Are aeroplanes just ships of the sky?
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I was hoping to get a quick sense for whether, when building IRB models, banks typically have:
- separate models for Aviation vs. Shipping, or
- a single “object finance” model that covers both aircraft and ships (and possibly other objects which have similar deal structures and risks)
A client is debating whether to go with one or two models – for extra context, they have a much larger shipping portfolio than aviation, so they’re hoping a single model might get past “volume concerns” for the aviation portfolio
I think I’d prefer two models, but with very similar underlying structure
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I only know banks that have these separate. Sometimes with extra models for helicopters and yachts too…
Small sample size though
Aren’t the risk drivers pretty dissimilar? In shipping you have this interplay between long term market dynamics (construction orderbooks vs. scrapping age vs. global trade) and short term dynamics (e.g. water levels in the Panama canal, whether you have to re-route from the Suez canal due to geopolitical tension, …) which I don’t think Aviation has in the same way
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I am also used to these being different models (and yachts being their own thing as well, given that they are fundamentally consumer goods with radically different drivers than cargo ships and the such).
I know more about underwriting models where airframe and engines (often financed separately) are also separate models given the different dynamics in those markets
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When I built Asset Finance models many years ago we built the same model for both Shipping and Aviation and then you differentiate by key cluster characteristics with their different volatilities. e.g.,
- Aviation – type: widebody / narrowbody / regional + subtype: Airbus Axxx
- Shipping – type: tanker / drybulk / gas / container / offshore + subtype: e.g., handy / aframax / panamax / suezmax
- Readiness – ready-built / in-production
Plus then the typical SPV characteristics you simulate in specialized lending
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Airplanes are ships of the sky from an LGD perspective, but not from a PD perspective. Railcars are also ships of the land by the same token
From a PD perspective, they are generally separate. The maritime companies and airlines have very different obligor dynamics
From an LGD perspective, the main drivers are downtime (i.e. how long the asset sits idle after a default) and shortfall (i.e. the decrease in the new lease after a default since usually periods of default coincides with pressure on asset prices and lease rates), but not the value on the plane. It is seldom that you’d actually lose the asset in any meaningful way, so that does not affect the LGD. There are international treaties that lessors would seek the jurisdiction of the lessee be a part of, before sending an expensive plane over with a long lifetime left on the asset. The other jurisdictions get the older planes where the lessor does not care all that much, whether they get it back or not
To be clear, you’d parameterize the LGD model differently for different assets as the downtime and shortfall dynamics are different. But the model structure is the same. So, it becomes a bit of an optical choice on whether you call that a single model or not