Commercial aircraft continue to outperform virtually every other asset class in which financiers can invest, resulting in perhaps unprecedented levels of competition and some of the “cheapest” access to money that airlines have ever enjoyed. As a result, manufacturers such as Boeing continue to express a bullish outlook even while interest rates begin to show some signs of increasing.
“Liquidity is some of the highest I’ve ever seen,” Boeing Capital Corporation president Tim Myers told AIN during the recent International Society of Transport Aircraft Traders (ISTAT) conference in San Diego. “We’re seeing a lot of new investors coming into the space. Because when you look at aircraft finance as an investment alternative, it has really proven itself since ’08-’09, when the financial crisis hit. If you look at other fixed assent type of investments and aircraft have continued to outperform almost everything else. The airline industry is profitable again, so that’s driving people into the space, but we’re seeing continuing new investment coming in from places like Korea, places like Australia...the Japanese regional banks are back in the business...Taiwan.”
The influx of money has come from virtually every kind of source. Myers characterized the number of leasing companies that have entered the market as “phenomenal,” resulting in an environment where, for Boeing, 40 percent of its airplane placement funding comes from lessors. According to Airbus COO for customers John Leahy, lessors account for some 50 percent of all the funding for the European company’s airplanes.
For Boeing, bank debt accounts for some 34 percent of its placements—from sources around the globe—while direct cash purchases amount to about 26 percent of its sales. “The one thing that we’ve seen with commercial aircraft bank debt is it’s coming from everywhere, whether its the European banks that were strong; the U.S. banks are playing; Australia is kicking in; the Middle East banks are participating; you’ve got banks certainly in Asia,” said Myers. “But it’s competitive. You’ll probably hear some rumblings about how competitive it is. Some people are coming off new aircraft and going down into the second tier airlines and looking at used aircraft just to chase yields.”
Meanwhile, capital market funding from instruments such as Enhanced Equipment Trust Certificates (EETCs) account for another 31 percent of the marketplace, and export credit agencies typically back another 9 percent.
Happily for Boeing, the strength of capital markets and bank funding has softened the blow of the government’s failure to renew the charter of the U.S. ExIm bank. While Airbus continues to suffer an interruption of export credit agency funding while it works to address “irregularities” involving third-party consultants, Myers said he remains concerned about the potential lack of equilibrium once ECA funding to Airbus resumes.
“We’re certainly working with the government to make sure that Boeing gets a level playing field,” he stressed. “To us that means ExIm Bank is back up and running.”
Export financing accounts for much of the success of the aerospace industry in general, particularly during lean times, he added. During the financial crisis of 2008-2009, export financing accounting for 30 percent of Boeing’s deliveries. In fact, Airbus never once dropped production rates—they increased during that time—even while the financial markets had become nearly frozen. Without ECA financing, the company would undoubtedly have faced the expensive proposition of dropping rates substantially.
Meanwhile, Boeing, through its participation in the Aviation Working Group, spends a lot of time and effort fostering an environment that encourages financiers to take the risks associated with backing commercial aircraft sales. Myers cited the Cape Town Convention as one of the important elements of ensuring such a healthy environment. In the event of bankruptcy, airlines registered in a country that has ratified the convention must ensure their airplanes either go back to their owners or they must renegotiate their contracts with lessors or banks within, typically, 60 to 90 days.
“We’ve found that by having Cape Town ratified in different countries and then adopted by the [Organization for Economic Cooperation and Development (OECD)]...creates more access to the financial markets for the airlines that reside in those countries,” said Myers. “Boeing has been pushing that kind of initiative with the Aviation Working Group [co-chaired by Boeing and Airbus comprised of airframe and engine OEMs, banks and leasing companies].”
Sixty-five countries have so far ratified the Cape Town Convention, but Myers would like to see more. “We’re looking to see more of the Europeans really move. The UK ratified Cape Town and we were hoping to see that kind of be where Europe would really start taking off...Now most European countries have fairly sophisticated bankruptcy laws already, but still I think Cape Town would make it easier for those countries to do the kind of financing...especially if they were trying to do international EETCs and things like that.”
Myers also stressed the importance of the ability to freely and quickly transfer airplanes across borders in the event of lease expirations, for example. “So we’re trying to work with [ICAO] and the various civil aviation authorities around the globe to try to create some kind of a standardized cross-border transfer for airplanes,” he noted. “This is a very sensitive topic because it involves safety standards, other issues with different countries, but the entire industry will benefit from having these standards in place and the ability to move aircraft freely because it adds to the mobility of the asset.”
Of course, ease of mobility lessens risk for investors and, therefore, the longevity of the asset and its residual value. Under the status quo, however, it takes too much time and expense to transfer airplanes in Myers’s estimation. “There are ways we think that we can work together with the right aviation authorities to bring them together...because it will basically lower the cost of financing for everybody, if we can make that happen.”