Backlog of delayed orders now
coming through is driving recovery. Claire Hack
reports.
Go deeper with GlobalData
Aviation finance is on the runway
to recovery. Funders say the segment began to take off mid-way
through 2010, following a year when potential clients put off
orders in anticipation of future prices falling.
A high level of private wealth,
combined with solid residual values, means it escaped the worst of
the crisis. And recovery has come quicker to aircraft leasing: the
share of global jet fleet managed by operating lessors reached 35%
during 2010. Progress is predicted to continue in 2011.
Private flyers
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By GlobalDataSociété Générale Equipment Finance
(SGEF) expects 2011 to be a record year for business volumes in
aviation finance as the backlog of delayed orders begins to
clear.
SGEF global head of aviation
Philippe Foulon said: “Volumes will definitely be much, much
greater in 2011. People were holding orders until they were sure
they could get a good bargain but we saw a reversal of that
behaviour in 2010.
“This was especially visible in the
last quarter. That’s a very good indicator that we’re back in an
active market situation.”
In addition, prices are improving
as demand for high-end corporate aircraft strengthens. In Europe,
wealthy clients are often impatient for new aircraft, meaning a
year-old plane, if it is immediately available, can often fetch a
higher price than one that is not yet complete.
Foulon said: “Typically, most
clients won’t wait until the last year of the contract to terminate
and they might get a new plane in the meantime.
“A lot of private clients are very
keen to get the most recent technology.” Customers often terminate
a typical 7- or 12-year contract at five years.
Second-hand aircraft, which make up
half of those handled by funders, retain a high residual value.
Foulon said: “Most aircraft are
still worth more than 50% of their original value in year 10 after
their manufacturing date. Financing packages and repayment
schedules therefore have to reflect this, and to include early
termination options if applicable.”
Early termination can be good news
for a leasing company which is then in a position to re-market the
asset, either selling or re-leasing it.
“It always takes time to
manufacture a new plane and that means there’s an active demand for
relatively recent aircraft. Typically the aircraft is five years
old, but it could be up to 10 or 15. It is still a very good
asset,” Foulon added.
SGEF has been present in the
segment for 30 years, working with assets with a value of between
$200,000 (€151,320) and $50m, primarily smaller, private and
corporate aircraft, as well as helicopters. It has business in 15
countries across Europe, and in the US and Brazil.
“In Brazil, it is mostly
helicopters. They use them to facilitate urban traffic,” Foulon
said.
“It is a very global market. You
can basically sell back a plane from Europe to anywhere around the
world.”
Commercial
airlines
On the commercial airline side, DVB
Bank is among several European banks to offer asset-backed
financing both to airlines and to aircraft operating lessors. It
provides loans, secured against the aircraft, so that planes can
then either be bought or leased.
DVB managing director of aviation
research Bert van Leeuwen said: “When we talk about asset-backed
finance, we mean a loan provided to a client with the asset as
security.
“So in case the client cannot repay
the loan, the bank can take title to the asset and sell the asset
to generate enough funds to recover the loan.”
One such deal was a five-year,
$162.8m loan facility for ICBC Financial Leasing, a wholly-owned
subsidiary of the Industrial and Commercial Bank of China, signed
in the final months of 2010.
Much of DVB’s business is
contingent on the performance of aircraft leasing companies, and
the nascent recovery in the segment has been beneficial for the
bank.
“In general, we have seen the
commercial jet market has recovered quite quickly, meaning that
demand for aircraft picked up as well,” van Leeuwen said.
However commercial airline finance
faces a challenge in that the rising cost of fuel is expected to
make newer, more fuel efficient jet engines increasingly popular,
while the market for older and pre-owned commercial aircraft
declines.
The delay in delivery of the new
Boeing Dreamliner to mid-2011 has exacerbated the trend.
“Airlines planned to take the
Dreamliner but had to keep older aircraft. Older aircraft have
fallen out of favour. They’re dropping in value dramatically,” Van
Leeuwen said.
The delay may have a further knock-on effect on financing
because it will hold up fitting out the new aircraft to meet
individual airlines’ standards, an operation which can cost tens
ofms of dollars.
See also: Avolon at a
glance
