Soapbox: New frontiers in aircraft finance
Funding for new commercial aircraft has been hit by the Eurozone crash but there is some good news
With the list price of new and cost-efficient commercial aircraft ranging from $80 million-plus for a modern narrowbody, to over $200 million for a modern widebody, the availability of aircraft finance is clearly a key ongoing issue for airlines and manufacturers alike.
The combination of high fuel prices and aircraft technological progress means that the operation of the latest aircraft is a “when” rather than “maybe” issue for most airlines. Inevitably, the recent turmoil in global financial markets has affected the availability of aircraft finance. Financing institutions, driven by the new capitalisation rules and their desire to reduce risks and exposure, have less money to lend and are increasingly choosy about who they lend it to.
Major airlines can still finance new aircraft with commercial banks but airlines of lower credit quality find it difficult. These airlines will continue to use Export Credit Agency (ECA)-backed finance and Sale and Leaseback (SLB) deals with leasing companies.
Many banks prefer to lend money to leasing companies instead of to airlines because they have a motivated leasing company between them and the airline to manage the aircraft if something goes wrong. There are few sources of finance for aircraft over five years of age.
Effects of the financial crisis
The recent global financial crisis has introduced uncertainty into the aircraft finance market. The main reasons for this are:
- European commercial banks that dominated aircraft finance have scaled back lending since 2008.
- Aircraft finance is a US dollar-based business and the cost of providing finance in dollars has greatly increased.
- Aircraft finance is a global, product-led business. Many banks reduced their focus to local markets where risk exposure was considered lower.
- The crisis has been accompanied by a period of losses at many airlines.
In 2009, there were fears of a funding gap where manufacturers would not be able to deliver all of the aircraft they had on order, due to reduced funding. This was avoided because the ECAs increased their activity in the market (and will provide about 30% of funding in 2012). It was older aircraft that had the biggest funding problems.
The market stabilised somewhat in 2010 and banks became more certain about the scale on which they could lend to airlines. New lessors also entered the market and offered a valuable new source of capital.
Through 2011, however, the market worsened as the Eurozone crisis took hold and many of the remaining European banks either exited or scaled back their operations.
The outlook for 2012 is still uncertain because of the continuing issues with European banks. This situation is exacerbated by the likely increase in deliveries by the aircraft manufacturers. Deliveries (per year) are now expected to rise by 40% from 2011 to 2015. In addition, various changes to ECA funding costs and availability are likely.
Of the various causes for optimism, I would point to the fundamental cost benefit for new and replacement aircraft, and the fact that aircraft financing never followed the derivatives bubble. When you can kick the tires there is some comfort in the asset.