Colm Barrington

With record numbers of aircraft orders having taken place, the 49th Paris Air Show demonstrated the strength and a renewed confidence within the air finance industry. At the same time significant changes in the structure of global aircraft manufacture and financing became apparent.

Colm Barrington, CEO of FLY Leasing told Asset Finance International: “The Paris Air Show showed that more companies are coming back into the industry, manufacturers are announcing increased production and both leasing companies and airlines are ordering more aircraft. The cycle appears to be on the rise.”

“Starting with the airlines, which is where our customers are, they are doing fine. While perhaps they’re not as well off financially as last year, mainly because of higher fuel costs, all FLY’s lessees are paying and we haven’t experienced any defaults or bankruptcies for over a year.”

“The aircraft leasing industry in general is doing well, and from our perspective it’s in pretty good shape and there’s strong demand. GECAS (GE Capital Aviation Services) – which has more than 1000 aircraft and so rank as an industry bellwether – had only one aircraft off lease at the end of 2010, which is very impressive.”

Welcome back to securitization

“Financing is also becoming readily more available for lessors and ILFC (International Lease Finance Corporation) in particular is completing a very impressive refinancing programme. We have also recently seen the return of asset backed securitizations with GECAS’ recent aircraft engine financing. This was the first such transaction since FLY’s securitization in August 2007. I think that potential issuers were reluctant to be the first back into this market as they didn’t want to overpay, but now that GECAS has closed a securitization that market should hopefully open up more broadly again.”

“Over the next few years there should be more opportunities than challenges for lessors, as our industry is on the rise. There is a huge demand for aircraft, particularly in the East, and more particularly from China and India which will help drive the leasing industry forward.”

“Also, if fuel prices remain high it will require significant re-fleeting, particularly in North America where many of the fleets comprise older and less fuel efficient aircraft. Continuing to use older and less fuel efficient aircraft in an era of increased fuel prices could result in airlines suffering cash flow problems.”

Airbus success at the Show

Airbus was one of the biggest success stories at the Paris Air Show, winning approximately $72.2bn worth of business for a total of 730 aircraft. This success has set a new record for any commercial aircraft manufacturer at any show. The commitments are made up of Memorandum of Understanding (MoU) for 312 aircraft worth $28.2bn and firm purchase orders for 418 aircraft worth around $44bn.

“Le Bourget is a strong confirmation of our product strategy,” said Tom Enders, Airbus president and CEO. “With over 1,000 commitments just half a year after launch our A320neo is a real bestseller.”

“The best air show ever for Airbus in terms of number,” said John Leahy, Airbus chief operating officer, Customers.

 Duopoly in danger

Although the success of Airbus demonstrates the strong grasp the company holds on the market, many believe that Airbus and Boeing will not be able to maintain their duopoly for much longer.

Indeed, Jim Albaugh, the head of Boeing’s civil jet division, was willing to admit as much: “The days of the duopoly with Airbus are over.”

Manufacturers in China, Russia, Brazil and Canada are all beginning to construct more planes and will become a potent threat to the two established companies.

 “Airbus and Boeing cannot maintain their duopoly over time, particularly with China and other countries starting to manufacture their own aircraft. These countries have also brought in Western technology to help design their planes,” commented Barrington.

 Shift of power from West to East

Meanwhile Indian airlines walked away with a third of the total orders, amounting to $23bn. While Malaysia’s AirAsia signed a record 200-plane order, Indian carrier IndiGo was close behind with an agreement for 180 jets.

GoAir also placed an order for 72 Airbus jets valued at $6.6bn, while Jet Airways placed orders for 49 aircraft and low-cost carrier SpiceJet signed a deal with Boeing for 30 Boeing 737 planes at an estimated cost of $2.7bn.

These orders have certainly shown how carriers in the East have become far more dominant in recent years.

“The shift in power from West to East has been happening for a while, and all trends are going that way. The global financial difficulties over the past three and a half years haven’t affected airlines’ business and aircraft sales in China, which have been growing significantly,” added Barrington.

“I believe that in time we will also see more aircraft manufacturing in the East. It has happened in other industries and is inevitable for larger commercial aircraft over time. Airbus is now manufacturing A320s in China and I’m sure the Chinese manufacturers have been having a close look at how they are doing it!”

However, while India’s airlines have deals amounting to $40bn in the works, analysts believe their ability to take hold of all these could be tested by high fuel taxes, poor infrastructure, and frequently rising interest rates.

All growth in India

India’s domestic network is expected to generate the world’s fastest air traffic growth over the next 20 years. Airbus expects domestic travel in the country to grow by more than 9% over the next two decades.

To feed this demand, India will need to acquire 1,100 commercial jets worth up to $130bn, representing about 4% of the worldwide forecast for commercial airplanes according to Deloitte aerospace analysts.

However, analysts have predicted that India lacks the infrastructure to handle such a quantity of jets, and even Indian authorities are pessimistic about their country’s capabilities.

“We do not have adequate infrastructure to support more than 400 aircraft in the coming years,” an AAI (Airports Authority of India) official. “Currently, airlines on metro routes do not get slots in time to land, which in turn pushes up its operating costs further.  Ageing airports would be harmful for the aviation industry. It’s not just about inducting new aircraft to meet the growing air traffic demand. It’s about runway capacity and airport capacity as well.”