Jetrader - May/June 2010 - 22

Emerging Entrants
China, Middle East at lead of new funding sources

The recent ﬁnancial market turmoil has helped accelerate some fundamental change among the leading sources of commercial aircraft ﬁnancing. One involves the ongoing shift of regional inﬂuences on the business of aircraft ﬁnancing. Long the domain primarily of the West’s ﬁnancial community, today’s aircraft ﬁnancing marketplace is becoming much more diverse, reﬂecting the nature of the current airplane market demand. “As with air travel being very closely linked with the world’s economies, so is aircraft ﬁnance,” says Kostya Zolotusky, managing director of capital markets development for Boeing Capital Corporation, the aircraft manufacturer’s ﬁnancing arm. Zolotusky explained that those regions of the world with signiﬁcant account surpluses and thus, a lot of banking system liquidity, also tended to be the most powerful players in aircraft ﬁnancing. (See “Evolution of Aircraft Banking” chart.) “We saw that dynamic in the 1980s when the Japanese banks took over from the U.S. banks as primary sources of aircraft. Japan’s economy was running a tremendous account surplus, and the banks there were ﬂush with liquidity and needed to deploy capital. As they realized that aircraft offer a great investment opportunity, they became market makers,” Zolotusky said. When Japan’s economy stagnated in the late ‘80s timeframe, its banks signiﬁcantly reduced their aircraft ﬁnancing footprint. At the same time, Europe’s economies were burgeoning and its banks were feeling very strong, leading to them becoming the dominant aircraft ﬁnanciers.

“Today, as you look around the world for the regions running signiﬁcant account surpluses and whose banking systems are becoming very liquid, what you’ll see are the emerging parts of the world, clearly led by China,” Zolotusky said. China has enjoyed its status as the largest emerging market for the last two decades. In some respects, it has almost become a fully developed market, but it still has a lot of continued running room in terms of high GDP growth. “China’s bankers have been participating in aircraft ﬁnancing in a very material way since about 2002 by primarily focusing their resources on ﬁnancing deliveries to Chinese carriers,” said Foster Arata, BCC’s vice president for Asia and Greater China who, with his team, is based in Hong Kong. Boeing has been actively helping the Chinese develop their aircraft ﬁnancing and leasing industries since 2004. Boeing’s latest market outlook reports that China is expected to be the largest market outside of the U.S. for new aircraft over the next two decades. As its liquidity surpluses grow, increasingly China is also becoming a larger force in aircraft ﬁnancing and has begun moving into the global aircraft ﬁnancing arena. “For 2009, the Chinese banks and lessors did a fantastic job of successfully ﬁnancing all of the country’s aircraft deliveries as well as closing on a large number of sale and leaseback transactions with some of the best credit airlines in the industry.” Arata said. The list includes providing ﬁnancing for deliveries to airlines in the Republic of Korea, Germany, France, the United Kingdom, the United States and Australia.

“Today, as you look around the world for the regions running significant account surpluses and whose banking systems are becoming very liquid, what you’ll see are the emerging parts of the world, clearly led by China.”
– Kostya Zolotusky – BCC’s managing director of capital markets development
China is believed to have done $4 billion to $6 billion in aircraft ﬁnancing for all manufacturers in 2009. Its 2010 contribution is expected to be lower due to reduced deliveries by the manufacturers. In addition, as the Central Government exits a period of heavy stimulus support in favor of a more sustained longterm growth, it has afﬁrmed a target of reducing new loans year over year by 22 percent. For the near term this is likely to slow lending and increase the spreads required by Chinese banks.

Middle East Growth
According to BCC’s Zolotusky, a dynamic similar to China’s exists in the Middle East, with the region facing challenges around

22 The ofﬁcial publication of the International Society of Transport Aircraft Trading

Jetrader - May/June 2010

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