Is There Money to Fund Asia's Airline Expansion?
While booming air travel in Asia has led to a rush of new aircraft orders, there is also a growing concern that financing this expansion may be difficult, especially for over-leveraged airlines given a global funding squeeze.
“If an airline is profitable, getting the financing for expansion won’t be a problem,” says Kapil Kaul, CEO, South Asia, CAPA — Centre of Aviation. “But for airlines which have been taking losses recently and are over-leveraged, I think the next few years could be very difficult.”
At present Asia Pacific airlines operate 5,436 passenger planes between them and have placed orders for another 3,200 planes, according to latest figures from U.S.-based aviation industry analyst OAG.
India’s airlines are among the largest purchasers, with the current fleet of 427 planes set to reach 1,000 by 2020, according to CAPA. India’s Indigo and Go Air have between them recently ordered about 200 planes for more than $23 billion, according to a Reuters report.
Further east, Indonesia is also a market with huge potential. Indonesian carrier Lion Air ordered a record 230 planes from Boeing , finalizing this deal last week at the Singapore Airshow.
Its national carrier Garuda, which also operates a low cost carrier, CityLink, plans to expand its existing fleet of 89 aircraft to 194 by 2015.
Neighboring Malaysia’s low cost carrier Air Asia also ordered 200 Airbus aircraft last year.
"Asia has been the hot house for aircraft orders throughout the global economic downturn,” says Aviation Week’s International Editor Robert Wall. “It’s where the action is, with a widespread anticipation of huge future demand for air travel. But financing such an expansion is a worry in all this. Where will the funding come from?”
According to industry watchers loss-making carriers may find attracting funds most difficult. A point in case is the fiercely competitive Indian market. “India’s airlines saw combined losses of around $6 billion between 2005 and the end of the first quarter of 2011,” says Kaul. “Many of them have balance sheet issues and there are also structural problems with the sector.”
CAPA estimates Indian carriers will incur a combined loss of $2.5 billion for the year that ends March 31, 2012.
Besides growing concerns over profitability, the timing is also not right given the current risk-aversion among European banks owing to the sovereign debt crisis, say some analysts.
But others argue that there is plenty of money in the market for buying mobile assets like planes.
“In terms of funding, we don’t foresee any problems,” says Elisa Lumbantoruan, Garuda’s Chief Financial Officer, “what we need we can still get.”
"Financing such an expansion is a worry. Where will the funding come from?""
Airbus CEO Tom Enders told CNBC on the sidelines of the Singapore Airshow that while funding in general was not drying up, traditional sources of funding were. “Airlines need to look elsewhere (for funds). But there is lots of money around for mobile, efficient assets like aircraft."
According to Robert Wall an aircraft is a moveable asset, which makes it easier to get finance. “You can always sell it to another airline, move it to another route, or even country."
Export-import banks often step in to fund or offer guarantees that help secure funding for aircraft, say analysts. For example, Lion Air confirmed this week it would approach the U.S. Ex-Im Bank to help fund its 230 plane order.
It has done this successfully before too, securing $1 billion in financing from the U.S. Ex-Im Bank in 2009 to support an order for 30 Boeing 737-900ers.
Last year, the U.S. Ex-Im Bank provided guarantees for about 29 percent of plane purchases from Boeing, according to the company’s finance arm.
While euro zone banks may be more reluctant to fund deals these days, “banks in the Gulf, Chinese banks, Japanese banks are also coming back, so there is money out there,” adds Wall.
But some airlines prefer leasing new aircraft instead of buying them. “These days it’s much better to lease,” says Lumbantoruan. “You can have a 7-10 year lease, with even early termination built into the contract, so you can provide passengers with latest planes every few years.”
For debt-laden and loss-making airlines especially, leasing planes makes better business sense. “With finance for over-leveraged companies difficult, what they’ll do is lease,” says Kaul. “They’ll do this to cover themselves until their balance sheets start looking healthier again in a few years’ time.”