Why we should help both airlines and Izakaya which is a small Japanese pub now
When you get on an airline, JAL, ANA, American, and others, you might think that these companies own the planes because you see the big company name on them.
That would be incorrect. It is said that there are roughly 20,000 commercial aircraft flying in the sky today, half of which are leased. Ultimately, tens or hundreds of thousands of investors around the world, including Japan, are holding these aircraft. This means that the majority of aircraft are securitized.
Airplanes can be 5 to 6 billion yen even for a small private jet, and 30 to 60 billion yen for a big plane. It is not something you can buy by cash, even for the big airlines.
Therefore, airlines lease the planes from leasing companies for a long period of time under "lease contracts" that last at least five years and up to 15 years or more. But since it is a lease, you can' not say "I will stop it" in the middle of the contract. The lease contract does not allow you to say it. You hold long-term debt now.
However, the leasing companies themselves do not own the planes. Usually, leasing companies sell airplane lease contracts to investors around the world as in the form of a small securitized product, for example, 10 million yen per unit. In other words, the leasing companies are trying not to take any risks yourself. it is the securitization of airplanes. it is a pass-through product.
Airplane leasing products are a highly attractive product. The reason is.
1) Annual yields from these products often in excess of 10 percent. In Japan with negative interest rates time, it seems a really attractive financial product, and many wealthy people, including banks, especially regional financial banks, have invested in a lot of aircraft leasing products, In today, What's more, the investment targets are planes from aircraft companies that you can see, touch, and know well. Don't worry, says a salesman.
2) What's more, it's also a special product for tax-saving purposes. If you purchase an airplane lease product, you can write off 80 percent of it in the first year and the remaining 20 percent in the second year as a full loss under Japanese Tax Law. It helps to save tax for the wealthy.
However, it's not all good stories. There are several risks. These are:
1) Interest payments are mainly denominated in U.S. dollars. Therefore there is a currency risk for Japanese investors. Especially when the yen strengthens and the dollar weakens, you can lose money unexpectedly. Of course, however, in the opposite case: an unexpected exchange profit may be made.
2) Non-cashable. Since there is no market for aircraft leases, they are often contractually prohibited from being sold or exchanged for cash. That is the leases have liquidity risk.
(3) The redemption of intermediate interest and principal is "not" guaranteed. This is a serious problem now under COVID-19 shock.
The last risk has not been paid so much attention, so far. It was the sales talk of a salesperson at a leasing company that there has been little reason to think that a big, famous airline would go bankrupt. In fact, the airline industry has been suffering from a shortage of pilots for the past 20 years or so. It was such a booming industry.
This time, however, we are under a coronal shock. Suddenly, the coming and going of the people stopped. Airline companies have been paying labor and leasing costs based on the fact that expected future increase in passengers and the cash flow from in passengers on a daily, albeit seasonal, basis.
It is said that if all of the airline's flights were to be stopped, the cash on hand would be zero in about two to four months.
But note that the situation is also the same for small Izakaya, which is a Japanese pub. They also heavily depend on money coming from day to day operations.
Already the British airline Flyby has been pushed into bankruptcy. Even the big airline Delta Air Lines has seen its stock price halved to $22 a share in the past month. Some people think that the financial crisis of 2007 is still OK because the price was $10 at the time of the financial crisis of 2007, but the corona shock will not be so easily converged. There may be a succession of bankruptcies in the future, especially for LCCs.
On March 15, the three major aviation alliances - Oneworld, SkyTeam and Star Alliance, to which many of the world's airlines belong - asked their governments for their support.
Governments seem to be willing to help, but they will not be able to bail out all the companies very well. if it were Inadequate support, smaller LCCs will continue to fail, and defaults on aircraft leasing products may become more frequent.
What are the implications of these facts?
One important consequence can be the following.
1) Why would the airlines just help! Isn't it the same with izakaya? There will always be complaints about what a "daily money business" they are. Both must be supported!
2) The corona shock is different from the financial crisis of 2007. The former is a real thing (health, life?) Many people say that the latter is a financial (credit) risk, but in fact, they are the same in that they both have the same inherent risk of securitized products.
(3) While the financial crisis of 2007 was due to the fact that "subprime real estate", a poor quality real estate that is difficult to convert into cash.
If aircraft companies go bust, won't the airlines (airplanes) be to start selling off as done during the time of the financial crisis of 2007?
4) As compared with the financial crisis of 2007, the Corona shock, a bigger, more securitized product is coming to the brink.
April 26,2020
Soichiro Moridaira, Ph.D.
Emeritus professor of Keio University
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Addendum 1.
Reuters reports that the U.S. government's support for eight major U.S. companies, including American Airlines, has been finalized. For example, it appears that the industry's No. 1 American will receive a package of aid to the tune of a whopping ¥1 trillion. The U.S. government will acquire stock acquisition rights (the right to subscribe to new shares, functioning as a call o
Addendum 2.
Australia's Virgin Airlines, the Australian subsidiary of Britain's Virgin Airlines, is reportedly under default: 21 April 2020. Total debt is 340 billion yen.
If you want to know something about "Izakaya" in English, please see the following Wikipedia's URL https://en.wikipedia.org/wiki/Izakaya
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The Cherry blossom Front is moving to the north in the Japanese archipelago now. May the peaceful everyday life return.
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