Posted March 24, 2009 3:25 PM
By Andy Golub
The View from ISTAT's 26th Annual Conference
There were close to 1000 attendees at the ISTAT 26th Annual Conference in Scottsdale, and it seemed as if each had their own unique set of challenges. While airlines, publicly traded lessors and banks could all cite weakened balance-sheets, broken business models, devastating spikes in the cost of inputs during 2008, and uncertain near term business prospects, there was little consensus on what the commercial aviation industry should expect to see in 2009. And so the conference began with the confessional mood of a 12-Step Recovery meeting where all attendees stand up in turn to declare, " I am a [CHOOSE ONE: O AIRLINE O LABOR UNION O LESSOR O OEM O OEM SUPPLIER O BANK] and I have a problem."
There were particularly energized conversations during Financiers and Lessor panels where the "liquidity squeeze" / "funding gap" took center stage. Perhaps in response to fuzzy math on the funding gap presented recently in Hong Kong, Walt Skowronki of Boeing Capital Corp laid out BCC's figuring of the financing needs for 2009. BCC expects that there will be just about enough liquidity to fund the $68bn of total commercial aircraft deliveries scheduled this year. Their breakdown:
$19bn Commercial Banks (incl. regional banks who are up 50% from 2008)
$18bn ECAs (doubled this year)
$~1bn RJ ECAs
$14bn Internally generated cash
$10bn Lessors
$~5bn OEMs
Bob Morin of EXIM, as the voice of the ECAs, focused on how a coordinated America-European response will double the availability of ECA support in 2009. He deflected questions on possible changes to home country rules for EXIM to support Boeing at home. There was also some questioning of the availability of the market to fund ECA loans, government guarantees and all. Mark Streeter of JPM Chase hinted at a possible solution coming from unnamed I-Banks who are working on an ECA securitization structure that could reopen the capital markets.
Robert Martin at BOC Aviation touted the growing support of local Chinese banks which have been providing an increasingly substantial share of bank financing, as proof of the emergence of regional players. He cited 2009 as the year that the US dollar will be tested as the universal currency of aviation finance, noting the recent frenzy of deliveries to the developing world has intensified the impact of the mismatch between a local currency revenue base and a USD financing. Robert Genise at DAE Capital extended this point, emphasizing that the credit implosion in Eastern Europe raises the spectre of a home grown European crisis which could dwarf the US sub prime crisis.
Elco Van der Straat at DVB provided an equally sobering observation on the flight to quality among financiers. While top-tier airline and lessor credits may receive support for new deliveries; this support will come at a very steep price. For lower quality borrowers, the financing market may very likely be closed. New aircraft deliveries will also have to compete with very richly priced refinancing of older equipment.
And then Steve Udvar-Hazy dropped a bomb on everyone... metaphorically. (I paraphrase) "When a bomb goes off," he started, "it takes a long time for the sound of the blast to catch up to the light, a bomb went off in the markets last October and the manufacturers are just hearing the noise now..." He continued more directly, stating that the OEMs need to cut production by 25% to 30% to avoid overwhelming customer demand.
Boeing and Airbus quickly stood to rebut that sentiment. Scott Scherer at BCC and Mark Pearman-Wright at Airbus both emphasized their companies' recently announced scale backs in production rates. Implementing adjustments to the supply chain takes approx 18 months, so their current actions should be taken as evidence of a pro-active approach to supporting their customers through this crisis.
As the conference closed, I felt that the novelty of this current crisis was fading. In its place there seems to be an uneasy conversation emerging. The first global recession that commercial aviation has ever seen requires an unprecedented level of coordination among the airlines, lessors and manufacturers. But if financing liquidity does not return to the market, the attendees at the next industry meetings may well begin by declaring, “I am a [CHOOSE ONE: O AIRLINE O LABOR UNION O LESSOR O OEM O OEM SUPPLIER O BANK] and YOU have a problem."
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