Friday, June 19, 2009

‘Swine’ Bankers Shun Jet Loans, Leave $36 Billion Gap

By Andrea Rothman and Susanna Ray

June 19 (Bloomberg) -- The biggest threat to the global airline industry isn’t the swine flu outbreak, according to AirAsia Bhd.’s Tony Fernandes.

“We’ve been through SARS, bird flu, tsunami, you name it,” Fernandes, the founder and chief executive officer of Southeast Asia’s biggest discount carrier, said at the Paris Air Show this week. “The only swine now are bankers.”

Carriers from Air France-KLM Group to AirAsia, already coping with a slump in travel, also have to deal with banks that are unwilling to finance aircraft purchases. Airlines have to come up with money to pay for jets ordered years ago or face penalties for cancellations. In 2010, the funding shortfall may reach $36 billion, or as much as 60 percent of the spending on larger aircraft, saidNick Cunningham, an analyst at Evolution Securities in London.

“Debt is the critical component of any strategy right now,” said Steve Rimmer, CEO of Guggenheim Aviation Partners LLC in Issaquah, Washington. Guggenheim has 56 aircraft either owned or under contract with a value of $2.5 billion and makes money by leasing them to carriers in return for regular payments. “We, like everyone, are chasing debt.”

Airlines, which posted a total of $10.4 billion in losses in 2008 according to theInternational Air Transport Association, are eliminating jobs, cutting routes and grounding planes to survive a slowdown.

AirAsia X, Air France

AirAsia X, the long-haul affiliate of Malaysia-based AirAsia Bhd., is seeking short-term financing from more banks and paying higher borrowing costs, saidAzran Osman Rani, the CEO of AirAsia X. The airline announced an order theParis show for 10 Airbus SAS A350s, valued at $2.4 billion at list prices, as regional low-cost traffic grows in defiance of the global aviation slump.

AirAsia said its borrowing costs have climbed less than 100 basis points from a year earlier. Air France-KLM, Europe’s biggest airline, said the cost of financing aircraft purchases has increased by about 220 basis points from a year ago. A basis point is a hundredth of a percentage point.

“A year ago, when you wanted to finance an aircraft you’d have a queue through your doors,” Air France CEO Pierre-Henri Gourgeon said in an interview last month. “Once when we asked for three aircraft to be financed we got positive answers from 12 banks. Now it’s the reverse. It takes a lot of time.”

Paris-based Air France has turned to BOC Aviation, Asia’s biggest aircraft lessor and a unit of Bank of China Ltd., to help finance jetliner purchases. Air France’s traditional lenders include Calyon Securities and Natixis Transport Finance, a unit of Natixis SA, both based in Paris. Bertrand Hugonet, a Calyon spokesman, and Victoria Eideliman, a Natixis spokeswoman, didn’t immediately return calls and messages seeking comment.

State Backing

BOC Aviation said on June 4 that it will borrow as much as $560 million to help finance aircraft purchases. The Singapore- based company has acquired 40 planes since December and predicts it will have invested $10 billion in jets by 2012, more than doubling the current fleet size of 96.

The backing of Bank of China, the nation’s third-largest bank by assets, gives BOC an advantage amid financial woes at General Electric Co., whose Gecas aircraft-leasing unit has the biggest fleet in the world, and American International Group Inc., the owner of International Lease Finance Corp., said Alasdair Whyte, the publisher of Airfinance Journal.

“BOC has been one of the few lessors who’ve had a parent willing to support them,” Whyte said. “There’s a complete shortage on the lessor scene for sale-leasebacks.”

‘Best Time to Invest’

GE says it’s coming back into the market now that capital markets have eased.

“We, in recent months, have seen our funding costs decline significantly,” saidNorm Liu, who becomes Gecas’s chief starting next month. “It’s the down cycle, and that’s typically the best time to invest.”

That’s what John Slattery is doing. The former head of Royal Bank of Scotland Group Plc’s RBS Aviation Capital founded GreenStone Aviation in Dublin last week, after amassing $100 million from Jefferies Capital Partners, to do only jetliner sale-leaseback transactions. Slattery said he wants to attract as much as $500 million in private equity funding by the end of next year.

The difference between the value of an aircraft during an economic boom and a recession is typically 12 percent to 15 percent, Slattery said. In the current cycle, worsened by the credit crunch, the gap could be as much as 20 percent, he said. In addition to receiving monthly leasing payments, aircraft lessors retain the planes for possible sale later.

Loan Guarantees

Sky Holding Company, a San Francisco-based aircraft leasing and management company founded in 2007 by former Pegasus Aviation executives, has a fleet of about 100 aircraft and said it’s now seeking sale-leaseback transactions.

The company is “ready to go,” CEO Rich Wiley said, declining to comment on the amount of private-equity financing he’s lined up. “Our job is to bring a new source of capital to the airlines.”

As airlines wait for the private money to return, governments have increased the guarantees they offer on bank loans. European export credit agencies will back about half of Airbus deliveries next year, up from 40 percent in 2009, Airbus Chief Operating Officer John Leahy said.

The U.S. Export-Import Bank has also said it may boost guarantees on bank loans for Boeing Co. aircraft this year by more than 70 percent and may even lend money directly. The organization is set to put up $9 billion in loan guarantees for planes from Boeing and smaller aircraft makers, up from $5.2 billion in 2008, John McAdams, the bank’s chief operating officer, said April 15.

Not Charity

Airplane makers jump in only as a last resort when their customers can’t get financing elsewhere.

“We’re not a bank, not a charity organization,” Airbus CEO Tom Enders said last week during the biennial show, the largest for the aerospace industry. “We have to use funds on a very selected basis.”

This year, Airbus is providing 1 billion euros ($1.4 billion) to help customers pay for their planes and will raise the figure next year, Enders said. Walt Skowronski, president of Boeing Capital Corp., says the funding gap has narrowed amid “gradual improvement” and the Chicago-based planemaker may not have to provide the $1 billion in direct financing it’s prepared to give.

Boeing is considering “whatever financial support we think is appropriate” forUAL Corp.’s United Airlines, said Boeing Commercial Airplanes President Scott Carson. The unprofitable carrier is considering taking advantage of the economic slowdown to seek discounts for as many as 150 planes to replace older models in its fleet.

“Certainly the area of financing is not something that’s unknown to the manufacturers,” United Chief Financial Officer Kathryn Mikells said in an interview. “And that’ll be part of the conversation we’ll be having.”

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