Boeing's Aircraft Lending Unit Sees Global Changes Ahead

The global market for aircraft financing is headed toward healthy structural changes, but first it must weather another tough year, a Boeing Co. (BA) executive said Thursday.

Boeing expects a worldwide need for $62 billion for airlines to buy new commercial aircraft in 2010, down from $68 billion this year, as fewer aircraft get delivered to airlines, Kostya Zolotusky, managing director, capital markets development at Boeing Capital Corp., said in an interview from London.

Boeing Capital on Thursday unveiled its forecast for the 2010 aircraft lending market. Boeing and Airbus will be asked to provide less financing support to customers in 2010 than in 2009, according to the forecast.

At the beginning of this year, some bankers believed there could be a funding gap of $10 billion or more, as bone-dry credit markets forced European banks out of the aircraft-finance business. Credit woes also hit the parent companies of many aircraft lessors, resulting in big players like International Lease Finance Corp., a unit of American International Group (AIG), being put up for sale.

But the capital markets opened up this year, allowing airlines to raise cash, much of which will finance deals next year. As well, regional banks in growth markets like China and the Middle East contributed most of the $18 billion in bank financing. Government export-import banks in the U.S. and Europe contributed $21 billion of aid this year. Boeing and Airbus ended up plugging a relatively small financing gap of $2.5 billion this year. Boeing said it will help customers with $800 million of financing in 2009 and now sees a need for less than that in 2010.

Boeing expects 2010 to be challenging, as Europe, the historical mainstay for aircraft bank lending, remains on the sidelines. Zolotusky said capital markets, mainly in the U.S., and regional banks in China, Asia and the Middle East will contribute to financing at similar levels to 2009, as will government banks.

The biggest change in the 2010 forecast is that Boeing expects direct funding from aircraft lessors to fall to $6.5 billion from $9 billion in 2009, as leasing companies receive less unsecured funding from their financially weak parents. Those lessors will still buy aircraft, but their funding will come from banks, Zolotusky said.

Over the next few years, Zolotusky said, aircraft financing will undergo some fundamental changes. He expects large lessors to brake up into smaller businesses that rely on outside funding--from banks and capital markets--rather than their parent organizations.

As well, new banking markets around the world will grow, and more countries will add export-import banks to facilitate international trade.

Ron Wainshal, head of Aircastle Ltd. (AYR), a medium-sized U.S. lessor with a fleet of 128 aircraft, expects airlines increasingly to lease, rather than buy, aircraft. He said about one-third of the world's commercial fleet now is leased. While owning airplanes is common at U.S. airlines, in emerging markets--which represent the greatest growth opportunities--airlines are more likely to rent planes. In some cases, their credit is too shaky to appeal to banks. Other airlines want to conserve capital. Wainshal said banks would rather work with leasing companies that have strong balance sheets and good business experience rather than a start-up airline, for example, or an established carrier with less-than-stellar credit.

Boeing's 2010 forecast may be too optimistic for increased global lending by regional banks, Wainshal said. "Some of these banks aren't very sophisticated. They will learn, but it will take them a while before they are ready to expand outside of their domestic markets."

But Wainshal is bullish on his own business. "Earlier this year, leasing companies weren't sure where they could place aircraft." He said a deal that Aircastle announced Thursday to place six Airbus aircraft with South African Airways means Aircastle has found homes for all but one aircraft for 2010.

"It's a harbinger that the climate for aircraft leasing is improving," he said, adding that "we believe we will be able to access multiple sources of attractive debt financing for these aircraft."

-By Ann Keeton; Dow Jones Newswires; 312-750-4120; [e-mail]