1 A Flightglobal Advisory Service ascendworldwide.com Ascend Aircraft Investment Index Summary In this paper, we will elaborate on the future capital needs of the aircraft leasing industry and the challenges faced in raising this capital in the presence of competition from other asset classes. We have established the Ascend Aircraft Investment Index (AAII) as a dedicated solution to benchmark the rewards and risks of aircraft leasing against those of other industries. The AAII will demonstrate achievable annual core returns of 6.2% for the 1991-2012 period, when paired with a return volatility of 5.7%. We will also discuss the low correlation between returns from aircraft leasing and the general economy or the performance of other indices, and its causes. The performance results of various aircraft types included in the AAII will be shown in a dedicated section, followed by a presentation of the assumptions underlying the AAII. While our analysis of past data is important to providing insight to this industry, this paper does not intend to forecast or extrapolate the future performance of aircraft leasing. Benchmarking the performance of Aircraft Leasing Portfolios A defining trend in commercial aviation has been the rise of aircraft leasing. Whereas only 2% of the global fleet in service was managed by operating lessors in 1981, this share has increased to nearly 40% today. In absolute numbers, the growth of aircraft leasing has been even more impressive as the total lessor-managed fleet has soared from less than 150 aircraft in 1981 to well over 9,000 in 2013 – a 60-fold increase. Benchmarking Historical Performance of Aircraft Leasing Chart 1: The Growth of Operating Leasing
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1A Flightglobal Advisory Service ascendworldwide.com
Ascend Aircraft Investment Index
Summary
In this paper, we will elaborate on the future capital needs of the aircraft leasing industry and the challenges
faced in raising this capital in the presence of competition from other asset classes. We have established the
Ascend Aircraft Investment Index (AAII) as a dedicated solution to benchmark the rewards and risks of aircraft
leasing against those of other industries. The AAII will demonstrate achievable annual core returns of 6.2% for the
1991-2012 period, when paired with a return volatility of 5.7%. We will also discuss the low correlation between
returns from aircraft leasing and the general economy or the performance of other indices, and its causes. The
performance results of various aircraft types included in the AAII will be shown in a dedicated section, followed by
a presentation of the assumptions underlying the AAII.
While our analysis of past data is important to providing insight to this industry, this paper does not intend to
forecast or extrapolate the future performance of aircraft leasing.
Benchmarking the performance of Aircraft Leasing Portfolios
A defining trend in commercial aviation has been the rise of aircraft leasing. Whereas only 2% of the global fleet
in service was managed by operating lessors in 1981, this share has increased to nearly 40% today. In absolute
numbers, the growth of aircraft leasing has been even more impressive as the total lessor-managed fleet has
soared from less than 150 aircraft in 1981 to well over 9,000 in 2013 – a 60-fold increase.
Benchmarking Historical Performance of Aircraft Leasing
Chart 1: The Growth of Operating Leasing
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Aircraft leasing is expected to grow even further, with the fleet under management to double over the next 15
years. As regular fleet renewals are necessary to keep up with market requirements, the aircraft leasing industry
will require hundreds of billions of US dollars in capital investment. These needs are unlikely to be matched by
the current capital providers for aircraft leasing, as the aviation sector would weigh significantly higher on their
balance sheets. Therefore, attracting new, yet untapped, capital sources will be a key factor for the future success
of the aircraft leasing industry.
There are a number of factors which make aircraft leasing an interesting investment proposition: the asset is highly
mobile yet protected by international agreements, operator risk is reduced by high lessee diversification paired
with good asset management, and the large-ticket nature of aircraft paired with expected fleet growth allow for
investment of large sums.
Before the Lehman shock, the focus of investors was on the reward potential of investments, but this has undeniably
shifted towards aspects such as investment risk, the steadiness of returns and counter-cyclical behavior. This
is understandable since the heralded benefits of diversification proved non-existent when several, seemingly
unrelated, asset classes collapsed in unison during the crash. There was nothing to provide support for investors’
equity as many of these asset classes were not backed by physical collateral.
In order to attract new capital sources, the aircraft leasing industry needs to prove its appeal in the face of
competition from other more established investment sectors. But how can this be done in the absence of any
industry-wide transparent metric? The creation of a credible industry benchmark is important for potential investors
to make informed investment decisions when comparing aircraft leasing and its alternatives. The acute need for
such a benchmark has led Ascend to create the Ascend Aircraft Investment Index (AAII), an unlevered monthly
index based on the performance of an aircraft leasing portfolio.
Ascend Aircraft Investment Index – Methodology
Indices have proven to be effective instruments that track and benchmark the performances of various
business sectors or investment strategies (e.g. S&P MidCap 400, S&P SmallCap, S&P 500). In addition,
they can capture aspects such as return volatility and return correlation with the performance of the general
economy or other assets.
In order to create an index, we have to adopt an underlying model that simulates the way an aircraft leasing
portfolio functions and its respective returns over the period of measurement. We also need to specify assumptions
concerning the investment strategy that will be undertaken for the hypothetical aircraft leasing portfolio.
The aircraft portfolio model underlying the AAII is able to simulate the various strategies pursued by an aircraft
leasing company.
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In this paper, we will analyse the case of the so-called “passive strategy” and will refer to the index as “AAII
Passive”. The passive strategy precludes any active trading in the portfolio in reaction to temporary market
developments. It allows us to measure the core returns from leasing, which can be used as a yardstick for the
performance of any active strategy. The details of the passive strategy are explained in depth in the next section
and in the Appendix.
The aircraft portfolio leasing model underlying the AAII is based on the way a real aircraft leasing portfolio functions.
The model simulates the essential processes in a leasing portfolio, such as acquisitions and disposals of aircraft,
and the placement of aircraft on consecutive leases. Its inputs are based on Ascend’s historical Market Values and
Lease Rates to accurately mirror past circumstances.
When calculating the monthly returns from the portfolio, the model includes factors such as asset appreciation/
depreciation, lease stream, lessor fees, capital expenditure for new acquisitions and capital gains from asset
disposals (if any).
The Total Rate of Return for a single month is derived as follows:
*Low volatilities in the 1991-2000 decade for certain types (737-800, A330-200) are to a large effect due to a late entry into service and resulting limited number of data points.
**Cells highlighted in red in the “Return” Column indicate returns lower or closer to the long-term risk-free interest rate for the 1990-2012 period
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To this end, the AAII Passive strategy satisfies these requirements as it has low positive/negative correlation with
all asset classes listed in the tables below. The correlation ranges are broken into four groupings;
1. Red represents high correlation less than or equal to -70% and greater than or equal to 70%
2. Yellow represents medium correlation less than or equal to -50% and greater than or equal to 50%
3. Green represents low correlation less than or equal to -15% and greater than or equal to 15%
4. White represents no correlation
To protect against the downside, investing in a combination of assets that fall between the ranges identified in 2-4
above are best. The tables below show the correlations between asset classes for the periods of 1991-2000 and
2001-2012.
During the 1991-2000 period there was low correlation between the AAII Passive index and all other asset classes.
*Low volatilities in the 1991-2000 decade for certain types (737-800, 737-700, A330-200) are to a large effect due to a late entry into service and resulting limited number of data points.
**Cells highlighted in red in the “Return” Column indicate returns lower or closer to the long-term risk-free interest rate for the 1990-2012 period
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Chart 8: Ascend aircraft investment index – comparative performance benchmark
Chart 9: Selected narrowbody aircraft total return indices between 1991-2013
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Chart 10: Widebody aircraft total return indices between 1991-2013