Airlines increasingly using capital markets, rather than banks, to fund plane purchases
Globally airlines are buying passenger planes at huge cost. This year they may spend $104 billion this year, and $112 billion in 2014. Banks and export credit agencies have been the main source of aircraft financing in the past. They are retreating from this sector, due to having stricter regulations on minimum capital requirements, and also government restrictions on export credit. So airlines are finding more diverse funding sources. They are making greater use of capital markets, and pension funds, to fund purchases of aircraft. American airlines have used asset-backed bonds for many years, but now others including BA are starting to do so. They have issued asset-backed bonds called Enhanced Equipment Trust Certificates to finance the purchase of new aircraft. Boeing estimated that capital markets will provide 14% of aircraft financing this year, and 22% in 2014 – compared with just 3% in 2010. Boeing said export credit-backed funding fell from 31% of aircraft financing in 2010 to 23% in 2013 and 18% in 2014. Borrowing from banks was around 30% of the total before 2008, but will be around 25% in 2014, with less from European banks and more from Chinese and Japanese banks.
Airlines tap capital markets for financing
By Andrew Parker in London (FT)
Airlines are making much greater use of capital markets for aircraft financing, as the cost of debt backed by export credit agencies increases and some banks scale back lending, according to figures from Boeing.
This year several non-US carriers including British Airways for the first time issued asset-backed bonds known as Enhanced Equipment Trust Certificates to finance the purchase of new aircraft. US airlines have used the technique for years.
Boeing estimated that capital markets will provide 14% of aircraft financing this year, and 22% in 2014 – compared with just 3% in 2010.
Airlines turn to capital markets for funding
15 Jul 2013 (Aviation Business)
By Denise McNabb
Airlines and aircraft leasing companies are expected to seek around $30 billion from capital markets next year to fund new planes as more countries adopt a global protocol that allows them to register planes as security for their orders.
This expected funding requirement sourced from pension funds, the insurance industry and big investment institutions, and issued in the form of jet bonds, is twice the amount sought from markets this year.
Banks and export credit agencies, until now the main source of aircraft financing, are retreating from this sector, under pressure from more stringent regulations such as the minimum capital requirements of Basel III for banks and government restrictions on export credit as the global financial crisis eases.
The progressive acceptance by countries of the Cape Town Convention (implemented in 2004) and its adjunct Aircraft Protocol (2006) means airlines now have a global standard whereby they can secure aircraft and aircraft equipment as security for their purchases in the event of bankruptcy, protecting lenders when planes cross borders outside lenders’ jurisdictions.
Australia passed laws to adopt the Cape Town Convention and Aircraft Protocol (CTC) on 20 June and it will come into operation next year, but a date has yet to be set by the Federal Government .Other countries in the Asia/Pacific region that have adopted the protocol, allowing them to issue debt through Enhanced Equipment Trust Certificates (EETCs), include New Zealand, Singapore, Malaysia and Fiji.
Prior to the CTC, aircraft financing through bond issuances had been mainly the domain of US carriers borrowing in the US using these internal collateralised arrangements.
In June British Airways raised $US927 million to upgrade its elderly fleet through a hybrid bond issue of EETCs with six Airbus A320s, two Boeing 777s and six Boeing 787s used as security.
Air Canada sold $C424 million of the bonds in April.
Kostya Zolotusky, Boeing Corporation’s managing director of capital markets and leasing told a press conference in Sydney last week that “airlines were not good performers but demand for their assets had been really good.” He said by the end of 2014 it was expected that aircraft collateralised bonds would account for 20 per cent of the world market of new plane orders.
This year banks are expected to provide about $29 billion to fund about 28 per cent of new aircraft and government export credit agencies – around 20 per cent of the $104 billion total, Zolotusky said.
Total financing required in 2014 will be $116 billion, rising to $132 billion in 2017.