CTAIRA analyst Chris Tarry suggests that the likely rise in delivery financing required in 2013 and beyond means the cost of aircraft ownership will increase even further
During the next few weeks, analysts and some financial journalists will be publishing their lists of who they expect to be winners - rather than losers - in terms of their share price during the next 12 months. In stockmarket terms, airlines have tended to outperform the market during an economic recovery and underperform in a downswing. While there may be some surprises, it is unlikely that many, if indeed any, airlines will feature in these lists.
For most airlines the operating environment in 2013 will be "challenging". The economic outlook has been well documented, and although there is focus on "nowcasting" (to get a more informed view of the present), this is often as problematical as forecasting what will happen during the next year and beyond - if we are brave enough.
Economic optimism is in short supply and the consequences in the near term are corporate travel budgets under pressure - with evidence of a structural change here, too. The imbalance between supply and demand, where at industry level both yields and load factors are declining, suggests there is an inevitably of continuing good value fares for leisure passengers.
We have often sympathised with fleet planners and those involved with the asset management side of the business; even in a "steady state" environment it is difficult, if not impossible, to be accurate about likely outcomes a few years into the future.
It becomes more difficult when it also involves a significant investment in an asset with a long life. In quieter moments some fleet planners may be tempted to consider how their forecast for 2012 and beyond a few years ago matches up with the actual outcome and, if they knew what they now know about the actual outcome, what effect it would have had on the orders that were placed - almost inevitably less.
The recent Financing Outlook review from Boeing Capital makes interesting reading; not least because there is an expectation of an increase of some $9 billion in the delivery financing required between 2012 and 2013 from about $95 billion to $104 billion. The increase between 2013 and 2014 is some $12 billion, with the increase between 2014 and 2015 expected to be about $9 billion. In other words, the requirement between 2012 and 2015 will have risen by about a third against the background of a still challenged financial performance for the industry.
While the volume of available capital is clearly a key issue, so is its cost. We have used the concept of "affordable capital" as a measure of success in the past and here performance is a key determinant and, in essence, the strong will get stronger. It is undoubtedly the case that a number of institutions, particularly in Asia, are returning to the market. It is also clear that selectivity will remain the key and risk will be appropriately priced - widebodied aircraft operated by "good names" will always be the preference.
As regards tapping new sources, there have been a number of suggestions that some non-US airlines will, for the first time, seek to fund their aircraft through enhanced equipment trust certificates, although it is a more expensive means than the traditional debt-based financing.
However, even before an aircraft is delivered there is the issue of pre-delivery payments, which appear to have become even more of a challenge and represent a major call on cash.
A key issue for any airline is the affordability of its finance. Boeing's assumption is some 25% of aircraft deliveries in 2013 will be funded by cash, suggesting almost $80 billion has to be funded externally. If we take a quick look at the sensitivities, each 100 basis points (1%) increase in the cost of funds (compared to plan or previous experience) puts an $800 million call on the industry's profits and cash.
The cash consequences may well become even more telling against a background where there is continuing pressure on operating cash flows, combined with an increasing amount of more expensive debt to be serviced. There are already airlines where this set of circumstances is manifesting itself as a particularly vicious squeeze.
Theoretically, there is an option of sub-leasing "surplus" aircraft, but the cost of capital of most airlines is not low enough, even in normal times. In the narrowbody segment we are starting to hear anecdotes of attractive rates on offer - at between a third and a half of what might be expected using "traditional" lease-rate coefficients.
The effects of the broken cycle in the airline operating environment will percolate through the system - so it is not only a question of hanging on for a bumpy ride until there is a recovery to previous levels. As 2012 has progressed, there has been increasing support for our view that the economic lives of aircraft need to be revisited. This, as we have suggested in the past, will have knock-on effects, not least raising the cost of ownership.
While the fundamentals for 2013 are not particularly exciting, it is a time of increasing opportunity, not only for those who know where they want to take their businesses, but in particular for those who can get there sufficiently quickly to gain a first-mover advantage. In this respect, 2013 will be no different from the past.