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Differentiating in the crowded aviation market

Aviation | HCFX

Scenario

There are high volume, low margin businesses. And then there are airlines.

At an average margin of just 2.6%, our client has their work cut out, in ensuring that their entire supply and value chain is optimised to compete (and be profitable) in such a competitive sector.

Our client “wet-leases” aircraft to European airlines. This means that they supply aircraft, crew, insurance and maintenance as a package to airlines.

Whether the requirement is to fill the airline’s inventory during peak season, or to help them start new “tester” routes (to assess demand without committing to long term leasing options), the market presents plenty of challenges.

How do you get an edge in such a market?

One approach our client can take is to offer their clients, the airlines, leasing options in their operating currency.

With the aviation industry being so heavily dependent on US dollars, this works well for airlines who have a different operating currency, and are therefore not forced to pay in US dollars. Instead, they can pass this FX risk to our client.

This was something they were keen to explore, but without the risk of falling foul of the FX market.

Solution

Our client is very familiar with hedging. What they hadn’t considered, beyond creating value for their customers, was the opportunity to expand their client base to new jurisdictions.

Protecting the bottom line was first and foremost the consideration. However, in offering local currency rates, we present an opportunity to benefit from favourable FX market movements over the life of the trade.

Let’s explore that a bit more.

Whilst normally hedging with vanilla FX forward contracts, we’d be agreeing to exchange a set amount of currency, at a set rate, at a defined date in the future.

By using some optionality, we were accepting a very slightly worse rate than the forward, but with the opportunity to benefit if the spot market has moved favourably.

This meant that the client always has a known worst-case rate of exchange, but the opportunity to improve by up to 1.5-2% versus the forward, if the market moved favourably.

A small percentage gain, perhaps. But in a world of razor thin margins, this could improve the profitability of a lease by around 30%.

Implementation

Implementing the programme was a relatively simple process. But there were more people involved in the transaction lifecycle than there were in deciding to make the change.

So, we wanted everyone up to speed.

Rather than a series of meetings, we brought all the stakeholders together and walked through the trades, from pricing to execution, risk management and reporting, and then onto settlement cashflows.

After everyone was clear, it was time to make a start and begin trading.

Outcome

A solution that protects the client from adverse currency movements whilst allowing them the opportunity of upside is great, but it’s really just the icing on the cake.

And the cake itself? Our client can now differentiate themselves in a crowded market and create more value for their clients. Which in turn is winning them more business – and that in turn is winning HCFX more trades. So everybody’s happy.

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