Comment: Mind the gap

This story is sourced from Airline Business
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For those of you familiar with London's underground railway system, you will recall the stern voice that booms out "mind the gap!" as the incoming train grinds to a halt. The warning is clear: don't fall down the space between the platform and the train as you step into the carriage. Remarkably, accidents where travellers do topple into the gap are more common than you would think.

For the mischievous among us, it could be a good time to suggest beginning any meeting in this business where the discussion turns to money matters with a "mind the gap" announcement. The gap in question is that between the money needed to finance the 1,000 or so aircraft planned for delivery in 2009 and the money that will be available.

The total airlines and others will need to find to pay for these aircraft is a cool $65 billion. In normal times this is a not a problem. In fact credit-worthy airlines have found themselves inundated with financing offers in the past few years. Now the sources of money have evaporated faster than a downpour in the Australian outback.

Take the banks. Before the credit crash there were around 20-30 banks active in air finance. Of these, 40% have left the market, such as Germany's WestLB and Dutch bank ING, 20-30% of them are closed for new airliner financing and only 30% are still active, says Christian McCormick, managing director of French bank Natixis Transport Finance. His bank stopped booking new aircraft finance business towards the end of this year but is looking to resume in 2009. Today it is believed only three, maximum four, banks anywhere are booking new aircraft finance business.


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McCormick describes the new financing world, where money has got more expensive and supply has dwindled, as "recalibrating the industry". But does this recalibration actually mean some will simply not be able to find the money to pay for their new aircraft? Nobody knows yet of course, but there are plenty of doomsayers who say yes.

The gap is large. McCormick puts it at $10 billion to $20 billion. ILFC founder Steven Udvar-Hazy reckons it is about $15 billion. "This is still 300 aircraft. More than a third of [next year's] production is vulnerable to non-delivery," he says.

Who might fill the cash gap? Chinese banks are a possible source, but are expected to need it for their home carriers. Other sources, such as the Middle East, sovereign wealth funds and regional banks, say in Russia, are thought unlikely to plug much, if any, of the hole.

It will, as always, be those with weak balance sheets and poor strategies that will be scrambling for the scarce funds. "The bottom 10-15% of the market is going to suffer," says Udvar-Hazy, who also believes there will be fewer lessors around too.

Cracks are already appearing. Several new Airbuses, including two A320s in Kingfisher Airlines colours, have been parked at the manufacturer's Toulouse factory in recent weeks. Either the airlines cannot finance them, or don't want to because they don't need them.

The white knight galloping to the rescue is surely the manufacturers themselves. Understandably both are playing this down. They have substantially reduced their financing in the good times, but are preparing to cough up again. Both have already outlined plans for $1-2 billion each in 2009. A more realistic sum could see Airbus and Boeing having to put up some $4 billion each. Couple this with a production rate cut, as advocated by Udvar-Hazy and Jeffrey Knittel, president of lessor CIT Aerospace, and the funding gap narrows considerably.

The solution for many carriers will be the sensible one: don't even try to bridge the gap. Already there are those saying "we can't afford it and we're not going to buy it" and deferring deliveries and cancelling orders. As Pedro Heilbron, the chief executive of Panama's Copa Airlines and outgoing president of the Latin Airline Association, said at the recent Latin Airline Leaders' Forum: "Right now it is the time to lay low and let the bullets fly by."