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Saudi Arabian airlines' mega deal spurs Syariah aircraft finance

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A Saudi Arabian airlines plane on the tarmac at the King Fahd International Airport in Dammam, Saudi Arabia.

[DUBAI] The market for Islamic aircraft loans may have just doubled in size.

Not content with issuing two of the largest sukuk on record to fund its aviation ambitions, Saudi Arabia - via its state- owned carrier - last week placed orders for 50 planes from Airbus Group SE. The deal has a list price of US$7.7 billion compared to about US$5.8 billion raised globally since 2006 through Syariah-compliant aviation loans. Airbus is selling the aircraft to the Aircraft Leasing Islamic Fund, which will lease them to Saudia.

The deal underscores the growing importance of Islamic financing to the airline industry, after Airbus helped established a fund and the UK backed an Emirates airline sukuk. Global Syariah-compliant financial assets may almost double in the four years to 2018, according to Ernest & Young LLP. The International Air Transport Association expects Middle East passenger growth of 13 percent this year, the fastest in the world.

"Islamic financing, particularly sukuk, is the smart way to go," Nabil Issa, a Riyadh-based partner at law firm King & Spalding LLP, which helps arrange Syariah-compliant deals, said June 17.

"You open up to a whole new world of investors, especially in Saudi and Kuwait." The aviation industry is a good fit for Islamic financing, which is often based on assets to help comply with the religion's ban on interest.

Emirates, the world's biggest airline by international passenger traffic, this year raised US$913 million from the sale of Islamic bonds guaranteed by the UK government to purchase aircraft, including A380s.

In 2013, Saudi Arabia's General Authority of Civil Aviation issued a 15.2 billion-riyal (S$5.32 billion) sukuk after selling a similar amount the previous year.

"If you're doing a lease-financing, which most aircraft financing is anyway," then it makes sense to structure it in a Syariah-compliant way, Issa said.

The International Air Finance Corp., which manages the Alif Fund, financed the Saudia deal, according to an e-mailed statement from the airline. Kuwait Airways also used the fund to pay for five A330-200 planes.

This is not the first time Saudia tapped the Islamic loan market. The carrier, whose long-term plan is to offer shares to the public, already has a 7.2 billion-riyal Syariah-compliant loan outstanding and embarked on selling stakes in some of its units, including catering and ground-handling.

Saudia, formally known as Saudi Arabian Airlines, is seeking to increase capacity domestically and access new international routes as competition at home intensifies. Qatar Airways is set to open its own airline, Al Maha Airways, in the kingdom.

At the Paris Airshow last week, Saudia ordered 20 A330-300 Regional planes and 30 A320s, as part of plans to almost double the fleet to 200 by 2020.

The new planes "will enable us to expand our domestic and regional network and better absorb growing passenger traffic," Director General Saleh Al Jasser said in a statement last week.

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