Aircraft buyers’ issuance of bonds backed by planes will double to about $30 billion next year, as banks withdraw funding because of new lending rules and governments limit export credit, Boeing Co. said.
Aircraft-backed bonds will fund about 15 percent of plane deliveries worldwide this year and rise to a “high twenties” percentage of the market in 2014, Kostya Zolotusky, Boeing’s managing director of capital markets and leasing, said in Sydney yesterday. The planemaker’s forecast of next year’s debt issuance is equivalent to about 39 percent of such bonds issued globally since 1987, based on JPMorgan Chase & Co. research.
British Airways Plc and Air Canada sold bonds backed by jets this year as carriers seek new ways to finance their fleet expansion amid shrinking sources of traditional funding. The industry needs $4 trillion to $5 trillion by 2031 to buy about 40,000 new planes required by growing demand from emerging economies, the International Air Transport Association said.
New issues of the aircraft-backed bonds “will probably continue to double for a couple of years,” hitting $30 billion in 2014, Zolotusky said. “Airlines as a whole are not good credits but the demand for these assets has been really good.”
Funding for delivery of aircraft worldwide will reach $104 billion in 2013 and rise to $132 billion in 2017, according to Boeing.
British Airways raised $927 million last month from its first issue of such bonds. The debt, known as enhanced equipment trust certificates, was backed by six Airbus SAS A320-200s, two Boeing B777-300ERs, and six Boeing B787-8s. Air Canada sold $424 million of the bonds in April.
Rising interest rates as the U.S. economy improves, and a cash crunch in China which drove interbank rates to a record high in June, won’t slow the availability of finance for aircraft purchases, Zolotusky told reporters at a briefing.
A 1 percentage point increase in the cost of financing a Boeing 777 “is equivalent to oil going up in price by $3 a barrel” in terms of airlines’ total expenses, he said. That makes carriers relatively insensitive to rising interest rates, he said.
“Oil has moved up well over $70 a barrel and the airlines didn’t turn off the lights, didn’t turn off their operations, and showed their most profitable year when it was over $100,” he said.
In China, airlines are working according to five-year plans which are backed by the government and state-controlled banks, making a funding drought unlikely, Zolotusky said.
“Right now we are feeling pretty good about how the system is working, in terms of Chinese banks financing deliveries to Chinese airlines,” he said.
A greater concern is the withdrawal of funding from commercial banks as they limit lending in line with the Basel Committee on Banking Supervision’s 2010 revision of minimum capital levels, known as Basel III. Banks will provide about $29 billion to finance about 28 percent of aircraft deliveries this year, according to Boeing.
Government export credit agencies, which stepped in to finance aircraft purchases after the 2008 credit crisis froze capital markets, are also cutting back. Funding from export-import banks this year will be lower than Boeing’s initial forecast, at about 20 percent of the $104 billion total, compared with about 30 percent during 2012, Zolotusky said.
Bonds are “the only market that has enough liquidity that can absorb lower capacities in the other two markets,” Zolotusky said, referring to the decline in bank and government financing.
Airlines face a challenge in funding fleet growth over the coming decades, according to IATA, as returns on investment are the lowest among 29 industries surveyed and fall consistently short of the cost of funds.
The $2.50 per-passenger journey that airlines earned in 2012 was equivalent to the price of a cup of coffee and will rise to $4 this year, enough to buy a sandwich, IATA Director General Tony Tyler said in a July 3 speech in Sydney. That’s “nowhere near the returns that our investors expect,” he said.