Signs of recovery in the airline market may be encouraging talk of a future boom in aircraft ordering, but the industry still has to tackle the ticklish question of where the cash will come from.
Even on conservative estimates of aircraft deliveries, the sums involved will be vast. Assuming that output recovers to a relatively modest annual total of 600 aircraft, the market would have to find funding of nearly $40 billion a year. That is roughly twice the volume being swallowed up before the boom of the late 1980s.
Some of the slack is likely to be taken up by operating-leasing companies, whose share of the world market is expected to carry on growing to around 30%.
"We can now demonstrate that in good times and bad, leasing has grown," says John Pluengner of International Lease Finance, adding that leasing is no longer restricted to the traditional clutch of small carriers. Airlines such as Cathay Pacific, KLM and Swissair have all now dipped into the lease market, helping to shield balance sheets and lessen their exposure to tumbling residual values.
MANUFACTURER SUPPORT
During recession, airlines have also looked to the traditional haven of manufacturer support. Accordingly, the exposure of Airbus Industrie, Boeing and McDonnell Douglas (MDC) to customer financing has roughly doubled, to above the $10 billion mark. Credit-rating agency Moody's estimates that it could double again by the end of the decade.
Airbus reveals that volumes of financing are running at 5-10% of sales, a figure, which MDC admits, is not far off the mark. Regional-aircraft manufacturers have fared no better, as the near-ruinous level of liabilities racked up by British Aerospace testify.
Although none of the manufacturers is keen to expand its exposure, all are now treating the prospect as a serious possibility.
Airbus financial director Ian Massey points out that, even if the percentage of support remains relatively constant, the growth in aircraft sales will ensure that the dollar value carries on multiplying.
That is a key reason behind the consortium's decision to borrow from the experience of its UK partner and launch Airbus Finance (AFC) towards the end of 1994. That is a necessary step to put the consortium's jumbled finances in order, says Massey.
Fokker has launched a similar financing operation through its parent Daimler-Benz, while the Saab and MDC civil-aircraft divisions are strengthening links with their existing group-finance arms.
Manufacturers have been able to count on their governments to take some of the strain of customer funding, through the provision of export credit guarantees. The volumes of US aircraft and engine financing being put through the powerful EXIM bank peaked at nearly $3.5 billion in 1993, with a further $3 billion in the 1994 fiscal year.
Airbus says that the European export credit agencies have been underwriting as much as 30% of its annual sales during the recession, giving a value of around $2.5 billion.
SECURITISATION
In the past, export credits and customer financing, have been little more than stop-gap solutions and, although this time round they look likely to linger longer, they fail to provide a fundamental answer to the funding problem.
New horizons are opening up, however, in the form of asset-back securitisation. For years, credit-card companies and others have been bundling up their assets and using them to raise vast volumes of financing. In 1994, the US market for such securities was sized at around $250 billion.
GPA pioneered the market for aviation two years ago with the launch of its first ALPS securitisation. Essentially, the leasing company parceled up a hand picked portfolio of 14 leased aircraft and raised more than $500 million against it from investors.
Provided that sufficient aircraft are put into the portfolio as security, such a deal is more or less assured of high A-credit rating. That allows companies to tap into investment markets, which they may not have dreamed of reaching with their own credit rating. It also makes the borrowing significantly cheaper.
Airlines, too, have begun to test the market with their own variations on the theme. In 1994, Northwest Airlines applied securitisation techniques in raising over $400 million in two transactions. These included the use of ten of its aircraft, pooled into an equipment trust.
What made the Northwest transaction different from more conventional asset-backed deals is that the airline was able to divide it into separate tranches, explains Jackie Naturman, at the Lehman Brothers merchant bank. The top tranche was heavily securitised by the aircraft and so won an A-credit rating, quite independently from the airline's own B-rating. "The savings can be dramatic," she says, adding that there is no reason why other rated airlines should not now follow suit.
In a similar transaction, Boeing was involved in setting up the Jet Equipment Trust, based on five 737-300s and two 747-400s on lease to United Airlines. Again, the top portion of the issue has won an A-rating.
"The rating gets you in the door," says GPA treasurer Ed Hanson. Once through, the potential is enormous. Hanson cites the example of the US commercial property market. The first securitisation of commercial mortgages took place in the late 1980s with a $1 billion issue. The market has now blossomed to $20 billion.
With GPA's second ALPS launch and the Northwest deals, he points out that aviation will have raised close to $1.5 billion in the securitisation market over the past 12 months. If commercial mortgages are an example, then more could follow.
Manufacturers have been taking note of the potential. Massey says that once the new Airbus financing arm has had time to secure itself a suitably high credit rating over the next four to six years, the aim will then be to move some of the liabilities off its books. He suggests a deal of between $2.5-4 billion based on a portfolio of 40-80 aircraft.
Securitisation is not a universal panacea. As Hanson says, you have to be big enough to create a good risk-free spread of assets. It is also more than a tool for those wishing to free themselves from existing liabilities than for new-aircraft acquisitions. If it achieves no more than this, then manufacturers and airlines alike will have good cause to celebrate.
Source: Flight International
