Bankers biggest threat to airlines: Fernandes

THE biggest threat to the global airline industry isn’t the swine flu outbreak, according to AirAsia Bhd’s Datuk Seri Tony Fernandes. “We’ve been through SARS, bird flu, tsunami, you name it,” Fernandes, the founder and chief executive officer of Southeast Asia’s biggest discount carrier, said at the Paris Air Show this week.

“The only swine now are bankers.” Carriers from Air France-KLM Group to AirAsia, already coping with a slump in travel, also have to deal with banks that are unwilling to finance aircraft purchases.

Airlines have to come up with money to pay for jets ordered years ago or face penalties for cancellations. In 2010, the funding shortfall may reach US$36 billion, or as much as 60 per cent of the spending on larger aircraft, said Nick Cunningham, an analyst at Evolution Securities in London.

“Debt is the critical component of any strategy right now,” said Steve Rimmer, CEO of Guggenheim Aviation Partners LLC in Issaquah, Washington. Guggenheim has 56 aircraft either owned or under contract with a value of US$2.5 billion and makes money by leasing them to carriers in return for regular payments. “We, like everyone, are chasing debt.”

Airlines, which posted a total of US$10.4 billion in losses in 2008 according to the International Air Transport Association, are eliminating jobs, cutting routes and grounding planes to survive a slowdown. AirAsia X, Air France AirAsia X, the long-haul affiliate of Malaysia-based AirAsia Bhd, is seeking short-term financing from more banks and paying higher borrowing costs, said Azran Osman Rani, the CEO of AirAsia X.

The airline said at the show it ordered 10 Airbus SAS A350s, valued at US$2.4 billion at list prices, as regional low-cost traffic grows in defiance of the global aviation slump. AirAsia said its borrowing costs have climbed less than 100 basis points from a year earlier.

Air France-KLM, Europe’s biggest airline, said the cost of financing aircraft purchases has increased by about 220 basis points from a year ago. A basis point is a hundredth of a percentage point. “A year ago, when you wanted to finance an aircraft you’d have a queue through your doors,” Air France CEO Pierre-Henri Gourgeon said in an interview last month.

“Once when we asked for three aircraft to be financed we got positive answers from 12 banks. Now it’s the reverse. It takes a lot of time.” Paris-based Air France has turned to BOC Aviation, Asia’s biggest aircraft lessor and a unit of Bank of China Ltd, to help finance jetliner purchases.

Air France’s traditional lenders include Calyon Securities and Natixis Transport Finance, a unit of Natixis SA, both based in Paris. State Backing BOC Aviation said June 4 that it will borrow as much as US$560 million to help finance aircraft purchases.

The Singapore-based company has acquired 40 planes since December and predicts it will have invested US$10 billion in jets by 2012, more than doubling the current fleet size of 96. The backing of Bank of China, the nation’s third-largest bank by assets, gives BOC an advantage amid financial woes at General Electric Co, whose aircraft-leasing unit has the biggest fleet in the world, and American International Group Inc, the owner of International Lease Finance Corp, said Alasdair Whyte, the publisher of Airfinance Journal.

“BOC has been one of the few lessors who’ve had a parent willing to support them,” Whyte said. “There’s a complete shortage on the lessor scene for sale-leasebacks.” ‘Best Time to Invest’ GE says it’s coming back into the market now that capital markets have eased. “We, in recent months, have seen our funding costs decline significantly,” said Norm Liu, who becomes Gecas’s chief starting next month.

“It’s the downcycle, and that’s typically the best time to invest.” That’s what John Slattery is doing. The former head of Royal Bank of Scotland Group Plc’s RBS Aviation Capital founded last week GreenStone Aviation in Dublin, after amassing US$100 million from Jefferies Capital Partners, to do only jetliner sale-leaseback transactions.

Slattery said he wants to attract as much as US$500 million in private equity funding by the end of next year. The difference between the value of an aircraft during an economic boom and a recession is typically 12 per cent to 15 per cent, Slattery said. In the current cycle, worsened by the credit crunch, the gap could be as much as 20 per cent, he said. In addition to receiving monthly leasing payments, aircraft lessors retain the planes for possible sale later. -- Bloomberg