Jetrader - January/February 2009 - 15

has made commercial lending more expensive. Public debt/capital markets and private equity/hedge fund sources have further degraded. However, the increasingly global market for aircraft ﬁnancing—despite the unprecedented ﬁnancial turmoil—provides us with cautious optimism about sources of aircraft ﬁnancing in the near to medium term. Some additional context for each of the market sectors is warranted. Aircraft Financing Environment After recovering from disruptions following 9-11, the aircraft financing marketplace mostly hummed along into early 2008. By late 2008, Boeing Capital's “stoplight” view of the health of aircraft financing players, particularly key sources, has changed significantly. It gives industry players pause over whether adequate financial market funding will be available for future deliveries, and prompts prudent planning by the manufacturers for direct financing in some cases. Capital Providers Leasing Companies* 2003 R/Y 2004 Y 2005 G 2006 G 2007 G 2008 Y/R Commercial Banks* R/Y G G G G Y/R U.S. Public Debt* / Capital Markets* Export Credit Agencies* (like U.S. Ex-Im Bank) Private Equity / Hedge Funds Tax Equity Funds, mostly in Europe Airframe and Engine Manufacturers New Sources of Funding* (China, Middle East, other emerging markets) G Good availability of financing at market prices R R R/Y Y G/Y/G R G G G G G G/Y G G G G G R R R Y Y G G/Y Leasing companies typically account for 20 percent to 30 percent of aircraft ﬁnancing. A number of new (Graphic source: Boeing Capital Corp.) entrants have joined the established lessors during the current cycle and other institutions are looking to join this exclusive club. As with all ﬁnancial institutions, aircraft lessors have been signiﬁcantly impacted by the global ﬁnancial disruption. In practically all the cases, the lessors’ challenges are those of their parent institutions or funding source dislocations, not from their aircraft portfolio performance. Nevertheless, a number were well positioned and are now perusing buying opportunities that turbulent markets offer. Many have predicted that there will be considerable consolidation in the leasing sector. We tend to agree, with one important qualiﬁcation: A year from now, we expect to see about the same number of lessors as today as new players from China, the Mideast and elsewhere continue to enter this lucrative space. Lessors R R/Y G G G Y G * Key sources of funding G/Y Y Limited financing capacity and rising borrowing costs R Temporarily not financing, very limited capacity or high borrowing costs Commercial Banks In 2008, commercial banks provided about 40 percent of all aircraft ﬁnancing. In the 60s and 70s, U.S. banks were the primary aircraft ﬁnanciers. In the 80s, it was Japan’s banks. When Japan struggled late in the decade, Europe’s banks picked up the torch and have remained in the lead ever since. The European banks have come under severe pressure in the current crisis. Yet most are expected to come back strong into the sector in early 2009. Regional banks are largely niche players, but are emerging in some markets (see new funding sources chart above). The next generation of aircraft bank debt will be much more global—with Chinese, Middle East and other regional banks—joining the Europeans. Commitment to Improve China’s Role in Financing – Boeing has agreed with four of China’s leading banks investing in the aviation sector to work together to expand the country’s involvement in aircraft ﬁnancing on a regional and global level. A delegation led by Boeing Capital Corp. Photo courtesy of The Boeing President Walt Skowronski joined Capital Corporation senior ofﬁcials from the Bank of China, the Industrial and Commercial Bank of China, China Development Bank and the Export-Import Bank of China in signing agreements to enhance executive relationships, identify new ﬁnancing opportunities with airlines inside andw outside China, and enhance the aircraft ﬁnance and legal infrastructure in the People’s Republic of China. “China is currently the fastest-growing aviation market in the world, and Chinese banks are taking on an increasingly important role in supporting aviation’s unparalleled growth in the country,” said Skowronski, seen here at a mid-November 2008 signing event with Chinese banking ofﬁcials. Over the past decade and a half, U.S. capital markets have been the deepest and most efﬁcient aircraft ﬁnancing markets in the world. However, their lending has been largely conﬁned to U.S. domestic carriers. Due to the sub-prime crisis, the U.S. capital markets are too expensive for new issuances. However, this is a market that has endured deep cyclical downturns, and we fully expect it to recover, with 2010 appearing to be the most likely timeframe at this juncture. Capital Markets Export Credit Agencies The Export-Import Bank of the United States (Ex-Im Bank) and other export credit agencies have been valuable resources Ex-Im has consistently ﬁnanced around 20 percent of Boeing deliveries, and European ECAs about the same for Airbus. As it did after 9-11, ExIm recognizes the industry’s challenges and is prepared to step up again. Boeing’s backlog is globally diverse; majority of our deliveries are Ex-Im eligible. Ex-Im expects to sustain its share of ﬁnancing despite projected record deliveries. Post 9/11, these were important players, providing signiﬁcant liquidity through the Enhanced Equipment Trust Certiﬁcate (EETC) market. Recently hedge funds have not been active in the sector. Jetrader 15 Hedge funds and private equity

Jetrader - January/February 2009

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