How is Current Market Volatility Impacting Aircraft Financing?
With the recent stock market dip, credit tightening and sub-prime mortgage meltdown, many analysts are wondering how this wave of increased market volatility and risk will impact aircraft demand and financing. Since early August, Boeing has been working with our customers and aircraft financiers to understand and help manage the current market instability
Aircraft demand is primarily driven by two factors. The first is economic growth and the second is airline profitability. When the market demand is healthy, the availability of capital to fund this growth usually follows. Current circumstances appear to support these assumptions. Despite the rise of sub-prime mortgage defaults and reduced U.S. GDP, the world economic outlook remains positive with growth at or above trend due to strong growth in China, India and Europe, which will offset slow U.S. growth. Airline profitability also is predicted to outpace last year, with many airlines reporting higher second quarter earnings due to revenue growth and decreased cost structures. Load factors and utilization rates are strong as consumer-booking trends remain solid amidst the market turmoil.
The current market volatility has not affected the underlying world economy fundamentals, nor has it materially impacted financing of new aircraft deliveries. During 2007, customers have seen historic low rates in new aircraft financing and, while the current credit crunch will have an effect on risk evaluation and spreads in the market, there is plenty of appetite and liquidity in the market to finance the upcoming deliveries. Of the numerous sources for aircraft capital, only the U.S. capital markets have pulled back. Kostya Zolotusky, Boeing Capital’s managing director of Capital Markets Development, explains, “Recent return of U.S. capital markets to aircraft finance has been a welcome source of additional liquidity, but we need to keep it in perspective. In 2007 and 2008, only about one percent of Boeing's deliveries are expected to be funded by the U.S. capital markets. Most aircraft financing is still provided by regional banks, leasing companies, export credit and cash from operations.”
Overall, the outlook for airline profitability and global GDP remains strong and as long this remains true, Boeing believes there will be adequate and reasonably priced capital available for aircraft finance.
