Aircraft Finance

Question 1

Finance

Answer 1

Air industry is constantly changing - airlines always looking to lower costs
Competition is intense - lowering seat mile costs is vital especially for feeder routes to compete against LCCs
12,000 new aircraft due to be delivered through 2020

Aircraft are financed:
25% - lessors
25% - self financed
50% - other sources - bonds, export credit agencies, commercial banks, aircraft/engine manufacturers

Narrow body aircraft are the most popular, wide body jet are growing, regional jet is shrinking with turboprop replacing them

Question 2

Preceding 10-15 years

Answer 2

9/11, SARS, Swine Flu, volcanos, LCCs, financial crisis
-Air industry has still been growing

• Increasing competition, affecting profits
• Airlines have lost equity and have more debt - weakening their balance sheets - lowering their margins
• Planes are becoming more fuel efficient - the costs of the newer aircraft are lowering (IATA)
• Price of air travel has fallen (IATA)
• Capital cost of $4-5 trillion to replace and add aircraft to support air travel growth (IATA)

Question 3

Basel III Agreement - 2013

Answer 3

An agreement - a stable funding ratio - money will become harder to obtain
Enables the banks to become more resilient - keep more money in the bank
Airlines will find it harder to get loans

Question 4

Cape Town Convention 2001

Answer 4

An international treaty - to standardise transactions involving movable property.
If an airline goes bust, if the aircraft is not in the registered country, put a lien/detain on the aircraft. Effectively grounding the aircraft.
Law where the owner was based applies
Lenders gain confidence now that their is clarification to the situation of the assets if the airline goes bust
A registry for who actually owns the craft, engines and other valuable items

Question 5

Export Credit Agencies (ECAs)

Answer 5

ECAs - Governmental institutions that act as a “middle man” between national governments and exporters to issue export financing, forms are:

• Credits
• Credit insurance and guarantees

ECAs can also offer credit or cover on their own account - does not differ from normal banking activities
Some ECAs are government sponsored, some are PPP or private
EU- ECB- Export Credit Guarantee Department, USA- Ex-Im Bank

Question 6

Aircraft Sector Understandings on Export Credits for civil aircraft (ASUs) - OECD 2014

Answer 6

ASU - Set new rules to level the playing field for ECAs and the preferential treatment for airlines

Question 7

Manufacturer Finance

Answer 7

OEMs have divisions responsible for helping smaller and less credit worthy airlines find finance to buy their aircraft
Have good links with their country’s ECA - eg Boeing and Ex Im Bank

Question 8

Traditional sources of funding tighten

Answer 8

Europe and USA - tightening their lending
Financial crisis has had an impact
Chinese banks are moving towards aviation lending

Question 9

New financial instruments - EETCs

Answer 9

EETCs - Enhanced Equipment Trust Certificates
Used to buy capital assets
Enables airlines to raise cash to buy aircraft with investment grade debt
Set up a separate company which owns the aircraft. In case the airline goes bust, the holding company (SPV) owns the aircraft so that the airline can maintain their cash flow/buy back their own aircraft
AF/Iberia tried EETCs in 2000
Air Canada Case - May 2013 - 4.66% interest rate - 5 777s

1. Airline issues EETC
2. Sets up SPV
3. Debt secured against aircraft
4. Airline pays the interest
5. Bust: lenders can recover aircraft for sale to recover their investments