Despite new concerns over emerging markets that mounted on Friday,
an annual gathering in Dublin this week attracted record numbers of
lawyers, bankers and lessors who keep the $100 billion a year
jetliner industry aloft with funding.
Just a few years ago, tougher capital regulations triggered fears
that airlines would be unable to find the funds needed to pay for
record numbers of aircraft being ordered from Airbus <AIR.PA> and
Boeing <BA.N>, as European banks scaled back.
But Asian banks helped fill the void and financiers in Ireland, the
world's leading hub for aviation finance, said new money was pouring
into the promising sector in their wake.
"I don't think there's a sector of the financing space that isn't
open for business. Everything is very robust right now," Jude
Bricker, treasurer of low-cost U.S. airline Allegiant Travel <ALGT.O>,
said at the Airline Economics conference.
With U.S. airlines back on a more stable footing and oil prices
relatively calm, aviation is luring interest from longer-term
investors such as insurers and pension funds, who hope to boost weak
returns dictated by low interest rates.
"We've seen the pensions, endowments looking to make up lost
investment time, and more hedge fund investors looking for stable
spread over time but not necessarily a super-sized return to make it
work," said Daniel Hartnett, partner at law firm Kaye Scholer.
Capital markets such as that in Enhanced Equipment Trust
Certificates (EETC), a secured corporate bond structure typically
used by U.S. airlines, are increasingly opening up to foreign
airlines because of a recent treaty to protect lenders.
In a landmark transaction, Air Canada <ACb.TO> last year issued an
EETC backed by five Boeing jets. More investors are also placing
funds privately with airlines to avoid dilution when such public
offerings are over-subscribed.
"The choice of where to go to refinance or finance used to be more
guided by what was open, but now everything is open," said Eric
Eugene, head of transportation finance at BNP Paribas. "Our clients
have a much wider variety of options than there used to be."
Leasing firms, which own or manage 40 percent of the fleet, remain
active. And an ample supply of competitive financing means fewer
airlines are resorting to guarantees from U.S. and European export
credit agencies, which have raised their fees.
"We are in a very healthy market but these are changing markets. We
are using less export credit but replacing a lot of that capacity
with capital from multiple markets," said Kostya Zolotusky, a
managing director at Boeing Capital.
The resulting competition across the aviation industry means yields
aren't as high as they were and that is pushing investors to look at
new areas to fund, such as older aircraft.
"There's a lot of money chasing a few assets," said Tom Tuggle,
executive managing director at CMC Capital Markets.
But despite concerns that rates could rise as central banks ease off
printing money to stimulate the economy, delegates said it has
rarely been a better time to be an airline treasurer — traditionally
a nerve-racking job.
"Any CFO should be looking at refinancing everything they've got
right now," said Ron Wainshal, chief executive of Aircastle <AYR.N>,
whose key shareholders include the Ontario Teachers' Pension Plan, a
major Canadian pension fund.
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Cheap money has in turn indirectly boosted the manufacturers who are
now sitting on record order backlogs.
They are exposed to risks that airlines will not be able to pay for
jets they have ordered, but say they are confident others will step
in and funding will remain readily available.
The most worrying spot on the horizon is emerging markets, which
have dominated aviation's growth in the past five years.
The Dublin gathering took place in the shadow of the World Economic
Forum in Davos where bosses warned the "gold rush" of upstart
economies was over. The rise of a new middle class has been driving
much projected aviation growth.
A flight from emerging market assets accelerated on Friday, sending
the Turkish lira to a new low and setting global shares on course
for their worst week this year.
Political instability in Turkey and Thailand, both big markets for
aircraft, were cited as risks by two aviation industry chiefs in
Dublin, speaking on condition of anonymity.
One banker reeled off a list of "red flags" from currencies in
Venezuela and Argentina, to growth in Brazil or India.
For now, China — whose domestic market is by far the fastest-growing
air travel segment — is on everyone's watch list but is not
dramatically slowing, delegates said. Jetmakers are said to have
dozens of unannounced orders on their books.
A less tangible concern is whether the airline industry that
underpins an eight-year waiting list for new planes, and generates
the need for finance, has changed for the better.
Shares in European airline stocks <.TRXFLDEUPUARLI> have risen 42
percent over the last year, while U.S. airlines stocks <.TRXFLDUSPARLI>
have almost doubled over the last year.
Yet despite talk of fundamental improvements in the way airlines are
run, with capacity restraint improving the profits of U.S. carriers,
the industry operates on razor-thin margins.
"The margin for error is non-existent. A lot of things can go awry,"
CMC's Tuggle told Reuters. "Cheap money can sustain the industry,
but things can get very different when it turns."
(Additional reporting by Conor Humphries
and Alexandre Boksenbaum-Granier; editing by Anthony Barker)
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