Air Transport World

The party's over. (the aviation-finance market has its ups and downs)

The experience of the past three years has taught financiers a very basic lesson in physics: What goes up must come down.

There was a satisfying symmetry to the selection of Michael G.K. Post to head up the final session at IATA's 2-day aircraft finance conference held in New York last April, amid the wreckage of the world airline industry. Exactly three years ago to the month, he led off a conference on the same subject with a grim warning that the aviation-finance market was dangerously overheated and headed for a fall (ATW, 7/88). Coming as it did during a period of relative prosperity and at the dawn of the greatest aircraft-ordering boom the world has ever seen, his warning seemed misplaced to many. Of course, in hindsight, Post was right on the money, as was clear well before last spring's IATA conference.

That is not to say that Post foresaw every disaster that befell the airline industry over the past three years. He did not predict that the roof would peel off an Aloha Airlines 737, nor the devastating effect that this would have on used-aircraft values. He did not reveal the final shape of U.S. and European noise regulations that further devalued Stage 2 aircraft, nor predict that Iraq would invade Kuwait and as a byproduct, plunge the world's airlines into financial chaos.

No, all he did in 1988 was to ask lenders to consider more closely the curious behavior of the airline industry and be aware of the pitfalls awaiting those ;ho rushed in where angels feared to tread. He estimated that by the end of that year, nearly 800 aircraft would be surplus to the industry's needs in the U.S. alone, with more on the way. He said that asset-based financing, without an analysis of the airline credit risk, was flawed. He challenged the current wisdom about residual values fueling the sale/leaseback market: "We all know in our heart of hearts that at the end of a cycle, the value of an aircraft is going to come back to nothing but we believe that in the short-term, not too much can go wrong and the value is always going to be good. …

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