Boeing is in talks with Gulf banks to develop a range of sharia-compliant aircraft financing products.
The US aircraft manufacturer is keen to tap into the underdeveloped aircraft finance market in the region as liquidity in other parts of the banking market dries up.
Boeing says it is trying to develop a global equivalent to the enhanced equipment trust certificate, a product similar to a lease that has been used to finance US aircraft sales for several years.
The system is based on a certificate being sold to investors by a trust, and the money raised being used to buy an aircraft.
The plane is subsequently leased to an airline, with regular payments made to the investors via the trust. The airline takes ownership of the aircraft when the certificate matures.
Certificates are sold on the bond market, and Boeing says a similar product, tailored to be sharia compliant, could also prove popular in the Islamic bond (sukuk) market.
“We are starting to see a trend that more aircraft are being financed Islamically, and there is a large pool of capital [in the region] that so far has not been accessed to finance aircraft,” says John Matthews, managing director of aircraft financial services for the Middle East and Africa at Boeing Capital Corporation, the manufacturer’s financing arm. “The enhanced equipment trust certificate has provided a tremendous amount of financing for US airlines over the years. What we would like to do, if we can find a financier and can help them develop the technology, is something similar in the sukuk market.”
The number of banks that are active in the aircraft finance market has dwindled rapidly this year, to about 15 from close to 60, and Boeing and Airbus are facing a huge potential shortfall in short-term funding on their deliveries.
Some analysts have estimated that the manufacturers could face a $10-20bn financing gap in 2009 (MEED 3:10:08).
With the credit markets so uncertain, the manufacturers are searching for new sources of funding and targeting banks in emerging markets, particularly the Gulf.
Financial institutions in the region have begun to participate in aircraft finance deals in recent years, but have rarely taken on the role of lead arranger.
“We are certainly hopeful [Middle East] banks will take more of a lead role on deals,” says Matthews. “We want to help them get more comfortable with aircraft as an asset type, and with moving more money into the market.”
“We are trying to find institutions that have the interest and capability to help us develop this product,” says Matthews. “Sukuk is one example we think would work, but traditional Islamic financing would too. We are not picky.”
Despite the large number of planes on order for the region’s airlines, passenger demand is falling. Figures from the International Air Transport Association (IATA) for September show a 2.8 per cent drop in Middle East passenger traffic year on year. This is the first such fall in more than four years and is in line with a global drop of 2.9 per cent (MEED 24:10:08).