The Civil Aviation Administration of China has signalled an expansion of operating leasing in China by ordering airlines to cease providing lessors with a Bank of China guarantee. However, future growth may be limited to lessors willing to accept unguaranteed deals and carriers which can prove their own financial health.
The CAAC has discouraged operating leases in the past to limit uncontrolled capacity growth. However, a number of lessors have been willing to accept unguaranteed deals over the past year to boost their presence in the market. ILFC agreed the first unguaranteed transaction last year with Xinhua Airlines and the Chinese authorities seized on the opportunity to limit Bank of China's exposure to the sector, believed to exceed US$10 billion. 'The CAAC jumped on "that deal" and told airlines that if they want to lease aircraft, go and see ILFC,' says one Asian lessor.
The CAAC told carriers they have no reason to incur the extra expense - usually in the form of a facility fee - of a bank guarantee to back leases. The only premium lessors can expect to demand from Chinese airlines for unguaranteed operating leases is a larger security deposit. Since the CAAC's recommendation became clear Gecas and Boullioun Aviation have also entered into unguaranteed transactions since June.
It remains unclear if airlines will be allowed to tap other banks, notably International Commercial Bank of China and the People's Commercial Bank of China, for guarantees. However, lessors believe a two-tier system of guaranteed and unguaranteed deals is unlikely to develop. 'All the Chinese carriers know what each "is" paying and what each lessor is offering,' says another lessor. 'They use that to drive a uniform lease rate.'
The CAAC's announcement does not extend to structured financing such as finance leases where the absence of a guarantee would have a significant impact on pricing. There have been only three unguaranteed deals over the past two years, and despite the introduction of a new aviation law in March lenders and export credit agencies continue to seek the comfort of a guarantee. Air China remains the only carrier with which financiers are comfortable dealing on an unguaranteed basis, though China Southern has financed progress payments without support.
By playing on lessors' demand to enter the Chinese market, the CAAC has accepted that operating leases will play a larger part in meeting future fleet needs. 'The CAAC has authorised the purchase of a core number of aircraft,' says the Asian lessor. 'There is a large gap between those and forecast demand which will have to be filled by operating leases.'
While lessors have welcomed the green light to move into China it is clear that entry will be limited to the larger players with the resources to monitor and manage Chinese lessees. 'Lessors are going to have to be comfortable with the individual airlines rather than rely on a Bank of China guarantee,' notes the lessor. 'In the long term the effect will be beneficial, encouraging good commercial discipline.'
Lessors have already focused on the larger airlines and their regional affiliates and it is clear that increased operating lease access will fall unevenly on airlines. Former CAAC carriers also benefit from at least an implicit guarantee of CAAC support in the event of a default.
David Knibb
Source: Airline Business
