Banking crisis spawns leasing boom

Lessors will be providing 50% of aircraft fleet funding by 2020, Boeing’s top money man tells Tom Ballantyne on a visit to the region.

November 1st 2014

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The airline business may be volatile, but when it comes to financing the thousands of new airplanes on order, business could not be better, said Boeing Capital Corporation’s managing director of capital markets and leasing. Read More »

Kostya Zolotusky said: “We see a very strong market for aircraft and aircraft investors. Although we are always mindful that markets can change and they can change quickly, we are seeing an extraordinary great evolution of leasing company business models and their success.

“We have a lot of completed trades in the leasing space. In the last two years, the Japanese have come into the market. We will see other Asians following them,” he said.

Boeing believes almost all sectors of aircraft financing have a positive outlook for aircraft deliveries. Only export credit agencies are a cause for concern, as the U.S. government is debating their future, while financing by airframe and engine manufacturers is classed as “cautionary”.

Aircraft financing, worth $104 billion in 2013 and $112 billion this year, is forecast to increase to $139 billion by 2018. The two major aircraft manufacturers predict a world market for new jets of 36,000 plus, valued at US$5.2 trillion.

Since the global financial crisis six years ago, when many banks withdrew from aircraft financing, significant shifts in the sources of cash have occurred. The biggest mover has been capital market funding, which increased from 14% of all financing in 2013 to 22% this year. More increases are forecast.

Lessor funding has risen by four per cent to nine per cent, while bank debt has dropped from 28% to 25% and export credit funding has declined to 18% from a recent average of 23%.

A decade ago, said Zolotusky, European banks dominated this sector. Today, it is nicely balanced around the world. “Chinese banks do nearly all the delivery financing in China. Japanese banks are back in the global market. Australian banks and other Asian banks are starting to play globally and not just in local and regional markets. One example is the Commonwealth Bank (in Australia), which is becoming a true global aircraft finance bank,” he said.

“I will continue to argue that airplanes, in the last several decades, have been the best performing asset class. In essence, airplanes are high quality, moveable, global real estate. If you invest in real estate in any particular region there’s a problem, you can’t move it,” he said. “But you can move airplanes to where demand exists.

Assisting this mobility Boeing said is lessors’ shift from commercial bank financing of their fleets to capital markets funding. In 2014, more than 40% of lessor borrowings will have been secured from capital markets, said Zolotusky.

Lessors also are expanding their fleets from their traditional narrow body portfolios to the wide-body sector. “Roughly 30% of the global fleet of lessors will be wide bodies. By the end of this decade, 50% of the global fleet will be on operating lease. The growth of operating leases versus buying the airplanes is accelerating,” he said.

“New global banking regulations have had a dribble down effect on the availability of airline financing.

“Some airlines can no longer afford or come up with the equity necessary to secure export credit funding. Those two trends are shifting the economics of leasing versus buying and a lot of airlines are favouring leasing,” he said.

Boeing does not expect interest rates to increase significantly, which would result in financing becoming far more expensive.

“When the fuel price started spiking from the mid-$30s, there were a lot of smart people who said if the fuel gets to $50, turn out the lights. Fuel got to $50 and the airlines kept going. They said if fuel hits $70 there will be no-one left standing. Fuel hit $70 and they kept going. Airlines had their second most profitable year when the fuel was at $115 a gallon,” Zolotusky said.

“This year it is hovering at under $100 (at press time oil was US$84 per barrel) and airlines will have their most profitable year ever. Global airlines have found a way to adjust.

“The chance of interest rates moving up that much is very low. It would mean the global economy was exploding. I don’t think the global economy is going to go that way all of a sudden.”