Finance houses exit Gulf aviation market

03 October 2008
Airlines struggle to fund fleet expansions as debt markets tighten and passenger numbers fall.

Middle East airlines will struggle to fund orders for new planes as the aircraft finance market contracts in the wake of the global banking crisis, industry experts tell MEED.

The tightening of the debt markets could put a brake on the continued expansion of the aviation sector, which has been one of the fastest-growing elements of the Gulf economy in recent years.

With international finance houses struggling to ensure their own survival in recent weeks, dozens of banks are turning away from aircraft financing to focus on their core business.

Industry figures say that the number of banks involved in aircraft finance deals has slumped dramatically.

“Boeing estimates that there are 15 aviation finance banks remaining in the marketplace,” says a London-based financier. “If you go back two years that number would be close to 60.”

The shrinking finance market is also impacting on leasing companies, removing airlines’ most obvious alternative to buying outright.

“Operating lessors have the same difficulties. A lot of them were hoping to look to the capital markets for securitisation but the capital markets are dead right now,” says Charlton.

Middle East carriers have largely avoided the crisis caused by high oil prices that has consumed the global aviation market.

With the rise in passenger numbers far outstripping the global average, the region’s airlines have continued to order new planes.

Dozens of Airbus A330s and A320s, Boeing 777s and 737s are due to be delivered to the region’s airlines in 2009 and 2010, while the first Airbus A380 superjumbos have already arrived. Each order will require funding.

Some airlines have secured finance for their orders. “We had already financed four Embraers through Calyon and arranged operating leases on some [Airbus] A319s before the current crisis,” says Samer Majali, chief executive officer of Royal Jordanian.

“The next deals will be finance leases on the [Boeing] 787s, which are some way off.”

Those needing to arrange finance in the near future will find it harder than before.

The strength of the Middle East market has meant Gulf carriers could previously be assured of securing credit where other airlines might have struggled.

But finance houses’ exodus from the aviation sector means all but the largest state-backed carriers such as Emirates Airways, Etihad and Qatar Airways are in difficulties.

“Up to three or four weeks ago Middle East carriers were seen as somewhat removed from the crisis,” says another London-based aircraft financier.

“People took comfort in the close alignment between the airlines’ expansion plans and those of their national governments.

“But the market today is very difficult. It is all about liquidity now and we are into a phase of the cycle where a lot of deliveries are coming through over the next three years.

“At the moment it is hard to see how the banking sector is going to be able to cover that.”

Evidence is emerging that the Middle East airline market had hit a downturn before the Wall Street crash in September.

Figures released by the International Air Transport Association (IATA) at the end of September show that the summer holiday season failed to produce the anticipated bounce in passenger numbers (MEED 30:9:09).

Middle East passenger growth fell to 4.3 per cent in August, down from 10.6 per cent in the first half of 2008. In particular, international long-haul traffic, which Gulf hubs depend on, has slumped.

Passenger numbers in the Asia-Pacific region fell 3.1 per cent in August, while European airlines registered growth of just 1.6 per cent.

“Middle East airlines are facing unexpected weakness in travel demand,” says Brian Pearce, chief economist at IATA.

“This is affecting long-haul markets, which we had expected to hold up better. The hope that regions such as Asia, the Middle East and Latin America could decouple from the problems in the US has proved to be false.

“The credit conditions will be an issue for everybody. Deliveries are coming through at about 100 [planes] a month worldwide.”

Banks remaining in the market are unwilling to offer substantial loans on new planes and are reining in loan-to-value (LTV) terms - the proportion of the cost of a plane a bank will finance - in a bid to minimise risk.

“LTV tests have fallen a long way,” says Bob Charlton, a Dubai-based partner at law firm Freshfields Bruckhaus Deringer, which specialises in aviation.

“In a growing market they [LTV terms] could be 80-85 per cent but I have heard of banks offering 50 per cent.

“Airlines and operating lessors will have to look elsewhere for the balance of funds, to the manufacturers and export credit agencies.”

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