Regional airlines turn to export credit agencies

17 October 2008

Middle East carriers will increasingly rely on foreign agencies as other forms of financing dry up.

Airlines in the Middle East are expected to dramatically increase their reliance on funding from national export credit agencies over the next 12 months, as alternative sources of finance dry up.

Export credit agencies are used by governments to support their major exporters and provide counter-cyclical funding, supplying loans during periods of economic downturn, when commercial lenders are unwilling or unable to accept the risk of a deal.

The Export-Import Bank of the US provided $5.5bn in funding for airlines in the 12 months to 30 September - $1bn more than in the previous 12 months. Of this, $850m was allocated to the Middle East, with deals arranged on seven aircraft bought by Dubai-based Emirates airline and Oman Air.

Bob Morin, vice-president of the bank’s transport division, says the figure will rise significantly in 2009.

Morin predicts the bank will provide close to $9bn in financing worldwide in 2009 and, given the number of aircraft due to be delivered to the Middle East in the coming months, the number and value of its deals in the region will increase.

“We can lend through the current cycle, and Middle East carriers feature prominently on the order books of Airbus and Boeing,” he says.

The three European agencies that support Airbus orders are the UK’s Export Credits Guarantee Depart-ment (ECGD), France’s Coface and Germany’s Euler Hermes. In 2006-07, the three agencies backed the sale of 58 Airbus aircraft, with ECGD alone providing guarantees worth £483m ($830m).

The financing deals included orders for Qatar Airways, Royal Air Maroc and Turkish Airlines.

“Export credit agency cover for aircraft sales is 15-20 per cent [of the financing needed], and this is likely to increase dramatically,” says one Airbus official.

The move to seek new sources of funding follows the withdrawal of financial institutions from the aircraft finance market over the past year, as banks focus on their core business.

Industry executives say the number of banks active in the market has fallen by about 75 per cent over the past two years, to about 15 banks from 60.

The trend has accelerated in recent weeks, as credit markets dried up (MEED 3:10:08).

In these circumstances, funding from export credit agencies becomes critical, although the region is thought to be better placed to weather the downturn than other aviation markets, as traffic figures are still growing, albeit more slowly than before.

Boeing hosted a conference in Dubai on 15 October, to discuss methods of funding with Middle East airlines and financiers.

Among the airlines seeking finance, Oman Air is hoping to raise $600m in funding to pay for seven long-range Airbus A330s, which are due to be delivered from 2009.

The airline became Oman’s national carrier in 2007, after Muscat withdrew from its involvement in Gulf Air. Since then, Oman Air, which had based its network on short-haul routes, has been expanding rapidly to build up its international presence.

The airline held talks with several banks to discuss funding proposals in early September. According to one official at Oman Air, the airline is likely to wait to see how banking markets settle before selecting a deal.

Abu Dhabi-based Etihad Airways has also paused its latest round of financing negotiations, to allow some normality to return to the market (MEED 14:10:08).

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