potential funding sources could be non-core fleet sale and leasebacks, asset optimization, pension loan or senior unsecured bond.
According to Finnair, fleet renewal is an essential part in a successful strategy implementation. This is justified with reduced unit costs and improved fuel efficiency. In first phase in 2008-2010 MD11 fleet was replaced with Airbus 330/340 aircraft. The second phase was carried out in 2012 as 9 aircraft were reduced from European fleet and Embraer traffic was transferred to Flybe. The third phase is to be initiated during 2013-2014 when Boeing 757 fleet is going to be replaced with Airbus A321 ERs. The fourth and currently final phase from is scheduled to start in the second half of 2015 as Airbus 350 XWB aircraft arrive. They will partly replace current A340s and partly increase capacity. As a result, this harmonized Airbus fleet brings asset and crew utilization benefits. Overall, Finnair has very modern and quite consistent fleet. The company has the possibility to adjust the size of its fleet flexibly according to demand and outlook due to its lease agreements with different durations.
Boeing 787, launched finally in 2011. Airbus will respond with their brand new A350 extra- widebody which should be entering into service during 2015. In Finnair, A330 is used in shorter long-haul routes such as New York, Seoul, Delhi, and Nagoya. Among airlines A330 is considered to be very cost efficient with low operating costs per seat. It also has good cargo capacity and as a whole offers excellent operational flexibility. With total of 622 orders up to date A330-300 is Airbus’ best-selling widebody. The A330-300 can carry more passengers than the B787, is cheaper and is more readily available.32
When new aircraft types are launched, which occurs usually in about 20 year cycles, the values of older models in same category naturally tend to decrease. At the moment in the widebody category Boeing is on the verge of launching their new 787 Dreamliner to the market while their existing model 777 is still being produced with increasing rates.
Meanwhile Airbus is producing both A330 and A340 types and the scheduled introduction of their newest widebody A350 is in the year of 2013. Naturally both manufacturers are now promoting the sales of their existing flagships but the risk of increased depreciation in the future is imminent. The production rates are thus high but the demand for widebody aircraft is still limited. The aftermarket of those aircraft can be challenging in the future. Indeed, smaller narrowbody aircraft are a lot more liquid than their larger counterparts. My data provider, the Aircraft Valuation Analysis Company, describes the current market as stable than before but at the same time mentions weakness of the global economy and fragility of the aviation industry. This can be seen as slightly negative effect on the current and short term market values of aircraft. However, it must be stated that although the market of used aircraft have slowed in general, A330-300 have regained the 2007 values and lease rates as previously mentioned.33 The demand for A330-300 is solid and the scarcity of the aircraft pushes the values and rates up.
The popularity of A330 has been increasing ever since its launch. The aircraft seems to fit in the fleets of almost 100 hundred operators as the aircraft is considered very versatile and flexible. Also continuous improvements applied by Airbus to its jetliner result in lower costs and better operations for the A330-300. This would supposed to have a positive impact on the popularity. These advancements range from weight reductions in the airframe to introduction of modern passenger cabin features and form system improvements to engine upgrades and advanced navigation systems in the cockpit. They also result in longer maintenance check
32"Widebody Values Could Gain From Growth."Aircraft Value News22, no. 3: 5.Business Source Complete,
EBSCOhost, retrieved 5.3.2013
33 2012 Operating lease survey. Airfinance Journal. Jul/Aug2012, p1-1., retrieved 1.10.2012
intervals.34 A330-300 is a good choice in Finnair’s harmonized Airbus fleet because of lowered utilization costs of personnel and maintenance.
According to Aircraft Finance Guide, the global A330 fleet has an average age of less than seven years. This means that the majority of in-service aircraft are still with their original airline operators. Over 1,000 A330 passenger aircraft have been sold and more than 750 are in service with 95 operators. According to Ascend, only 10 A330s are in storage today, which reflects low supply. Airbus A330 has also been a very popular aircraft among the operating lessors. They actually manage 44% of the fleet currently in service. This is a high percentage and carries the risk that airlines may choose to manage capacity in future downturns by simply not renewing leases as they expire. As so many airlines have ordered either B787 or A350XWB, the threat to A330 residual values is clear. Despite all the cautions arisen by these issues, the fact remains that for many routes, the A330s are the most efficient aircraft of their size available today, and apparently for many years to come. According to Aircraft Finance Guide, it will take a long time before some new competitive model has sufficient amount of aircraft in the market. The 787-8 is set to be the first new aircraft to threaten the A330 but it could be 2017 before sufficient numbers of them are in service. The larger B787-9 and A350XWB-900 are not likely to reach sufficient numbers until perhaps as late as 2020, meaning that the threat to A330-300 values are likely to be lower.35
34 http://www.airbus.com/aircraftfamilies/passengeraircraft/a330family/a330-300/, retrieved 2.3.2013
35 Aircraft Finance Guide 2012, UBM Aviation, http://edition.pagesuite-
professional.co.uk/launch.aspx?pnum=6&eid=1607145a-5fa1-4ac4-aae9-e66ea4abee12, retrieved 2.3.2013
Graph 18. Development of A330 share of all widebodies.
This study is built around a hypothetical acquisition of a new Airbus A330-300 aircraft in the beginning of the year 2013. My purpose is to study particularly the financing decision of the acquisition not the investment decision. However, one can draw conclusions about the role of the possible new A330 aircraft. As Finnair states in their financial report 2012, the company is evaluating alternative to minimize the effect of possible delays on deliveries of A350. So, the acquisition of A330 would most probably be a temporary alternative due to delays or alternatively because of sudden increase in demand of long-haul routes. Because of Finnair’s reliance on the success of long-haul operations between Europe and Asia, the need for fuel- efficient and modern widebody aircraft is undisputable.
3 THEORETICAL FRAMEWORK
This chapter is divided into three sections. The first one presents briefly few necessary definitions. The second section introduces the most relevant existing literature to date by first presenting the investment analysis with different methods and their benefits and challenges.
Then the use of these methods in airline business is reviewed. Finally, few words about specific challenges of the estimation of the cost of capital and residual values are spoken. The third section explains tax and accounting treatment of leases more thoroughly.