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Aviation History
1993
1993 - 0081.PDF
FUNDS leasing companies to arrange at least 23% of the financing for future aircraft deliver ies, representing around $90 billion be tween 1992 to 2000. Holden stresses that no more than a third of these will actually be "owned" by the leasing companies. The remainder will be sold on to investor groups and run by the leasing companies on their behalf. GPA itself has come to rely increasingly The financing gap 1992 - 2000 Leasing - company owned Investor owned $100bn. The gap $110bn Total = $400 billion Source: GPA heavily on sales to investors. These range from individuals who are looking for a secure long-term investment (and who per haps like the idea of owning part of a tangible, attractive asset like an airliner), through to corporate investors. Despite the present downturn, Holden argues that investing in aircraft remains a relatively solid investment and is certainly less volatile than investing in an airline direct (see graph, right). Unlike investments in fixed assets such as property, aircraft can be moved around the world to where they can make money. Unlike computers, modern aircraft have a relatively long life and, unlike other more mature markets such as shipping, the air market can still boast underlying growth. The rates of return also compare favoura bly. Between 1974 and 1990, an aircraft investment averaged an annual return of over 12%, only marginally behind US equi ties and more than a point ahead of the then booming real-estate market. The leasing sector, however, is not im mune to recession. As GPA has found to its cost, once the delicate balance of investor confidence has turned sour, a leasing busi ness can unravel dangerously quickly. When GPA's attempt to tap into equity markets through an international flotation ran aground in June 1992, the group's ability to fund its ambitious for ward aircraft orders from traditional sources (pri vate investors and capital markets) narrowed virtu ally overnight. The leas ing group is still locked in tense negotiations with banks and manufacturers in an attempt to cut down on order commitments and restructure finances. WINNING SECURITY GPA is betting that part of the solution at least will come from ALPS-style securitisa- tion packages. By securing a bond issue against a portfolio of aircraft, the ALPS has won a high-grade "AA" credit rating, which opens access to a whole new section of institutional investors. GPA's first ALPS package was launched by Citibank in June 1992, in parallel with the failed flotation, though unconnected to it. That raised $521 million, largely secured against a portfolio of 14 airliners on operat ing lease around the world. (The unsecured 25% received a lower BB rating.) Peter Sokell, vice-president of aerospace at Citibank in London, says that the pack age was predominantly placed in Europe, and mainly with investors who would not have previously invested in the industry. Pension funds and insurance companies have simply not able to invest in anything less secure than AA-rated. There is a world market of $100 billion a year for such debt and Sokell believes that there is no reason why airlines could not reasonably secure a 10% share netting a valuable $10 billion annually. A second flotation (ALPS-2) was planned to follow later in 1992, but with GPA in the midst of a highly public financial restruc turing, the launch was postponed. The plan now is to launch in the first quarter of 1993. Again, the main part of the $750 million due to be raised is likely to receive an "AA" rating. Technically, at least, the ALPS should not be affected by the uncertainties surrounding GPA or the fate of the group's own credit rating. One of the attractions of the package is that it can stand alone as an independent entity with its own debt rating. There is a precautionary provision in the ALPS issue for someone else to run the operating lease if it ever became necessary. GPA hopes to launch three or four ALPS packages each year, potentially raising $3 billion annually and possibly overtaking straight investor sales as a source of capital for aircraft purchases. Sokell adds that the concept is not confined just to GPA or even to leasing companies. Airlines themselves could use securitisation as a vehicle to fund their own purchases. The main limitation is the need to provide a balanced portfolio of different aircraft types and customers in order to keep a good spread of risk. On its own, an individual airline is unlikely to be able to offer a sufficient spread, although a group of airlines could pool some of their aircraft into a central fund — perhaps co-ordinated by a bank and managed by a leasing company. Such an arrangement could also prove attractive to airframe and engine manufac turers looking for a way to help fund sales without penalising their own balance sheets and debt ratings. The manufacturer would simply have to assemble the pool of aircraft and leave the securitisation programme to stand on its own. Airbus confirms that it has been ap proached about such a structure and is not dismissing it out of hand. The consortium's managing director Jean Pierson has himself stated that in the future "...some major transactions will require a triangular agree ment" between manufacturers, airlines and one or more leasing companies. Even if securitisation does fulfil its prom ise, it will not make up all of the ground needed to fund projected airliner deliveries. If Holden is correct, then airlines will have to spend $400 billion on new aircraft between 1992 and 2000. No more than $160 billion (40%) will be bought by airlines. Another $120 billion (23%) will be arranged by leasing companies, of which the majority will be sold on to investors (in cluding ALPS investors). Perhaps another $40-50 billion worth of investor finance will be arranged by airlines direct. That still leaves a gap of $110 billion to come from other yet unidentified sources. Part of the cash could come through Returns on aircraft against aircraft equities S 60- OJ CO I 40- CJ retur n (p e ro o o CO S -20- I -40- < / \ / \ 1 \ A Aircraft 7—\imm/\ 1 V \ /\ Equities I I 1 1 80 82 84 86 88 90 Year Source: GPA traditional routes such as finance leasing, manufacturer support and export credit, which is now undergoing a revival. Greater use of securitisation packages could also help close some of the rest. How the remainder is financed is an open question. How it is answered could well determine the shape of the world airline industry in the 1990s and beyond. j| FLIGHT INTERNATIONAL 20 - 26 January, 1993 27
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