Airlines often face uncertainty on where to seek financing for acquiring additional aircraft, while financiers focus on transactions with specific ticket sizes and risk criteria. For airlines, finding the right lenders for their transactions can be challenging.
Knowing which lenders to approach can save time and money, narrowing the focus to those most suitable for the airline’s requirements and likely to offer preferential terms. A lender unfamiliar with a specific aircraft type, airline, or region typically factors in this uncertainty, resulting in additional borrowing costs for the airline.
Lender Considerations
To know which lenders to approach, it is important to understand how lenders look at aircraft financing transactions, their risk appetite, and their preferences. Not all lenders are the same.
At a fundamental level, lenders typically analyse a transaction across asset risk, credit risk (the airline), and country risk. They also vary in terms of their preferences and the risk they’re willing to take within each of these parameters:
- Asset Type: Whether financing corporate or commercial aircraft, engines, turboprops, regional jets, narrow-body jets, or wide-body jets, different lenders may specialise in various asset types.
- Airline Profile: Factors such as being a scheduled or non-scheduled operator, market share, revenue generation in local or foreign currency, current and forecasted financial performance, and financial position influence lender preferences. Lenders vary in their credit risk tolerances, with some more flexible towards higher-risk airlines.
- Country Considerations: The country’s support for financing, currency payment issues, adherence to international conventions like the Cape Town Convention, and political stability are crucial. Regional lenders may be better equipped to handle challenging jurisdictions than foreign lenders unfamiliar with the country’s risk profile.
Considering these factors when compiling a target list of lenders is essential. Moreover, understanding the types of financiers to approach is crucial.
Sources of Financing
Aircraft financing sources can generally be categorised as follows:
- Aircraft Lessors: With around 50% ownership of the world’s commercial aircraft, lessors play a significant role in financing. Their extensive asset management capabilities and flexibility make them suitable for challenging transactions. While often structured as operating leases, they may offer finance lease solutions, allowing airlines to take ownership of the aircraft.
- Commercial Banks: Direct lending by commercial banks accounted for 20% of new aircraft delivery financing in 2022. These loans, secured or unsecured, vary in focus, with some targeting tier 1 airlines and new aircraft, while others specialise regionally or in higher-risk transactions.
- Capital Markets: Bonds, ABS, and EETC transactions in the capital markets constituted around 14% of new aircraft delivery financing in 2022. However, access is limited to large, high-credit-quality borrowers in mature markets.
- Non-bank Lenders: Institutional investors and debt funds typically have higher capital costs, resulting in higher lending rates. As a result, they often cater to more challenging transactions or those not suitable for commercial banks or the capital markets.
- Export Credit Agencies (ECA’s): ECAs provide direct lending to airlines or credit guarantees, enabling financing from commercial banks. However, their support is primarily for exports from their home market, limiting their assistance to financing new aircraft deliveries only.
Larger, high-credit-quality airlines typically finance acquisitions through aircraft lessors, commercial banks, and capital markets, offering the lowest financing costs. Conversely, smaller airlines or those in challenging jurisdictions often rely on aircraft lessors, local commercial banks with a better understanding of country risk, non-bank lenders, or ECAs.
With over 20 years of industry knowledge, ACC Aviation provides impartial advice and acts as a trusted advisor to aviation stakeholders worldwide. We help airlines identify suitable sources of financing, prepare transaction materials, and advise our clients on the transaction from origination through to closing.
For more information or to discuss your requirements, contact our advisory team.
