British Aerospace has finalised a novel plan to protect itself financially from any dramatic swings in the regional aircraft market, with the setting up of its "financial risk insurance programme" .
BAe has a portfolio of some 600 aircraft, including BAe 146 regional jets and turboprops such as Jetstreams and ATPs, in which it has financial recourse liabilities. The portofolio is managed through BAe's Asset Management division, and the company has been studying ways to reduce its long-term financial exposure.
One of the main sources of financial exposure comes from residual value guarantees made by BAe to buyers. The company also has contingent liabilities through head leases from financial institutions that have purchased aircraft under sale/leaseback deals, which BAe then leases back and places with airlines on operating leases.
The programme involves the transfer of some £2.4 billion ($4 billion) of risk to a consortium of insurance companies, reportedly led by the UK's Royal & Sun Alliance, in exchange for a one-off premium of £38 million. This payment will be made as an exceptional charge to BAe's 1998 accounts. BAe retains a first loss obligation, which amounts to 10% of the risk transferred, which it says its current provision levels are adequate to cover. The programme will last for about 15 years during which the £2.4 billion-worth of risk will reduce to almost zero.
BAe finance director George Rose says the deal boosts the company's financial position by "virtually eliminating the downside risk in the income stream from our existing fleet of regional aircraft". Group managing director, commercial aerospace, Tony Rice adds that, although BAe is confident it has adequately covered the downside risk for its regional aircraft, "-recognising the timescales over which this activity must be assessed and the cyclicality of this activity, it is prudent to draw a line under our exposure in this way".
Source: Flight International
