Air Transport Awash In Capital, but Bubble Fears Persist

 - March 19, 2014, 11:05 AM
Lessors financed 38 percent of Airbus deliveries last year. (Image: Airbus)

Talk of production “bubbles” again colored the discourse at the March 16 to 18 International Society of Transport Aircraft Trading (ISTAT) Americas 2014 conference in San Diego, even while OEMs in attendance insisted that record backlogs fully justify their planned rate increases. Manufacturers highlighted a strong backdrop for aircraft demand fueled by aging replacement needs, a 20-seat increase in the capacity of narrowbodies since 2007, emerging-market long-term capacity requirements and the global expansion of low-cost carriers, according to a research note from Sterne Agee. OEMs also cited statistics showing air traffic growing faster than capacity, “robust” utilization rates accompanied by high load factors and net delivery growth of some 3 percent a year. However, soft demand within the air cargo market and weaker GDP growth within the Asian and emerging markets tempered the optimism somewhat.

From a financial perspective, said Sterne Agee, the industry remains “awash” in capital and the leasing market continues to expand. Forecast deliveries of some 1,365 hundred-plus-seat airliners and cargo airplanes this year reflect mid-single-digit growth for both Boeing and Airbus, it added, requiring $115 billion in financing requirements.  

Last year some 56 percent of the required financing came from cash and debt, 23 percent from export credit, 20 percent from sale and lease-back agreements and 1 percent from the OEMs. Analysts expect export credit use to decline this year, while capital markets fill the resulting gap, said Sterne Agee. European, Chinese and Japanese banks remain active players in financing aircraft, while leasing companies continue to see share gains, too, it added. Airbus reports that leasing companies financed 38 percent of its deliveries last year.

Meanwhile, financiers expressed concern about new sources of cheap capital driving up current market values and new product introductions and increasing production rates suppressing future values, according to a separate research note from UBS Global Aviation.

“While the manufacturers remain extremely bullish, most of the lessors were skeptical of higher production rates and market values,” said UBS. “Even so, most established lessors continue to take new aircraft anyway, either on spec or through sale and leaseback transactions, driven by the growth demands of being public companies this cycle.”