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Aviation History
1993
1993 - 0080.PDF
THE FIGHT FOR GPA's attempts to wrestle an agree ment out of its banks and airliner manufacturers has been hitting the headlines — providing proof if it was needed of the traumas going on in airliner financing. Although less well publicised, a key part of GPA's recovery rests on the planned launch of the leasing company's second Aircraft Lease Portfolio Securitisation (ALPS). The success of the launch also has wider implications beyond its importance to GPA's survival — although the group is in desperate need of the $750 million it will raise if it is to weather the coming year with anything approaching comfort. The securitisation concept is being tipped by many as one of the most promis ing ways for a hard-pressed airline industry to raise new capital over the 1990s and beyond. Its chances will be improved if GPA gets the ALPS-2 away smoothly. Most enthusiastic supporters suggest that the securitisation market could be used eventually to fund up to 25% of the industry's mushrooming aircraft purchases. The concept is relatively straightforward — a bond issue secured against a range of aircraft on operating lease — essentially combining asset-backed finance with bonds. The result is a package with sufficiently low risk to attract invest ment from pension and insurance funds — money which was previously beyond the industry's reach. The fact that the in dustry badly needs to broaden its financing base is not in question. Estimates vary, but the general consensus is that new jet-airliner de liveries over the next decade will average around 600 a year, giv ing an annual bill of $40 billion. If these forecasts hold true, airlines will have to finance around $350 billion of aircraft between now and the end of the decade. That would mean spending more over the next eight years than in the two previous decades combined — best esti mates for 1970-1990 suggest an expenditure of only $340 billion at 1991 dollar rates. GPA's chief strategist Ken Holden adds World airlines need to find $400 billion to fund new aircraft deliveries through to the end of the decade. Kevin O'Toole looks at whether the money is available andfrom where. that the 1990s spend would be roughly equivalent to twice the value of the current fleet and more than double the cost of the aircraft delivered in the 1980s. This development comes at a time when traditional forms of financing are under pressure. The banking sector which under wrote much of the spectacular growth of the late 1980s — Japanese banks alone contributed almost half of the funding — has dried up. The vogue for asset-backed financing, which helped pour money into aviation, is over and is unlikely to return at the same level. Even without the recession and plumet- ting aircraft values, the banks could not sensibly have continued to keep building up their aviation portfolios at the same break neck pace as in the 1980s (Flight Interna tional, 23 December - 5 January). How much ground the airlines can make up from other sources is uncertain. Reces sion over the past three years has more than wiped out the profits of the previous boom and halved the industry's nominal equity base. Return on aircraft investments against other US$ investments 7- 6 High return Low risk Aircraft • •Commercial real estate •Treasury bills V Average ^ inflation (US) Low return Low risk Equities • High return bond's1"7* High risk Low return High risk T 1 1 r— 4 6 8 10 12 14 16 Measure of relativity (percentage) As the air-travel market recovers, airline financial performance should begin to im prove, although traffic growth alone does not necessarily guarantee profits. Net-profit margins will have to be pushed up from their traditional 1% to the 4-5% level, says Holden. That means a real and sustained increase in fares, a factor which itself could act to slow traffic growth. In a recent circular, the International Civil Aviation Organisation (ICAO) sug gests that industry-wide cash reserves might fill almost a quarter of future aircraft investment. It goes on to warn that this cash is not spread evenly among the carriers. The cash-strapped US airlines are a case in point, especially since the USA is expected to continue to account for 40% of new aircraft purchases. ICAO adds that options to raise cash from aircraft sales and lease-back deals are also becoming more limited, in a climate of weaker secondhand values and a disappear ing market for older stage 2 aircraft. Holden at GPA believes that such factors will leave airlines able to fund no more than 40% of aircraft deliveries over the next decade. About half the figure is likely to come from debt, with the remainder sourced from a mix of cashflow, new equity and aircraft sales. Even the 40% could be optimistic, unless airline yields and profits begin to pick up fast. OPERATING LEASE GPA is not alone in arguing that the airlines will therefore be pushed (willingly or other wise) further into the arms of the operating lessors. The sector has roughly doubled in size over the past five years, now account ing for around 20% of aircraft deliveries by number and 18% by value. In a business where capital equipment costs are notoriously high, Holden argues that it is not unnatural for airlines to keep such asset costs off their books by turning to leasing. He quotes the example of the hotel industry, where the leading chains may control thousands of hotels around the world, but probably own only hundreds, with the rest franchised out. In future, he suggests that the pattern for airlines may be to settle on some "optimum mix" of financing options, splitting owner ship three ways: owning part of the fleet as a cushion against the bad times; using finance leasing for other aircraft, where terms are favourable; and running the remaining third on operating lease as a hedge against the fluctuations in air traffic. Given such figures, GPA expects the 26 FLIGHT INTERNATIONAL 20 - 26 January, 1993
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