Jetrader - March/April 2011 - 13

Although the dust of economic disruption is still settling, the aircraft financing marketplace of 2011 continues its steady performance—in sharp contrast to other investment alternatives—thanks to the inherent strength of aircraft assets and the way they have been managed. Boeing’s annual forecast for 2011 of the aircraft ﬁnancing landscape shows fewer risks and greater liquidity for all market participants (see Chart 1: Aircraft Financing Environment). While it won’t see the return of the great liquidity of 2005-2007, the industry overall will have adequate availability of reasonably priced capital. Challenges should be limited to speciﬁc deals and not the result of systemic issues. A new Aircraft Sector Understanding (ASU) governing export credit agency funding will go into effect and drive important industry realignment. However, this realignment will not be instantaneous. It will take place over two to three years as signiﬁcant volume from export credit shifts into commercial markets. According to Kostya Zolotusky, Boeing Capital Corporation’s managing director for capital markets development, you can chalk this brightening outlook up to the sustained performance of the commercial aircraft market and to the value of aircraft assets themselves. “Aircraft ﬁnance is driven by aircraft demand, and one of the reasons we did so well through the downturn was that, as we anticipated, the demand was wellmanaged and balanced,” Zolotusky said. “And moving forward, we are clearly seeing increasing demand—from economic recovery, growth in emerging markets and higher fuel prices—with the demand for new, fuel-efﬁcient airplanes surpassing most expectations.” Zolotusky offers that the industry’s demonstrated ability to continue to attract capital, while other investment avenues struggled for attention, is the best validation of its near- to mid-term prospects. “Whenever you have real demand, there’s capital there to support it,” Zolotusky

said. “While there are times when we’re concerned about sufﬁcient liquidity, we’re conﬁdent that with real demand, there will be adequate supply. And over time, if that supply is not reasonably priced, it will become so, because the markets adjust.”

New Rules for Export Credit Agencies
The tightened credit in recent years as a result of the economic disruption found many stalwart aircraft bank lenders deprived of capital to pursue aviation opportunities. As a result, Export Credit Agencies (ECAs) stepped in to supplement commercial sources to satisfy real demand and to mitigate the consequences of the ﬁnancial crises on aviation. However, when commercial banks regained their footing, they expressed concerns of being crowded out by ECA-backed deals. In addition, some airlines not eligible for ECA support

as a result of so-called “home market” restrictions on lending in the aircraftmanufacturing countries of Europe, as well as the United States, expressed a desire for a more equitable management of export credit. The new ASU is a complicated compromise of many, often contradictory, interests. It outlines new ECA lending terms and conditions in an effort to respond to calls to “level the playing ﬁeld” by players in both established and emerging aircraft-building nations, as well as for the airlines who purchase their products. One of its byproducts is higher fees for aircraft export lending. “The new ASU’s higher prices and more restrictive terms will materially expand the demand for commercial ﬁnance, and over time this drives expansion of the depth, breadth and scope of the commercial markets,” said Boeing’s Zolotusky.

Chart 1

Chart 1: Aircraft Financing Environment
Boeing’s annual aircraft ﬁnancing forecast as of early 2011 reﬂects improving conditions overall as major sources return to more healthy conditions after several years of dislocation. Among market highlights, aircraft leasing companies, the capital markets and private equity in particular are expected to continue strong performances. Meanwhile, export credit agency (ECA) support, while continuing in the near term at levels on par with recent years, is expected to begin a downward transition, driven by higher costs under the new global Aircraft Sector Understanding (ASU) agreement taking effect that governs ECA lending. (Graphic: Boeing)

Jetrader 13

Jetrader - March/April 2011

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