Air carriers around the world should brace themselves for potentially harder-to-get and more expensive financing to purchase aircraft, says a new report.
“Airlines will need to be prepared for increased costs for fleet acquisitions or even situations of costs increasing for existing financings,” according to the analysis by PricewaterhouseCoopers.
Demand for new aircraft is at sky-high levels these days, fuelled by expanding airlines in emerging markets, the emergence of a new generation of aircraft, the replacement of aging North American fleets and cost-cutting measures by airlines requiring more fuel-efficient planes.
At the same time, airlines face a number of headwinds on the financing side, says the report.
Funding pressures are up because of ongoing global economic uncertainty, the European sovereign debt crisis, the recent downgrading of several European banks and the growing difficulty in obtaining U.S. dollar funding, it says.
Also putting pressure on pricing are new, more market-oriented policies by leading export credit agencies, including Export Development Canada.
Airlines will likely accelerate the search for alternative sources of funding and might also be forced to pass on higher aircraft funding costs to consumers via more expensive tickets, the PwC report says.
Aircraft deliveries will have to be financed over the next three to five years at a time when liquidity is scarcer and the ability to leverage assets is reduced, says the study.
“The key challenge for airlines, who have record orders in place, will be to find financing at a competitive rate in an exceptionally tough environment,” it says.
In the end, financing will likely be found, but at potentially higher prices, the report concludes.
Airlines, lessors, manufacturers and financiers will have to work together and be more inventive in locating additional sources of financing, it adds.
Manufacturers, such as Boeing Co., Airbus SAS and Bombardier Inc., may also have to step up by providing a greater share of customer financing, says the study. Manufacturers’ share was 7 per cent last year, up from 3 per cent in 2011, according to the analysis.
This new context offers an opportunity for non-traditional investors to step in, according to PwC.
Already, there have been new investment flows into the sector as funds backed by the governments of China, Singapore and the UAE enter the fray with substantial stakes, the report says.
Other pools of cash that have not historically been present in the sector but that might be interested include sovereign wealth funds, insurance companies, pension funds and some private equity funds, it says.