Less room for new players in aircraft financing market

Singapore

SOME players in the aircraft financing market are taking a cautious view, given the backdrop of a large number of aircraft orders and deliveries, which could lead to oversupply in the industry.

"A lot of people have come into the market because they view that there's money to be made, but there's also money to be lost," said Paul Jebely, global head of aviation finance at law firm Clyde & Co. "Caution is the prevailing sentiment among those that have been active in the market for more than one cycle."

There has been increased liquidity in recent years on the back of brighter prospects for the aviation industry, from avenues such as the aircraft leasing companies, capital markets, commercial debt markets and private equity.

"There's tons of liquidity in the market (now) and there's more limited original equipment manufacturer (OEM) and export credit availability, which is okay because the rest of the market has recovered very nicely," said Mr Jebely.

In contrast, back in 2010, aircraft lessors were more cautious while private equity and commercial debt finance were limited. On the other hand, export credit was far more active and plane manufacturers too were stepping in to provide funding.

According to the banks and lessors, there is now less room for an increasing number of competitors, what with credit margins decreasing and more plane order cancellations likely on the cards, he said. "That applies to the bank market, that applies to the leasing market as well."

"We now have the single largest commercial aircraft order book in history, certainly in Asia but I think that applies globally in large part because of the (orders from Asia)."

Over the past five years, passenger traffic has risen rapidly, powered by economic growth in the region as well as the rise of the budget carriers.

"It's difficult to predict the future. Aircraft take time to build. If you're going to place an order for a new aircraft, you're basically predicting where the traffic growth will be in a minimum of eighteen months out," he said. "That's not to say people have not made errors in judgement on what is effectively an exercise in predicting the future."

Budget carrier Tiger Airways has cancelled orders for nine Airbus A320s amid overcapacity in South-east Asia, while AirAsia X is said to be considering the deferral of some plane orders.

At the same time, Mr Jebely suggested that some cancellations could also be a result of airlines opting to lease aircraft instead.

With aircraft leasing, planes can generally be put into service quicker than new aircraft deliveries, leading to instances where orders due for delivery three years out have been cancelled in favour of aircraft leasing, he added. In addition, it also delivers other advantages for carriers such as tax incentives and a stronger balance sheet.

Nearly 40 per cent of the fleet in Asia is leased today, up from some 20 per cent four years ago, he noted.

"That's just going to grow. The aircraft lessors are extremely active in Asia - not just placing out their own aircraft but also doing a high volume of sale and leaseback transactions (from airlines)."