Airline Financing Won't Dry Up Tomorrow

Implications: Though understandable, it's a bit of a stretch to draw a straight line between tightening credit markets and the ability of airlines to finance new aircraft. There's a connection of course, but it's a geared one. Liquidity isn't the real problem here, it's profitability...

Analysis: The Boeing Co. is well positioned to weather the current U.S. financial crisis, the company's chairman and chief executive said Thursday, but there could be implications, such as having to help customers finance airplane purchases. That should be ‘having to help customers finance airplane purchases, again’.

Boeing Capital has been there, done that and moved on. It's not regression to have to revisit a formerly, profitable operation (and Boeing Capital also provided funding in the space and defense markets, not just airlines). It's just pragmatism -- you do what you have to do get the job done, keep the (post-strike) production rates up and steady the market.

There are arguments that direct customer financing can be a more viable option than an OEM's constantly being forced by market pressure to help customers out with bigger discounts, larger rotables pools, assisted training, maintenance & MRO provisos, waived penalties, indirect marketing and promotional help and a host of other endorsements which hit the OEM's bottom line in one shape or form. That is of course if customer financing reduces the incidence of all of the above. A big if...

What's the industry's take on aircraft financing? Well, as always, there are the naysayers who point to aircraft financing drying up, backlogs collapsing, secondhand and lease-market values plummeting and portfolios with them, etc. By and large, these are the same guys who drove oil to its earlier ridiculous and totally unjustified heights this year.

True, it's not a pretty picture (otherwise Boeing wouldn't be thinking of stepping back in) but so widespread is the financial disharmony in the West that various governments (U.S., UK, France, Belgium, Germany etc) have already intervened to stabilize their markets and theoretically allow 'normal' business to resume. That business is the quest for profitability, and that's where the main longer-term danger to aircraft financing lies.

A more-than-seasonal downturn in the airline industry is inevitable, but it was inevitable even before last week's major bail-outs. U.S. and European airlines are already cutting capacity, grounding older aircraft and trying to keep the revenues flowing steadily enough that they can contemplate 2009's financial commitments with something less than abject fear. No change there, then.

They'll be assisted in this search for stability by one factor which is possibly key in the aircraft-finance picture -- commercial aircraft remain a readily-transferrable ,reliable and solid asset to back, there is no market collapse imminent (save oil at $250, global economic ruin or wee green men) and while airlines and profitability have never really gone hand-in-hand, aircraft can be real money-makers.

Today the airline industry is truly global. When it was far less so, in the '80s and early-'90s in particular, one or two depressed markets dragged the whole cycle downhill. Not anymore. Regulated China and the oil-rich Middle East are today's aircraft magnets in a global industry, so collapse in not on the cards.There are far bigger financing risks out there than commercial aircraft, so airline financing won't dry up tomorrow. Or the next day.