Airlines are now in a better position when it comes to finding money than a year ago, but the markets are still very jittery and a big change is looming on the horizon, threatening to increase the cost of financing.

"Finance is still at the bad end of expensive," says Dick Forsberg, who is head of risk and strategy at new lessor Avolon. "It's okay if you have the name, but it is tough if you're stuck as a mid-position carrier." World events are adding to market volatility. On Tuesday 25 May the FTSE 100 closed below 5,000 for the first time since October and the next day the Dow Jones closed below 10,000 for the first time since February.

This underscores the fragility of the financial markets which, in turn, is prompting banks to compete fiercely for low-risk financings, such as export credit agency-backed aircraft deals and solid credit airline structures. To date, this has been good news for airlines as tough competition has driven down pricing.

CHANGE LOOMS

However, changes to government guarantees mean airlines are about to see the cost of ECA-backed financings potentially double from the start of 2011, as the industry prepares to wean these carriers off the very guarantees they have relied on to ride out this financial crisis. This change could be a tough call for the industry, which has seen a 100% plus drop in pricing on ECA-guaranteed financings over the last year.

The Aircraft Sector Understanding will limit the amount of ECA funding on offer by making government guarantees more expensive for airlines, thus encouraging increased activity in the commercial market. Airbus and Boeing welcome the changes, even though these measures will result in potentially fewer and pricier guarantees for their products.

Kostya Zolotusky
 © Boeing
Kolotusky: change is needed

"We recognise export credit financing is not sustainable at cur rent levels," said Kostya Zolotusky, managing director capital markets at Boeing Capital, speaking at CAO's Inside Air Finance conference in May. "We are committed to dialling down ECA support, so the commercial markets can do as much as they can stand." Airbus senior vice-president of structured finance, Nigel Taylor, believes the price of export credit will increase "across the board", with support likely being "twice as costly" under the new ASU.

Large aircraft contracts signed by 30 April 2007, with deliveries through 31 December 2010, are exempt from the terms of the new ASU agreement. For regional jets, ECA commitments given by 1 July 2007, with deliveries scheduled through 31 December 2009, are also grandfathered under the existing agreement.

BANKS BACK MOVE

Unsurprisingly, commercial banks agree the move is a good one. One European banker says the availability of "favourably" priced export credit-backed financing is limiting the amount of aircraft deals in the market. "Appetite for aviation financing is being killed by the ECAs," says the banker. "There is more [bank] appetite out there than what is obviously available, but this supply is being killed off because the ECAs are pricing us out of the market."

The banker explains that carriers realise the dilemma, particularly with long-standing banking relationships, but airlines "would be crazy not to take up the cheap pricing" available through ECA-backed financings.

There is no doubt that those airlines which have relied on ECA funds will find the changes difficult. But others, such as Lufthansa and British Airways, are excluded from obtaining government guarantees. This is because of the "home country rule", which blocks them from getting the support for aircraft made locally. They claim the support is unfair and will be less irked by the changes.

Virgin Atlantic head of strategic fleet planning Alan Leeks suggests the solution is to "just stop export credit", but Taylor from Airbus responds: "We can't just stop it. It supports jobs and you can't stop that sort of support mechanism. What you can do is make it more aligned to the market, which is the challenge for the next 6 months."

Zolotusky from Boeing Capital adds: "If you look at what has happened to the global market, we in essence skated past an unbelievable storm, not through artificial subsidy, but by supporting real demand. ECAs helped us weather that storm."

While this will be a bitter pill for the industry to swallow, perhaps the ASU change is the first step towards a level playing field not only in terms of pricing for aircraft but for airlines as well.

 

Source: Flight Daily News

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