Euro Debt Crisis Limits Airline Finance Options

 - April 23, 2012, 10:00 AM
From l to r, Q Aviation Management CEO Greg May, US Airways vice president and treasurer Tom Weir, United Airlines senior v-p of finance and treasurer Gerry Laderman, WestJet vice president and treasurer Candice Li and Atlas Air vice president and treasurer Ed McGarvey commiserate on the state of the European bank debt market at last month’s ISTAT Americas Conference in Scottsdale, Arizona. (Photo: Gregory Polek)

The International Monetary Fund’s April 18 warning that Europe’s banks could lose some $2.6 trillion over the next 18 months lent weight to concerns of a continuing aircraft finance drought recently voiced by airline treasurers and finance bosses. Calling the situation “disappointing” during last month’s ISTAT Americas conference in Arizona, United Airlines senior vice president of finance and treasurer Gerry Laderman lamented what he called the “overreaction” by some governments in Europe to compel their banks to carry more capital.

In last week’s Global Financial Stability Report, the IMF, which had previously urged European banks to further cut back on lending to preserve liquidity, advocated a more balanced approach out of concern about suppressed economic activity in Europe and beyond.

Laderman’s counterpart at US Airways, Tom Weir, noted that while his airline accessed the European bank debt market for deliveries “pretty much exclusively” in 2008 and 2009, it has since had to turn to other sources. “This year things have only gotten worse,” he said. “We’ve seen, for example, a lot of sale-leaseback proposals where the lessors were fairly confident in getting leverage from European banks and ultimately weren’t able to get it.”

Weir did express hope that some institutional debt would surface to take up the senior tranche of some of the transactions. “There’s an idea knocking around out there that that’s in the offing, but we actually haven’t seen a firm commitment for senior debt,” he said.

While Laderman concurred that the European lending environment has only deteriorated this year, he, too, expressed some hope that institutional investors will serve as a substitute under the premise that aircraft carry some of the most attractive kind of collateral against which one can lend. “Hopefully, more institutions see that and we’ll have some sort of substitute for the European banks that have shut down their aviation lending practice,” he said.

But Atlas Air vice president and treasurer Ed McGarvey reported higher finance costs for four- and six-year-old Boeing 737-800s than for new 747-8 Freighters, which it funded more competitively as recently as December 2011. “So it just shows what’s happened to the number of people who were willing to come in and bid on the aircraft—that pool has shrunk dramatically,” he concluded.