Home' Asian Aviation : AAV Sept 2010 Contents Outlook Summit Report
Export credit agencies (ECAs), like
household insurers, used to have the
reputation of being conspicuously
absent during a crisis, only to reappear
again at buoyant times. Yet aircraft
leasing companies are finding it
endishly di cult to shake o the insurers-of-last-resort
a er they were pressed into action by governments
during the 2009 credit crunch.
e problem, as outlined during this year's Australia
Paci c Aviation Outlook Summit by Peter Harbison,
executive chairman of the Sydney-based consultancy
Centre for Asia Paci c Aviation, is that the ECAs
"plugged the gap" le a er suddenly risk-averse credit-
rating agencies downgraded the creditworthiness of
aircra lessors, in ating the cost of aircra acquisition
for airlines. Governments then stepped in to safeguard
the eet expansion plans of their national and regional
carriers, o ering bond-backed guarantees.
According to Tony Ramage, executive vice-president
for the Asia-Paci c and Middle East at Singapore-based
lessor BOC Aviation, now that the market has more or
less stabilised, it is time for the ECAs to leave the market,
lest permanent distortion occurs.
"As part of our business model, we're a speculative
aircra buyer ; we buy in the bad times, lease in the good
times," Ramage explains. Yet the extension of favourable
credit lines from ECAs has created a di erent market
dynamic, one where airlines can purchase their own
aircra and actually compete with the lessors by leasing
back any surplus from their eets.
Spoilt for choice
David Phillips, capital markets fund executive at the
global aircra fund of share-portfolio management rm
Investec, goes further.
"Since the start of 2010 there has been a change in the
nance available to airlines. ey are spoilt for choice
now, as the ECAs have gone beyond their mandate and
now o er government-backed credit," he explained.
Recently, Singapore Airlines (SIA) regional subsidiary
SilkAir received 22 bids for its sale-and-leaseback eet
expansion proposal. "We're concerned that the market
is a bit hot at the moment and the returns some of the
mainstream lessors will make from deals this year make
them unattractive companies in which to invest [our
fund's] money," Phillips said.
What worries analysts is the prospect of airlines
having immovable assets and rising debt. If a second
recession hits Europe, this o en fatal combination could
push many airlines to bankruptcy, Phillips warns.
" e capital expenditure of some airlines back in
2007 was greater than revenue," he says. e easy credit
of 2010 risks sparking a similar rush to purchase, which
should worry airline chief executives, he adds.
e bene t of leasing , though, is not lost on Patee
Sarasin, chief executive of ai low-cost carrier Nok Air,
whose various crises -- from avian u, through tsunamis
and political street protests -- have reinforced a desire
"We've had operating leases since we started [in
2007], which have given us the exibility to respond to
the ups and downs of our environment," he said. While
start-up airlines are not usually o ered the chance to
purchase aircra , Patee said the ai government has
extended a loan guarantee o er to Nok Air in a bid to
stimulate the aviation sector.
"Even as we expand and even a er we have taken the
airline to its initial public o ering, we will still lease,
because we are debt-free and want to stay that way," he
says. Nok may even lease some of its Next Generation
Boeing 737s from arch rival ai International Airways,
which acquired them with ECA backing.
Lessors have the edge
Phillips points out that lessors should outperform sale-
and-leaseback deals in terms of total cost over the useful
life of the aircra . Not least since asset-management is
a key task for lessors, rather than just one department
within a sprawling organisation.
Ramage estimates most leasing companies to have
a cost of equity of around 12 percent, whereas even
with ECA-backed credit, airlines struggle to achieve
14 percent. He adds that there is a parallel in the retail
sector, where stores exited the property purchase and
management space two decades ago, as shopping mall
developers proved more adept.
But an aircra appears as a depreciating asset on
the pro t and loss sheet -- easy to explain and easier
to amortise. Lease repayments, on the other hand, just
appear as heavy costs.
ere is another perk for airlines too. Aircra leased
to other carriers provide carriers with capital gains,
which are a handy revenue stream in uncertain times
and scally bene cial in many regimes.
Yet there has been a quiet shi in the type of carrier
leasing aircra . Conventional wisdom had it that large
airlines, normally former ag carriers, bought, while
those further down the food chain had to contend
themselves with renting.
"It's very hard for a start-up to buy aircra , whereas
a top tier airline is spoilt for choice," Philips says.
However, for some years SIA has been moving steadily
into the lease market and has been followed recently by
carriers such as Qantas.
Ramage says this partly re ects the desire to ape the
exibility of low-cost carriers and partly comes down to
capital management. n
ECAs threaten to distort leasing
Now that the economic turbulence is settling, aircraft leasing companies are calling for export credit agencies to
leave the market, writes Justin Wastnage.
AsianAviation | SEPTEMBER 37
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