Differentiating in the Crowded Aviation Market: Case Study

Operating in a low-margin, highly competitive sector requires constant optimisation across the value chain. This case study explores how Marex supported an aviation business in differentiating its offering while managing FX risk.

Overview

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

At an average margin of just 2.6%, our client had to work smartly to ensure their entire supply and value chain was 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. 

Requirements range from filling the airline’s inventory during peak season, or helping them to start new “tester” routes to assess demand without committing to long-term leasing options, the market presented plenty of challenges alongside opportunities 

One approach our client had taken was to offer their clients – the airlines, leasing options in their operating currency. 

With the aviation industry being so heavily dependent on US dollars, this worked well for airlines who have a different operating currency and are therefore not forced to pay in US dollars. Instead, they could 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. 

FX strategy and proposed solution

Our client was very familiar with hedging. What they had not considered was the opportunity to expand their client base into new jurisdictions. 

Protecting the bottom line was the primary consideration. However, by offering local currency rates, we presented an opportunity to benefit from favourable FX market movements over the life of the trade. 

Structured FX approach with optionality

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

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

This meant that the client always had 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, but in a world of tight margins, this could improve the profitability of a lease by around 30%. 

Implementation and delivery

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. 

To ensure alignment we brought all stakeholders together and walked through the trades, from pricing to execution, risk management and reporting and then onto settlement cashflows. 

Once everyone was clear, we began trading. 

Results and outcomes

A solution that protected the client from adverse currency movements whilst allowing for upside was valuable, but only part of the story. 

The real benefit is that our client can now differentiate themselves in a crowded market and create more value for their clients.