Record Orders, Deliveries & Backlog – Who Pays and How?

ADS data released today reveals  another record year for the Commercial aerospace industry – with deliveries up 6%, orders up 8% and the overall backlog up 14% from 2013 levels.

 

Record numbers in 2014 are also a positive for UK industry – with the backlog worth up to £170bn and offering over 9 years worth of future work in hand. Despite record numbers of production, demand and order book levels, these statistics also raise another important industry question – who pays and how?

 

The large cost of purchasing an aircraft means it is one of the more difficult of assets to source appropriate financing opportunities for – regardless of whether you are a new start up or legacy airline/ lessor. However, whilst the amount of finance required is high, the strong global demand for aviation and the historical legacy of predictable and large returns (including through the financial crisis where delivery levels only dipped by 8 from 2009-10) means that aviation financing is becoming much more diversified.

 

For manufacturers, this provides a greater level of stability in airlines being able to fulfill the large numbers of orders we have seen over the past few years. According to Boeing’s Capital Market Outlook, in 2015 around $120bn of finance will be required for new deliveries in 2015 – to supplement ADS’ own forecast rise of deliveries by 5%, to around 1420 aircraft in 2015.

 

One trend which has been developing over the last 5 years to support this diversification, and which is set to continue, is the rise of capital market funding and the reduction of Export Credit Agency financing. Boeing’s outlook suggests that in 2015, Capital markets will fund 32% of deliveries in 2015 – up from 28% in 2014. This also compares with $1.5 billion worth of capital market financing in 2010.

Finance AviationIn 2015, Export credit is set to remain at 15%, but will more likely decrease over the next few years – driven by an increase in capital markets. This rise in capital markets pushing export credit finance down, is led by the confidence financiers have about the prospects of returns and security of asset-backed finance in aviation.

 

UK Export Finance for example, is seeing a reduction in dependence on export finance from airlines – which is likely to fall back to historic, pre-recession levels. Importantly, the type of future business for Export Credit Agencies will be focused on emerging markets – where aviation demand is pushing greater aircraft orders and deliveries, but where the financing market is perhaps not as mature as Europe or North America.

 

Whilst, as Boeing also suggests, concerns over interest rate levels, fuel prices, currency volatiliy and geo-political issues mean the finance market remains cautious, the level of diversification for aviation finance is growing significantly. This demonstrates the confidence for airlines, lessors and overall, for manufactrurers who count on finance for successful delivery of production aircraft.