Swine flu 'less terrifying than bankers'

The biggest threat to the global airline industry isn't the swine flu outbreak, according to AirAsia Bhd's Tony Fernandes.

"We've been through Sars, bird flu, tsunami, you name it," Fernandes, the founder and chief executive of Southeast Asia's biggest discount carrier, said at the Paris Air Show last week. "The only swine now are bankers."

Carriers from Air France-KLM Group to AirAsia, already coping with a slump in travel, also have to deal with banks that are unwilling to finance aircraft purchases. Airlines have to come up with money to pay for jets ordered years ago or face penalties for cancellations.

In 2010, the funding shortfall might reach US$36 billion ($56 billion), or as much as 60 per cent of the spending on larger aircraft, said Nick Cunningham, an analyst at Evolution Securities in London.

Steve Rimmer, CEO of Guggenheim Aviation Partners in Issaquah, Washington, said, "Debt is the critical component of any strategy right now." Guggenheim has 56 aircraft either owned or under contract with a value of US$2.5 billion and makes money by leasing them to carriers in return for regular payments. "We, like everyone, are chasing debt."

Airlines, which posted a total of US$10.4 billion in losses in 2008, according to the International Air Transport Association, are eliminating jobs, cutting routes and grounding planes to survive a slowdown.

AirAsia X, the long-haul affiliate of Malaysia-based AirAsia Bhd, is seeking short-term financing from more banks and paying higher borrowing costs, says Azran Osman-Rani, the CEO of AirAsia X.

The airline announced an order at the Paris show for 10 Airbus SAS A350s, valued at US$2.4 billion at list prices, as regional low-cost traffic grows in defiance of the global aviation slump.

AirAsia said its borrowing costs had climbed less than 100 basis points from a year earlier. Air France-KLM, Europe's biggest airline, said the cost of financing aircraft purchases had increased by about 220 basis points from a year ago. A basis point is a hundredth of a percentage point.

"A year ago, when you wanted to finance an aircraft you'd have a queue through your doors," Air France CEO Pierre-Henri Gourgeon said last month.

"Once when we asked for three aircraft to be financed we got positive answers from 12 banks. Now it's the reverse. It takes a lot of time."

Air France has turned to BOC Aviation, Asia's biggest aircraft lessor and a unit of Bank of China, to help finance jetliner purchases. Air France's traditional lenders include Calyon Securities and Natixis Transport Finance, a unit of Natixis SA, both based in Paris.

BOC Aviation said on June 4 that it would borrow as much as US$560 million to help finance aircraft purchases. The Singapore company has acquired 40 planes since December and predicts it will have invested US$10 billion in jets by 2012, more than doubling the current fleet size of 96.

Alasdair Whyte, the publisher of Airfinance Journal, said the backing of Bank of China, the nation's third-largest bank by assets, would give BOC an advantage amid financial woes at General Electric, whose Gecas aircraft-leasing unit has the biggest fleet in the world, and American International Group, the owner of International Lease Finance.

"BOC has been one of the few lessors who've had a parent willing to support them," Whyte said. "There's a complete shortage on the lessor scene for sale-leasebacks."

GE says it is coming back into the market now that capital markets have eased.

"We, in recent months, have seen our funding costs decline significantly," said Norm Liu, who becomes Gecas' chief starting next month. "It's the down cycle, and that's typically the best time to invest."

That is what John Slattery is doing. The former head of Royal Bank of Scotland Group's RBS Aviation Capital founded GreenStone Aviation in Dublin this month, after amassing US$100 million from Jefferies Capital Partners, to do only jetliner sale-leaseback transactions.

Slattery says he wants to attract as much as US$500 million in private equity funding by the end of nextyear.

The difference between the value of an aircraft during an economic boom and a recession is typically 12 to 15 per cent, Slattery says. In the current cycle, worsened by the credit crunch, the gap could be as much as 20 per cent. In addition to receiving monthly leasing payments, aircraft lessors retain the planes for possible sale later.

Loan Guarantees Sky Holding Company, a San Francisco aircraft leasing and management company founded in 2007 by former Pegasus Aviation executives, has a fleet of about 100 aircraft and is now seeking sale-leaseback transactions.

The company was "ready to go", CEO Rich Wiley said, declining to comment on the amount of private-equity financing he has lined up. "Our job is to bring a new source of capital to the airlines."

As airlines wait for the private money to return, Governments have increased the guarantees they offer on bank loans.

European export credit agencies would back about half of Airbus deliveries next year, up from 40 per cent in 2009, Airbus chief operating officer John Leahy said.

The US Export-Import Bank has also said it may boost guarantees on bank loans for Boeing aircraft this year by more than 70 per cent and may even lend money directly.

John McAdams, its chief operating officer, said on April 15 that the bank was set to put up US$9 billion in loan guarantees for planes from Boeing and smaller aircraft makers, up from US$5.2 billion in 2008.

Aircraft makers jump in only as a last resort when their customers cannot get financing elsewhere.

"We're not a bank, not a charity organisation," Airbus CEO Tom Enders said last week. "We have to use funds on a very selected basis."

This year, Airbus is providing €1 billion ($2.2 billion) to help customers pay for their planes and Enders said it would raise the figure next year.

Walt Skowronski, president of Boeing Capital, says the funding gap has narrowed amid "gradual improvement" and the Chicago planemaker may not have to provide the US$1 billion in direct financing it is prepared to give.

Boeing was considering "whatever financial support we think is appropriate" for UAL's United Airlines, said Boeing Commercial Airplanes president Scott Carson.

The unprofitable carrier is considering taking advantage of the economic slowdown to seek discounts for as many as 150 planes to replace older models in its fleet. Bloomberg