This year there is a $124 billion financing requirement for commercial jets, says Boeing Capital, and although almost all indicators are green in the aircraft financing environment, the industry is not immune to external factors.

The abrupt drop in oil prices has mainly benefited airlines but a change in interest rates could impact the industry.

For the time being, attractive funding remains available and new investors continue to enter the sector.

The finance teams at Airbus and Boeing both continue to work hand-in-hand with financiers to develop awareness of the commercial aircraft market.

Over the year, the aircraft financing space has attracted new equity from private equity and hedge funds, superannuation fund money and pension companies, in addition to traditional sources of finance.

Asset-based financing has attracted a lot of investments over the past few years, and the profile of investors attracted to aircraft finance continues to evolve.

"The type of investor is changing," says Boeing Capital's vice-president and general manager of aircraft financial services, Tim Myers.

"Cheung Kong is an example. They have started a joint venture with MCAP and they look at this market very seriously."

The Cheung Kong conglomerate includes five of six major businesses, he says, but the new leasing platform wants to grow its exposure substantially.

"Cheung Kong wants to be in the top five lessors in a short period of time," says Myers.

It is large institutions such as Cheung Kong, with deep pockets of capital, that are attracted to the industry, he says.

Sovereign wealth funds, too, are interested. "We have seen a number of companies in the space with interest in leasing companies because they don't necessarily want to manage their investment," he says.

New investments have also emerged with pockets of funding in South Korea through local insurance and private funds looking at cross-boarder transactions, says Airbus's senior vice-president of customer finance, Nigel Taylor.

Partnership platforms are particularly targeting Asian capital and investor markets.

The structure benefits new entrants as the platforms' managers are experienced companies in aircraft financing. Furthermore, partnerships are featuring experienced banks underwriting not only senior but junior and mezzanine tranches.

The market has opened up to a different type of investors with different risk profiles and appetites for asset types. Those new platforms are looking at widening the pool of investors to pension funds as well as European and US institutional markets.

Similar financings are emerging from Asia, Taylor says, while more funding could be provided from European investors.

The French legal system is currently looking at allowing lending by insurance companies and should the law be approved, the French insurance companies could become more active players in the future, he says.

Taylor also sees Scandinavian markets coming into aircraft financing through private and institutional players.

"In 2015, we expect those pockets of funding to further open to our industry," he says.

But this year's main contribution will remain the capital markets.

"The US capital markets provided close to $35 billion across the board in 2014 and we expect them to contribute substantially to this year's requirements," says Taylor.


"The year 2015 is about strength. We see lot of diversity, volume and depth in terms of aircraft finance," says Myers.

Boeing Capital continues to see this strength as a result of a healthy and balanced global demand for new aircraft, driven by anticipated growth in passenger traffic, record airline profitability and the continuation of a replacement cycle to improve the fuel and performance efficiency of the global fleet.

Boeing's latest Current Aircraft Finance Market Outlook shows that this year's sources of funding include export credit agencies participating at 15% of the total deliveries, unchanged from 2014.

The airframer remains cautious about its contribution into the space because of the US Export-Import Bank's reauthorisation situation.

"We are cautionary because of the politics around the Ex-Im Bank," says Myers. "There are still opportunities where we are asked to come in because of the Ex-Im [situation]. There is a bit of a cloud on it right now, and customers have asked us to backstop the financing in case Ex-Im can't be there.

"Having Ex-Im withdrawn is not the ideal situation, but we don't see it as a long-term problem, and it will be reauthorised."

The decrease in ECA financing is being compensated by capital markets and commercial debt, showing the confidence financiers have about the prospects of asset-backed finance in the aviation sector.

"Reflecting the current strength of commercial markets, export-credit usage should continue at historically low levels," says Myers.

Next year, 23% of deliveries will be funded with cash while the remaining 2% will be tax equity, Boeing foresees.

Liquidity has been plentiful over the past three years.

Funding for this year's Boeing deliveries is set to mirror that of the broader industry, with unprecedented liquidity driving strength and diversity in major sources of financing. The OEMs' exposure is very limited.

Taylor agrees: "2014 was Airbus's best ever year, with almost no financing provided. The ECAs were at their lowest levels, in terms of percentage terms."

For Airbus, ECA-supported financings represented about 10% of the whole product range of deliveries, and Taylor anticipates a similar level this year.

"The market has come back completely in terms of diversification and currencies. Financings closed in dollar, euro and yen-dominated currencies in 2014, and we may see yuan-denominated transactions this year," he says.

The capital markets' contribution to annual deliveries and the aviation finance sector in general continues to grow. This year, capital markets will fund almost a third of the commercial jet deliveries, a record level. This compares with $1.5 billion worth of financing in 2010.

A lot of funds are flooding into the capital markets, says Myers.

"More airlines are getting ratings and the capital markets feel more secured to provide them unsecured financing," says Myers.

"Also, there is a lot of new financing out there and private placements have grown substantially over the past year or so."

Growth of five percentage points in the capital markets next year, to 32%, will mainly be at the expense of pure commercial bank lending, which will drop to 28% from 31% in 2014, Boeing predicts.


The past five years have seen an emergence of local financiers in the commercial bank debt market.

Bank debt remains plentiful and diverse. And while financiers look at cross-border transactions, Chinese banks have yet to shift to global deals.

The Chinese banks, set to contribute 23% of next year's commercial debt-supported funding, remain focused on domestic markets, says Myers.

An estimated 90% of Chinese bank lending funds domestic customers, he adds.

Taylor says Chinese airlines can be unpredictable: "They tend to make a range of financing options and opt for alternative solutions."

He is unsure whether Chinese customers may require ECA support this year.

"This will depend on the commercial banking market, which is still performing strongly," he says.

Middle Eastern banks have grown over the past few years along with the region's new narrowbody and widebody deliveries. Two-thirds of Boeing deliveries in the Middle East are now funded by local financiers, says the airframer.

This was further evidenced in December 2014, with the first Boeing 787-9 and Airbus A380 models being funded by local and regional banks under commercial debt and Islamic structures.

Taylor says the Middle Eastern appetite for Airbus financing continues to be strong and diversified.

Over the past two years, National Bank of Abu Dhabi, for instance, has been involved in co-operation deals with the European airframer on leasing and financing projects as well as management activities on new and used Airbus aircraft. Recently, the bank firmed an agreement with Airbus to provide spare-parts financing for the Flight Hour Services programme.

The institutions have also looked beyond local airlines, and more globally, reflected by some aircraft finance partnerships they have built with Western financiers.

German banks are set to play an active role next year and more local banks are returning to the aviation market, says Taylor.

Boeing predicts that their exposure will amount to 17% of the commercial lending market next year, above Japan with 13%, France with 10%, the USA with 9% and Australia with 8%.

Myers says $2 billion-worth of Boeing deliveries are heading to Russia over the next 18 months, and Boeing Capital is working to bring other lending sources.

"Many banks and leasing companies in Russia are still having their part of the delivery stream and are supporting Aeroflot, UTair and S7 Airlines," he notes.

"Primarily, they were tapping a lot of European funding sources or going for the capital markets in the USA. We are working with them to bring other lending sources that don't have the same kind of sanctions," says Myers, adding that Boeing Capital is working directly with Chinese lenders and has some relationships in the Middle East.


Over the past three years, lessors have shifted the bulk of their leverage from commercial bank debt to more efficient capital market funding, says Boeing Capital. This expanded capital market liquidity is attracting new institutional investors and encouraging the evolution of aircraft portfolio securitisation structures.

Capital markets will be the primary source of leverage for lessors, which are a conduit to the public markets for many airlines.

Lessors, says Myers, are tapping more of the capital markets to fund their growth. In 2012, the capital markets represented 32% of lessors' sources of financing. Next year, they will represent 53%.

Myers sees lessors as the darlings of the capital markets.

"Capital markets love funding leasing companies because they get a lot of diversity in terms of product type and at the same time diversity in airlines," he says.

"And we have seen quite a few products coming into the space in terms of private placements, new financing structures that are really aiming at supplying funds to lessors."

Myers says secured and unsecured lessor funding is more balanced today.

"The capital markets have such a zest for aviation that we have seen some ABS [asset-backed security] deals where the average life of the asset has been 14 to 17 years of age. And leasing companies love talking about their portfolio being the youngest in the industry."

Capital markets are taking all different types of assets, young fleets and more mature fleets with the right kind of asset protection and management behind them.

Lessors are forecast to finance 21% of deliveries with cash, with another 20% sourced from commercial bank debt facilities, says Boeing Capital. The ECAs are set to contribute to 6% of lessors' funding in 2015.

Taylor expects operating lessors to continue tapping capital markets this year both on the secured and unsecured basis. "I don't see any signs of lessors returning big-time to the ECA market," he says.

Myers says Chinese banks that have their own lessors cannot provide funding for them. They do cross-pollination to fund their leasing subsidiaries but also get access to ECAs.

Chinese banks fund 9% of deliveries in the domestic market but Chinese lessors are actually seeking foreign capital for their aircraft deliveries, including using US Ex-Im Bank guarantees.

"Chinese lessors are actually looking outside of China, and Ex-Im Bank is one of those," he says.

In addition to Airbus and Boeing deliveries, Flightglobal's Ascend consultancy arm says turboprops will represent almost $2.3 billion-worth of delivery financing in 2015.

The company expects ATR to represent about $1.7 billion-worth of deliveries, and Bombardier the remaining $580 million.

Another $1 billion-worth of orders will hit the market in 2015 for Bombardier regional jets and CSeries, says Ascend.

Embraer will be the busiest airframer in the 70- to 130-seat range, with more than $3.1 billion-worth of deliveries this year, says Ascend. The Embraer 175 model, in particular, will represent almost 75% of Brazilian aircraft deliveries in dollar terms.

Sukhoi Superjet 100 deliveries are set to account for $1.1 billion this year.

Source: Airline Business