The general view amongst industry analysts appears to be that the global economic crisis of the past 18 months has reached the bottom of the cycle and that we are now beginning a period of slow (albeit unstable) recovery within the aviation sector. It is also commonly accepted that Asia will lead the world in this recovery, with the US, Europe and other developed economies (which for this purpose includes Japan) lagging behind.
Airbus predicts China’s GDP will grow by upwards of 8 per cent per annum over the next 5 years, whilst Boeing put that figure at 7.2 per cent until 2028. Airbus forecasts an average 6 per cent traffic growth in Asia generally per year for the next 20 years, and much of that will be in China alone. In 20 years’ time, 41 per cent of all commercial air traffic will be to, from or within Asia Pacific (as against 31 per cent in 2008). Airbus’ fleet in China has grown from under 100 at the turn of the millennium to 524 by the end of September 2009, with almost a further 100 Airbus aircraft scheduled for delivery this year and with 320 orders for the A320 aircraft in mainland China. Boeing, whose current fleet of aircraft in China numbers well over 800, will deliver 51 aircraft into China this year and 63 in 2011, and predicts that China will need to triple the size of its fleet to over 4,600 aircraft by 2028 to cope with the growth in demand for air travel.
The figures are staggering, and it appears to be a certainty that China will have a huge role to play in the aviation industry over the next few decades. The general perception is that there will be a general shift from West to East of the aviation industry during that period, and that China’s continued economic growth and appetite for new aircraft will present many opportunities for Western investment into China and the rest of Asia. However, China has historically looked inwards for investment and has tended not to resort to the global financial market to meet its funding needs. Indeed, China has been busy over the last year or two establishing a number of domestic aircraft leasing companies (not to mention an A320 production line) in order to manage the demand of the Chinese airlines for new aircraft and the financing requirements inherent in this. Hence, for the time being at least, China’s growth into the leading aviation powerhouse will be largely organic.
The trend began in late 2006 with the acquisition by the Bank of China of Singapore Aircraft Leasing Enterprise Pte. Ltd. (renamed as BOC Aviation Pte. Ltd.) and has most recently seen the purchase of Allco (newly renamed Hong Kong Aviation) by the HNA Group. Several Chinese investors have also expressed interest in the sale of the lease portfolios by ILFC and RBS Aviation Capital. Add to this, the likes of ICBC Leasing, CDB Leasing (CLC), Minsheng Leasing, Changjiang Leasing, China Merchants Bank, CCB Financial Leasing, Dragon Aviation Leasing and China Aircraft Leasing Company and it becomes clear that the China appears well positioned to make the most of the fast-growing domestic leasing market.
With the exception of BOC Aviation, a genuine top ten global leasing company by volume with a true international outlook, the other Chinese lessors have much more of a domestic focus. Another important element of their constitution, crucial to their predicted success in the current economic climate, is that in many cases their parent company is a state-owned Chinese bank with the same credit rating as the Chinese government itself. Although there are restrictions on a parent bank lending directly to its related leasing companies, it would be an understatement to say that the Chinese leasing companies will not struggle to find liquidity from their owners and other local financial institutions. From this position of strength, the Chinese banks and leasing companies would appear to be well placed to meet the domestic Chinese funding requirements for new aircraft over the coming years. China appears to have ensured it can remain self-sufficient in its aviation leasing and financing needs in the immediate future.
However, the operating lease market in China is currently not without its problems. Most of the newly established leasing companies only provide finance leases and do not act as true operating lessors. They are also faced with tough domestic regulatory and tax restrictions, the constant supervision of the authorities and the lack of diversity in the domestic financial markets. In addition to this, the airlines themselves are hampered from obtaining international loans by tough foreign exchange restrictions on the payment of Dollars out of China. The result is that the Chinese leasing companies have struggled to offer sufficient leasing products to meet the airlines’ needs, whilst the airlines themselves have been hindered in their ability to obtain foreign debt to finance their acquisitions. The Chinese banks have therefore had to become more involved directly with the airlines themselves through debt financing structures when and where the restrictions on domestic operating leasing or foreign lending have required. In addition, banks including ICBC, China Construction Bank and Bank of China have concluded direct agreements with Airbus and Boeing in separate deals worth over US$6 billion to cooperate on aircraft financing and leasing and explore short term financing solutions for the domestic Chinese market.
The result of these events in China shows a growing trend that the Chinese banks are willing to provide aircraft related financing, and are slowly developing a pool of talent, experience and expertise to enable them, should they so wish, to spread their influence in the aviation sector beyond their borders and into the international market. The foreign exchange restrictions governing Dollar denominated loans from domestic lenders to international borrowers are nowhere near as stringent as for domestic borrowers borrowing from overseas lenders, and in a climate where most traditional Western sources of commercial debt are experiencing the exact reverse in fortunes to their Chinese counterparts, the timing could soon be right for the Chinese banks to take advantage. Some have already started to emerge from their domestic cocoon, as evidenced by the recent loan facility provided by China Development Bank of US$86 million of pre-delivery financing and US$272 million of long term financing to AerCap in relation to four new Airbus A330 aircraft.
Against the backdrop of a gloomy 2009 where traditional sources of financing for aircraft largely dried up or could only be found at a premium by borrowers with the very best credit rating, and with analysts predicting a funding gap for 2010 of US$2.5 billion against a financing requirement of US$65 billion and pure commercial debt remaining tight with predictions of no additional capacity than was available in 2009 and at the same pricing levels, there are seemingly huge opportunities for the Chinese banks to start to spread their influence into the international aviation finance market, just as their appetite for aircraft related financing, together with their knowledge and experience is growing.
The real focus should therefore not be on the transitional shift of the aviation industry from West to East, but on the more immediate emergence of the Chinese banks into traditional Western spheres. The question is whether 2010 will be the year that the Chinese banks step into the international limelight and assume a leading role in international aircraft finance deals. Although it appears a little premature to promote the Chinese banks to this position of prominence at this stage, there may well be an important role for them to play during 2010. Perhaps they do not yet have the experience and expertise of their Western counterparts to fulfil this role, or the same breadth of industry contacts to call on to generate business, but it seems clear that they do have the resources available to them to bring to the table what the customer wants and is so desperately short of. Maybe 2010 will be a stepping stone for the Chinese banks and the year when an unlikely marriage is formed between themselves, with their financial resources, and the Western banks, with their industry know-how and experience, in order to bring deals to the table to meet the international financing needs of the aviation industry.