Aircraft financing costs set to rise, PwC says
Global airlines face a hike in the cost of financing aircraft deliveries as an international pact on export credits squeezes already-scarce funding, according to consultants PwC.
Tougher policies by leading Export Credit Agencies (ECAs) could result in higher ticket prices and speed up the development of alternative funding channels in the $100 billion jetliner market, it said in a report published on Monday.
Although the industry is expected to cover its needs this year, the higher costs and tightening of funds could also put pressure on manufacturers such as Airbus and Boeing to fill the gap with more customer finance, it added.
Manufacturers made up 7 percent of global aircraft financing in 2012, up from 3 percent in 2011, according to the report.
For years government export credit agencies in the main aircraft-producing nations -- the United States, Canada, Brazil and EU members such as France, Germany and the UK - have acted as a backstop to promote exports to fragile foreign airlines.
But since the financial crisis, cheaper aircraft loans made available as a result of ECA guarantees have become a routine funding option as airlines expand rapidly in emerging markets.
According to the Organization for Economic Co-operation and Development (OECD), ECA-backed loans have historically funded 20 percent of aircraft deliveries but this rose to 30 percent after the 2008 crisis as purely commercial credit became scarcer.
ECA guarantees allow banks to base their loans on sovereign risks rather than the shakier credit risks of the airlines.
Under an OECD-brokered accord which comes fully into force this year, the cost of ECA funding will increase towards market rates and their conditions will be unified for the first time.
Broader funding scarcity is also driving up funding costs, though Asian banks are stepping up their activities and the industry is once again expected to cover its needs this year.
The average cost of funding is set to rise from 150-225 basis points over benchmark LIBOR lending rates to 320-500 points, Donal Boylan, chief executive of Hong Kong Aviation Capital, was quoted as saying in the PwC report.
"Airlines may seek to pass through part or all of the increase which in the current fragile market could impact volumes," the firm's analysts said.
A major beneficiary of higher ECA charges and a fall in the proportion of assets that banks are prepared to finance, will be providers of operating leases, PwC said. Lessors take delivery of about one in three aircraft sold by Airbus and Boeing.
(Reporting by Tim Hepher; editing by Jason Neely)