The market for aviation financing, traditionally a complex and lucrative one, could be facing one of the most radical transformations in recent history according to PwC, as traditional western banks retire to be replaced by emerging market lenders.
The group’s report, entitled
‘Aviation Financing – Fasten Your Seatbelts’
, says that aircraft orders are at a record high and raises the question of how they will be financed in future. European banks are pulling out of the market, while Asian investors are aggressively looking to expand.
As backlogs of aircraft orders reach unprecedented levels, the survey shows lessors and airlines will be battling for the most competitive finance rates in one of the most turbulent economic climates in recent times. As of July 2012 the aircraft order books of Airbus and Boeing had risen to 8,500, and while financing costs on jets are likely to rise, the report suggests that “the jury is out” on how this will impact the different parts of the value chain, which includes aircraft manufacturers, airlines and lessors.
July 2012’s backlog of 8,500 is equivalent to seven or eight years’ production, which is the estimated time of delivery if a company were to place an order now. At present just over 1,000 jets are being delivered each year compared to circa 700 in 2002. The backlog has an estimated list price of US$1.2 trillion and an estimated real cost, after discounts, of about US$700bn.
“There are a number of headwinds in the aircraft finance market which may make these orders more difficult to finance – and more expensive,” said PwC financial services partner, Shamshad Ali. “With the cloud of economic uncertainty still hovering around Europe, we are seeing banks there retreating from the market and interest from Asian investors is increasing. We are already seeing banks from China and Japan snapping up aviation assets and we think this trend will only accelerate.”
Colleague Neil Hampson, PwC’s global head of aerospace and defence, added: “The industry is still experiencing unprecedented levels of orders for new aircraft that are more fuel efficient, technologically superior and that can replace ageing fleets. Our research highlights that whilst financing will be available, it will be at a higher price. As competition to secure financing intensifies, the question remains as to who will be picking up the cost.
“As part of our research we discovered more aircraft are being parted out after only seven or eight years’ service instead of the traditional 25 years, as investors are gaining greater value and returns than if the aircraft remained operational. The flipside of this, however, could be more aircraft retiring to so called ‘jet cemeteries’.”
The report notes that financers such as banks, capital markets and sovereign wealth funds (SWFs) can invest directly in an airline (such as BA/American Airlines) or indirectly via lessors (such as Air Lease Corporation, AerCap). Amongst the finance options PwC lists in the report are export credit loans – which exist in the US, Canada, France and Germany and tax lease offers.
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