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A Fireside Chat with Prof. David Yu, Chairman of China Aviation Valuation Advisors

Insight by

Helane Becker, Cowen’s Airlines & Aircraft Leasing analyst speaks with Professor David Yu, Chairman of China Aviation Valuation Advisors and Asia Aviation Valuation Advisors. They discuss the reopening of China’s economy, current thoughts on market values for aircraft and lease rates, and expectations regarding the recovery of the aviation sector.

Press play below to listen to their conversation.


Speaker 1:                       Welcome to Cowen Insights, a special look at the coronavirus and its effects on sectors across the economy, as well as the policy arena. You will hear the latest insights from leading experts about where things stand and what’s around the corner.

Helane Becker:                [00:00:30] Hi everybody. And thank you very much for calling in this morning. So I’m Helane Becker. I cover the airline industry here at Cowen, and I’m joined this morning by Dr. David Yu, who is the chairman of China Aviation Valuation Advisors and its sister firms, Asia Aviation Valuation Advisors and Korea Aviation Valuation Advisors. They are China, Korea [00:01:00] and Asia’s first professional aviation valuation and advisory firm providing investment and financing solutions to investors, partners, et cetera.

                                         Dr. Yu is also a Professor of Practice in Finance at NYU Shanghai, where he teaches investing and financing classes with a focus on cross border and real assets in NYU Stern and HKUST’s Masters [00:01:30] of Global Finance Program and NYU Stern Shanghai’s Masters of Quantitative Finance Program. Dr. Yu is well-regarded. He holds a CFA, he has a PhD in finance, and he also has an MBA in general management with a concentration in finance. So Dr. Yu, thank you very much for agreeing to spend this half hour with us. We really appreciate your time. And as I said, thank you very much. I know it’s [00:02:00] late in Shanghai right now. I think you’re in Shanghai, right?

David Yu:                         Yes, I am.

Helane Becker:                Yeah. So I know it’s late Friday night, so thank you very much for giving a part of your Friday night with us. So let’s get right into it. Here in the US, they’re starting to think about reopening the economy. What was the government’s process to reopening the economy in China? And do you think there were ways it could have been done better?

David Yu:                         [00:02:30] Well, the restart in China, the restart of the economy has been multiple tiers. And today I’ll say, I’ll work backwards. So today we are not fully back to normal. Schools, which are controlled by various provinces, some of which are open, [00:03:00] but places like here in Shanghai and Beijing, they’re not open yet. There are plans to open by the end of the month for just the grade 9 and grade 12 students, high school and middle school. But other grades are not back open. To me, this is a big area because this is a big area of concern.

                                         Other parts of the economy, public [00:03:30] spaces, movie theaters, et cetera, have all really reopened at this point. But I think this it’s a gradual, gradual mix. And I think they’ve been taking a cautious approach, I think in terms of going forward there, because they’re still wary of any additional outbreaks or increases, et cetera, that it’s not [00:04:00] fully open today. So I just hope that it continues. So it’s a work in progress, that’s probably the best way to put it.

Helane Becker:                Okay. So I guess in a way, that’s what we have to look forward to here, because we’re kind of in the same boat where we haven’t started to reopen anything, but they’re starting to look to do that over the next, I would say two to four weeks. Anyway, I’m hoping for that. So have there been any [00:04:30] signs of the second wave or hotspots since people resumed somewhat of a normal life? I don’t know if how your days are going and whether you’ve resumed somewhat of a normal life. I know you’re teaching online.

David Yu:                         Sure, no problem. So I guess first off, there has been some outbreaks, but most of the outbreaks have been important [00:05:00] ones. I think the cases for coming from Russia have been quite big, and I think they’ve started to address that. And also down in the south in Yunan province, they’ve also stopped the border there. So it seems to be at least from the numbers here, that it’s mostly from imported cases versus organic cases.

                                         For myself these days, like I said, campus [00:05:30] is actually closed. So you have to get special approval to get back to my office, for example. So teaching online, but restaurants are open. Movie theaters, was open briefly, and then it was shut down. But, most things like gyms, museums, and other public places, I would say, Shanghai itself from what I’ve seen from friends and other people, it’s more [00:06:00] than 50% back to normal. Lots of people on the streets, all wearing masks, of course, but it’s getting quite, sometimes crowded from all the things I’ve seen. So it’s showing signs of coming back for sure.

Helane Becker:                That’s for sure. Really, really good to hear because that’s what, you’re about six weeks after, or six weeks into reopening now?

David Yu:                         [00:06:30] Yeah. About six weeks to eight weeks. Yeah. I went into lockdown what, January 21st. So yeah, that’s about right.

Helane Becker:                So, when you think about your business, how do you apply or do you apply machine learning to valuation and how are you thinking about current market values for aircraft [00:07:00] and lease rates, let’s say over the next year or two?

David Yu:                         That’s a great question. It’s always a work in progress, the group company and group of companies are all very new, it’s a startup in that sense, but obviously lots of inherent knowledge. I think one of the main things I wanted to do in working with [00:07:30] the data and such is actually use it to a much higher degree. And I think the aviation industry, especially on the valuation side, everyone has models, but at the same time, a lot of the models have been around for a long time. So I think there’ll be ways to incorporate many of the advances such as machine learning to our profession. When [00:08:00] I say our profession, I mean the valuation and forecasting profession and this is frankly, it’s a somewhat tough proposition. It’s not as much data as other fields, but it’s definitely yielding some interesting results from this. It’s something that we continue to kind of refine going forward.

                                         And I guess I’ll address [00:08:30] the second part of your question, sorry about that. So the second part of your question was about going forward. Look, I think we’ve obviously, I’m sure other people have as well, is run multiple scenarios of what’s going to happen, and what if. I think all of the modeling is really kind of predicated upon when specific regions or the world [00:09:00] per se, stabilizes, and therefore can see kind of a light at the end of the tunnel. With that kind of data point, you can really get a much more refined basis in terms of how things go going forward.

                                         So as things are today, it’s obviously very bad in the sense that all aircraft are all sitting on the [00:09:30] ground. We look at it as we continue to monitor things, but I think there’s two ways to look at it. One is a basic kind of a long-term viewpoint of economic useful life, a.k., are you looking at shorter term horizons or much longer term horizons? And second off, really from a data point, point of view to today, these last few months, there’s been very [00:10:00] few aircraft transactions to put in. So, there’s been talk of up and down… There’s a wide range of opinions here, but I think from our point of view, we look at it from a longer point, but dissect it into specific subsections where we’re going to make our calls on valuation.

Helane Becker:                That’s hugely helpful. That was a lot of information [00:10:30] to think about actually. So for the Chinese airlines, I know China Southern reported traffic overnight, and they said that traffic was still down 72% year over year, but it was up 83% month over month. So, obviously they had a low bar to compare to in February, but how [00:11:00] is that, and let’s just say, I don’t know how big they are, I should know this relative to the rest of the Chinese airlines. But, how has that recovery gone? And as part A of the question and part B of the question is, I know the Chinese industry grounded most of its fleet in January, how much of that has come back and is there a percentage of that fleet that will never come [00:11:30] back?

David Yu:                         Good question. So, China Southern is the biggest in terms of fleet size and one of the big three. So together, roughly what, 70, 80% of total traffic. So a big component there. In terms of China traffic, it started early, in China. So really kind of towards the end of January, [00:12:00] when I went into lockdown, the trends started trending downward. But at the end of the day, once the first kind of signs of reopening were where folks could go back, it wasn’t full lockdown. Then at that point, it was a big rebound, but that was a very temporary rebound, and if you think about it, a lot of folks were trying to get back home to their working [00:12:30] homes, I mean, from their kind of family vacations or home holidays, et cetera.

                                         So, that makes sense. And now, we’re now in… And then the numbers went down again. And that’s very logical in terms of just people, once they got settled, they didn’t want to go anywhere. Even today, many people, while many of the inter province type restrictions have been canceled, [00:13:00] Beijing still has it. So if you leave Beijing and come back, you have to quarantine for 14 days still, today. So this concern still is there, even for domestic travel. But that said, I think the government and CAC has been guiding the airlines into having at least somewhat of a schedule, a bump up in the scheduled carriers [00:13:30] percentage today. So, that’s where we sit today.

Helane Becker:                One question came in, do you have a sense of which aircraft would likely to be retired? Or maybe I’ll ask it this way. You guys have a fairly good rail system, right? I know when the high speed rail went in between Shanghai and Beijing, air travel dropped, [00:14:00] and I’m assuming that, that kind of air travel never really came back and people shifted to the trains. Any sense of aircraft fleet, what aircraft are being retired, how the airlines are thinking about recovery in 2021? Let’s not even talk about 2022 because that’s so far off, as to be, seems like it’s so far off anyway. [00:14:30] But any sense on aircraft retirements and maybe aircraft that could come under the most pressure?

David Yu:                         Sure. Basically for folks who’ve been following this development of China, there’s been massive amounts of new orders, right? And basically fleet renewals, as well as disposals of old aircraft. And there’s still [00:15:00] quite a few old aircraft, that’s in the books of the airlines. Some of them, a portion of them have been grounded already and parked. So, given what’s going on, I don’t see them really coming back into service. There’s a big issue of the accounting depreciation. So affecting prices, [00:15:30] especially reflecting older aircraft. So I think this in general, this will have it so that older aircraft will really kind of stay on the ground and not really come back.

                                         But at the same time, look, on a value’s basis, I would say, it’s very similar in that regards where a lot of aircraft are not going to be in demand, the older aircraft types. [00:16:00] And especially in China, it’s historically, the preference has been on new aircraft. Both because of, for various reasons, safety, just a new aspect, et cetera. But I think this trend will continue to happen. But I think for the second, third tier airlines, they definitely will start [00:16:30] considering other options to basically decrease their cost basis.

Helane Becker:                Right. I don’t know if you saw this, this morning or overnight, it was overnight for me anyway. Norwegian is in the process of restructuring, right? And I mean, this is a slightly off topic, but one of the potential solutions is that air cap holdings, which is one of the world’s largest leasing companies, winds [00:17:00] up owning some piece of Norwegian. Do you think we would see more transactions like that with airlines? And then I guess the other way round, with less stores owning parts of airlines, because repossessing their planes may not be the right answer because they’re just going to get parked anyway for a while. Do you think that’s a trend we could see?

David Yu:                         Ah, that’s an [00:17:30] interesting question. I know, as a former lessor industrial lessor, I would say my preference has never been to be an equity owner of an airline, right? You really are as an operating lessor, the main point is, you’re managing the risk of the residual value of the aircraft [00:18:00] and running the airline would have totally different dynamics drivers that compared to aircraft leasing. So, long story short, I think, look, I don’t think it’s something that they would want to do or would desire to do, and in some circumstances, it might be one of the few choices, especially the fact that today, not many aircraft, what are you going to do, take your aircraft back? Where [00:18:30] are you going to place it? You’re going to put it… You’re just going to keep parking it. And if so, its like, “How long are you going to do it?” So, this might be a good option in order to extract some value in an otherwise negative circumstance. So definitely I wouldn’t rule it out for sure, but it’s not something that’s preferred.

Helane Becker:                Right. I think the only reason [00:19:00] you do that is if you repo your aircraft, it’s going to get parked, to your point anyway, as opposed to leaving it on property, you know how it’s being… If you take it back, you know how it’s being stored and you know that at some point you can get it ready for another operator. The problem is it’s probably one or three years away before another operator shows up, right?

David Yu:                         Yeah, no, [00:19:30] if you look at the GFC, basically sometimes, it took over two years to get certain types of aircraft replaced, right? Others, more streamlined ones were quicker. But the issue, I guess, is another issue of just basically, how do you maintain your value of your aircraft, if it’s in a position with an airline that’s not in the greatest financial shape. So as a lessor, [00:20:00] you just have to really kind of look at it and have really good asset management in order to avoid, say asset stripping or other types of cannibalization of parts, et cetera, that would damage the value of your investment. So these are lots of different nitty gritty things to look at, but I’m sure, especially with Air Caps, kind of pointed the other day, they’d definitely consider.

Helane Becker:                Right. Do [00:20:30] you think any of the Chinese airlines are looking to make incremental orders for aircraft or is it too soon in the recovery process for them to even think about that?

David Yu:                         I think at the moment, I think they’re with everyone else in the airline space where they’re trying to A, avoid losses as much as possible in [inaudible 00:20:56] and of course, find a way to [00:21:00] restart the engines, restart the routes and especially on the international side, right? And so China has effective closed its borders to international foreign passport holders. But, if they can get a visa, they can still come in, but very few of those have been granted. So, that is the biggest issue I think [00:21:30] is, order is now is it seems to be in the longer period, definitely there’ll be more orders to come. But one thing to note is that orders have historically come from on a government level, base level and then gets re split between the airlines. So it’s not only a airline specific kind of issue, but it’s also partly a foreign policy on the national level decision as well.

Helane Becker:                [00:22:00] Oh, gotcha. Okay. And then putting on your leasing hat for a minute, how do you think early returns, rent holidays and repossessions affect maintenance events and cash flows for the lessors?

David Yu:                         Yeah, so [00:22:30] I’m sure every airline, whether they have cash or not so much of it, have asked every one of their lessors for rent holidays or rent deferrals. That’s what I’ve heard from many of folks. I think the issues are really from a lessor’s point of view is, are those asks, are they legitimate, and which ones to grant, first off. [00:23:00] Because there’s lots of airlines with lots of cash, but they want rent deferrals and rent holidays. And as a lessor, you go, “You have money. What’s the issue?” At least first off and if you think about it, as a lessor, you’re giving essentially in some ways it’s an asset you want to be… You want your assets secured, right? [00:23:30] So you want to not be the first person in terms of unsecured lending. So the question then is, are you going to elongate or restructure the lease somewhere else so that you can maybe extend the tinder, et cetera.

                                         But at the end of the day, I think cashflow wise, they’ll definitely make some concessions for sure. It’ll be a varying degree. I think it depends on the asset quality of the [00:24:00] underlying less use of the portfolio. If it’s really bad, then I’m sure there’ll be more triage, I would call it, that’s needed. But remember, a lot of the lessor, a lot of the deals have underlying secured debt underneath. So it’s great to give airlines, rent holidays, et cetera, but you also have your own obligations for financing. [00:24:30] So that needs to be addressed as well. So it’s a double-edged sword in that sense. So it gets more complicated, with more complex funding structures with some of the folks.

Helane Becker:                Okay. Have you heard at all, if any of Chinese airlines that were granted rent deferrals have started to pay back [inaudible 00:24:53] some of those?

David Yu:                         Let me put it this way. There have been [00:25:00] rents that have been paid that historically you wouldn’t have thought it would. And I’ll say that H&A for a little bit, have paid some of those rents, but those might be a more individual type examples there. I would say, look, from a local lessor’s point [00:25:30] of view, I think there’s been… A Chinese lessor’s point of view, I think there’s been support. There’s been a lot of support for the Chinese airlines from them. And I think there’s been underlying support from government’s point of view. So, it’s somewhat, almost semi subsidized kind of point of view.

Helane Becker:                So I have two more questions that came in. The first one is with respect to the lessors. [00:26:00] Do you think that there are any… We always talk about airlines going bankrupt. Do you think any lessors will fail during this timeframe?

David Yu:                         I think smaller, mid-sized ones, there definitely could be some that don’t make it out of this. And the reason I say that is if you think about it, the cycles, current cycle, it depends [00:26:30] whether you subscribe to the super cycle theory or not. But the mini cycle has started from 2008, 2009 until now. So 10 years and 20 years, if you subscribed until from 9/11 to now. But basically, if you think about it, no one in this 10 years, all are trending, prices going up, things have done well, it’s been bullish, and for the folks who have been around [00:27:00] for multiple cycles, I think it’s different. I definitely see there’ll be some pressures for lessors, especially for the newer ones, just given the fact that this will be their first time seeing a big decrease market swing here.

Helane Becker:                Right. And then the only other question that came in had to do with pilots. Some of the airlines in China had been reliant on foreign pilots. And I know they were, [00:27:30] I don’t know if the right word is furloughed, laid off, terminated, whatever. Do you see that being a permanent, I don’t know, a thing, the right word, that those pilots won’t be coming back to China?

David Yu:                         At the moment, remember in a relative kind of cost point of view, the foreign pilots [00:28:00] were handsomely paid folks. And they made anywhere I’ve seen from anywhere from three to 10 times as much as a local pilot, at times. So from that perspective, a lot of them were first to go, right? The cost is relative. And today, [00:28:30] the demand isn’t there enough that the existing pilots are utilized 100%, so I don’t see the big spurge or a big increase in foreign pilots reentering the space until things stabilize a bit more. So, to me, this is just how long is the recovery going to take, type question as well.

Helane Becker:                That’s really great. [00:29:00] And that was kind of the last question I had. Is there anything that wasn’t asked or I didn’t ask that you wanted to add as a closing remark?

David Yu:                         Yeah, I guess I wanted to say that, look, everyone’s trying to look at many data points and try to read the tea leaves as they say, and we all do, lots of data, et cetera. But at the end of the day, what we see is [00:29:30] in the most kind of a need for help is many folks have not come to fruition in the sense that they need to assess their risk or their positions more, finally. I think a lot of people are still either don’t want to hear it or are in denial or just still in shell shock. But I think that the more people who will have are coming grips to [00:30:00] what’s happening today, I think that way we can get out of this faster. So I guess that would be my concluding remark.

Helane Becker:                That’s really helpful and well reasoned and thought out. And Dr. Yu, thank you very much for participating in our discussion this morning. I really appreciate your time and we’ll let you go and say, have a nice weekend and stay healthy.

David Yu:                         [00:30:30] Thank you very much us too, you and all the rest of you as well, stay healthy and I hope we get through this, all of us, soon.

Cowen Host:

Helane Becker, Airlines & Aircraft Leasing Analyst


Prof. David Yu Chairman of China Aviation Valuation Advisors, based in Shanghai

Professor David Yu is Chairman of CAVA & AAVA. He is the only Senior ISTAT (International Society of Transport Aircraft Trading) Certified Aviation Appraiser in N. Asia & China and one of ~20 globally. He is a professor of practice in finance at New York University Shanghai and Stern School and is a recognized expert in cross border investing, financing and valuation. His articles and op-eds have appeared in Forbes, Nikkei Asian Review, Business Traveler, Airline Economics and he is a contributing editor at Airfinance Journal. He is an active business and economics commentator for China Radio International, ARD German, ABC Australia, among other media. He is a Senior Instructor for IATA. He is the external thought leader in aviation finance and leasing for KPMG Ireland and also a recognized Aviation Expert by the Export Import Bank of China and the Tianjin Free Trade Zones among others. He acts as a board director or advisor of companies (incl. airlines) and investment funds.

Previously, he was the Managing Director and Head of Asia for IBA Group, a UK based aviation valuation firm. CIO of Inception Aviation and the China Chief Representative, VP Asia (Head of Asia) and Executive Committee member at Libra Group, a large Greek family investment conglomerate, where he was responsible for all of Libra’s Asian interests including aviation, shipping, energy, hotels and real estate. Prof. Yu was based in four continents before running Asia and founding the China business. Prior to Libra, Prof. Yu worked in investment banking with Bank of America Merrill Lynch’s Global Industries Group, where he focused on M&A, debt and equity transactions in transportation, aerospace and defense, and diversified industrials.

Prof. Yu is a CFA Charterholder and has a double major B.A. (full honors) and an M.S. from Johns Hopkins University. He also has an M.B.A. from New York University’s Stern School of Business. He has a Ph.D. in Finance from University of Nottingham Business School and studied at Peking University’s Guanghua School of Management and the National University of Singapore’s School of Business. He is a member of ISTAT and CFA Institute and is a frequently invited speaker at conferences.

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