Following the annual ISTAT meeting in March, we published a piece about the Boeing view of the so-called funding gap for 2009: the financing shortfall seen by just about everyone except Boeing and Airbus as between $10bn and $25bn this year needed to pay for more than 1,000 airplanes due for delivery by the Big Two and Bombardier and Embraer.
Boeing believes the gap is $0-$5bn and Airbus, though not presenting at ISTAT, has a similar view.
We mentioned in our story that we have been invited to visit Boeing Capital officials to get detail about their methodology. We did, and we wrote that piece for Commercial Aviation Online, for which we are a regular contributor. That piece was published April 2. We can now reprint it below.
|Source:||Commercial Aviation Online|
Who is correct in the international debate over the 2009 aircraft financing “funding gap:” Boeing and Airbus – which say there is a relatively small, manageable gap, or the rest of the world’s aviation participants, who claim there is a gap of $10bn-$25bn, depending on who’s doing the talking?
The debate began last year and continued through the annual US conference of the International Society of Transport Aircraft Traders (ISTAT) in Phoenix in March. Walt Skowronski, the president of Boeing Capital Corp. (BCC), the manufacturer’s customer financing arm, led a finance panel comprised of officials from DVB Bank, JP Morgan and the US Export-Import Bank. Skowronski set the stage with BCC’s view that there is a funding gap this year of $0-$5bn, and claimed this is “manageable.” Skowronski’s own panelists disagreed. A lessors panel that followed, manned by CEOs from ILFC, BOC Aviation and DAE Capital, also disagreed, asserting that in their view the funding gap is $10bn-$20bn.
BCC officials, on the defensive from the pounding by lessors, met with CAO on 31 March to provide for the first time to the media more detail about their methodology in reaching their conclusions.
Officials, including those at BCC and top executives at Boeing Commercial Airplanes (BCA) Boeing corporate, have often made references that the company performs “top down” and “bottom up” analysis of the financing for its customers (airlines and lessors) facing deliveries this year. The absence of detail left the market faced with Boeing making claims that could be characterized as in its self-interest, standing alone with Airbus against advisors, banks, lessors and airlines.
Skowronski at ISTAT characterized talk of huge funding gaps as “hysteria.” He and Kostya Zolotusky, BCC’s managing director, Capital Markets Development, also said comments by lessors about funding gaps and calls for production cuts reflect self-interest, a way to shrink supply and create demand for their airplanes.
Zolotusky explained that BCC has a “war room” tracking the financing for each Boeing aircraft this year (roughly 485 at 1 January). Updated daily with information from all over the world, he said the analysis includes talking with the airlines, banks and Ex-Im, all of which provide detail that BCC then assesses for risk factors (i.e., the likelihood any financing source will fail to follow through for whatever reason). Officials then rate each funding source on each airplane.
From this analysis, BCC projects the amount of customer financing Boeing is probably going to have to provide (the current estimate is $1bn this year).
Boeing’s advantage over banks, advisors, lessors and aerospace analysts attempting to perform funding analysis, Zolotusky says, is that they have to do so on a macro basis. For example, one bank can’t call a competitive bank and find out how much aircraft financing funding capacity exists. Boeing, Zolotusky says, as a non-competitor, can – and does.
The result, BCC says, is that based on what it knows today, the funding gap is up to $5bn, far less than the numbers cited by others.
Skowronski acknowledged that any number of global factors could upset the conclusions.
“It’s a fragile, dynamic market that can change at a moment’s notice,” he told CAO. “The spigot can be cut off just like that,” he said, snapping his fingers. “We’re still in a very scary environment.
“We’re not trying to purposely put a happy face on this,” Skowronski said. In this context, he added that BCC is prepared to do whatever it takes to support its customers, including increasing its customer financing well beyond the $1bn widely reported so far. But, “We’re not seeing firm requests come in the door that will turn into a funding by Boeing.” BCC’s pricing sometimes prompts a customer to go elsewhere for less expensive financing.
If one accepts the methodologies described by BCC as sound, there may be one underlying fallacy. Boeing’s micro analysis necessarily is for its own airplanes. Zolotusky said no such analysis was attempted on the Airbus or regional jet deliveries, even though Boeing’s total market financial projections include these.
Airbus’ projections are similar to Boeing’s but its methodology is unknown at this time. CAO submitted a request to Airbus after its meeting with BCC for a similar briefing.
Skowronski said “there are interesting things afoot” that could find new capital this year and next. Boeing and Ex-Im Bank have approached the market with a concept to provide up to $2bn in funding through the currently closed capital markets.
Additionally, when the European Union ratifies the Cape Town agreement, BCC believes that this will open up a number of new financing sources and an international EETC market. Ratification may occur this year, BCC believes.
While many observers believe that there will be a bigger funding challenge in 2010, Skowronski “at this point” disagrees and “at this point, I tend the other way.” Not only are there hopes for the Ex-Im capital market and international EETC issues, he believes that lessors currently out of the market will be positioned next year to return in their traditional roles.
He also believes that many banks worldwide that have received government support will be positioned to resume lending next year.
One group of banks that won’t be back, Zolotusky says: US banks. These prefer structured financings instead of airplane deals. Also: European banks will continue to shun US airlines, Zolotusky believes, a continuing fall-out of the bankruptcies post-9/11 in which those banks took beatings. They have long memories, Zolotusky said, and they haven’t forgotten the experience, nor have they forgotten the people who beat them up.