Safwan Kuzbari, CEO of Novus Aviation Capital, says the aviation industry needs billions to finance future growth.
Tell us about the history of Novus, and briefly how it has reached this point?
Novus was established in March 1994 by a group of aviation industry professionals with long-standing and diversified expertise. Novus is mainly specialized in financing wide body aircraft and targets quality rather than volume contracts. It is thus selective in its partnerships with airlines and financiers, while aiming at minimizing investment risk.
Aircraft investment services that are structured by Novus Aviation for financial institutions and investment companies are designed individually to the investor's needs (including yield requirement and geographical exposure) and risk profile. Novus also acts as co-sponsor in its aircraft investments. Structuring aircraft leasing and financial products for equity investors includes aircraft origination, sourcing, negotiation, conclusion, management and remarketing among others. Novus’ in-house research team - supported by our senior executives who have had a lifetime of watching the aircraft industry's ups and downs, identify the components needed to successfully build aircraft portfolios for investors.
What have been some of the highlights for the firm in the past couple of years?
In the past couple of years, Novus completed various aircraft transactions, as outlined below, and established an alternative financing platform Tamweel Aviation Finance (TAF) by partnering with prominent organizations such as Airbus, Development Bank of Japan, Nord/LB and a select group of highly professional and experienced investors. TAF is engaged in finance leases and provides high LTV ratios to borrowers. Moreover, Novus opened new offices in Dubai and Hong Kong.
The leasing business has of course changed: talk us through that, and why is aircraft leasing growing?
Aircraft leasing emerged in the 1970s as a solution for airlines that did not have the financial resources to purchase aircraft outright. An airline business’ primary concerns are that of safety, the cost element and market share. A single new delivery airliner from Boeing or Airbus today can cost anywhere between US $30m and US$300m.
The airline industry is highly capital intensive but has a track record of relatively low profit margins and strong volatility that can fluctuate from profitable to loss-making operations almost overnight. Consequently, airlines tend to retain significant cash reserves in order to sustain themselves through industry down-cycles. Further, airlines tend to use the operation lease approach in order to mitigate the asset risk exposure upon disposal or retiring on an aircraft.
The aircraft leasing sector helps airlines to spread the cost of acquiring aircraft without the need for an initial capital contribution thereby helping airlines to preserve cash. As more airlines took advantage of both the cash-conserving aspect and the increased capacity management afforded by the option to return aircraft at lease expiry, demand for the product increased and more financial services companies were attracted to the business. The scale of the leasing sector expanded rapidly to the present day where around 50% of all Boeing and Airbus deliveries are directly or indirectly financed by aircraft lessors.
The Big three airlines in the GCC have become successful, and success usually attracts more competition: is this true of the leasing sector. Is it becoming more competitive?
The leasing sector has become more competitive as the global investor market recognises the revenue-generating and value-retaining properties of commercial transport aircraft, making it an attractive asset class for investment. This has been particularly highlighted since the financial crisis and the challenges encountered with other traditional asset classes like shipping and real estate.
In emerging markets, where there is a huge amount of cash available to invest as the result of successful economic growth such as in the GCC and China, the low interest rate environment has prompted fund managers to explore alternative investments and the aircraft leasing sector has become one of the most popular choices to employ funds. However, the downside of this flood of new money is that increasing availability has depressed investor returns so it is unclear how long some of the new participants will remain in this sector before funds are removed and deployed elsewhere. Consequently, whilst there have been a number of new lessors entering the market over the past few years, their investment horizon might not be as long as the traditional players like Novus which has been present during a number of industry cycles.
What does the future hold for aviation financing?
The aviation financing market is continually evolving and is highly liquid with a diversified range of financing products open to airlines. The global flow of funds enables airlines to source their aircraft financings far from their home environments and many larger airlines can access the global capital markets to find the least expensive solutions. As an example, Emirates has a widely diversified portfolio of financing products which it has utilised including funding from GCC-based commercial banks, U.S. capital markets, Japanese tax leases, Islamic, European export credit and operating leases. As commercial aviation becomes better known to the investing and financing sectors, the variety and scale of participants is likely to keep on growing. The airline industry needs around US $150bn per year (and growing) just to finance new aircraft deliveries.
How have the fuel prices affected aviation?
Fuel prices have a direct bearing on the operating profitability of airlines as, in almost every case, fuel is the single biggest expense and has accounted for almost 50% of the total operating costs for some very efficient low-cost carriers in the recent past. The increased profitability and additional ‘free cash-flow’ (i.e. not needed for operations or debt service) could allow some airlines to pay cash for some new aircraft or tempt them to prolong the service life of older and less fuel efficient aircraft in order to save on the additional capital outflows from acquiring new.
However, there has not been much evidence of this so far as airlines haven’t yet benefitted fully from significantly reduced fuel prices over the past year due to wrong-way fuel hedging. Nonetheless, IATA expects an almost doubling of global airline profits during 2015 to US $29.3bn with lower fuel prices being the driver. Consumers should also benefit as airlines start to pass through some of the cost savings in order to stimulate further traffic growth.
What about the future, the Middle East region is pretty unstable – is it a risk leasing planes to airlines outside the GCC? Does this mean that you as a firm are focusing outside the region?
One of the positive investor attributes for an aircraft is in its high mobility so the risk in lending to Middle East airlines outside the GCC can be justified as long as the returns achieved compensate for the additional risk of airline default. Novus operates on a global scale so Middle East airlines are an important grouping and are a viable leasing proposition as long as the markets are fully understood and risk monitoring is diligently applied. Novus has two offices in the Middle East region and we are active in marketing to airlines based there.
What is the strategy for the future?
Novus is in continuous discussions with various financiers, investors and airlines to close new aircraft transactions in the near future, and will be developing its aircraft portfolio throughout the years. Novus has been already mandated for a number of aircraft transactions to be closed in 2015 and 2016, including operating leases, aircraft management and mezzanine financing under TAF.
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