3.811 14.5251 1.1409 0.7216 0.6870 0.2873 0.2187 0.1803
Real assets6 26 (16.8700) 8.6055 0.9022 0.5797 3.188 10.1623 0.9863 0.6417 0.3997 0.0000 (0.0687) 0.1254
US treasuries 132 (0.7639) 0.5636 0.1097 0.1800 0.193 0.0372 0.0014 (0.0003) 0.0000 (0.3997) (0.4684) 0.0000
1-3M
USD swap rate 132 (30.1781) 31.4864 (0.6147) (0.1501) 7.712 59.4683 0.1384 0.3738 (0.3302) (0.7299) (0.7985) (0.0428)
10Y
USD 3M 132 (35.7205) 54.7351 (0.0457) (0.0791) 10.020 100.3959 (1.0004) (0.2430) (0.2592) (0.6589) (0.7275) (0.0259)
LIBOR
US CPI 132 (3.6850) 1.3768 0.1844 0.1610 0.374 0.1397 0.0206 0.0073 (0.0191) (0.4188) (0.4875) (0.0511)
MSCI world 132 (18.9312) 11.3076 1.1843 0.6484 4.395 19.3202 1.2200 0.9960 0.4684 0.0687 0.0000 0.1066
S&P 500 132 (16.7929) 10.9193 1.1789 0.7866 4.347 18.8930 1.0308 0.9418 0.6065 0.2068 0.1381 0.1395
Broad debt 396 (3.9732) 6.2131 0.4137 0.3908 1.607 2.5831 0.3062 0.0869 0.2108 (0.1889) (0.2576) 0.1312
1
Risk free rate is US treasuries 1-3M mean
2
Starts from 2.1997
3
Starts from 10.1999
4
Starts from 6.2006
5
Starts from 12.2001
6
Starts from 5.2005
(continued)
n Min (%) Max (%) Median Mean Std. Var β (Real β (MSCI Mean α (Real α (MSCI Sharpe
1
(%) (%) Dev asset) world) over RF assets) (%) world) ratios (%)
(%)1 (%)
Index 1 MoM 12,015 (11.8712) 10.2745 0.0241 0.4730 2.615 6.8381 (0.2282) (0.0443) 0.1675 (0.8592) (0.3192) 0.0640
WA MV
Index 2 MoM 6817 (18.9991) 7.5487 0.0219 0.2752 2.926 8.5642 (0.2835) (0.0456) (0.0304) (1.0570) (0.5171) (0.0104)
WA MV
Index 3 MoM 5199 (8.1385) 11.9864 0.1555 0.6489 2.842 8.0784 (0.2031) (0.0482) 0.3433 (0.6833) (0.1433) 0.1208
WA MV2
Index4 MoM 5154 (27.6055) 8.6975 0.0427 0.3074 3.902 15.2251 (0.4268) (0.0355) 0.0018 (1.0248) (0.4848) 0.0005
WA MV
Index 5 MoM 1511 (6.9616) 8.8196 0.1081 0.3512 2.274 5.1701 (0.1167) (0.0857) 0.0456 (0.9810) (0.4410) 0.0201
WA MV3
Aircraft 2508 (35.7439) 43.4109 1.4964 1.5074 11.380 129.4978 1.4820 0.5986 1.2018 0.1752 0.7152 0.1056
lessors4
Real estate 396 0.3294 1.4261 0.7777 0.8025 0.249 0.0619 0.0046 0.0030 0.4969 (0.5297) 0.0102 1.9978
Shipping 132 (19.8428) 38.8833 1.6946 1.6218 10.606 112.4882 (1.7228) 0.0582 1.3162 0.2896 0.8296 0.1241
Agr. land 132 (0.0033) 7.5933 0.5683 0.9428 1.264 1.5968 (0.1853) 0.0541 0.6372 (0.3894) 0.1506 0.5043
Timberland 264 (3.0094) 6.8164 0.6407 0.8305 1.528 2.3347 0.3771 0.1269 0.5250 (0.5017) 0.0383 0.3436
Commodities 132 (9.1297) 13.1207 0.3799 0.5334 4.191 17.5671 1.3222 0.1344 0.2278 (0.7988) (0.2588) 0.0544
Crude oil 264 (24.8600) 40.2353 2.3593 1.5049 10.183 103.7001 1.8852 0.0680 1.1993 0.1727 0.7126 0.1178
Gold 132 (9.3094) 16.8453 (0.0990) 0.4861 4.060 16.4822 1.5978 0.0862 0.1805 (0.8461) (0.3062) 0.0445
Precious 132 (11.0819) 15.1079 (0.1829) 0.5525 4.113 16.9185 1.8302 0.1321 0.2469 (0.7797) (0.2397) 0.0600
metals
Airlines 132 (26.2798) 22.3267 0.2081 0.2267 8.716 75.9605 (0.8776) 1.1151 (0.0789) (1.1055) (0.5655) (0.0090)
Transportation 264 (20.8783) 14.3578 1.3184 1.0792 5.610 31.4725 0.0499 0.9137 0.7736 (0.2530) 0.2870 0.1379
Infrastructure5 67 (7.5067) 6.5623 1.7221 1.4574 2.981 8.8839 1.1293 0.4250 1.1519 0.1252 0.6652 0.3865
Real assets6 26 (3.2100) 4.6231 1.4849 1.3322 1.655 2.7375 0.9615 0.1274 1.0266 0.0000 0.5399 0.6205
US treasuries 132 (0.7639) 0.5636 0.3768 0.3056 0.174 0.0303 0.0014 0.0016 0.0000 (1.0266) (0.4867) 0.0000
1-3M
USD swap rate 132 (11.8870) 29.5720 (0.7257) (0.0169) 5.534 30.6279 (0.8563) 0.1998 (0.3225) (1.3492) (0.8092) (0.0583)
10Y
USD 3M 132 (25.1986) 22.4335 0.0000 0.1127 5.489 30.1328 (0.1181) 0.1208 (0.1929) (1.2195) (0.6796) (0.0351)
LIBOR
US CPI 132 (3.6850) 1.3768 0.1869 0.1829 0.417 0.1739 0.0162 0.0055 (0.1227) (1.1493) (0.6094) (0.2942)
MSCI world 132 (13.3108) 8.9797 1.2204 0.7923 4.058 16.4664 0.7661 0.9924 0.4867 (0.5399) 0.0000 0.1199
S&P 500 132 (14.4436) 9.7768 1.1789 0.8869 4.325 18.7061 0.5083 1.0007 0.5813 (0.4454) 0.0946 0.1344
Broad debt 396 (3.6564) 4.8062 0.2923 0.4584 1.526 2.3298 0.4338 0.0126 0.1529 (0.8738) (0.3338) 0.1001
1
Risk free rate is US treasuries 1-3M mean
2
Starts from 2.1997
3
Starts from 10.1999
4
Starts from 6.2006
5
Starts from 12.2001
6
Starts from 5.2005
(continued)
n Min (%) Max (%) Median Mean Std. Dev Var β (Real β (MSCI Mean over α (Real α (MSCI Sharpe
1
(%) (%) asset) world) RF (%)1 assets) world) (%) ratios (%)
(%)
Index 1 MoM 7243 (3.1365) 5.2569 0.4361 0.7875 1.5366 2.3613 (0.0025) 0.0043 0.6647 0.8203 1.5287 0.4326
WA MV
Index 2 MoM 3738 (3.8151) 6.3823 0.8414 0.8314 2.3534 5.5386 (0.0731) (0.0552) 0.7086 0.8641 1.5726 0.3011
WA MV
Index 3 MoM 3506 (3.7196) 5.1791 0.6655 0.8677 1.9435 3.7770 0.0317 0.0319 0.7449 0.9004 1.6089 0.3833
WA MV
Index 4 MoM 2575 (2.3868) 9.4386 0.4436 1.7808 3.2236 10.3913 (0.0371) (0.0087) 1.6580 1.8135 2.5220 0.5143
WA MV
Index 5 MoM 1134 (5.6921) 5.4493 0.4164 0.3842 2.6487 7.0157 (0.0954) (0.0860) 0.2613 0.4169 1.1254 0.0987
WA MV
Aircraft lessors 703 (21.0529) 28.6740 (0.1267) 0.1248 12.1500 147.6225 1.6956 1.3258 0.0020 0.1575 0.8660 0.0002
Real estate 111 (11.4848) 6.2830 0.2778 (0.4176) 3.2185 10.3588 0.5587 0.4178 (0.5404) (0.3849) 0.3236 (0.1679)
Shipping 37 (46.6789) 52.9171 4.2564 2.0756 19.0199 361.7573 1.7928 1.0997 1.9528 2.1084 2.8168 0.1027
Agr. land 37 0.2223 2.6400 0.6871 0.9184 0.7744 0.5997 (0.0417) (0.0244) 0.7955 0.9511 1.6596 1.0273
Timberland 74 (14.2696) 13.6359 0.7601 (0.0064) 4.8729 23.7453 0.8556 0.6774 (0.1292) 0.0264 0.7348 (0.0265)
Commodities 37 (22.3251) 13.7866 1.4600 (0.2506) 7.0390 49.5477 1.0676 0.6522 (0.3734) (0.2178) 0.4907 (0.0530)
Crude oil 74 (33.2646) 31.0283 2.5407 1.0363 11.5926 134.3894 1.5944 1.0284 0.9135 1.0691 1.7775 0.0788
Gold 37 (16.8896) 13.0137 2.2551 1.9184 6.3206 39.9500 0.4550 0.1533 1.7956 1.9511 2.6596 0.2841
Precious metals 37 (18.6736) 13.6739 2.4609 1.8424 6.7977 46.2088 0.5269 0.1919 1.7195 1.8751 2.5836 0.2530
Airlines 37 (26.5725) 24.2940 (0.3039) (0.0682) 10.9579 120.0758 1.2431 0.9975 (0.1910) (0.0354) 0.6730 (0.0174)
Transportation 74 (15.9992) 17.0595 0.7613 (0.5351) 7.2704 52.8581 1.1055 0.9177 (0.6579) (0.5023) 0.2061 (0.0905)
Infrastructure 37 (14.4816) 10.6156 0.1469 (0.4818) 5.6275 31.6688 1.0903 0.8147 (0.6047) (0.4491) 0.2594 (0.1074)
Real assets 37 (16.8700) 8.6055 0.2376 (0.0327) 4.7674 22.7277 0.9730 0.6853 (0.1556) 0.0000 0.7085 (0.0326)
US treasuries 37 (0.0052) 0.4931 0.0261 0.1228 0.1479 0.0219 (0.0045) (0.0039) 0.0000 0.1556 0.8640 0.0000
1-3M
USD swap rate 37 (30.1781) 20.4611 (0.6905) (1.1272) 9.6657 93.4253 0.2944 0.1999 (1.2500) (1.0945) (0.3860) (0.1293)
10Y
USD 3M 37 (35.7205) 54.7351 (2.3114) (4.3719) 18.6447 347.6242 (1.1088) (0.7622) (4.4947) (4.3391) (3.6307) (0.2411)
LIBOR
US CPI 37 (1.7705) 1.0478 0.1931 0.1344 0.4886 0.2387 0.0250 0.0096 0.0116 0.1672 0.8756 0.0238
MSCI world 37 (18.9312) 11.3076 (0.5233) (0.7412) 6.4175 41.1844 1.2419 0.9730 (0.8640) (0.7085) 0.0000 (0.1346)
S&P500 37 (16.7929) 9.5607 0.1997 (0.7020) 5.8968 34.7718 1.0776 0.8707 (0.8249) (0.6693) 0.0392 (0.1399)
Broad debt 111 (3.7627) 6.2131 0.4698 0.5453 2.1623 4.6754 0.2494 0.1551 0.4224 0.5780 1.2865 0.1954
1
Risk free rate is US Treasuries 1-3M mean
(continued)
n Min (%) Max (%) Median Mean Std. dev Var β (Real β (MSCI world) Mean over α (Real α (MSCI Sharpe
(%) (%) asset) RF (%)1 assets) world) ratios
(%) (%) (%)1
Index 1 MoM 21,249 (9.1773) 8.0354 0.8896 0.8094 2.991 8.9450 (0.1342) (0.0283) 0.7988 0.2246 (0.1570) 0.2671
WA MV
Index 2 MoM 11,129 (10.8101) 7.4076 0.3739 0.2381 3.118 9.7204 (0.1713) (0.0676) 0.2275 (0.3468) (0.7284) 0.0730
WA MV
Index 3 MoM 10,115 (13.8674) 8.8526 1.3975 1.0697 3.621 13.1110 (0.1166) (0.0124) 1.0591 0.4848 0.1033 0.2925
WA MV
Index 4 MoM 6580 (11.9470) 10.4857 0.5869 0.6632 4.060 16.4859 (0.1706) (0.0535) 0.6527 0.0784 (0.3032) 0.1607
WA MV
Index 5 MoM 5409 (10.4915) 7.7395 0.2082 0.0708 2.942 8.6543 (0.1698) (0.0711) 0.0602 (0.5141) (0.8956) 0.0205
WA MV
Aircraft lessors 1615 (11.4832) 11.8357 0.9033 1.1893 4.788 22.9297 1.1876 1.0206 1.1787 0.6045 0.2229 0.2462
Real estate 255 (3.6164) 4.1223 0.6971 0.7416 1.378 1.8989 0.5152 0.3148 0.7310 0.1567 (0.2249) 0.5305
Shipping 85 (40.6584) 34.5437 0.0137 1.0382 13.630 185.7674 0.7355 0.6785 1.0276 0.4533 0.0718 0.0754
Agr. land 85 0.1628 3.1867 0.6933 1.0409 0.819 0.6708 0.0450 0.0540 1.0303 0.4561 0.0745 1.2580
Timberland 170 (5.8907) 5.8097 1.1077 0.6333 2.488 6.1907 0.7740 0.6169 0.6227 0.0485 (0.3331) 0.2503
Commodities 85 (12.9667) 10.4144 (0.2376) (0.3453) 4.409 19.4364 1.4085 0.8491 (0.3559) (0.9302) (1.3117) (0.0807)
Crude oil 170 (19.3238) 23.4352 (0.1860) (0.1855) 8.015 64.2453 1.9535 1.2562 (0.1961) (0.7704) (1.1519) (0.0245)
Gold 85 (11.0520) 12.2000 0.0505 0.1540 5.130 26.3127 1.0022 0.3361 0.1434 (0.4309) (0.8125) 0.0280
Precious 85 (14.0686) 12.1650 (0.0771) 0.1615 5.608 31.4538 1.1959 0.4692 0.1510 (0.4233) (0.8049) 0.0269
metals
Airlines 85 (13.4083) 18.3223 1.5083 1.6831 7.737 59.8639 1.1376 1.0683 1.6725 1.0982 0.7166 0.2162
Transportation 85 (9.2305) 13.8789 1.0469 1.1819 4.732 22.3955 1.1644 1.0493 1.1713 0.5970 0.2155 0.2475
Infrastructure 85 (6.4879) 9.1862 1.0870 0.9610 3.256 10.6014 1.2880 0.7909 0.9504 0.3761 (0.0054) 0.2919
Real assets 85 (6.8932) 6.9889 0.8330 0.5849 2.567 6.5906 1.1035 0.6549 0.5743 0.0000 (0.3816) 0.2237
US treasuries 85 (0.0052) 0.0777 0.0052 0.0106 0.015 0.0002 0.0019 0.0011 0.0000 (0.5743) (0.9559) 0.0000
1-3M
USD swap rate 85 (21.6955) 31.4864 0.5666 (0.0113) 9.539 90.9912 0.6003 1.2965 (0.0219) (0.5962) (0.9778) (0.0023)
10Y
USD 3M 85 (34.8474) 47.2129 0.2147 1.4884 9.662 93.3586 (0.1724) 0.2021 1.4778 0.9035 0.5219 0.1529
LIBOR
US CPI 85 (0.6069) 0.5810 0.1713 0.1369 0.207 0.0428 0.0242 0.0161 0.1263 (0.4480) (0.8296) 0.6103
MSCI world 85 (8.5761) 10.3647 1.3117 0.9664 3.692 13.6294 1.3543 1.0857 0.9559 0.3816 0.0000 0.2589
S&P500 85 (7.0240) 10.9193 1.2859 1.1792 3.425 11.7335 1.1497 0.9766 1.1686 0.5943 0.2128 0.3412
Broad debt 255 (3.9732) 3.3980 0.4710 0.2230 1.434 2.0561 0.4686 0.1947 0.2124 (0.3618) (0.7434) 0.1482
1
Risk free rate Is US treasuries 1-3M mean
236
D. YU
Fig. 6.4 Asset class rankings by alpha (real assets) over four time segments
6
Fig. 6.5 Asset class rankings by alpha (MSCI world) over four time segments
COMPARATIVE EXAMINATION BETWEEN THE AIRCRAFT AND OTHER…
237
238
D. YU
Fig. 6.6 Asset class rankings by sharpe ratios over four time segments
6
Fig. 6.7 Risk and return of aircraft and comparative asset classes time 1–4
239
240
D. YU
Fig. 6.7 (continued)

(continued)
Fig. 6.7
242
D. YU

beta with respect to Real Assets and MSCI World, Index 1–5 are mostly in
the bottom quartile of the rankings. Aircraft Lessors are found to be near
the top with standard deviation, variance, beta to Real Asset and MSCI
World at three, three, two, and five, respectively.

(6.1996–6.2007)
In the pre-GFC Time 2, return and volatility of Index 1–5 MoM WA MV
are compared to the 20 comparative asset class benchmarks. For Time 2,
the aircraft asset classes have moved down slightly. Index 3 is ranked 12
while Index 1, 5, 4, and 2 are in the third and fourth quartiles ranked 16,
18, 19, and 21, respectively. Like Time 1 by return measures, Aircraft
Lessors is ranked second and the Shipping asset class is top ranked. The
mean return for all datasets is positive except for the USD Swap Rate Ten Yr.
In terms of excess return over the risk-free rate are all positive for all the
indexes except for Index 2 MoM WA MV, Airlines, US CPI, USD 3M
LIBOR, and USD Swap Rate Ten Yr. Again, US Treasuries 1–3M is the
risk-free benchmark and ranked 20. Index 1 MoM WA MV excess return
over risk-free rate is 0.1675% and ranked 16. MSCI World is ranked 11
and for alpha over MSCI World, one more than half the asset classes are
negative. Index 1 MoM WA MV excess return over MSCI World is
−0.3192%. With the Real Assets benchmark ranked fifth, there are several
additions to the negative alpha over Real Assets compared to negative
alpha over MSCI World. Index 1 MoM WA MV excess return over Real
Assets index is −0.8592%.
The Sharpe ratio tells a slightly different story, where Index 1–4 moved
down compared to Time 1. Indexes 3 and 1 moved down to nine and 14,
respectively, Index 4 and 2 are in the lower quartile at 18 and 22, while
Index 5 increased two rankings. Aircraft Lessors index stayed at the same
rank at 12. The highest Sharpe ratios are Real Estate, Real Assets, and
Agricultural Land asset classes for Time 2. Index 1 MoM WA MV’s Sharpe
ratio is 0.0640%.
In terms of standalone volatility with standard deviation and variance,
Index 1–5 is ranked in the third quartile like Time 1. In terms of relative
volatility or beta with respect to MSCI World, Index 1–5 are at the bot-
tom of the rankings. In terms of beta with respect to Real Assets, Index
1–5 is in the third and mostly fourth quartiles. Aircraft Lessors are found
to be at the top in terms of standard deviation and variance and four and
five with respect to beta to Real Asset and MSCI World, respectively.
244 D. YU

(6.2007–6.2010)
In the period GFC Time 2, return and volatility of Index 1–5 MoM WA
MV are compared to the 20 comparative asset class benchmarks. During
this period, Index 1–5 are ranked generally in the upper quartile with Index
4 ranked fourth out of 25 while Index 3, 2, 1, and 5 ranking seven–nine and
11, respectively. In Time 3, Aircraft Lessors is ranked right under the median
at 13 while Shipping, Gold, and Precious Metals are top-ranked asset classes.
A little less than half of the datasets for the mean return are negative.
In terms of excess return over the risk-free rate, again a little less than
half the group is negative as US Treasuries 1–3M is the risk-free bench-
mark and ranked 14. Index 1 MoM WA MV excess return over risk-free
rate is 0.6647% and ranked ninth. During Time 3, MSCI World performed
poorly and had a mean of −0.7412% and ranked 23. That means for alpha
or excess returns over MSCI World the only negative excess returns are
USD Swap Rate 10Y and USD 3M LIBOR. All other indexes exhibit posi-
tive alpha to MSCI World. Index 1 MoM WA MV excess return over
MSCI World is 1.5287%. Real Assets ranked 16, while still negative, per-
formed much better than the MSCI World. Given that Real Assets is
slightly under the median, a bit less than half have negative alpha. Index 1
MoM WA MV alpha over Real Assets is 0.8203%.
The Sharpe ratio tells a slightly different story, with Index 1–4 in the
top two–five rank while Index 5 is at ten. Index 1–5 all moved significantly
higher compared to Time 2 while Aircraft Lessors decreased one to 13.
The highest Sharpe ratio is the Agricultural Land asset class for Time 3.
Index 1 MoM WA MV’s Sharpe ratio is 0.4326%.
Again, in terms of volatility with respect to standard deviation, variance,
or beta to Real Assets or MSCI World, Index 1–5 are in the lower half of
the rankings for each. Aircraft Lessors still near the top such as in Time 2
with ranking of third for standard deviation and variance while second and
third for the beta to Real Assets or MSCI World, respectively.

(6.2010–6.2017)
In the post-GFC period Time 4, return and volatility of Index 1–5 MoM
WA MV are compared to the 20 comparative asset class benchmarks. The
return analysis is focused on mean figures for asset class and comparative
excess returns over the risk-free rate and market proxies, Real Assets and
MSCI World. By these return measures, Index 3 is ranked sixth out of 25
while Index 1 and 4 are at 11 and 13 with Index 2 and 5 are ranked 16
and 21 in the comparative set. Time 4 Index 1–5 rankings are similar to
Time 1. Aircraft Lessors is ranked near the top at three. The top ranked is
the Airlines asset class. For the mean return for all datasets are positive
except for USD Swap Rate 10Y, Crude Oil, and Commodities.
In terms of excess return over the risk-free rate are all positive except for
USD Swap Rate 10Y, Crude Oil, and Commodities with US Treasuries
1–3M as the risk-free benchmark ranked 22. Index 1 MoM WA MV excess
return over risk-free rate is 0.7988% and ranked 11. For alpha or excess
returns over MSCI World, more than half of the comparative set is nega-
tive as the benchmark is ranked nine. Index 1 MoM WA MV excess return
over MSCI World is −0.1570%. Real Assets is ranked 14 and is higher than
MSCI World which is similar as Times 1–3. Negative alpha over Real
Assets occurs in slightly less than half the comparative sets. Index 1 MoM
WA MV alpha over Real Assets is 0.2246%.
The Sharpe ratio for Time 4 tells a slightly different story, with most of
the comparative sets are negative except for the top three ranked
Commodities, Crude Oil, and USD Swap Rate 10Y. Index 5 moved to
five on top of Index 1–4 which are spread out with a bigger range from 8
to 21. Aircraft Lessors decreased slightly to 15. Index 1 MoM WA MV’s
Sharpe ratio is −0.2671%.
In terms of volatility with respect to standard deviation, variance, or
beta with respect to Real Assets or MSCI World, Index 1–5 is similar to
Time 1 rankings with most in the third and fourth quartiles with the
exception of Index 4 in standard deviation and variance ranked 11. Only
USD 3M LIBOR is the lowest for the beta with respect to Real Assets.
Aircraft Lessors are found to be near the middle.
4.6
Correlation and Covariance Observations
Correlation statistics of Index 1–5 and the comparative asset classes for
Time 1–4 can be found in Table 6.5. The covariance statistics for Index
1–5 compared with other asset classes are found in Table 6.6. Figure 6.8
shows Time 1 case for correlation versus covariance of the various asset
classes. Time 2–4 figures are found in the Appendix.
246
D. YU
Table 6.5 Time 1–4 asset class summary correlation statistics

Time Scenario 1 - 6.1996-6.2017 Correlation Statistics
US
Index 1 WA Index 2 WA Index 3 WA Index 4 WA Index 5 WA Aircraft Precious Transportatio Infrastructure Treasuries 1- USD Swap USD 3M
(4)
MV MV MV (1) MV MV (2) Lessors(3) Real Estate Shipping Agr. Land Timberland Commodities Crude Oil Gold Metals Airlines n Real Assets (5) 3M Rate 10Y LIBOR US CPI MSCI World S&P 500 Broad Debt
Index 1 WA MV 1.0000 0.6985 0.9517 0.6893 0.5591 (0.0298) (0.0554) 0.1291 0.0651 0.0055 (0.0444) (0.0687) (0.0633) (0.0719) 0.0902 0.0688 (0.0531) (0.0971) (0.0979) 0.0247 0.0532 0.0033 (0.0440) (0.0341) (0.0265)
Index 2 WA MV 0.6985 1.0000 0.4530 0.9514 0.8708 (0.0124) (0.1013) 0.0877 (0.0460) (0.0504) (0.0343) (0.0279) (0.0031) (0.0126) 0.0402 0.0083 (0.1184) (0.1465) (0.0785) (0.0011) 0.0495 0.0403 (0.0876) (0.0862) 0.0141
Index 3 WA MV (1) 0.9517 0.4530 1.0000 0.4596 0.3435 (0.0299) (0.0277) 0.1375 0.1009 0.0243 (0.0387) (0.0738) (0.0710) (0.0795) 0.1023 0.0849 (0.0132) (0.0510) (0.0899) 0.0309 0.0396 (0.0017) (0.0196) (0.0088) (0.0353)
Index 4 WA MV 0.6893 0.9514 0.4596 1.0000 0.7121 0.0085 (0.0837) 0.1129 (0.0191) (0.0019) (0.0305) (0.0234) (0.0236) (0.0313) 0.0459 0.0333 (0.0796) (0.1129) (0.1276) (0.0008) 0.0240 0.0291 (0.0473) (0.0519) 0.0256
Index 5 WA MV (2) 0.5591 0.8708 0.3435 0.7121 1.0000 (0.0317) (0.1037) 0.0261 (0.0548) (0.1204) (0.0758) (0.0423) (0.0014) (0.0125) 0.0380 (0.0215) (0.1618) (0.1550) 0.0148 (0.0161) 0.0754 0.0424 (0.1440) (0.1277) (0.0273)
(3)
Aircraft Lessors (0.0298) (0.0124) (0.0299) 0.0085 (0.0317) 1.0000 0.3239 0.0790 (0.0672) 0.3670 0.2339 0.2088 0.0061 0.0506 0.2510 0.4044 0.4657 0.6010 0.0106 0.2121 (0.0714) 0.1305 0.4046 0.3872 0.0180
Real Estate (0.0554) (0.1013) (0.0277) (0.0837) (0.1037) 0.3239 1.0000 0.0793 0.0172 0.7275 0.3337 0.1893 0.0989 0.1262 0.3763 0.4837 0.6986 0.8157 0.0328 0.0033 (0.0106) 0.1191 0.5993 0.5505 0.3256
Shipping 0.1291 0.0877 0.1375 0.1129 0.0261 0.0790 0.0793 1.0000 0.0730 0.1449 0.1992 0.1758 0.0516 0.0512 0.0074 0.0242 0.1837 0.1813 (0.0259) 0.1593 0.0304 0.2694 0.1219 0.0673 0.0760
Agr. Land 0.0651 (0.0460) 0.1009 (0.0191) (0.0548) (0.0672) 0.0172 0.0730 1.0000 0.1655 (0.0667) (0.1197) 0.0180 0.0124 0.1123 0.1448 0.0427 (0.0398) (0.0181) 0.0378 0.0752 (0.0746) 0.1016 0.0811 (0.0217)
Timberland 0.0055 (0.0504) 0.0243 (0.0019) (0.1204) 0.3670 0.7275 0.1449 0.1655 1.0000 0.3648 0.2287 0.1039 0.1438 0.3650 0.5466 0.6970 0.7836 0.0215 0.2048 (0.0468) 0.0642 0.6893 0.6296 0.2104
Commodities (0.0444) (0.0343) (0.0387) (0.0305) (0.0758) 0.2339 0.3337 0.1992 (0.0667) 0.3648 1.0000 0.8328 0.3727 0.4020 0.0117 0.1828 0.5176 0.7085 0.0284 0.1897 (0.0694) 0.2532 0.4000 0.3148 0.2844
Crude Oil (0.0687) (0.0279) (0.0738) (0.0234) (0.0423) 0.2088 0.1893 0.1758 (0.1197) 0.2287 0.8328 1.0000 0.2164 0.2364 (0.1287) 0.0579 0.3976 0.5692 0.0362 0.2175 (0.0270) 0.2374 0.2615 0.2001 0.1340
Gold (0.0633) (0.0031) (0.0710) (0.0236) (0.0014) 0.0061 0.0989 0.0516 0.0180 0.1039 0.3727 0.2164 1.0000 0.9832 (0.1354) (0.0497) 0.2338 0.3641 (0.0401) (0.2612) (0.0795) 0.0477 0.0975 0.0072 0.4718
Precious Metals (0.0719) (0.0126) (0.0795) (0.0313) (0.0125) 0.0506 0.1262 0.0512 0.0124 0.1438 0.4020 0.2364 0.9832 1.0000 (0.1057) (0.0069) 0.2587 0.3983 (0.0397) (0.2204) (0.0944) 0.0492 0.1447 0.0569 0.4586
Airlines 0.0902 0.0402 0.1023 0.0459 0.0380 0.2510 0.3763 0.0074 0.1123 0.3650 0.0117 (0.1287) (0.1354) (0.1057) 1.0000 0.6632 0.3463 0.3744 0.0131 0.1206 0.0353 0.0955 0.5122 0.5547 (0.0277)
Transportation 0.0688 0.0083 0.0849 0.0333 (0.0215) 0.4044 0.4837 0.0242 0.1448 0.5466 0.1828 0.0579 (0.0497) (0.0069) 0.6632 1.0000 0.5450 0.5949 (0.0364) 0.2428 (0.0443) (0.0425) 0.7253 0.7493 0.0652
Infrastructure (4) (0.0531) (0.1184) (0.0132) (0.0796) (0.1618) 0.4657 0.6986 0.1837 0.0427 0.6970 0.5176 0.3976 0.2338 0.2587 0.3463 0.5450 1.0000 0.9325 0.0184 0.0276 (0.2135) 0.1197 0.8494 0.7748 0.4947
Real Assets (5) (0.0971) (0.1465) (0.0510) (0.1129) (0.1550) 0.6010 0.8157 0.1813 (0.0398) 0.7836 0.7085 0.5692 0.3641 0.3983 0.3744 0.5949 0.9325 1.0000 0.0290 0.0504 (0.2648) 0.1970 0.8933 0.8178 0.6073
US Treasuries 1-3M (0.0979) (0.0785) (0.0899) (0.1276) 0.0148 0.0106 0.0328 (0.0259) (0.0181) 0.0215 0.0284 0.0362 (0.0401) (0.0397) 0.0131 (0.0364) 0.0184 0.0290 1.0000 (0.0411) (0.0390) 0.3093 (0.0074) (0.0098) 0.0345
USD Swap Rate 10Y 0.0247 (0.0011) 0.0309 (0.0008) (0.0161) 0.2121 0.0033 0.1593 0.0378 0.2048 0.1897 0.2175 (0.2612) (0.2204) 0.1206 0.2428 0.0276 0.0504 (0.0411) 1.0000 0.0970 0.1881 0.2139 0.2086 (0.5632)
USD 3M LIBOR 0.0532 0.0495 0.0396 0.0240 0.0754 (0.0714) (0.0106) 0.0304 0.0752 (0.0468) (0.0694) (0.0270) (0.0795) (0.0944) 0.0353 (0.0443) (0.2135) (0.2648) (0.0390) 0.0970 1.0000 0.0716 (0.1070) (0.0619) (0.2908)
US CPI 0.0033 0.0403 (0.0017) 0.0291 0.0424 0.1305 0.1191 0.2694 (0.0746) 0.0642 0.2532 0.2374 0.0477 0.0492 0.0955 (0.0425) 0.1197 0.1970 0.3093 0.1881 0.0716 1.0000 0.0857 0.0202 0.0024
MSCI World (0.0440) (0.0876) (0.0196) (0.0473) (0.1440) 0.4046 0.5993 0.1219 0.1016 0.6893 0.4000 0.2615 0.0975 0.1447 0.5122 0.7253 0.8494 0.8933 (0.0074) 0.2139 (0.1070) 0.0857 1.0000 0.9562 0.2386
S&P 500 (0.0341) (0.0862) (0.0088) (0.0519) (0.1277) 0.3872 0.5505 0.0673 0.0811 0.6296 0.3148 0.2001 0.0072 0.0569 0.5547 0.7493 0.7748 0.8178 (0.0098) 0.2086 (0.0619) 0.0202 0.9562 1.0000 0.1381
Broad Debt (0.0265) 0.0141 (0.0353) 0.0256 (0.0273) 0.0180 0.3256 0.0760 (0.0217) 0.2104 0.2844 0.1340 0.4718 0.4586 (0.0277) 0.0652 0.4947 0.6073 0.0345 (0.5632) (0.2908) 0.0024 0.2386 0.1381 1.0000
1 2 3 4 5
Note: Starts from 2.1997 Starts from 10.1999 Starts from 6.2006 Starts from 12.2001 Starts from 5.2005
Time Scenario 2 - 6.1996-6.2007 Correlation Statistics

US
Index 1 WA Index 2 WA Index 3 WA Index 4 WA Index 5 WA Aircraft Precious Transportatio Infrastructure Treasuries 1- USD Swap USD 3M
(4)
MV MV MV (1) MV MV (2) Lessors(3) Real Estate Shipping Agr. Land Timberland Commodities Crude Oil Gold Metals Airlines n Real Assets (5) 3M Rate 10Y LIBOR US CPI MSCI World S&P 500 Broad Debt
Index 1 WA MV 1.0000 0.8593 0.9590 0.8343 0.7343 (0.0038) (0.1350) 0.2333 (0.0002) (0.0007) 0.0137 (0.0795) 0.0390 0.0120 0.1535 0.0980 (0.0130) (0.1721) (0.0834) 0.0363 0.0142 0.0271 (0.0693) (0.0714) 0.0580
Index 2 WA MV 0.8593 1.0000 0.6892 0.9859 0.8246 0.0027 (0.1999) 0.2712 (0.0493) 0.0369 0.1142 0.0093 0.0473 0.0406 0.0916 0.0434 (0.0402) (0.1260) (0.0971) 0.0402 (0.0269) 0.0909 (0.0637) (0.0858) 0.0905
Index 3 WA MV (1) 0.9590 0.6892 1.0000 0.6597 0.6235 (0.0049) (0.0872) 0.2188 0.0259 (0.0347) (0.0343) (0.1194) 0.0389 0.0022 0.1805 0.1157 (0.0068) (0.1524) (0.0902) 0.0252 0.0060 0.0046 (0.0685) (0.0641) 0.0417
Index 4 WA MV 0.8343 0.9859 0.6597 1.0000 0.7300 0.0059 (0.2255) 0.2791 (0.0433) 0.0581 0.1202 0.0080 0.0490 0.0433 0.0910 0.0564 (0.0325) (0.1434) (0.1082) 0.0527 (0.0347) 0.0847 (0.0372) (0.0609) 0.0881
Index 5 WA MV (2) 0.7343 0.8246 0.6235 0.7300 1.0000 0.0227 (0.0934) 0.2217 (0.0636) (0.0624) 0.0715 0.0043 0.0159 0.0087 0.1123 0.0118 (0.1026) (0.0832) 0.0583 0.0067 (0.0687) 0.2064 (0.1577) (0.1763) 0.0639
(3)
Aircraft Lessors (0.0038) 0.0027 (0.0049) 0.0059 0.0227 1.0000 (0.0191) 0.0685 (0.0555) 0.0789 0.0877 0.0953 0.0025 0.0553 0.1183 0.2736 0.1472 0.3528 0.0555 0.0912 (0.0052) 0.0834 0.2141 0.2006 (0.0772)
Real Estate (0.1350) (0.1999) (0.0872) (0.2255) (0.0934) (0.0191) 1.0000 (0.0408) 0.4961 0.1982 0.0371 0.0149 0.1007 0.1098 0.0468 0.0221 0.0236 0.0223 (0.1231) 0.0046 0.4987 0.1178 0.0500 (0.0125) (0.0136)
Shipping 0.2333 0.2712 0.2188 0.2791 0.2217 0.0685 (0.0408) 1.0000 0.1233 0.0912 0.1538 0.0334 0.1810 0.1606 0.0359 (0.0505) 0.0768 (0.2260) (0.0367) (0.0122) 0.0816 0.3134 0.0224 (0.0480) 0.1825
Agr. Land (0.0002) (0.0493) 0.0259 (0.0433) (0.0636) (0.0555) 0.4961 0.1233 1.0000 0.3635 (0.0516) (0.1134) 0.1188 0.1140 0.1494 0.1735 0.0887 (0.1508) (0.0222) 0.0580 0.2445 (0.0330) 0.1752 0.1187 0.0322
Timberland (0.0007) 0.0369 (0.0347) 0.0581 (0.0624) 0.0789 0.1982 0.0912 0.3635 1.0000 0.1237 (0.0090) 0.1585 0.1985 0.0683 0.2129 0.3596 0.3918 0.0032 0.1000 0.2261 0.0106 0.3397 0.2823 0.0410
Commodities 0.0137 0.1142 (0.0343) 0.1202 0.0715 0.0877 0.0371 0.1538 (0.0516) 0.1237 1.0000 0.8159 0.3196 0.3331 (0.1370) 0.0103 0.1059 0.5852 (0.0974) (0.0129) 0.1928 0.1362 0.1311 0.0739 0.1677
Crude Oil (0.0795) 0.0093 (0.1194) 0.0080 0.0043 0.0953 0.0149 0.0334 (0.1134) (0.0090) 0.8159 1.0000 0.1856 0.1867 (0.2680) (0.1105) 0.0418 0.4309 (0.0373) (0.0374) 0.1267 0.0838 0.0273 (0.0086) 0.0808
Gold 0.0390 0.0473 0.0389 0.0490 0.0159 0.0025 0.1007 0.1810 0.1188 0.1585 0.3196 0.1856 1.0000 0.9758 (0.1473) (0.0454) 0.3383 0.6203 (0.1537) (0.1665) 0.0626 0.0928 0.0869 (0.0347) 0.3831
Precious Metals 0.0120 0.0406 0.0022 0.0433 0.0087 0.0553 0.1098 0.1606 0.1140 0.1985 0.3331 0.1867 0.9758 1.0000 (0.1133) 0.0036 0.3438 0.6456 (0.1618) (0.1270) 0.0651 0.0699 0.1313 0.0200 0.3410
Airlines 0.1535 0.0916 0.1805 0.0910 0.1123 0.1183 0.0468 0.0359 0.1494 0.0683 (0.1370) (0.2680) (0.1473) (0.1133) 1.0000 0.6322 0.1851 (0.2811) 0.1653 0.1248 0.0861 0.1135 0.5232 0.5562 (0.1216)
Transportation 0.0980 0.0434 0.1157 0.0564 0.0118 0.2736 0.0221 (0.0505) 0.1735 0.2129 0.0103 (0.1105) (0.0454) 0.0036 0.6322 1.0000 0.2784 0.0192 (0.0657) 0.2357 0.1450 (0.1592) 0.6664 0.6708 (0.0869)
Infrastructure (4) (0.0130) (0.0402) (0.0068) (0.0325) (0.1026) 0.1472 0.0236 0.0768 0.0887 0.3596 0.1059 0.0418 0.3383 0.3438 0.1851 0.2784 1.0000 0.8372 0.1078 (0.1868) 0.0882 (0.0094) 0.6885 0.5909 0.3953
Real Assets (5) (0.1721) (0.1260) (0.1524) (0.1434) (0.0832) 0.3528 0.0223 (0.2260) (0.1508) 0.3918 0.5852 0.4309 0.6203 0.6456 (0.2811) 0.0192 0.8372 1.0000 0.0336 (0.3548) (0.0911) 0.0701 0.6817 0.4483 0.5912
US Treasuries 1-3M (0.0834) (0.0971) (0.0902) (0.1082) 0.0583 0.0555 (0.1231) (0.0367) (0.0222) 0.0032 (0.0974) (0.0373) (0.1537) (0.1618) 0.1653 (0.0657) 0.1078 0.0336 1.0000 (0.0684) (0.1245) 0.4496 0.0375 0.0422 (0.0967)
USD Swap Rate 10Y 0.0363 0.0402 0.0252 0.0527 0.0067 0.0912 0.0046 (0.0122) 0.0580 0.1000 (0.0129) (0.0374) (0.1665) (0.1270) 0.1248 0.2357 (0.1868) (0.3548) (0.0684) 1.0000 0.1617 0.0353 0.1477 0.1260 (0.6889)
USD 3M LIBOR 0.0142 (0.0269) 0.0060 (0.0347) (0.0687) (0.0052) 0.4987 0.0816 0.2445 0.2261 0.1928 0.1267 0.0626 0.0651 0.0861 0.1450 0.0882 (0.0911) (0.1245) 0.1617 1.0000 0.0660 0.0900 0.0336 (0.1012)
US CPI 0.0271 0.0909 0.0046 0.0847 0.2064 0.0834 0.1178 0.3134 (0.0330) 0.0106 0.1362 0.0838 0.0928 0.0699 0.1135 (0.1592) (0.0094) 0.0701 0.4496 0.0353 0.0660 1.0000 0.0542 (0.0607) 0.0619
MSCI World (0.0693) (0.0637) (0.0685) (0.0372) (0.1577) 0.2141 0.0500 0.0224 0.1752 0.3397 0.1311 0.0273 0.0869 0.1313 0.5232 0.6664 0.6885 0.6817 0.0375 0.1477 0.0900 0.0542 1.0000 0.9460 0.0337
S&P 500 (0.0714) (0.0858) (0.0641) (0.0609) (0.1763) 0.2006 (0.0125) (0.0480) 0.1187 0.2823 0.0739 (0.0086) (0.0347) 0.0200 0.5562 0.6708 0.5909 0.4483 0.0422 0.1260 0.0336 (0.0607) 0.9460 1.0000 (0.0360)
Broad Debt 0.0580 0.0905 0.0417 0.0881 0.0639 (0.0772) (0.0136) 0.1825 0.0322 0.0410 0.1677 0.0808 0.3831 0.3410 (0.1216) (0.0869) 0.3953 0.5912 (0.0967) (0.6889) (0.1012) 0.0619 0.0337 (0.0360) 1.0000
1 2 3 4 5
Note: Starts from 2.1997 Starts from 10.1999 Starts from 6.2006 Starts from 12.2001 Starts from 5.2005
248 D. YU
Table 6.6 Index 1–5 MoM WA MV summary covariance statistics

Index 1 - All Aircraft MoM MV vs. Comparative Metrics - Covariance Statistics
Time Scenario 1 2 3 4
Time 6.1996-6.2017 6.1996-6.2007 6.2007-6.2010 6.2010-6.2017
Weighted Simple Weighted Simple Weighted Simple Weighted Simple
Ave Ave Ave Ave Ave Ave Ave Ave
(1)
Aircraft Lessors (0.7676) 1.1047 (0.1144) (1.2080) (0.5206) (1.2512) (1.7860) 2.1662
Real Estate (0.2217) 0.3197 (0.0871) 0.2864 (0.4595) 0.5233 (0.2348) 0.0704
Shipping 4.4275 0.4798 6.4214 (5.0428) (3.1791) 1.5666 4.4990 7.9704
Agr. Land 0.1824 0.2682 (0.0008) 0.6590 (0.1283) 0.2491 0.5792 (0.3145)
Timberland 0.0374 (0.0164) (0.0026) (0.2234) (0.2756) (0.6883) 0.3074 0.4329
Commodities (0.5577) 0.3038 0.1495 (0.7393) 0.0309 0.9696 (1.6935) 1.4492
Crude Oil (1.7577) 0.8028 (2.0999) 0.0617 0.8164 1.3001 (2.0508) 1.5136
Gold (0.8034) 0.9071 0.4112 (0.4213) 0.9001 (0.0601) (3.4160) 3.5393
Precious Metals (0.9644) 1.0798 0.1279 (0.3015) 0.9858 (0.2075) (3.4540) 3.8937
Airlines 2.0734 (0.4411) 3.4713 1.0871 (1.5787) (0.6057) 1.0880 (2.5880)
Transportation 1.0152 0.9373 1.4325 1.4774 (0.0689) (0.5902) 0.8984 0.5490
Infrastructure (2) (0.5465) 1.1269 (0.1077) 0.8306 (0.4895) 0.5689 (0.7145) 1.3322
(3)
Real Assets (0.8010) 0.7621 (0.6248) (0.1087) (0.0557) 0.0528 (0.8846) 1.1107
US Treasuries 1-3M (0.0495) 0.0507 (0.0377) 0.0413 (0.0545) 0.0659 (0.0031) (0.0009)
USD Swap Rate 10Y 0.4983 (0.6358) 0.5217 (0.1911) (2.7051) 0.3868 1.8023 (1.8689)
USD 3M LIBOR 1.3969 (0.9272) 0.2023 0.6198 6.1807 (4.9515) 1.1935 (2.0514)
US CPI 0.0033 (0.0189) 0.0293 (0.0943) (0.1083) 0.1480 0.0207 0.0055
MSCI World (0.5065) 1.0572 (0.7300) 1.2129 0.1789 (0.2878) (0.3862) 1.1766
S&P 500 (0.3883) 1.1015 (0.8016) 1.4654 0.3895 (0.5714) (0.0359) 1.0503
Broad Debt (0.1117) 0.8923 0.2304 1.3560 0.0455 (0.0238) (0.6517) 0.3927
Note: 1
Starts from 6.2006 2
Starts from 5.2005
Index 2 - All Narrowbody Aircraft MoM MV vs. Comparative Metrics - Covariance Statistics
Time 6.1996-6.2017 6.1996-6.2007 6.2007-6.2010 6.2010-6.2017
Aircraft Lessors(1) (0.3551) 0.1301 0.0915 (1.7085) 0.2166 (1.5430) -1.22094 0.7179
Real Estate (0.4519) 0.3835 (0.1444) 0.2995 (0.7025) 0.4003 -0.57646 0.1311
Shipping 3.3484 (1.0488) 8.3539 (8.0177) (6.9034) 1.0821 -0.70855 8.4575
Agr. Land (0.1436) 0.3596 (0.1810) 0.6435 (0.9302) 0.4299 0.256818 (0.1239)
Timberland (0.3832) (0.1220) 0.1639 (0.7516) (1.4517) (1.4022) -0.64082 1.1117
Commodities (0.4808) (0.0006) 1.3898 (1.5576) (2.7843) 0.4209 -2.28179 2.0205
Crude Oil (0.7959) (0.0140) 0.2763 (1.1124) (3.6597) 0.9461 -1.26097 1.1435
Gold (0.0441) (0.1064) 0.5582 (0.6452) (2.0345) (0.3577) -0.41596 1.2050
Precious Metals (0.1889) (0.0283) 0.4856 (0.6980) (1.8270) (0.7609) -0.78418 1.6556
Airlines 1.0259 (0.4532) 2.3188 0.9562 0.1563 (3.0160) -0.73259 (1.5394)
Transportation 0.1366 0.6500 0.7099 0.6818 (2.5516) 0.2395 0.630481 0.4048
Infrastructure (2) (1.4625) 1.3401 (0.4476) 0.7250 (3.0439) 0.8393 -1.1549 1.5735
Real Assets (3) (1.4534) 0.7677 (0.7761) (0.3319) (1.6607) (0.2108) -1.12911 1.2508
US Treasuries 1-3M (0.0421) 0.0501 (0.0491) 0.0455 (0.1105) 0.0642 -0.00238 (0.0011)
USD Swap Rate 10Y (0.0250) (1.1246) 0.6459 (0.2612) (0.3087) (2.0594) -0.88137 (2.3004)
USD 3M LIBOR 1.4489 (1.4202) (0.4282) 1.1052 13.0858 (11.3593) 0.340458 (2.1367)
US CPI 0.0334 (0.0409) 0.1100 (0.1122) (0.1723) 0.0019 -0.02436 0.0324
MSCI World (1.1237) 1.1173 (0.7512) 0.8371 (2.2754) 0.1453 -0.92186 1.5496
S&P 500 (1.0950) 1.1552 (1.0774) 1.1681 (1.6754) (0.0986) -0.56844 1.2650
Broad Debt 0.0660 0.9394 0.4025 1.0322 (0.6370) 0.8066 -0.17138 0.5143
Note: 1
Starts from 5.2005

Index 3 - All Widebody Aircraft MoM MV vs. Comparative Metrics - Covariance Statistics
(4) (4)
Time 6.1996-6.2017 6.1996-6.2007 6.2007-6.2010 6.2010-6.2017
(1)
Aircraft Lessors (0.8827) 1.7776 (0.1567) (0.7409) (0.7410) (1.1257) (1.9671) 3.1601
Real Estate (0.1297) 0.2790 (0.0607) 0.2938 (0.3270) 0.6122 (0.1017) 0.0292
Shipping 5.4239 1.6665 6.4115 (2.6178) (0.6253) 1.8151 6.5959 7.6721
Agr. Land 0.3296 0.2113 0.0944 0.7120 0.2382 0.1082 0.6892 (0.4493)
Timberland 0.1932 0.0722 (0.1525) 0.2004 0.3219 (0.2598) 0.6813 (0.0746)
Commodities (0.5648) 0.5977 (0.4117) 0.0133 1.3458 1.2209 (1.3987) 1.0144
Crude Oil (2.1969) 1.6625 (3.4952) 1.4943 2.8911 1.3172 (2.1326) 1.7268
Gold (1.0481) 1.7643 0.4511 (0.1184) 2.2720 0.0991 (4.5431) 5.2014
Precious Metals (1.2414) 2.0342 0.0253 0.1832 2.2953 0.1405 (4.4500) 5.4910
Airlines 2.7238 (0.4340) 4.4852 1.2861 (2.2757) 1.2146 1.8253 (3.4395)
Transportation 1.4538 1.2318 1.8639 2.2985 0.9604 (1.3915) 1.0657 0.5992
(2)
Infrastructure (0.1527) 0.9620 (0.0546) 0.9230 0.7871 0.2192 (0.5405) 1.1491
(3)
Real Assets (0.4975) 0.7512 (0.5561) 0.0978 0.7206 0.1383 (0.7684) 0.9995
US Treasuries 1-3M (0.0494) 0.0497 (0.0377) 0.0379 (0.0296) 0.0678 (0.0031) (0.0012)
USD Swap Rate 10Y 0.7269 (0.2682) 0.3992 (0.1433) (3.4763) 2.2717 2.9642 (1.5785)
USD 3M LIBOR 1.2152 (0.5839) 0.0956 0.1458 3.4672 0.5010 1.6075 (1.9356)
US CPI (0.0015) (0.0048) 0.0032 (0.0875) (0.0679) 0.2638 0.0388 (0.0134)
MSCI World (0.2629) 1.0864 (0.7944) 1.6818 1.3147 (0.7864) (0.1693) 0.8893
S&P 500 (0.1163) 1.1041 (0.7844) 1.8227 1.3381 (1.0743) 0.1793 0.8860
Broad Debt (0.1721) 0.8996 0.1807 1.7449 0.3175 (0.8243) (0.8282) 0.2928
Note: 1
Starts from 6.2006
2
Starts from 12.2001
3
Starts from 5.2005
4
Starts from 2.1997
Index 4 - All Narrowbody Classic Aircraft MoM MV vs. Comparative Metrics - Covariance Statistics
Time 6.1996-6.2017 6.1996-6.2007 6.2007-6.2010 6.2010-6.2017
Aircraft Lessors(1) 0.3233 1.1502 0.2624 (1.3604) 5.5156 (1.1990) (1.5466) 2.0133
Real Estate (0.4971) 0.5248 (0.2172) 0.4537 0.0604 0.4230 (0.5956) 0.1986
Shipping 5.7420 (2.4679) 11.4642 (11.2328) (6.2780) 4.5171 0.8864 7.7888
Agr. Land (0.0794) 0.5107 (0.2119) 0.8882 (1.0211) 0.5285 0.5175 (0.0966)
Timberland (0.0197) (0.4077) 0.3440 (1.0927) 0.6154 (3.3446) (0.5204) 1.5874
Commodities (0.5685) 0.1685 1.9506 (2.4217) (2.7531) 1.9182 (3.0647) 3.1693
Crude Oil (0.8893) 0.4916 0.3139 (1.9466) (1.3311) 2.9347 (2.2312) 3.1120
Gold (0.4450) 0.5019 0.7699 (0.8972) (3.1170) 1.0796 (1.8054) 2.8605
Precious Metals (0.6239) 0.6308 0.6894 (0.9718) (2.9791) 0.9841 (2.1847) 3.3437
Airlines 1.5578 (1.0328) 3.0713 1.1645 (1.4999) (4.2421) 0.1395 (2.9766)
Transportation 0.7281 0.3457 1.2299 0.6966 (0.1291) (2.2855) 0.8355 0.5259
Infrastructure (2) (1.3338) 1.8337 (0.5019) 1.0069 (1.8281) 1.1110 (0.8632) 2.1941
Real Assets (3) (1.4936) 1.2123 (1.1683) (0.5337) (0.8437) (0.0144) (1.1244) 1.9024
US Treasuries 1-3M (0.0912) 0.0635 (0.0730) 0.0652 (0.1468) 0.0819 (0.0059) (0.0031)
USD Swap Rate 10Y (0.0235) (0.6807) 1.1300 (0.5159) 1.9645 (1.5988) (2.4572) (0.7564)
USD 3M LIBOR 0.9348 (2.3853) (0.7382) 1.5748 17.0878 (19.1063) (1.3468) (2.7107)
US CPI 0.0321 (0.0683) 0.1368 (0.1753) (0.2405) 0.0662 (0.0197) 0.0198
MSCI World (0.8078) 1.6079 (0.5844) 1.1717 (0.3594) (0.4673) (0.7298) 2.6648
S&P 500 (0.8790) 1.5697 (1.0196) 1.6434 (0.1786) (1.1585) (0.3569) 2.1420
Broad Debt 0.1599 1.5399 0.5224 1.4441 (0.6851) 0.6850 (0.0375) 1.6612
Note: 1
Starts from 5.2005
250 D. YU

Index 5 - All Narrowbody NG Aircraft MoM MV vs. Comparative Metrics - Covariance Statistics
(4) (4)
Time 6.1996-6.2017 6.1996-6.2007 6.2007-6.2010 6.2010-6.2017
Ave 5 Ave 5 Ave 5 Ave 5 Ave Ave Ave Ave
Aircraft Lessors(1) (0.7395) (0.7537) 0.5291 (1.5573) (3.1647) (2.1845) (1.1186) (0.3573)
Real Estate (0.4486) 0.2632 (0.0576) 0.2121 (1.0894) 0.2062 (0.5411) 0.0811
Shipping 0.9376 0.9366 5.6516 (5.4197) (7.0430) (2.5799) (1.2077) 8.9232
Agr. Land (0.1631) 0.2908 (0.2099) 0.6205 (0.9222) 0.3707 0.2162 (0.1482)
Timberland (0.8820) 0.1737 (0.2457) (0.4212) (2.9210) 0.2068 (0.6784) 0.5259
Commodities (0.9610) 0.1926 0.6523 (0.6328) (2.7445) (0.8360) (2.0587) 1.3805
Crude Oil (1.0524) (0.2514) 0.0957 0.3249 (5.2116) (1.6427) (0.7793) (0.3356)
Gold (0.0186) (0.6698) 0.1408 (0.3910) (1.1612) (1.9922) 0.1328 (0.1790)
Precious Metals (0.1718) (0.5602) 0.0794 (0.3744) (0.9237) (2.6306) (0.2788) 0.3367
Airlines 0.8863 0.0303 2.2952 1.3217 2.2459 (2.2639) (1.0954) (0.5150)
Transportation (0.3174) 1.0080 0.1505 1.3618 (3.8380) 1.6873 0.7377 (0.0595)
Infrastructure (2) (1.5798) 0.8606 (0.5900) 0.5055 (3.7228) 0.2442 (1.2149) 1.0553
Real Assets (3) (1.3670) 0.3845 (0.3194) (0.1065) (2.1673) (0.7201) (1.1192) 0.7964
US Treasuries 1-3M 0.0065 0.0306 0.0203 0.0362 (0.0998) 0.0330 (0.0015) 0.0006
USD Swap Rate 10Y (0.3458) (1.8335) 0.0906 (0.0377) (1.9148) (1.4455) (0.1946) (4.2335)
USD 3M LIBOR 2.1337 (0.9766) (0.9778) 0.9028 13.1300 (6.3021) 1.2132 (1.5182)
US CPI 0.0336 (0.0140) 0.1273 (0.0534) (0.0963) (0.0801) (0.0262) 0.0415
MSCI World (1.6620) 0.7488 (1.4114) 0.9227 (3.5404) 0.0861 (0.9685) 0.5437
S&P 500 (1.4151) 0.7438 (1.6151) 1.1104 (2.3960) (0.0304) (0.5913) 0.3874
Broad Debt (0.1176) 0.4835 0.2293 1.0609 (0.7921) 0.6514 (0.2318) (0.4610)
Note: 1
Starts from 5.2005
4
Starts from 10.1999
4.7 Correlation and Covariance Observations: Time 1

(6.1996–6.2017)
In the Time 1, the 25 comparative datasets’ correlation and covariance are
calculated. Within the Indexes, Index 1 compared with Index 3 had the
highest positive correlation at 0.9517 overall while similarly Index 2 had
strong positive correlations with Indexes 4 and 5 with figures 0.9514 and
0.8708, respectively. The other combinations are in the moderately posi-
tive range of 0.3435 to 0.6985.
Compared to the other data sets, Index 1–5 had mostly slightly nega-
tive correlation at most −0.1618 between Index 5 and Infrastructure
index. The highest positive correlation is 0.1375 between Index 3 and
Shipping index. Surprisingly, Index 1–5 all had low negative or close to 0
correlation with Aircraft Lessors and also the Real Assets index. Between
the 20 comparative sets, Aircraft Lessors had moderate positive correla-
tions above 0.35 with Timberland, Transportation, Infrastructure, Real
Assets, MSCI World, and S&P 500. There are strong positive correlations
above 0.75 between Real Assets and Real Estate, Timberland,
6
Fig. 6.8 Aircraft correlation versus covariance with comparative asset classes time 1—6.1996–6.2017
251
252
D. YU

(continued)
Fig. 6.8
254
D. YU

(continued)
Fig. 6.8
256 D. YU
Infrastructure, MSCI World, S&P 500; Commodities and Crude Oil;

Gold and Precious Metals; Infrastructure and MSCI World, S&P 500;
MSCI World and S&P 500. The only moderately negative correlation is
between Broad Debt and USD Swap Rate 10Y.

(6.1996–6.2007)
similarly calculated. Within the Indexes, all of the combinations exhibited
moderate to strong positive correlation with the stronger range consisting
of 0.8343 and higher with the highest correlation at 0.9859 between
Index 2 and 4. The other combinations are in the moderately positive cor-
relation range of 0.6235 to 0.7343.
Compared to the other data sets, Index 1–5 had a correlation distribu-
tion around 0. Aircraft Lessors exhibited a very low positive and negative
correlation with Index 1–5. Real Estate showed the lowest negative cor-
relation with the Indexes with Index 4 exhibiting a low of −0.2255. The
other lowest asset class correlation is surprisingly the Real Assets, MSCI
World, and S&P 500 indexes. Shipping showed the highest positive mod-
erate correlation with the Indexes in the 0.2 range with Airlines also hav-
ing a slight positive correlation.
Between the 20 comparative sets, Aircraft Lessors had the strongest
correlation, a positive 0.3528, between Real Assets. The other moderately
positive correlation is with Transportation at 0.2736, MSCI World at
0.2141, and S&P 500 at 0.2006. Others in conjunction with the other
asset classes exhibited very weak positive and negative correlations. There
are strong positive correlations above 0.75 between Commodities and
Crude Oil; Gold and Precious Metals; Real Assets and Infrastructure; and
MSCI World and S&P 500. The only moderately negative correlation is
between Broad Debt and USD Swap Rate 10Y like in Time 1.
4.9
Correlation and Covariance Observations: Time 3
(6.2007–6.2010)
similarly calculated. Within the Indexes, the moderate to strong positive
correlations in Time 1 and 2 had diverged in Time 3. Index 1 had a
positive correlation with all the other indexes with Index 3 correlation of
0.8694 the highest. Index 2, while exhibiting a high correlation with
Index 4 and 5 at 0.8221 and 0.8184, respectively, had a slight negative
correlation with Index 3. Index 3 also had a slightly positive correlation
with Index 4 and a slightly negative correlation with Index 5. Indexes 4
and 5 also had a moderate positive correlation of 0.3607.
Compared to the other data sets, Index 1–5 like previous time periods
did not exhibit strong correlation in general. The highest moderate nega-
tive correlations are between Agricultural Land and Indexes 2, 4, and 5
being −0.5246, −0.4204, and −0.4621, respectively. USD 3M LIBOR had
the strongest positive correlations with Index 1–5 with a range of 0.983
to 0.3065. Aircraft Lessors like other Times 1–2 did not exhibit any mod-
erate positive or negative correlations with the range being −0.1011
to 0.1447.
Aircraft Lessors had generally moderate positive correlations with the
other 20 comparative sets. The moderately positive correlations are
between Real Estate, Timberland, Commodities, Crude Oil, Airlines,
Transportation, Infrastructure, Real Assets, USD Swap Rate 10Y, MSCI
World Index, and S&P 500 indexes with the highest correlation at 0.7350
with S&P500. The other moderate negative correlations are with
Agricultural Land, US Treasuries 1–3M, and USD 3M LIBOR while the
others are low positive correlations. There are strong positive correlations
above 0.75 between Real Assets and Real Estate, Timberland,
Infrastructure, MSCI World, S&P 500; Commodities and Crude Oil;
Timberland and Transportation, Infrastructure, MSCI World, S&P 500;
Gold and Precious Metals; Infrastructure and Transportation, MSCI
World, S&P 500; Transportation and MSCI World, S&P 500; MSCI
World and S&P 500. The moderately negative correlations are between
Broad Debt and USD Swap Rate 10Y, USD 3M LIBOR; Airlines and
Agricultural Land.

(6.2010–6.2017)
similarly calculated. Within the Indexes, all of the correlations are positive
with several very strong correlations like Time 1 and 2. Index 1 exhibited
258 D. YU
a strong positive correlation of 0.9588 with Index 3 while moderately

positive correlation is shown with the other Indexes. While Index 2 cor-
relation with both Index 4 and 5 are strong at 0.9416 and 0.9745, respec-
tively, it had a slight positive correlation with Index 3. Index 3 also had a
slightly positive correlation with Indexes 4 and 5. Indexes 4 and 5 also had
a strong positive correlation of 0.8505.
Compared to the other data sets, Index 1–5 like previous time periods
did not exhibit strong correlation in general and are mostly weak negative
correlation. Some of the weak positive correlations are with Shipping,
Agricultural Land, Timberland, Airlines, Transportation, USD Swap Rate
10Y, USD 3M LIBOR, and US CPI. Aircraft Lessors exhibited generally
a weak negative correlation. The highest weak negative correlation is with
Gold, Precious Metals, Commodities and Broad Debt. The highest weak
positive correlation is with Agricultural Land.
Between the 20 comparative sets, Aircraft Lessors had all weak to mod-
erate positive correlations. The highest moderately positive correlations
are between Timberland, Transportation, MSCI World, and S&P 500
indexes with the highest correlation at 0.7292 with MSCI World.
There are strong positive correlations above 0.75 between Real Estate
and Real Assets, Infrastructure, MSCI World; Timberland and MSCI
World, S&P 500; Commodities and Crude Oil; Gold and Precious Metals;
Transportation and MSCI World, S&P 500; Infrastructure and Real
Assets, MSCI World, S&P 500; Real Assets and MSCI World, S&P 500,
Broad Debt; MSCI World, and S&P 500. The only moderately negative
correlation is between Broad Debt and USD Swap Rate 10Y.
5 Conclusion
Following the main question, how do the aircraft asset-class segments
compare in terms of various returns and volatility metrics against other
real asset-backed classes and benchmarks in the four time segments, vari-
ous returns, as well as standalone and relative volatility metrics, are
investigated.
The main hypothesis is that aircraft asset class as represented by Index
1–5 MoM WA MV has a lower standalone risk in terms of standard
deviation and variance over the historical time periods compared with
the comparative sets. In terms of standalone volatility, standard devia-
tion, and variance, Index 1–5 is ranked in the bottom half or third and
fourth quartiles in all four time segments. Aircraft Lessors in terms of

standalone volatility, standard deviation, and variance, are found at or
near the top in Time 1–3 but moved down to eight out of 25 in the post-
GFC period Time 4. The Shipping asset class is higher in the volatility
metric for the periods that Aircraft Lessors are not at the top. The data
suggests that the main hypothesis is not correct while the statement
Aircraft Lessors asset class has a lower standalone risk in terms of stan-
dard deviation and variance over other comparable asset classes is mostly
supported by the data.
esis is that the aircraft asset classes have a lower relative volatility in terms
of beta or β, covariance and correlation compared with the other compara-
tive asset classes including publicly listed aircraft lessors in the four time
segments. In terms of relative volatility or beta with respect to Real Assets
and MSCI World, Index 1–5 are mostly in the bottom half or third and
fourth quartiles of the rankings in all four time segments. The betas are all
negative with the exception of Index 3 in Time 3 for both cases.
Aircraft Lessors are found to be within the top six for beta to Real Asset
and MSCI World in all four time segments. Crude Oil is the highest or
higher ranked beta to Real Asset in Time 1, 2, and 4 while Time 3 Shipping
is the highest and Crude Oil is slightly lower ranked. Similarly, the Airlines
index is the highest or higher in Time 1, 2, and 4 while Time 3 is lower at
four under top ranked Aircraft Lessor index under beta to MSCI World.
Other than Time 3 in the beta to Real Assets case, Shipping is ranked
lower than Aircraft Lessors asset class.
The data suggests that the second hypothesis is mainly correct. While
not the lowest in each case, the aircraft asset class is at the lower end of the
relative comparison. The statement Aircraft Lessors asset class has a higher
relative volatility in terms of beta, covariance, and correlation compared
with the other comparative asset classes is mostly supported by the data.
Continuing in the same line of questioning, the third hypothesis is
that the publicly listed aircraft leasing companies generate higher excess
returns or α relative to the risk-free rate, Real Assets and MSCI World
compared to the aircraft asset class in the four time segments. The rela-
tive rankings of the asset classes are the same for the various return met-
rics. The US Treasuries 1–3M is set as the risk-free benchmark and Real
Assets and MSCI World are assumed to be the other two market proxy
benchmarks.
260 D. YU
For Time 1 by these return measures, Index 1–5 is ranked 12, 13, 7,
19, and 20, respectively, out of 25. Aircraft Lessors index is ranked in sec-
ond. The top ranked is the Shipping asset class. The mean for all datasets
is positive except for the USD 3M LIBOR and USD Swap Rate 10 Yr.
Excess return over the risk-free rate are all positive for all the comparative
set except for Commodities and rates data US CPI, USD 3M LIBOR, and
USD Swap Rate 10 Yr. For alpha over MSCI World, MSCI World is ranked
11 so more than half of the asset sets are negative including all Index
except for Index 3. Real Assets is ranked below MSCI World at 17 so
Indexes 1 and 4 are positive alpha along with Index 3.
For Time 2, the aircraft asset classes have moved down slightly. Index 3
is ranked 12 while Indexes 1, 5, 4,and 2 are in the third and fourth quar-
tiles ranked 16, 18, 19, and 21, respectively. Like Time 1 by return mea-
sures, Aircraft Lessors is ranked second and the Shipping asset class is top
ranked. The mean return for all datasets is positive except for the USD
Swap Rate 10 Yr. Excess return over the risk-free rate are all positive for all
the Indexes except for Index 2 MoM WA MV, Airlines, US CPI, USD 3M
LIBOR, and USD Swap Rate 10 Yr. MSCI World is ranked 11 and for
alpha over MSCI World, one more than half the asset classes are negative
including Index 1–5. With Real Assets benchmark ranked fifth, all five
Index 1–5 are still negative.
For Time 3, Index 1–5 are ranked generally in the upper quartile with
Index 4 ranked fourth out of 25 while Index 3, 2, 1, and 5 ranking seven–
nine and 11, respectively. In Time 3, Aircraft Lessors is ranked right under
the median at 13 below Index 1–5 while Shipping, Gold, and Precious
Metals are top-ranked asset classes. A little less than half of the datasets for
the mean return are negative. Excess return over the risk-free rate, again a
little less than half the group is negative but not Index 1–5 nor Aircraft
Lessors. During Time 3, MSCI World performed poorly and had a mean
of −0.7412% and ranked 23. That means for alpha or excess returns over
MSCI World the only negative excess returns are USD Swap Rate 10Y and
USD 3M LIBOR. All other indexes exhibit positive alpha to MSCI World.
Real Assets, ranked 16, while still negative, performed much better the
MSCI World. Given Real Assets is slightly under the median, a bit less
than half have negative alpha.
For Time 4, Index 3 is ranked sixth out of 25 while Index 1, 4, 2, and
5 are ranked at 11, 13, 16, and 21 respectively in the comparative set.
Time 4 Index 1–5 rankings are similar to Time 1. Aircraft Lessors is

ranked near the top at three. The top ranked is the Airlines asset class.
For the mean return for all datasets are positive except for USD Swap
Rate 10Y, Crude Oil, and Commodities. Excess return over the risk-free
rate is all positive except for USD Swap Rate 10Y, Crude Oil, and
Commodities. For alpha over MSCI World, more than half of the com-
parative set is negative as the benchmark is ranked nine including all
Index but Index 3 and Aircraft Lessors. Real Assets is ranked 14 and is
higher than MSCI World which is similar as Times 1–3. Negative alpha
over Real Assets occurs in slightly less than half the comparative sets
including Indexes 2 and 5.
The data suggests that the third hypothesis is mostly correct. Aircraft
Lessors has higher excess returns or α relative to the risk-free rate, Real
Assets and MSCI World in all of the time segments except for Time 3.
than the aircraft asset market in the four time segments. Sharpe ratios
adjust the excess return to the risk-free rate to take into account for the
individual volatility and standard deviation. The rankings varied with the
four time scenarios.
In Time 1, Indexes 3, 1, 4, 2, and 5 Sharpe ratios are ranked three, six,
11, 19, and 20, respectively. Ahead of Index 3 in the ranking are
Agricultural Land and Real Estate asset classes. Aircraft Lessors is ranked
12 after Index 4 and ahead of Index 2 and 5.
In Time 2, Index 1–4 moved down compared to Time 1. Indexes 3 and
1 moved down to nine and 14, respectively, while Index 4 and 2 are in the
lower quartile at 18 and 22. Index 5 increased two rankings to 18. The
highest Sharpe ratios are Real Estate, Real Assets, and Agricultural Land
asset classes. Aircraft Lessors stayed at the same rank at 12 as Time 1 but
ranked after Index 3 ahead of the other 4 Indexes.
In Time 3, Index 1–4 in the top two–five rank while Index 5 is at ten.
Index 1–5 all moved significantly higher compared to Time 2. The highest
Sharpe ratio is the Agricultural Land asset class. Aircraft Lessors decrease
one rank to 13 from Time 2 but below Index 1–5.
In Time 4, most of the comparative sets are negative except for the top
three ranked Commodities, Crude Oil, and USD Swap Rate 10Y. Index 5
moved to rank five on top of Index 1–4 which are spread out with a bigger
262 D. YU
range from eight to 21. Aircraft Lessors decreased slightly to rank 15 from
Time 3 and ranked after Index 4 and ahead of Index 1 and 3.
The data suggests that the fourth hypothesis is partially correct. Aircraft
Lessors Sharpe ratios are only higher compared to some Indexes and in
some time segments.
5.1
Correlation and Covariance Observations
Within Index 1–5, there are mostly moderate to high positive correlations
in the four time segments. Compared to the other data sets, Index 1–5 did
not exhibit strong correlations with other benchmarks and the figures are
around 0 and slightly negative in the four time segments. Shipping was the
highest positive correlation with Index 1–5 in Time 2 in the 0.2 range and
otherwise showed a low positive correlation in the other time segments.
Otherwise, the lowest negative correlation with Index 1–5 was Agricultural
Land in Time 3. Aircraft Lessors in general exhibited a very low positive
and negative correlation with Index 1–5 in each of the time segments.
Airlines also exhibited mostly weak positive correlations.
Comparing between the 20 comparative sets, the themes that were
found across the time segments reinforced intuitive thoughts such as the
negative correlation between Broad Debt and USD Swap Rate 10Y and
less so with USD 3M LIBOR. Other strong correlations are between
Crude Oil and Commodities and Gold and Precious Metals given the
subcomponent is a subset of the larger group. Aircraft Lessors had the
strongest correlation with the two equity indexes, MSCI World and S&P
500, Transportation, Real Assets, Infrastructure, and Timberland for three
time segments except for Time 2 where it only had a weak correlation with
all the other asset classes.
Bibliography
Acquila Capital. (2015). Real Assets—Investments in Timberland. Retrieved from
www.aquila-capital.de/en/research/stellungnahme-zum-presseartikel-
aquila-waldinvest-iii
www.bloomberg.com
Brookfield Asset Management. (2017). Real Assets, Real Diversification. Retrieved
from www.brookfield.com
Cambridge Associates. (2017). Infrastructure Index. Retrieved from: www.

CambridgeAssociates.com
MSCI. (2017). MSCI World Index. Retrieved from: www.msci.com/indexes
NCREIF. (2017). Indices. Retrieved from: www.NCREIF.org
S&P Dow Jones Indexes. (2017). S&P Dow Jones Indexes. Retrieved from:
https://eu.spindices.com
CHAPTER 7
Conclusion
This research establishes the status of the aircraft asset class and its seg-
ments. Chapters 3 and 4 show the dynamics and drivers of the aviation
finance and leasing landscape with respect to both the global market and
more specifically the China market affecting aircraft pricing. The demand,
supply, and business model change drivers are laid out. Demand drivers
include economic factors, business cycles, exogenous shocks, fuel prices,
and traffic flows along with population demographics. Supply drivers
include aircraft manufacturers, parked or retired aircraft, operating leases,
secondary trading of aircraft, the financing environment along with cur-
rent trends and segments such as commercial banks, capital markets, and
export credit financing. In addition, an analysis of the drivers affecting
cross-border mergers and acquisitions in the industry is developed along
with the characteristics of the increased use of leasing, specifically aircraft
operating leasing.
A brief history of the aircraft leasing industry’s development is overlaid
on top of the progress in both China and globally. Interlaced with this
history, the drivers affecting cross-border mergers and acquisitions in the
industry and specifically sidecars are analyzed along with the development
and characteristics of the major global jurisdictions including Ireland,
Singapore, Hong Kong, and China. Tax and government incentives are
major drivers but there are other non-tax factors for leasing and these dif-
ferences and similarities between China and the other global jurisdictions
are discussed in depth.

https://doi.org/10.1007/978-981-15-6743-8_7
266 D. YU
Chapter 4 focuses on the empirical data and the historical market char-
acteristics and analysis of aircraft asset pricing in terms of returns and vola-
tility characteristics over different time segments and across multiple
cycles. The main question addressed is determining the market character-
istics of the aircraft asset class in terms of its returns, volatility, and trends.
This chapter fills in the gap in the academic literature by examining empir-
ical analysis and looks into the economic shocks through aviation asset
pricing. This unique dataset is hand collected including time series of spe-
cific aircraft type valuation data from a collection of major aircraft apprais-
ers over a 21-year period from 1996 to 2017 representing the entire range
of the aircraft asset class.
The aviation asset class is segmented into five different major aircraft
type groupings with different weighting construction effects including all
aircraft types, all narrowbody aircraft, all widebody aircraft, all narrow-
body classic aircraft, and all narrowbody next generation aircraft. These
groups are analyzed under four time segments that look at the overall and
subhistorical periods and the effects of the great financial crisis.
There are many takeaways from the observations from both cross-index
and cross-time analyses. The results suggest that the main hypothesis is
correct that the aircraft market represented by All Aircraft Types Index 1
MoM WA MV has higher value depreciation compared to the accounting
depreciation of 0.283% per month. In terms of the second hypothesis, the
data also suggests this is correct as the standard deviation is less than 3%
throughout the four time segments. The data suggests some mixed results
for the second hypothesis. Looking at the MoM WA MV case, narrow-
body aircraft Index 2 has lower value depreciation throughout the four
time segments than widebody aircraft. Narrowbody aircraft standard devi-
ation is lower for all the time segments except for the Time 3 case. While
there is one deviation in Time 3 standard deviation, the data suggests that
most of the second hypothesis is correct.
The data suggests mixed results for the third hypothesis for both value
depreciation and standard deviation. The data suggests that most of the
third hypothesis is correct that the narrowbody NG aircraft represented by
All Narrowbody NG Aircraft Index 5 will have lower value depreciation
and standard deviation throughout the four time segments than narrow-
body classic aircraft represented by All Narrowbody Classic Aircraft Index
4 as well as narrowbody aircraft represented by Index 2. The data suggests
mixed results for the fourth hypothesis. The data partially supports the
first part of the fourth hypothesis that the five aircraft market segments
7 CONCLUSION 267
will have lower value depreciation and standard deviation in the pre-GFC
period Time 2 than during and post the GFC Time 3 and Time 4, respec-
tively. Looking at the Index 1 results, the overall aircraft market has lower
value depreciation in Time 2 than the other times while for most indexes
in Time 3 the standard deviation is the lowest. For the second part of the
fourth hypothesis, the data does not support this. The overall aircraft mar-
ket has a higher value depreciation in Time 4 than in the other times while
for all indexes Time 4 also has the highest standard deviation.
Also, based on the correlation between BV and MV the data suggests
mixed results for the fifth hypothesis. The first part of the hypothesis that
there is slight to moderate correlation between MV and BV for the aircraft
types throughout the four time segments is found to be supported for all
the index and time scenarios except for the high correlation found in
Index 5’s Time 2 and 3. The data mostly supports the first part of the fifth
hypothesis. The data suggests that Time 2 is the highest relative correla-
tion for all indexes except for Index 3, where Time 3 is the highest relative
correlation and thus the data mostly supports the second part of the fifth
hypothesis. The data suggests that Time 4 is the lowest relative correlation
for all indexes except for Index 4 where Time 3 is the lowest relative cor-
relation and thus the data does not support the third part of the fifth
hypothesis. The lowest correlation between MV and BV is after the
GFC Time 4.
Chapter 5 focuses on the comparison of the aircraft asset pricing char-
acteristics with other real asset-backed classes and benchmarks in the four
time segments with investigative focus on various returns as well as stand-
alone and relative volatility metrics. The main hypothesis that aircraft asset
class as represented by Index 1–5 MoM WA MV has a lower stand-alone
risk in terms of standard deviation and variance over the historical time
periods compared with the comparative sets is not supported by the data.
The data mostly supports the statement that the aircraft lessors asset class
has a lower stand-alone risk in terms of standard deviation and variance
over other comparable asset classes.
In terms of stand-alone volatility, standard deviation, and variance,
Index 1–5 is ranked in the bottom half or third and fourth quartiles in all
four time segments. Aircraft lessors in terms of stand-alone volatility, stan-
dard deviation, and variance are found at or near the top in Time 1–3 but
are down to 8 out of 25 in the post-GFC period Time 4. The shipping
asset class is higher in the volatility metric for the periods that aircraft les-
sors are not at the top.
268 D. YU

esis, aircraft asset classes has a lower relative volatility in terms of beta or β,
covariance, and correlation compared with the other comparative asset
classes including publicly listed aircraft lessors in the four time segments,
is mostly supported by the data. While the aircraft asset class is not the
lowest in each case, it is at the lower end of the relative comparison. The
statement aircraft lessors asset class has a higher relative volatility in terms
of beta, covariance, and correlation compared with the other comparative
asset classes is mostly supported by the data.
Continuing in the same line of questioning, the third hypothesis, pub-
licly listed aircraft leasing companies generate higher excess returns or α
relative to the risk-free rate, real assets, and MSCI World compared to the
aircraft asset class in the four time segments, is mostly supported by the
data. Aircraft lessors have higher excess returns or α relative to the risk-free
rate, real assets, and MSCI World compared to the aircraft asset class in all
of the time segments except for Time 3.
Combining return and volatility concepts, the fourth hypothesis, pub-
licly listed aircraft leasing companies generate higher Sharpe ratios than
the aircraft asset market in the four time segments, is partially supported
by the data. Aircraft lessors Sharpe ratios are only higher compared to
some indexes and in some time segments. The rankings varied with the
four time scenarios.
In summary, the correlation and covariance of Index 1–5 both within
itself and with the other comparative datasets showed that within Index
1–5 there are mostly moderate to high positive correlations in the four
time segments. Compared to the other datasets, Index 1–5 did not exhibit
strong correlations with other benchmarks and the figures are around 0
and slightly negative in the four time segments. Shipping was the highest
positive correlation with Index 1–5 in Time 2 in the 0.2 range and other-
wise showed a low positive correlation in the other time segments.
Otherwise, the lowest negative correlation with Index 1–5 was agricul-
tural land in Time 3. Aircraft lessors in general exhibited a very low posi-
tive and negative correlation with Index 1–5 in each of the time segments.
Airlines also exhibited mostly weak positive correlations.
After the establishment of the aircraft asset class and the market seg-
mentations, further comparative analyses are conducted in Chap. 5 to
deduce the implications to the other real asset classes and major investable
benchmarks. The main hypothesis is that aircraft asset class as represented
by Index 1–5 MoM WA MV has a lower stand-alone risk in terms of
7 CONCLUSION 269
standard deviation and variance over the historical time periods compared
with the comparative sets. The data suggests that the main hypothesis is
not correct while the statement that aircraft lessors asset class has a lower
stand-alone risk in terms of standard deviation and variance over other
comparable asset classes is mostly supported by the data.
In case of the second hypothesis, an extension of the main question is
that the aircraft asset classes have a lower relative volatility in terms of beta
or β, covariance, and correlation compared with the other comparative
asset classes including publicly listed aircraft lessors in the four time seg-
ments. The data suggests that the second hypothesis is mainly correct.
While not the lowest in each case, the aircraft asset class is at the lower end
of the relative comparison. The statement aircraft lessors asset class has a
higher relative volatility in terms of beta, covariance, and correlation com-
pared with the other comparative asset classes is mostly supported by
the data.
The third hypothesis is that the publicly listed aircraft leasing compa-
nies generate higher excess returns or α relative to the risk-free rate, real
assets, and MSCI World compared to the aircraft asset class in the four
time segments. The data suggests that the third hypothesis is mostly cor-
rect. Aircraft lessors have higher excess returns or α relative to the risk-free
rate, real assets, and MSCI World compared to the aircraft asset class in all
of the time segments except for Time 3.
than the aircraft asset market in the four time segments. The data suggests
that the fourth hypothesis is partially correct. Aircraft lessors Sharpe ratios
are only higher compared to some indexes and in some time segments.
Within Index 1–5, there are mostly moderate to high positive correla-
tions in the four time segments. Compared to the other datasets, Index
1–5 did not exhibit strong correlations with other benchmarks and the
figures are around 0 and slightly negative in the four time segments.
Shipping had the highest positive correlation with Index 1–5 in Time 2 in
the 0.2 range and otherwise showed a low positive correlation in the other
time segments. Otherwise, the lowest negative correlation with Index 1–5
was agricultural land in Time 3. Aircraft lessors in general exhibited a very
low positive and negative correlation with Index 1–5 in each of the time
segments. Airlines also exhibited mostly weak positive correlations.
Comparing between the 20 comparative sets, the themes that were
found across the time segments reinforced intuitive thoughts such as the
270 D. YU
negative correlation between Broad Debt and USD Swap Rate 10Y and
less so with USD 3M LIBOR. Other strong correlations are between
crude oil and commodities and gold and precious metals given the sub-
component is a subset of the larger group. Aircraft lessors had the stron-
gest correlation with the two equity indexes, MSCI World and S&P 500,
transportation, real assets, infrastructure, and timberland for three time
segments except for Time 2 where it had only a weak correlation with all
the other asset classes.
The unrestricted model of independent variables in the regression and
statistical testing resulted in low R2 statistics under 0.100 Index 1–5. For
the main Index 1–5 regressions, the null hypothesis that all the coefficients
are not significant with a significance level of 5%, no model rejects the null
hypothesis. There are only a couple of independent variables that were
significant at the 5% significance level, namely, real estate in Index 1 and 2,
while labor and log (agricultural) were significant for Index 2.
The model was restricted for higher correlated variables, gold, general
commodities, and S&P 500, in order to reduce multicollinearity and VIF
figures and improve the model; the R2 figure remained very low. All of
Index 1–5 regressions, except Index 2, again did not reject the null
hypothesis that all the coefficients are not significant with a significance
level of 5%. For Index 2, the model accepts the null hypothesis with a p
value of 0.217. Similar to the unrestricted case, the specific independent
variables are significant at the 5% significance level and include real estate
for Index 1 and 2 and labor and log (agricultural) for Index 2.
These results support that there is very little explanatory power of the
comparative asset classes for the aircraft asset classes represented by Index
1–5. Individually, there are a few independent variables at a 5% significance
level. This supports the notation found earlier in other results that the
other comparable classes do not have much explanatory power for the
aircraft asset class and its subsegments and should be considered for inclu-
sion in portfolios for asset allocation.
Further subsequent studies with additional data are helpful to expand
the time horizon of the commercial aircraft asset class characteristics as
well as its segments by aircraft types. While the time segmentation data
provides a view for the responses of this market and segments toward a
large financial crisis, exogenous shock, namely, the great financial crises,
additional data would show the effects of other previous exogenous shocks
to the market. There can also be additional research that can be done to
expand the analysis in addition to the time horizon. The expansion of the
7 CONCLUSION 271
aircraft types to include regional and turboprops aircraft can also extend
the analysis as can the creation of prediction models for future values to
possibly improve the forecasts of the data based on historical data. In addi-
tion, if specific matching historical lease rate data to the aircraft types and
times can be potentially gathered, this would enable enhancement of the
return analysis and comparative analysis.
Appendix

https://doi.org/10.1007/978-981-15-6743-8
274
APPENDIX
Fig. A.1 Index 1 YoY—6.1996–6.2017

Fig. A.2 Index 2 YoY—6.1996–6.2017
Appendix
275
276
Appendix
Fig. A.3 Index 3 YoY—6.1996–6.2017. (Note: Index 3 data starts from 2.1997)
Fig. A.4 Index 4 YoY—6.1996–6.2017
Appendix
277
278
Appendix
Fig. A.6 Index 1 YoY—6.1996–6.2007
Appendix
279
280
Appendix
Fig. A.7 Index 2 YoY—6.1996–6.2007

Appendix
281
282
Appendix
Fig. A.9 Index 4 YoY—6.1996–6.2007

Appendix
283
284
Appendix
Fig. A.11 Index 1 YoY—6.2007–6.2010

Fig. A.12 Index 2 YoY—6.2007–6.2010
Appendix
285
286
Appendix
Fig. A.13 Index 3 YoY—6.2007–6.2010

Fig. A.14 Index 4 YoY—6.2007–6.2010
Appendix
287
288
Appendix
Fig. A.15 Index 5 YoY—6.2007–6.2010

Fig. A.16 Index 1 YoY—6.2010–6.2017
Appendix
289
290
Appendix
Fig. A.17 Index 2 YoY—6.2010–6.2017

Fig. A.18 Index 3 YoY—6.2010–6.2017
Appendix
291
292
Appendix
Fig. A.19 Index 4 YoY—6.2010–6.2017

Fig. A.20 Index 5 YoY—6.2010–6.2017
Appendix
293
294
Appendix
Fig. A.21 Asset class excess return over risk free rate (US Treasuries 1-3M) over 4 time Segments
Fig. A.22 Asset class rankings by Beta (Real Asset) over 4 time segments
Appendix
295
296
Appendix
Fig. A.23 Asset class rankings by Beta (MSCI World) over 4 time segments
Fig. A.24 Asset class rankings by standard deviation over 4 time segments
Appendix
297
298
APPENDIX
Fig. A.25 Aircraft correlation vs. covariance with comparative asset classes time 2—6.1996–6.2007
Appendix
299
300
Appendix
Appendix 301
302 Appendix
Appendix 303
304 Appendix
Appendix 305
306 Appendix
Appendix 307
308 Appendix
Appendix 309
310 Appendix
Appendix 311
312 Appendix
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Index
NUMBERS AND SYMBOLS Airline Traffic, 81, 110

9/11 World Trade Center Attack Airline Yield, 51
2001-2002, 48 Airports Infrastructure and
21st Century Maritime Silk Road, 89 Construction, 119–120
Alpha, 223, 227, 243–245, 260, 261
Appraisal Values, 140
A Asian Financial Crisis, 48, 100
Accelerated Depreciation, 15, 124 Asset Backed Securities (ABS), 37
Accounting Standards Codification Asset Pricing, 2–4, 20, 136, 224,
(ASC), 9 266, 267
Adjusted Present Valuation Method Asymmetric Information, 2, 20
(APV), 142 Auxiliary Power Unit (APU), 148
Agricultural Bank of China (ABC), 88 Available Seat Kilometers
Agricultural Land and (“ASKs”), xviii
Timberland, 4, 219 Aviation Capital Group (ACG), 64
Airbus A330-300 Type Aircraft, 152 Aviation Industry Corporation of
Airbus Global Market Outlook, 79 China (AVIC), 88
Aircraft and Engine Manufacturer Aviation Silk Road, 91
Financings, 60 Avitas, 152
Aircraft Asset Class, 3, 4, 21, 135,
136, 207–210, 258,
259, 265–270 B
Aircraft Leasing Scheme (ALS), 38 Backlog, 55
Airfinance Journal, 83, 127 Baltic Exchange Vessel
Airframe, 146, 148–150 Definitions, 216
Airline Business Models, 3, 21, 91 Bankruptcy Costs, 3, 20

https://doi.org/10.1007/978-981-15-6743-8
328 INDEX
Bareboat Charter, 214 Commercial Banks, 3, 60, 64, 99,

Bargain Price, 10, 11, 19 121, 130, 265
Basel III Regulations, 65 Commodities, 4, 26, 207, 208, 210,
Base Value (BV), 138 214, 218, 270
Beta, 208, 210, 223, 224, 243–245, Compagnie Francaise d’Assurance
259, 268, 269 pour le Commerce Exterieur
Big 3 Airline, ix, 109, 110 (COFACE), 61
Boeing Capital Corporation, 1, Comparative Asset Classes, 207–209,
33, 60–63 221, 225, 227, 245,
Boeing Current Market Outlook, 77 259, 268–270
Boeing 737 MAX Series, 146 Conflict Management, 74–75
Boeing 737 NG Series, 146 Construction Risks, 26
Book Depreciation, 145 Contract Laws of the People’s
Brazil Development Bank, 61 Republic of China, 98
Business Cycles, 3, 44, 48, 76, 91, 265 Correlations between the Asset
Classes, 210
Covariance Testing, 4
C COVID-19, vii, xix, xxi, xxii, viii, ix, x,
CAAC Airlines, 109 xi, xii, xxi, xxi, xxii, viii–xi
Capital Markets, 3, 8, 37, 60–62, 64, Credit Capacity, 2, 20
66, 91, 121, 124, 265 Credit Ratings, 2, 15, 20
Chapter 11 Bankruptcy, 14, 63 Cross Border Investments, 1,
China Airspace, 109–110 83–85, 89–91
China Banking Regulatory Cross-Jurisdictional Payments, 15
Commission (CBRC), 100 Crude Oil, 57, 225, 245, 256–259,
China Construction Bank (CCB), 88 261, 262, 270
China Insurance Regulatory
Commission (CIRC), 130
China International Trust and D
Investment Corporation Debt Capacity, 2, 20
(CITIC), 97 Delivery, 12, 54, 58, 59, 75, 140, 141,
China Investment Corporation (CIC), 88 148, 218
China Outbound M&A, 86, 87 Demand Drivers, 41, 53, 91
Chinese Finance Leasing Demise Charter, 214
Segment, 125 Demographics, 3, 87, 91, 112, 131,
Civil Aviation Administration of China 217, 265
(CAAC), 98 Depreciation, 11, 14, 15, 17, 19,
Classical Hub and Spoke Model, 81 37–39, 49, 88, 102, 124, 130,
Clean Tankers, 215 136, 137, 142, 145, 147, 159,
Collateral Verifications LLC, 152 171, 172, 174–177, 199–203,
Commercial Aircraft Corporation of 221, 226, 266, 267
China (COMAC), 54, 120 Dirty Tankers, 215
INDEX 329
Discounted Cash Flow Method First Oil Crisis 1973, 48

(DCF), 142 Flight Hours or Cycles, 148
Distress Value (DV), 138 Fluctuating Value, 14
Double Tax Treaties, 15, 36, Foreign Direct Investment
38–39, 102 (“FDI”), xvii
Dow Jones Transportation Average Free Cash Flow (FCF), 144
Index, 221, 226 Free Trade Zones (FTZs), 102
Freight Forward Agreements
(FFA), 214
E Freighter Conversions, 71
Economic And Business Cycles, 24–25 Freighters, 69
Economic Shocks, vii, xxii, xxiii, 4, 21, Full-life, 148, 150
25, 49, 266
Economic Useful Life, 145–147
Empirical Portfolio Theory, 4 G
Engines, 57, 139, 146–149, 156 GE Capital Aviation Services
Enhanced Equipment Trust (GECAS), 35
Certificates (EETCs), 37 Global Financial Crisis (GFC), xxi, 17
Escalation Rates, 141, 148 Global Fleet Projections, 81
Euler Hermes Aktiengesellschaft, 61 Gross Domestic Product (GDP), 41
Europe’s Aviation Safety Agency Gulf War Crisis 1990-1991, 40, 41
(EASA), 109
Excess Industrial Capacity, 118
Exit-Import Bank of China H
(CEXIM), 122 Half-life, 150
Exogenous Shocks, 3, 25, 41, 48, 58, Heavy Maintenance Check, 149
91, 265, 270 Henan Zhengzhou Airport Economic
Export Credit Agencies (ECAs), 60 Zone, 102
Export Development Canada, 61 Hong Kong Jurisdiction, 121
Export Financing, 8, 77 Hukou System, 106
Hurdle Rates, 74
Hurricane Sandy 2012, 48
F
Fair Market Value, 11
Federal Aviation Administration I
(FAA), 148 IBA Group, 41, 42, 59,
Finance and Economic 67–71, 90, 152
Commission, 99 Icelandic Ash Cloud 2010, 48
Finance Leases, 1, 2, 10, 14, 15, 19, Immigration Liberalization, 52
20, 23, 24, 34, 124, 130 Industrial and Commercial Bank of
Financial Accounting Standards Board China (ICBC), 128
(FASB), 9 Industry 4.0, 120
330 INDEX
Industry Profitability, 44–48 Life Limited Parts (LLP), 149

Infrastructure, 4, 26, 38, 66, 106, Liquid Benchmarks, 4
118, 119, 207, 210, 217 Liquidation Value, 22
Insurance Companies, 60, 66, 123, List Price, 77, 140, 141
130, 131 Low Cost Carriers, 23, 76
Insurance Financings, 60 Low Value Assets, 17
Interest rate products, 220
Interest Swap Rates, 16, 45
International Accounting Standards M
(IAS), 8 Made in China 2025, 118, 120
International Accounting Standards Maintenance Reserves, 12, 13
Board (IASB), 8 Major Shareholders, 100
International Air Transport Market Depreciation, 145
Association (IATA), 49 Market Drivers, 40
International Financial Reporting Market Value (MV or CMV or
Standards (IFRS), 8 FMV), 138
International Lease Finance Mass Entrepreneurship, 120
Corporation (ILFC), 34 Maximum Take off Weights
International Society of Transport (MTOW), 140
Aircraft Trading (ISTAT), 138 McDonnell Douglas Finance
Investable Benchmarks, 4, 268 Corporation (MDFC), 33
ISTAT Appraisers’ Program Measures for Administration
(IAP), 138 of Financial Leasing
Companies, 99
Mezzanine Debt, 8, 144
J Ministry of Commerce
Jet Fuel Prices, 49 (MOFCOM), 100
Joint Ventures, 3, 72, 98, 99, Minority Interest Investments
123, 130 investments, 90
Jurisdictions, 3, 14, 15, 19, 36, 38, Modern Portfolio Theory, 210
39, 99, 104, 120, 123, 124, 265
N
L Narrowbody Aircraft, 136, 156,
Landing Gears, 148–150 159, 221
Lease Cash Flow Streams, 138 Narrowbody Classic Aircraft, 136,
Lease Embedded Option, 12 156, 159, 221, 266
Lease Payment, 14, 139 Narrowbody Next Generation Aircraft,
Lease Rate Factor (LRF), 12 156, 159, 221
Lease Versus Own, 16 Nasdaq Transportation Index,
Letter Checks, 149 221, 226
LIBOR Rates, 45, 220 Net Orders, 54
INDEX 331
New Engine Option (NEO) Q

Aircraft, 153 Qualified Maintenance
New Real Asset Classes, 26 Reimbursement, 12, 13
1918 Flu Pandemic, xxii
1973 Oil Shocks, xxii
Non-double Tax Treaty, 36 R
NWS Holdings Limited (NWS), 66 Real Asset Classes, 4, 26, 268
Real Depreciation, 145
Real Estate, 4, 17, 26, 75, 76, 118,
O 130, 131, 148, 156, 207, 208,
Obsolesce Risk, 14 210, 213, 215, 216, 270
OEM’s Orderbook, 141 Regional Aircraft, 54, 84, 137, 209
One Belt One Road (OBOR), 91, 118 Regression, 4, 142, 208, 270
Operating Leases, 1, 3, 14–17, 19, Removal and Disposal Costs, 139
21–24, 33, 34, 66, 67, 69, 101, Repossession Rights, 138
124, 125, 130, 131, 265 Residual Value (RV), 138
Operating Leverage, 26, 72 Residual Value Guarantees, 3, 21
Optimal Ratio of Operating Restrictive Covenants, 15
Leases, 22, 23 Retained Risks, 17
Original Equipment Manufacturer Retirement Age, 58
(OEM), 140 Return Conditions, 138
Outright Acquisition, 15 Return On Asset (ROA), 14
Outsourcing, 75 Revenue Passenger Kilometers
(“RPK”), xviii
Revolving Credit Facilities, 64
P Right Of Use (ROU), 17
Parked or Retired Aircraft, 3, 265
Parts Manufacturer Authorized
(PMA), 15 S
People’s Bank of China (PBOC), 98 S&P 500 Airlines Total Return Index,
People’s Liberation Army Air Force xii, 220–221, 226
(PLAAF), 109 Sale And Leasebacks (SLBs), 2, 20
Pledged Collateral, 7 Salvage Value, 138, 139, 145, 147
Point to Point Model, 81 Scrap Value, 139, 140, 147
Portfolio Construction and Secondary Trading, 3, 53, 66, 69, 265
Management, 208 Second Oil Crisis 1978-1979, 48
Precedent Transactions Analysis, 142 Securitized Value or Lease-
Precious Metals, 4, 208, 210 Encumbered Value (LEV), 138
Pre-Delivery Payments (PDPs), 12 Security Deposits, 12, 13, 138
Product Diversification, 26 Seller Financing, 8
Public Aircraft Lessor Index, Senior Secured Bank Debt, 12
207, 209 Severe Acute Respiratory Syndrome
Punctuality, 110 (“SARS”), xvi
332 INDEX
Shanghai FTZ, 120 Tokyo Century Leasing (TCL), 73

Sharpe Ratio, 211 Trading Company, 36
Shipping, 4, 26, 65, 75, 88, 207, 208, Traditional Real Asset Classes, 26
214, 215 Traffic Flows, 3, 91, 265
Short Leases, 17 Twin Aisle Aircraft, 137, 156
Sidecars and Joint Ventures, 72–75
Significance Testing, 4, 208
Singapore Aircraft Leasing Enterprise U
(SALE), 65 UK Export Finance, 61
Single Aisle Aircraft, 153 Underutilization of Aircraft, 25
Special Purpose Vehicles (SPVs), 102 Urbanization, 52, 91, 106
Standalone Risk, 4, 208, 258, USD 1-3M Treasuries, 208
259, 267–269 USD 3M LIBOR, 4, 208, 220, 226,
State Administration of Foreign 227, 243–245, 257, 258, 260,
Exchange (SAFE), 102 262, 270
Statement of Standard Accounting USD 10 year Swap Rates, 208
Practice (SSAP), 18 US Export-Import Bank (US
State Owned Enterprises (SOE), 100 EXIM), 60
Sub-lease Rights, 138
Sub-leasing Arrangements, 15
Sum of the Parts Valuation, 142, 145 V
Supply Drivers, 150 Value Retention, 146
Supply Side Structural Vintage Data, 152
Reforms, 118–119 Voyage Charter, 214
Swine Flu 2008, 48
Syndicated Senior Secured Debt, 62
Syndicated Unsecured Debt, 62 W
Weighted Average Cost of Capital
(WACC), 144
T Weighting Construction, 4, 21, 266
Taxable Presence, 19 Widebody Aircraft, 4, 12, 58, 137,
Tax Depreciation Allowance, 102 154, 171–178, 198–200,
Tax Treatments, 1, 8 202, 266
Term Extensions, 138 Withholding Tax Rate, 39
Terminal Future Residual Value, 138 World Trade Organization (WTO), 99
Texas Pacific Group (TPG), 35
Tianjin Dongjiang Free Trade Port
zone (DFTP), 120 Z
Time Charter, 214 Zero-life, 149

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Aircraft

ISBN 978-981-15-6742-1 ISBN 978-981-15-6743-8 (eBook)

Cover illustration: © Nicole Lienemann / EyeEm / Getty Images

Today, the world is in the midst of a vastly different environment than we

Initial Responses to Covid-19: Phase I Virus Life

Initially, at the beginning of the response, economists slashed their forecast

Fig. 1 Fall in oil prices. (Source: Bloomberg 2020)

Current Situation: Phase II Virus Life Cycle (More

Lessors Index Airlines Index S&P 500 MSCI World

-$100.0 -$63 -$43.9

Fig. 3 IATA estimated COVID-19 impact on 2020 Airline revenue. (Source:

Europe 16.1%, (USD Millions)

Fig. 4 Confirmed state support for Airlines as of April 26, 2020

Asia Pacific 10.6%, South America 7.5%,

Fig. 5 Unconfirmed state support for Airlines as of April 26, 2020

week of February 17 and subsequently bounced back with the traffic on

Fig. 7 International and domestic scheduled flights YoY changes by country.

figures are not anticipated to rebound until border restrictions start to be

Severe Acute Respiratory Syndrome (“SARS”)

All Mainland China South Korea Japan Hong Kong SAR

cross-border impacts. As the current virus became a global pandemic, this

Fig. 9 International scheduled flights YoY changes by country. (Source:

Table 1 Global Airline performance by region

Carriers RPK% ASK% FTK% ATK% RPK% ASK% FTK% ATK%

Europe −5.5 −4.1 1.4 −2.8 −1.1 2.0 3.3 1.8

Source: International Air Transport Association 2003

120 SARS (2003) Avian Flu (2005) Avian Flu (2003)

Fig. 10 Impact of past disease outbreaks on aviation. (Source: International Air

Immigration curbs and flight cancellations from COVID-19 will have a

Great Financial Crisis (“GFC”) 2008/2009

In China, the 2008 passenger traffic increased by 3.3% but resulted in

Preliminary Outlook Going Forward: Virus

Shanghai, China David Yu, PhD. CFA,

Alcock, C. (2020). Airbus Restarts A320 Assembly in China as Virus Hits

International Air Transport Association. (2020c). COVID-19 Cuts

2 Background Concepts and Definitions 7

3 Global Aircraft Leasing Industry Characteristics 33

4 China Aircraft Leasing Industry Characteristics 97

5 Empirical Aircraft Asset Pricing135

6 Comparative Examination Between the Aircraft and Other

Fig. 2.1 IAS 17 9

Fig. 3.20 Aircraft retirements: 1970 to 2015 59

Fig. 6.2 Ten-year income and capital appreciation returns of real

Table 4.1 China leasing company structures 100

© The Author(s) 2020 1

accounting standards and treatments to leasing. These along with the

by examining empirical analysis and looks into the economic shocks

Background Concepts and Definitions

1 Accounting and Tax Treatments

© The Author(s) 2020 7

other financing options can be funding the acquisition through mez-

Fig. 2.1 IAS 17. (IFRS 2003)

Other situations that might also lead to classification as a finance

2 Operating and Finance Lease

(d) if the present value of the lease payments, discounted at an appro-

Every lease that falls outside these criteria is considered an operating

3 Typical Operating Lease Structure

pre-agreed metrics. As the cost of overhauls, especially major ones, are

Lease Rate and

Shanghai, China David Yu, PhD. CFA,

2 Background Concepts and Definitions 7

3 Global Aircraft Leasing Industry Characteristics 33

4 China Aircraft Leasing Industry Characteristics 97

5 Empirical Aircraft Asset Pricing135

6 Comparative Examination Between the Aircraft and Other

Fig. 2.1 IAS 17 9

Fig. 3.20 Aircraft retirements: 1970 to 2015 59

Table 4.1 China leasing company structures 100