Too soon to draw conclusions for 2010 funding

Here’s an item we wrote last week for for Commercial Aviation Online:

Boeing Capital Corp. (BCC) isn’t worried about global customer funding availability in 2010, but a top official also says it’s too soon to be sanguine.

Kostya Zolotusky, managing director, said that at the mid-year point today, BCC has “better visibility” for 2010 but that the tight credit market means deals that are normally arranged six months in advance now get arranged in shorter periods.

“We are tracking every [Boeing] airplane in 2010,” Zolotusky tells CAO. “Are we worried? No. Are we feeling pretty comfortable? Yes. But passing judgment on 2010 is premature. We made all of our 2009 predictions in November 2008,” at a time when the market was forecasting a funding gap of $10 billion-$20 billion or more and BCC forecast a $5 billion gap-to wide skepticism.

“We are now dropping under $5 billion,” Zolotusky says. “Capital markets are coming alive in last week. We had forecasted zero capital markets in 2009. We are clearly tracking 2010, but we don’t have a view yet. It’s too early to tell. Even in a good market people were committing to financing six months out. Now it’s shorter.”

It’s also unclear yet whether global traffic declines are bottoming out. Traffic demand drives orders and orders drives financing, Zolotusky says.

Concerns have been emerging that pre-delivery payment (PDP) financing is “drying up.” Zolotusky takes a different view. PDPs have returned to long-term historical norms, he says. From 2004-2007, global financing was the most liquid it has ever been, “which translated into PDP financing. This is aircraft equity, and people were willing to finance into junior positions.”

The PDP financing availability resulted in more airlines, particularly those with weaker balance sheets, to place more orders, Zolotusky says. “The hurdle to acquire airplanes was lower; now it is higher. If you look at historic PDP levels, it’s [now] returning to previous levels. There is very little PDP financing now and it is very conservative.”

Some observers expressed concern that Boeing could lose 787 orders as a result of the perpetual delays outrunning PDP financing commitments.

“We’re certainly cognizant of whether strike-related delays or 787 program delays because financing commitments are made with timelines,” Zolotusky says. “We are cognizant of and are working through these financing challenges.

“We will be affected a lot less than our competitors because they are the ones with enormous orders with young, challenged balance sheets, and you have already seen that.

When people talk about the strength of our backlog I think that’s what they are referring to.”

Leave a Reply

Your email address will not be published.