Air Transport World

Is it safe? (financing and the airline industry; includes article on financing of GPA Group)(Leasing & Finance)

With the airline industry poised to report its best financial results since at least 1988, lenders are stepping forward to finance new-aircraft deliveries with an enthusiasm not seen for at least five years. This confirms a trend that was identified last year (ATW, 12/94) and reflects a dramatic turnaround from the 1990-93 period, when investors and lenders abandoned the asset class en masse. Now, they have returned and the result is intense competition among financiers to do deals. Airlines, expecially those with good credit ratings, are benefiting from some of the lowest rates in years.

Klaus W. Heinemann, joint general manager-London Branch of the Long-Term Credit Bank of Japan, says Japanese banks have been very aggressive in aircraft financing, "to an extent that we have seen significant pressure on lending margins, especially in the European arena, where lending margins have come down quite significantly for [most of] the flag carriers."

Tom Hollahan, senior analyst of Citibank's Global Aviation Group, agrees. "Spreads have narrowed dramatically for all but the restructuring airlines."

John Slowik, senior transactor with Citibank's Global Aviation Group, adds: "I think even the bank markets are getting more aggressive toward aircraft and airline financings."

This enthusiasm is occurring against a backdrop of depressed aircraft deliveries and nagging difficulty in specific segments of the used market. Airlines and leasing companies took delivery of 517 new jets last year - the fewest since 1988 - and are expected to take only 485 this year, based on a forecast by Ponte Vedra Beach, Fla.-based analyst Edmund S. Greenslet.

The dearth of new deliveries is not viewed with alarm by investors, since the prevailing view is that much of what went wrong in 1990-93 is traceable to the excesses of the late 1980s, when airlines and operating-lease companies ordered far too many aircraft. Additionally, airlines are expected to restore balance sheets weakened by expansion in the late 1980s and the subsequent downturn, before embarking on any new aircraft-buying binges.

According to this argument, the profitability being enjoyed today is owing in no small measre to airlines' keeping capacity in check. As traffic growth slows (see graphs, page 30), this self-restraint becomes even more important for airlines' financial well-being, say experts. "So long as 6-700 planes stay in the desert, it looks like we don't have a surplus of aircraft," says Lazard Freres & Co. Managing Director James A. Paduano.

Still, there is irony a - plenty. During the 1991-93 period, when airliners were arriving by the planeload, capital was scarce. Now that there are relatively few to finance, lenders are falling all over themselves to do deals. Does this enthusiasm reflect a belief that things have changed for the better and that the airline industry is safe for investment? Some people think so.

At least, that was an opinion voiced in a speech given in Washington last fall by noted Salomon Brothers analyst Julius Maldutis, who said investors believe "there is some fundamental change that has occurred - namely, that there is going to be an extended profit cycle as a result of a capacity shortage, that [airline] managements have finally learned some very important lessons. …

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