After all, Airbus hardly invented the idea of separate finance units. McDonnell Douglas has had one for years. British Aerospace set up its Asset Management Organisation and JSX Corp in 1993. Fokker plans to launch an aircraft leasing company within months. Meanwhile, Saab is debating whether to split aircraft finance off from Saab-Scania Finance, while other turboprop builders have long since developed customer support units as an art form.
'Don't read too much into the Airbus deal,' warns Mark Schultz, Seattle finance lawyer at Perkins Coie. He points to the unique Airbus structure that imposes joint and several liability on each consortium member. By substituting a joint guarantee for those joint and several obligations, Airbus Finance Corporation will allow each member to cut its exposure by roughly 75 per cent. 'The basic advantage of Airbus Finance Corporation is that instead of covering each dollar four times, we will only cover it once,' says an Airbus spokesman.
So why delay until now a solution that Louis Emery, vice president for the Americas at British Aerospace's Asset Management Organisation, calls 'elegant and rational?'
The changing status of Airbus members could have something to do with it. When publicly traded Daimler-Benz AG acquired Deutsche Airbus, it had to add the latter's obligations to its consolidated balance sheet. Now the French government plans to privatise Aérospatiale in the next several years. These moves, plus the public status of British Aerospace plc, heighten the desire of consortium members to move Airbus obligations off their balance sheets.
A separate unit will not accomplish that overnight. Airbus will continue to obligate its members on new customer finance until its finance corporation gradually takes over all support. And the joint guarantees of the new unit's debt by consortium partners will remain in force until AFC earns a separate rating high enough to release the partners.
Yet the reasons for Airbus Finance Corporation may not stem from its structure alone. Paul Steinhardt, head of aerospace at Deutsche Bank, points to the increased availability of European debt syndication, which makes it possible for Airbus to fund its new finance unit with an initial $1.5 billion in syndicated debt.
Tassos Philippakos, senior aerospace analyst at Moody's Investors Services, also plays down the importance of structure. He sees the new unit as a manager of customer finance commitments: 'Airbus is trying to concentrate its financing effort in a specific unit in order to do the financing in a more systematic fashion that will make sense in terms of risk return.'
Airbus acknowledges reasons other than structure for forming the finance unit. 'It's part of the general maturity of Airbus Industrie,' says the spokesman. 'Today we are a much more mature company and the time was ripe to do that.' Renee Martin-Nagle, house counsel for Airbus North America, foreshadows where Airbus customer support may be heading. 'We learned our lesson on walk-away leases,' she told an Airfinance Journal conference in Washington. 'Airbus will only be on the fringe of the operating lease market, but we'll be in the middle of financing leases,' she predicts.
Whether it be leases, guarantees, or something else, Airbus president and chief executive officer Jean Pierson has publicly acknowledged that one lesson from the industry's current crisis is that 'financing aircraft sales is an important key to the future, which is why Airbus Finance Company is to be established.' Thus, Airbus Finance Corporation has at least two missions: to move support off balance sheets and to help Airbus provide customer finance.
Such mixed, potentially conflicting, motives concern Deutsche Bank's Paul Steinhardt, who wonders whether manufacturers who form separate finance units have a clear vision of their goal.
Such units can have several missions, Steinhardt notes. Aside from moving support obligations off balance sheets, properly structured units can be a vehicle for raising capital independent of the manufacturer's resources. They can remarket aircraft when the manufacturer becomes an involuntary used aircraft owner. And, obviously, they can help sell aircraft by offering support, although Steinhardt wonders how often lower prices wouldn't accomplish the same thing. Finally, Steinhardt sees well run finance units as helping manufacturers manage risks more professionally, recognising that they face the same dangers as anyone else who extends credit. 'For instance, few finance units actually insulate a manufacturer's balance sheet from support obligations. 'It may make more sense for Airbus because of the structure of the company,' says Moody's Philippakos, but otherwise, regardless of whether a manufacturer channels support through a subsidiary or an internal division, 'it doesn't affect our analysis. We add the liabilities of the subsidiary back to the parent. We look at the company as if it were one company.'
Philippakos says this applies even to a subsidiary where the manufacturer is a minority owner, such as Fokker's proposed leasing company. 'We would allocate a part. We have to incorporate a company's risk into the parent's analysis, whether it be a 10 or 100 per cent participant.'
Thus, a finance unit may seek a rating separate from its parent's, as Airbus Finance Corporation envisions, but a parent is stuck with its subsidiaries.
Even if a manufacturer wants to turn finance over to a separate corporation, it may face hurdles. When British Aerospace created Asset Management Organisation to remarket BAe146s, it was already a guarantor on many aircraft transferred to AMO. Ultimately AMO was formed as a British Aerospace division rather than a separate corporation.
Ownership may also be linked to capitalisation. Airbus expects to fund its unit without outside equity. Conversely, Fokker hopes to realise close to $580 million when it transfers part interest in its leased aircraft to the shareholders of a new lessor. However, it wants a say in how the company manages those aircraft even though 'Fokker is not a leasing company and has no intention to become one.' A rose by any name may smell the same, but since GPA's troubles, don't call a customer finance unit a lessor.
A frequent question which arises is whether a finance unit should serve its parent exclusively. McDonnell Douglas Finance Corporation illustrates how views on this can change. Before 1990, it had free rein, financing everything from rail cars to real estate. When crisis forced McDonnell Douglas to restructure by hiving off subsidiaries, MDFC was nominated. But the parent chose instead to trim MDFC's non-core portfolio and retain its aircraft finance experience. After some painful write-downs, that trimming continues. MDFC 'still has a distance to go,' reports Standard & Poors, but the unit's continuing liquidation of non-core assets is 'increasing the ties between the parent and subsidiary.'
Saab Aircraft Finance is considering a comparable move. It supports Saab aircraft, but it is part of Saab-Scania Finance. The aircraft unit would like to separate from that business, but wonders whether it can survive without Saab-Scania's guarantee. The answer may be closer support from the parent manufacturer.
MDFC may be moving toward exclusivity with its parent, and restructuring at Saab may bring manufacturer and finance unit closer, but British Aerospace's JSX Capital seems to be heading the other way. Formed to manage Jetstreams, JSX already has some other aircraft types in its remarketing portfolio and is interested in handling more non-BAe aircraft.
Ultimately, exclusivity becomes a question of goals. To the extent that a unit's capital is tied up in outside aircraft, it cannot support sales of inside aircraft. The question then is whether the unit's mission is to pursue profit wherever it can find it, or to help its parent peddle aircraft. When units seem unsure which to do, Paul Steinhardt sounds like more of a prophet. Recognising the dilemma, some manufacturers create separate units for separate functions. Airbus is forming both a finance corporation to support new aircraft sales, and an asset management group to convert and remarket used aircraft. And AMO does not handle Avro RJs.
As customer support grows, a manufacturer's asset management also needs to grow. According to David Irving, air finance solicitor at London's Seddons, remarketing 'has been forced upon Airbus, where they had to take back aircraft and have been expected by the lessees to bring [those] aircraft up to a certain standard and provide training.' He views this as a burden thrust upon manufacturers who 'still see their main role in life as selling aircraft.' Obviously, it is the way they sell them that thrusts manufacturers into the remarketing business.
In the third quarter of 1994, Boeing reported $3.4 billion in customer finance, an amount that keeps creeping up. This inevitably raises questions of whether Boeing can avoid the pressures that seem to propel manufacturers toward customer support units, and whether the move by Airbus will demand a competitive Boeing response.
Boeing's lips are sealed. The company was criticised in the late 1980s for failing to jump on the leasing bandwagon, but it has apparently elected to stick with its in-house group of about ten treasury people to handle customer support - for now, at least.
Boeing has formed dozens of corporations, often with engine manufacturers. But these special purpose corporations with such names as 'Gaucho-1 Inc' or '757UA Inc' were created for specific transactions. Despite speculation several years ago about its joint venture with Mitsubishi Trust & Banking, that unit still seems to function solely as a vehicle for Boeing's occasional resale of customer receivables in commercial markets.
If Boeing ever activates a separate support unit, it could pick from several existing subsidiaries. These include Boeing Equipment Holding Co, Boeing Financial Corp, Boeing Leasing Co, Boeing Sales Corp, and Boeing Sales Corporation Ltd. Some of these may already support customer finance, but none do enough business to warrant discussion in Boeing's annual report.
Perspectives differ over why manufacturers grow so shy at the mention of customer support. Moody's Philippakos says: 'I always thought and I still believe that the manufacturers provide customer financing as a last resort.' Capital providers, especially Japanese, have abandoned aircraft, he says, because of the industry's poor credit. Thus, manufacturers 'are caught in the middle. They know if they do not provide the finance they may lose a customer.'
But Chris Barry, Bogle & Gates finance lawyer, sees different dynamics. 'I see competitive pressure on the manufacturer to put together the best overall deal for the airline, including manufacturer support, even if the airline might finance without it.' Paul Dwyer, Boullioun's vice president for credit, agrees, pointing to United Airlines as a recent beneficiary of customer support, 'even though it has the capability and is using other forms of finance, including equipment trust certificates.' United, says Dwyer, 'was able to drive a hard bargain.'
The different reasons manufacturers have for providing support may help to explain their ambiguous aims in forming support units. Whether such units really provide 'a very focused mission,' as AMO's Louis Emery claims, may not be as important as a general recognition that, next to export credits, customer support has become the most important issue in aircraft finance.
The different reasons manufacturers have for providing support may help to explain their ambiguous aims in forming support units. Whether such units really provide 'a very focused mission,' as AMO's Louis Emery claims, may not be as important as a general recognition that, next to export credits, customer support has become the most important issue in aircraft finance.
Source: Airline Business
