Posted November 7, 2008 3:45 PM
By Eddy Pieniazek
The Missing Billions
There has been no shortage of serious talk this week in Hong Kong at a series of aviation events which have included the annual Asia-Pacific Airfinance Conference, not least of which has been ongoing discussions about the industry’s ability to fund the commercial aircraft scheduled for delivery in 2009.
In the ‘good’ times, in ballpark terms, we would expect to see Operating Lessors and Bank debt account for around 50% of the financing required, another 20% covered by ECAs/Exim and the remaining 30% is down to capital markets in the main, supported by OEM vendor financing where necessary.
In the ‘bad’ times the balance changes, we would anticipate the lessors, bank debt and capital markets to scale back. Right now the ‘bad’ times have the potential to aggravate the depth of scaling back. The industry would therefore be looking to the ECAs/Exim and the OEMs to help make up the difference. Theirs however, are not bottomless pockets.
2009 is a difficult year to measure in terms of expected deliveries, with the Boeing strike, Boeing 787 and Airbus A380 production delays, and production rate changes all clouding the issue somewhat. Nevertheless, we potentially have around 1,000 Airbus and Boeing jet deliveries scheduled, and another 200+ Embraer and Bombardier aircraft. If that is the case, we will need to find around $70 billion to help pay for these aircraft.
Bringing all those discussions and thoughts together, it looks like the lessors and banks (despite their current problems) could still account for around $22.5 billion of next years requirements, and the ECAs/Exim could provide a similar level of support. That’s 65% accounted for. Pencil in the OEMs for another $10 billion, that would still leave the market $15 billion short of the $70 billion needed, effectively a 20% shortfall.
Such a funding gap is probably a ‘worst case’ scenario. Right now we don’t really know where the money is going to come from, and the danger is, if the money doesn’t arrive, you could see 200 new aircraft heading for the desert.
OK, 200 is a big number. But 20% of the 2009 delivery backlog could represent 200 aircraft, and these could potentially become ‘white tail’ aircraft (built but not delivered to a customer).
For this to happen (and remember, we are assuming ‘worst case scenario’ territory here) we would need a few big “if’s” to materialise –
IF the capital markets disappear from the equation
IF that $15 billion shortfall is not met by other funding sources
IF the manufacturers produce the full quota of aircraft
Is this order of magnitude likely to happen? There’s no doubt the potential is there, but the answer should really be ‘no’.
To start with, the capital markets won’t entirely disappear. They might not be active today, but a year is a long time and we should see some returns next year, as the opportunity to acquire generative assets will be attractive to some. Private Equity, Sovereign Wealth Funds, Hedge Funds, Pension Funds and others might also be prepared once again to be part of the mix before next year is over. In addition, the ECAs/Exim and the OEMs can support the infusion of additional capital beyond the assumptions above. Add to this the fact that the manufacturers have the ability to scale back production and manage the flow of aircraft capacity (thus reducing the overall need for funding) and we can build, indeed hope for, a more manageable perspective.
It’s another set of “if’s” of course, but perhaps a more realistic one if past history is a guide. Nevertheless, even bringing the above to into play might still leave a $5 billion funding gap. Let’s not forget the state the banking industry is currently in. A $5 billion gap could be equivalent to over 50 aircraft temporarily ‘white tailed’ while financing is arranged. So even a relatively small funding gap will illustrate the stress the industry is currently experiencing.
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