October 2010

Airlines' risk analysis, the essential tool kit? Shane Matthews

Head of Credit Risk, RBS Aviation Capital

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RBS Aviation Capital - today

Team

• 63 aviation professionals

• Global reach

Portfolio Overview

• Top 4 operating lessor

• 217 owned, 36 managed aircraft

• 95 new aircraft on order with Boeing & Airbus

• Over 60 airline customers in over 40 countries

Seattle

New York

London

Toulouse Shanghai

Hong KongSingapore

Dubai

Dublin (HQ)

7 analysts dedicated to airline credit & risk management

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Portfolio Risk Management

Asset RiskAnalysis

Credit RiskAnalysis

TransactionQuality

Analysis

A holistic “3-pillar” framework approach promotes…

– Pro-active anticipation of issues

– Early initiation of corrective action

– Reinforced by cross-functional ownership for risk mitigation

This leads to….

– Timely exit from several troubled airlines

– Limited exposure to bankruptcies / defaults

– High asset and credit portfolio quality

Strategy - Financial Services Approach to Risk Management

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How do we look at an airline?

Franchise/business Plan

Competitive environment

Regulatory environment

Track record

Financial performance (cost and revenue)

Financial forecasts (are they realistic)

Management – expertise, track record and lock in

Ownership

Fleet profile – is it fit for purpose

These all combine to form a risk profile

We take a sum of the parts approach

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How we look at an airline?

Low Cost Carrier

Full ServiceCarrier

Hub and Spoke Pt to Pt

Long Haul Short Haul

Future direction is more important than historic positioning

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Financial Ratios

Cashflow

Loan to value/investment to value

ROCE/RWA

Interest cover

Debt/ Equity (including off balance sheet debt)

Liquidity Ratios

Margins

Key Sensitivities – these are company specific

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

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Features of Asian Aviation Market

Large population base

Wide geographic spread with large bodies of water

Strong economic activity

High level of Government involvement

Growing personal wealth

Growing leisure market

Gradual deregulation

Fragmented Full Service market

Low LCC penetration

Booming demand for aircraft and aircraft financing in Asia

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Market Position

Low Cost Carrier

Full ServiceCarrier

Hub and Spoke Pt to Pt

Long Haul Short Haul

SIA

Cathay Pacific

Virgin Blue Tiger

AirAsia

Qantas

ANZ

PAL

MASJetstar

AirAsia X

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Servicing your obligations

Fixed Charge Coverage(EBITDAR/(I+R))

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Cathay SIA AirAsia

Qantas AirChina

PAL Asiana CSA VirginBlue

Tiger Korean ANZ CEA MAS ANA

2010 2009 2008 2007

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Cash as %age of T/Over

0%

5%10%

15%20%

25%

30%35%

40%45%

50%

Tiger SIA ANZ Qantas Cathay AirAsia

MAS VirginBlue

ANA Korean CSA CAL AirChina

PAL CEA Asiana

2010 2009 2008 2007

Cash is King on a Rainy Day

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Sources of information

Site Visit

Due diligence calls

Competitor visits

Formal briefings for PLCs

Internet

News services

Wary of consumer websites – there is a natural bias

Constant process

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Ongoing Monitoring

Our job does not end once the credit application is approved

Banks do not like surprises so we therefore continue to monitor your performance

We have a policy of meeting each of customers at least once a year

We do a formal review of each of our clients annually

Ongoing monitoring does lend itself to speeder decisions

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Thank You

Q&A