Aviation Finance – Part 1: Aircraft Finance – what you need to know
Aircraft finance is a form of asset finance and the term encompasses a wide range of financing and leasing structures. These structures represent different ways of enabling an airline to acquire an aircraft (whether new or second-hand) and then operate it as part of its fleet. How an airline achieves that, and the structure it uses to do so, depend on a variety of factors including:
• How many aircraft it needs and whether permanently or temporarily.
• The type of aircraft it wants to acquire.
• Its financial status.
This note looks at the financing and leasing structures used by airlines to purchase and operate an aircraft during its operational phase (the period from and after its delivery to the airline by the manufacturer).
Parties involved in an aircraft finance transaction:
Globally, there are only a handful of major aircraft manufacturers, the most well known of which are Airbus and Boeing. Separately, there are a number of companies who manufacture aircraft engines and other material components such as the landing gear.
In almost all aircraft finance transactions, the manufacturers of the aircraft and its engines have a role to play
• For a new aircraft, manufacturers will have a very active role, because they need to co-operate with the airline and its financiers to ensure that everything is in place so that the finance is available to purchase the aircraft.
• For a second-hand aircraft, the manufacturers’ role is generally limited to making sure that the warranties for the aircraft and its engines are transferred to the airline or its financiers or both when the airline acquires the aircraft.
Airlines need aircraft to operate their businesses. The vast majority of airlines either cannot, or do not wish to, acquire the aircraft they need by using their own funds to purchase them from the manufacturer. Therefore, airlines look to external finance to fund their acquisition of aircraft.
In order to determine the aircraft finance structure best suited to meeting its requirements, an airline assesses many different factors including:
• Does the airline want to acquire a new or second-hand aircraft?
• Does the airline need the aircraft for a short or a long period?
• Does the airline want to own the aircraft or merely lease it?
• If the airline wants to own the aircraft, how much can it contribute to the purchase price from its own funds and how quickly can it repay the rest of the purchase price (that is, the amount which is financed)?
Aircraft Leasing Companies and Operating Lessors
If an airline decides that it does not want to own an aircraft (perhaps because it only needs the aircraft in the short term), the alternative for the airline is to lease the aircraft from a lessor.
There are a number of aircraft leasing companies whose business is to acquire aircraft and lease them to airlines for a fixed period, the length of which depends on the airline’s operational needs. These leasing companies acquire both new aircraft, direct from the manufacturer, and second-hand aircraft, either with or without a lease already attached.
Banks lend money, either directly or indirectly, to airlines to enable them to purchase aircraft.
Export Credit Agencies (ECAs)
ECAs are governmental agencies which support goods and services, such as aircraft, that are manufactured in the ECA’s home state and are to be exported.
The ECAs act as intermediaries between national governments and exporters by issuing export credit guarantees or credit insurance to banks so that those banks are guaranteed or insured in respect of certain amounts owed to them if the airline is in default. This exposes the banks to sovereign government risk, rather than airline credit risk. Exposure to sovereign government risk is preferable for banks because most sovereign governments are considered to be lower risk than corporate entities.
The European ECAs who support Airbus aircraft are:
• For the UK, Export Credits Guarantee Department (known as ECGD).
• For France, Compagnie française d’assurance pour le commerce extérieur (known as COFACE).
• For Germany, Euler-Hermes Kreditversicherungs-AG (known as Euler-Hermes).
Boeing aircraft are supported by Export-Import Bank of the United States (known as Eximbank).
In 2011, the Organisation for Economic Co-operation and Development (OECD) published its Arrangement on Officially Supported Export Credits, and its sector understanding on export credits for civil aircraft (Aircraft Sector Understanding or ASU). The Arrangement on Officially Supported Export Credits is a framework for the orderly use of officially supported export credits, and the ASU contains rules on the use of state financing to support commercial aircraft exports.
Sometimes a bank financing structure is combined with investment from individual or corporate investors who take more risk, because they usually only see a return after the banks have been repaid in full, in return for a higher return on their investment. Equity investors are often seen in tax efficient leasing structures.
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