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 PricewaterhouseCoopers.
Tougher policies by leading Export Credit Agencies (ECAs) could result in higher ticket prices and speed the development of alternative funding channels in the $100-billion (U.S.) 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 SAS and Boeing Co. to fill the gap with more customer finance, it added.
Manufacturers made up 7 per cent of global aircraft financing in 2012, up from 3 per cent 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 United Kingdom – 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, ECA-backed loans have historically funded 20 per cent of aircraft deliveries but this rose to 30 per cent 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 toward 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 the benchmark London interbank offered rate, to 320-500 points, Donal Boylan, chief executive officer of Hong Kong Aviation Capital, was quoted as saying in the PwC report. A basis point is 1/100th of a percentage point.
“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.