10% of 2009 deliveries to evaporate, says DVB

DVB is predicting that at least 10% of the scheduled aircraft deliveries in 2009 will evaporate because of the funding gap

From discussions with industry leaders over recent weeks, Bertrand Grabowski, member of the Board of Managing Directors of DVB Bank SE, and responsible for aviation, concludes, ”Both the current economic downturn and the credit crunch will have a very stressing effect on availability of funds for new aircraft deliveries this year. At least 10% of the current scheduled deliveries of approximately $73 billion this year may have to be deferred or cancelled in order to restore some kind of balance between the supply and the demand for financing.

"As manufacturers will try to avoid white tails at any cost, the cancellations and long term deferrals may have to result in the reduction of production, especially when it becomes clear towards year end that demand will not see a strong short term recovery," Grabowski adds. "Most of the analyses that are proposed to the public on the issue of the funding gap are flawed as they ignore the drag on lending capacity that is coming from refinancings and debt funding of sale and leaseback transactions.”

DVB says it has arranged and underwritten, in the past three months, close to half a billion dollars' worth of refinancings from airlines that were smartly preparing for the continuation of the credit crunch in 2009.

“Lessons have been learnt” Grabowski reports. “And for airlines too, cash is key. We are seeing prime and non-prime carriers offering sale and leaseback opportunities or simple mortgage loans at advance rates and pricing levels that are very attractive to the financiers. As a result, a significant portion of the global bank lending capacity may be moving away from new deliveries financing. The expectation that this cash eventually will go back to the manufacturers to pay for new deliveries some way is wrong. Most of the liquidity generated from sale and leaseback transactions and refinancings will serve to pay for other expenses, such as margin calls on fuel hedges, to increase cash hold-backs at credit card service companies or simply to serve current debt services in an environment of weakening operating cash flows.”

On financing needs for 2009, Grabowski estimates that Class A airlines, Chinese carriers and the three main Middle East main carriers will have no issue accessing funds. But this accounts only for a maximum of $30 billion. That leaves $43 billion to be found. At best, ECAs will be able to contribute just over $15 billion together, leaving a significant share to banks to fund lessors and carriers.

“To expect banks, for that segment of the market, in the absence of capital markets, to absorb up to $28 billion of new deliveries financing is wishful thinking”, Grabowski observes. “The manufacturers’ contribution to funding, for both accounting and credit crunch reasons, will remain symbolic. Last, we do not see any significant impact on the global market from the very few 'regional banks' that are rumoured to be looking at airline financing, with the exceptions of some Chinese institutions that will concentrate, at least for 2009, on their domestic market.” (Photo courtesy Denver International Airport)