Avation plc share price, company news, analysis and interviews

Exclusive interview with Avation plc CCO Soeren Ferre on the airline industry atmosphere, ATR demand, and future growth areas.

In an exclusive interview, Avation plc’s Executive Chairman, Jeff Chatfield, discusses leasing demand, arrears, cash payments, interest rates, and more in the aviation market. Find out how Avation has fared and what to expect in 2024.

Avation plc (LON:AVAP) Executive Chairman Jeff Chatfield caught up with DirectorsTalk for an exclusive interview to discuss aviation investments, ATR deliveries, airfares & aircraft purchase prices, SAF certification and the benefits of 75% of the company’s revenue coming from Asia.

Q1: Now, at the Paris investor day, you would have met with numerous aviation investors. Just in terms of feedback, what are their thoughts about aviation investments today and over the coming year?

A1: The market is extremely bullish and it’s attracting big amounts from investors who probably wouldn’t fit the profile of who you would imagine would be involved at this state of the interest rate cycle. There’s hedge funds and other investors that usually look for double digit returns appearing and investing in aircraft which is an interesting dynamic.

It’s driven prices up so the valuations of existing aircraft have gone up which is a bullish sign, we don’t know how long that’ll last but it’s certainly bullish at the moment.

Q2: Avation has 30 ATR orders and options over 4-5 years. Are deliveries expected to be spread evenly over each year or frontloaded or even end loaded?

A2: We’ve got an order book of ATR aircraft and ATR are the best CO2 aircraft in the world, low CO2, sustainable aviation fuel and very very popular for airlines that want to reduce their carbon footprint.

They’re pretty much sold out already so as production has really commenced, they’ve got to ramp up production so you would expect those to be spread out. ATR can’t make enough at the moment and their production is somewhat constrained due to supply chain issues, all the manufacturers are having problems with building aircraft which is probably why second-hand aircraft have increased in value.

Q3: Just in terms of market recovery, with strong demand and constrained supply, is it easing at all? Are you expecting airfares to rise further and aircraft purchase prices to escalate?

A3: I think aircraft purchase prices for existing aircraft that are flyers will escalate, there’s no doubt about that, clearly, there’s demand for aircraft and travel.

Airfares, we are not really directly exposed to air fares, airlines are, we lease aircraft to airlines so we’re on the back foot there. It would be hard to imagine airfares getting any higher because they’re already at an extremely high level at the moment to the point where I think passengers are starting to get worried about it.

I think that’s just demand, I don’t think there’s enough aircraft flying to satisfy the demand, the load factors of commercial aircraft around the world are very high and consequently, that allows airlines to charge more. The reason load factors are so high is there’s not enough aircraft but there’s demand.

Q4: Looking at aircraft technology as a whole, we’re seeing OEM’s aiming for SAF certification and a slow intake in SAF usage, are you seeing similar excitement for other technologies such as hydrogen?

A4: No, the SAF thing, it takes years to change aircraft technologies, it’s not an immediate thing, you can’t just say ‘wow, I’ve got a great idea to build an electric aircraft next year’, that takes 5/10/15 years to make a change like that.

SAF is a small incremental change, Sustainable Aviation Fuel is a manufactured jet fuel, it’s substantially similar to natural jet fuel so it’s a certification process to allow engines to use that fuel, it just takes time to have it certified and some requirements for lubricants to be added and all of the rest of the stuff. It’s not a huge leap, the problem with sustainable aviation fuel is it’s very expensive, at the moment it’s three times the price of normal fuel, and it’s produced in tiny quantities so when you say airlines are not taking it up, well it’s not really available.

I think they will take it up when it’s available, the manufacturers of engines will allow the use of sustainable aviation fuel but for a broader technological change, it will take a long time, it’ll take 15 years or so in my view. Aviation is so regulated and safety is so important, no one will take the risk o allowing unproven technologies to be deployed with the public, in a near term.

Q5: Where do you see the most excitement in technological developments?

A5: The most excitement is I think in modern engine types so the engine types are getting more efficient in terms of CO2, being certified for sustainable aviation fuel and on a per seat basis, they’re improving.

So, the increment improvements in engine technology is pretty good at the moment.

Q6: Avation has some A220’s in the fleet, would you be keen to add more 220’s if opportunities appeared?

A6: Yes, definitely. The A220’s are probably the best investment in the world because they’re a new clean design so they’re low CO2, 20% less CO2 per passenger, low fuel burn, extremely good aircraft, really good investment.

They’ve been going super well, the problem is supply, there’s not enough of them, Airbus’ ability to sell them outstrips their ability to make them, so they’re so supply constrained.

Q7: What would be your favourite current production narrow body from the air show if we had one to sell today?

A7: The best two investments, in our view, are A321’s, the A3221neo is pretty good, and A220’s.

Q8: Now, Asia was slow to come out of COVID, Boeing and Airbus have forecast growth in Asia to lead the globe over the coming years. With 75% of Avation’s revenue coming from Asia, have you consciously focussed the company on Asia for those reasons?

A8: Obviously, we’re Asia-Pacific and Europe so we’re not purely Asian.

The Asian markets are huge, the advantages of the Asian markets is you’ve got a lot of people within a short flying distance so they need a lot of aircraft. For example, the United States market, they’ve got access to their own money, they don’t need resources as much as Asin does so it’s a right market for leasing aircraft in Asia with lots and lots of growth.

You’ll see from the air show, the really big orders were Asian, they wouldn’t order aircraft if they didn’t have a demand for them.

Avation plc (LON:AVAP) Chief Financial Officer Iain Cawte caught up with DirectorsTalk discuss why income was down but profits were up, improving cash collection rates, why purchase rights have increased, ratings upgrade and funding for upcoming deliveries.

Q1: Iain, just looking at the results, we can see that income is down but operating profit is up, how was that achieved? Was it down to cost savings?

A1: Avation have achieved some cost savings, principally in administrative expenses, however what you’ll notice from the half year results is that operating profit has included a number of items that we would consider to be non-recurring.

So, for example, we had a $3.2 million plane receipt from Virgin Australia, a $3.2 million gain on derecognition of a finance lese, a $6.9 million unrealised gain on an equity investment, and $5.8 million of transition costs.

So, the net impact of those has been to boost operating profit.

Q2: As the aviation industry recovers, are cash collection rates improving?

A2: Yes, they are, although I’d caveat that with saying there are some localised differences in collection rates. So, if you look at the background, the regional travel market, excluding China, has recovered quicker than the international travel market.

The international travel market is recovering but the Asian market is probably recovering more slowly than the European and North American markets.

The large part of the difference is probably explained by the absence of Chinese travellers from the international market, where the Chinese market is expected to recover strongly perhaps towards the end of this year and early into 2024 as those travel restrictions are eased.

So, whilst cash collection rates for our regional airline and European airline customers have recovered strongly, Asian airlines that traditionally derive a substantial amount of their revenue from Chinese travellers are still lagging behind somewhat.

Q3: Can you explain for us why purchase rights increased in value?

A3: Obviously, the principal reason that we have a positive value to the options or the purchase rights is that the expected valuation of the asset is above our expected purchase price. We then feed that into a black-scholes option pricing model and the pricing model also takes inputs from risk-free interest rates, the expected life of the option, price volatility etc.

The fact of which has probably had the most impact on the purchase price valuation recently has been the in the increase in the risk-free interest rates. As an example, if you look at the US treasury bill rates, the one-year rate went from 2.8% as of 30^th June, which is the previous measurement date that we use for the options, up to 4.7% as of 31^st December. So, that has triggered part of the increase in the valuation.

Q4: What would you normally expect aircraft transition costs to be around?

A4: Theoretically, we shouldn’t incur any aircraft transition costs except for perhaps some legal fees associated with writing a new lease when we’re transitioning from one lease to a new lease. Also, perhaps some costs to move an aircraft  to a new delivery location.

Generally speaking, if the lessee has performed the lease correctly, the aircraft should be returned to us with all of the major components in air-worthy condition, and in accordance with redelivery conditions that are set out in the lease. We then would also receive cash compensation for utilisation of major component s since their last overhaul. So, normally we wouldn’t expect to incur transition costs in that situation.

What’s happened recently is that, for instance, we took redelivery of a 737 from Garuda as we had to terminate the lease because of non-performance by Garuda. When we took the aircraft back, both engines needed to be overhauled so we had to incur that cost but normally, transition costs should be minor or zero.

Q5: Now, EBITDA interest increased from 1.9 to 2.1, should we expect a rating upgrade at any point?

A5: Our rating assessment at the moment is B-, with stable outlook, and that rating was issued by S&P in August 2022. The fact that we have a stable outlook means that S&P believe that the rating is not expected to change within 12 months from issuing that ratio. So, the rating isn’t expected to change perhaps until later this year when it will be reviewed again.

Obviously, it would change if there were major changes in the business or the funding of the business such as a substantial repurchase of debt or big improvements in credit ratios such as the debt to equity ratio.

Q6: Just looking towards the outlook, how is the availability of secured debt? Are you confident you can get funding for upcoming deliveries?

A6: Yes, secured debt is certainly available for airlines with good credit standing. As an example, Avation recently refinanced two aircraft lease to airBaltic and we were able to obtain competitive financing and actually increase to the LTV ratio on those aircraft.

So, we are confident that we’ll be able to arrange leases for the two ATR deliveries that we have coming in 2024, and we’ll then be able to arrange secured loans against those leases.

For airlines with lower credit standing, there’s always the backstop option of ECA-backed funding which is available for new aircraft, and we have used that in the past.