Although the overall aircraft finance market encompasses a wide variety of financiers, smaller regional carriers often have difficulties accessing aircraft financing, but as we find, change is in the air.
Boeing’s 2018 Current Aircraft Finance Market Outlook forecasts a year of stable growth and funding diversification. The report says for the eighth straight year, passenger traffic saw above-trend growth with historically high load factors and aircraft utilisation rates.
This consistent demand growth, along with the resurgence of air cargo, is attracting new capital and innovative ways to access new financing markets.
However, a growing number of smaller regional carriers that seek to fly modern, more environmentally-friendly and fuel-efficient aircraft can sometimes face bottlenecks when it comes to financing.
“The financing of more efficient aircraft is not in itself a problem,” argues Anne-Bart Tieleman, CEO at TrueNoord. Indeed, he accepts it is generally easier to raise finance (at a sensible cost) for current in-production types compared to older, perhaps less efficient types. “This is simply because more modern, fuel-efficient aircraft are expected by financiers to have more resilient residual values and to be easier to remarket later on.”
Juliet Hewitt, marketing manager at regional aircraft marketing specialists Skyworld Aviation says financing on new aircraft is inherently riskier in the regional sector particularly where smaller carriers are concerned.
“Generally speaking, the traditional finance providers such as banks do not see the used regional aircraft market as a key area for opportunity, however, there are certain niche players in this sector looking for the right combination of credit and asset,” says Hewitt.
Private equity firms are a possible source of financing, but these arrangements can be costly, Hewitt warns. “Assets in the five to ten-year-old age bracket which have significant years of depreciation out of the way are of more interest to providers. Financing of new aircraft to larger carriers with solid credentials are more appealing to traditional lenders.”
Where smaller regional carriers seek to raise finance to purchase aircraft (whether for older or younger aircraft) Tieleman observes that they face the same situation as they always have – to offer attractive financials and stability to reassure a lender they can make the payments for the term of the loan.
“In this respect, leasing companies like TrueNoord always have an advantage over smaller carriers in the eyes of debt providers, as they offer greater diversification from a fleet of aircraft spread across multiple carriers and geographies.”
Another factor to consider is that when sourcing new aircraft, there is the possibility of export credit finance support. “This can make new aircraft financing for direct purchase by carriers attractive provided they meet the lending criteria,” Tieleman adds
Regional carriers are also supported by a thriving leasing market, according to Tieleman.
He says there is a healthy, competitive market for leasing aircraft. “Regardless of the type of aircraft the carrier chooses to operate, there are usually specialist leasing companies in a position to finance the aircraft and provide an operating lease. In some circumstances, the lease can provide the carrier with the option to purchase and own the aircraft at the end.”
Hewitt agrees that lessors are keen to enter into the regional market. She says there is a current trend for lessors looking for sale and leaseback opportunities on existing fleets of aircraft under 10 years old.
For example, Skyworld Aviation facilitated the sale and leaseback of six 10-year-old Embraer E170’s in operation with LOT Polish Airlines. “Whilst the lessors’ focus is really on keeping the asset for as long as possible, niche lessors will occasionally offer lease purchase arrangements, but these are more likely to be considered with older aircraft fairly near to end of life,” comments Hewitt.
For new aircraft, export credit agencies (ECAs) probably remain the single most attractive source of finance for regional operators according to Mark Hughes, chief commercial officer at Falko.
“Often, if financing is a problem it may be because the airline is stretching itself too far to afford the higher capital cost of a new aircraft when used aircraft are probably more suited to their financial position,” states Hughes.
The market for aircraft-backed debt is thinner for regional aircraft than the larger Boeing and Airbus products.
Hughes says: “Lending guidelines are also typically more conservative on these assets and banks prefer either new aircraft or to lend to lessors. The focus towards younger aircraft definitely makes new products a little easier to finance and ECAs will also help out here.”
Operators unable to attract financing for small acquisitions could benefit from work that is currently being undertaken by the European Regions Airline Association (ERA) on behalf of members where new fleets, purchased by lessors and leased to such carriers at competitive rates could be an option.
ERA is also working with manufacturers to help facilitate the introduction of more efficient types to smaller fleets by harnessing the European Investment Bank (EIB) financing.
Back in July 2017, ERA announced that two of its member airlines, KLM Cityhopper and Air Nostrum, had financing approved in principle for fleet renewal by the European Investment Bank (EIB). This financing was part of a €1 billion pilot project created by the bank.
“The EIB lending guidelines that have benefitted KLM Cityhopper and Air Nostrum were intended to promote and encourage fleet renewal,” declares Montserrat Barriga, the director general at the ERA.
However, Barriga points that the criteria used is quite narrow and more could be done in the interest of European regional connectivity by banks, and through European Commission incentivised mechanisms seen in airspace infrastructure, roads and railways.
The €1 billion financing pilot created by the EIB following a period of collaboration between ERA, its members and the EIB to provide more access to finance for regional aircraft and airlines signified a turning point in European airline financing and was widely regarded as good news for ERA members that seek to fly modern, more environmentally friendly and fuel-efficient aircraft.
“The project has indeed already yielded benefits; following highly detailed preparation and successful bids by ERA members KLM Cityhopper and Air Nostrum. The airlines had a total of €546 million financing approved in principle,” says Barriga.
ERA is working with more members to encourage them to pursue similar financing in the future. At the time of this writing, Barriga reports that there have been no additional transactions agreed; however, discussions are ongoing with stakeholders in several EU states.
This, in addition to the continuing discussions concerning access to financing for leasing organisations and a possible review of the lending criteria to afford access to those ineligible under the current guidelines. ERA is hopeful for further success stories.
Hewitt says there are no formal lending policies and guidelines in place for regional airlines. However, manufacturers can take advantage of local government financing to boost their orders, and national development banks have been instrumental in facilitating new aircraft orders.
For example, she highlights the Norwegian carrier Widerøe which recently took advantage of the BNDES [Brazilian Development Bank] finance facility with the delivery of their new Embraer E2.
Hewitt also points to Africa as a real growth market in the regional sector with some great opportunities and there are certain smaller niche providers looking to take up these opportunities with good credits in these territories. “However, the airlines with smaller operations and fleets looking to upsize their aircraft are finding it a challenge to source financing, so the new breed of turnkey support lessors are stepping in to plug the gap.”
She adds that territories with import age restrictions are proving to be a major problem for the used aircraft market and access to financing.
“These misguided rules are not only affecting the aircraft’s life span and market potential but are also effectively removing weaker and smaller airlines from those regions and giving competitive advantage to the larger established carriers. These age restrictions have no true relation to safety,” Hewitt stresses.
As the market evolves it is becoming clear that change is coming. There is an extensive fleet of older aircraft (both jets and turboprops) and new and more efficient types coming into the fray like the E2s.
“These new aircraft are not cheap and need financing,” reminds Tieleman. “Their arrival may have a potentially disruptive effect on the older aircraft currently in operation. We can anticipate some movement of aircraft in the next few years as older aircraft come off first lease and find new homes to go to, while new aircraft take their place,” he anticipates.
The most recent transactions at TrueNoord include the acquisition of three Embraer E190s on lease to Air France HOP! and five E190 with KLM Cityhopper.
Tieleman declares that it has been a very busy time since operation began. “We are well on our way toward reaching 30 aircraft or so in the next few months and we intend to continue this pace in the future.
“In terms of financing, our first deals generally were focused on specific assets we wanted to buy. As the business evolves and our portfolio increases, we are now working on growing our financing facilities further with more equity and debt facilities to fund our expansion plans.”
Skyworld Aviation has been very active in the difficult Saab 2000 market recently, having arranged the sale of three aircraft to an undisclosed party in Asia. The company has also concluded three lease transactions on behalf of Swedish Thun AB and one sublease from Eastern Airways of the UK.
Hewitt says all four aircraft are in the process of being delivered to SkyWork Airlines of Switzerland.
Skyworld also arranged the long-term lease of an ERJ 145 from RESIDCO in the US to Madagasikara Airways of Madagascar. “Two further ERJ 145 aircraft are penned for sale off-lease to a US-based airline, and we have also been involved in the lease-purchase placement of a fleet of European ERJ 145’s with an undisclosed airline. Other recent deals include a sale of an Airbus A320, the sale of a CRJ 200 into Mexico, and another sale of an ERJ 145 in the US.”
Over at Falko, the asset management company added 33 aircraft in 2017 and is arranging for four more. This is spread across both turboprops and regional jets.
“These deals have involved lessees worldwide including a number of very strong credits such as KLM and Aeroméxico. This has meant that Falko has been able to deploy a number of financing strategies to maximise both the strength of the individual deals and where appropriate the benefit of portfolio diversification,” concludes Hughes.
Falko is keen to grow its portfolio further in 2018.