Guide to Aviation Lawyers 2013
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Boeing’s rise in backstop commitments
I was told by one industry source recently that we are living in a “golden age of commercial financing”.
Airlines, according to the financier, have never had it so good. The market has plenty of banks willing to fund new aircraft, including new participants, and this year has seen a growing list of carriers succeed in tapping the US capital markets for the first time. Sources state that about 12 to 15 non-US carriers are looking to tap the capital markets within the next 12 months and, judging by the recent issuances, should probably do quite well.
For those airlines unable to access the capital markets, lease rates are still very competitive and lessors are expanding their fleets rapidly. Carriers today have plenty of options to fund new aircraft.
But this raises an interesting conundrum. If airlines can fund new aircraft deliveries so easily, why are they asking for more backstop commitments from Boeing?
Ultimate form of financing
Manufacturers offer their customers backstop financing to help fund aircraft deliveries. An airline pays a fee to ensure the availability of the financing and, if they require it when the aircraft delivers, will pay a separate, much higher rate for the financing from the manufacturer.
Unlike a car loan from a car manufacturer, air framers deliberately set the cost of this financing at a premium far and above the market rate offered by bank loans. The last thing an aircraft manufacturer wants to be is the primary financier to its customers. The high rates associated with backstop funding explain why so few of these arrangements are crystallized into actual financing (typically less than 10% in any given year, according to Boeing).
Boeing’s financing arm, Boeing Capital, has stated that the amount it makes available under these commitments has steadily increased in the past few years. In 1999 Boeing Capital had about $4.8 billion in backstop commitments on its books. In 2005 it was $11.4 billion, $9.8 billion in 2010, $15.8 billion in 2011 and at the end of 2012 it was $18 billion.
Nervous airlines
The big question is why this recent rise has occurred. There are several drivers behind this phenomenon. The first is that more airlines are ordering more aircraft. If a manufacturer, for instance, typically finances 1% of its customer deliveries, increased deliveries will inevitably force the manufacturer to increase its provision of customer financing. Both Boeing and Airbus have boasted record backlogs for 2013.
The second factor is that airlines have not forgotten the banking contraction that occurred in the financial crisis for aviation deals. Prudent airlines are willing to pay additional fees for the peace of mind of having financing in place, just in case. Airlines are buying these commitments as funding insurance in an uncertain world. Carriers are worried, for instance, about the impact of future banking regulation on the amount, or tenors, banks are willing to offer to fund new aircraft.
Boeing Capital states that another reason operators are asking for commitments is not based on unease over commercial banks but on concerns over the role of US Ex-Im. Export credit agency (ECA) financing has often been described as the last line of financing for aviation credits that commercial banks are unwilling to fund. Airlines worldwide will have witnessed this last line having to justify its existence (successfully) to secure its reauthorization last year from the US Congress.
Recently Boeing Capital argued this is one reason why US Ex-Im’s role is vital for its exports. A weakened US Ex-Im means the manufacturer has to offer more backstop commitments. Boeing dislikes offering backstop commitments because they represent contingent liabilities that eat up its balance sheet. This is money, argues Kostya Zolotusky, Boeing Capital’s managing director that would be better used for research and development into new aircraft technologies.
Insurance is about the perception of risk. US Ex-Im survived the Delta lawsuit with its guarantees to Air India in place. It marshalled general support to ensure that both the US public and Congress understood its role in supporting exports. The North American ECA is again due for reauthorization in May 2014. Both Boeing and US Ex-Im will be hoping for a calmer public debate over its role. The odds are likely that Boeing will have to cough up more in backstop financing commitments anyway this year than last merely based on the fact that airlines are ordering more aircraft. However, if US Ex-Im’s reauthorization process is smoother, then there is a better chance that fewer airlines will be asking for this service based on the strength of US Ex-Im’s political standing.
DICKON HARRIS,
Editor,
Airfinance Journal