Jetrader - September/October 2012 - 28

Airline Finance
from an Operating Lessor’s Perspective
Variable fuel costs and access to debt continue to challenge the industry
By Damon J.D’Agostino, Senior Vice President & Chief Sales Officer, CIT Aerospace

The aviation industry, like any other, is constantly evolving, but few industries confront the conﬂuence of multiple factors to the degree that the airlines do almost constantly. The industry has always faced signiﬁcant challenges, and most of them are not new. Yet recently, two factors—fuel cost and access to debt—have come under the spotlight. Such challenges bring opportunities for the industry and these opportunities come through growth. While growth in developed economies has been leveling off, demand for aircraft, primarily through large ﬂeet replacements, has been growing rapidly, particularly among airlines in Asia, Latin America and the Middle East. The increase in disposable income in countries such as China, Indonesia and Brazil, coupled with a rise in low cost carrier (LCC) penetration, has sparked a new appetite for air travel, driving demand for both new and used aircraft in these countries. With the demand for air travel projected to remain strong in emerging economies, we expect airlines to continue to expand their ﬂeets despite the challenging times they face. Even in India and China, where the frenzied growth of the past few years is now somewhat subsiding, we anticipate a continued stable, and perhaps more sustainable, growth rate.

Eurozone Credit Crunch
Since the start of the credit crisis in 2008, airlines have made a number of tough decisions to evolve and change their strategies to restore proﬁtability. These decisions have made airlines

lean, efﬁcient and more competitive. Yet in recent months, the economic recession has shifted focus to Europe where capital markets are still constrained and banks are under pressure. European banks have been major participants in the aviation commercial debt markets over the past number of years. However, the shortage of U.S. dollar liquidity in Europe has reduced the availability of ﬁnancing from European banks, which are reducing their exposure in asset ﬁnancing and taking signiﬁcant steps to build up their balance sheets in response to Basel III. Export Credit Agencies (ECAs) have traditionally been the source of alternative funding when the commercial debt markets and U.S. capital markets are disrupted. ECAs continue to play a big role in the industry, but the new Aircraft Sector Understanding (ASU) rules in 2013 will make the commercial debt market more comparable to the ECA-funded market in terms of pricing. With increases in the price of export credit ﬁnancing, some traditional lenders are reducing activity and newer banks are becoming active in aviation ﬁnance, albeit on a more conservative basis. As a result, airlines will need to diversify their funding sources. All these changes are occurring amid a trend toward mega orders from airlines that are boosting capital and liquidity needs. Lessors and lenders with asset knowledge and experience will be positioned to perform sale and lease back ﬁnancing and, in some instances, to provide PDP ﬁnancing to the airlines. This external source of capital will allow airlines to preserve their

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

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