TEXT-Fitch:Aircraft funding sources adequate to support 2012 growth

Wed Dec 21, 2011 8:57am EST

Dec 21 - Fitch Ratings does not expect the recent tightening of aircraft lending conditions in Europe to put the brakes on diversified global funding for new commercial aircraft deliveries in 2012. Despite turmoil in the European banking system and a retreat from aircraft finance by some historically active European institutions, alternative sources of capital are likely to fill the funding gap over the next year as aircraft financing requirements grow by approximately 20%.

Given the continuing uncertainty in global capital markets and some other changes in the market, the mix of aircraft funding sources will likely shift over the next two years. We expect commercial banks and export credit agencies (ECAs) to recede somewhat in importance, while lessors and financially strong airlines will sit in more advantageous positions. Non-European banks, especially in Asia, may also step in to fill financing voids left by their European competitors.

Public markets could become a more important source of aircraft capital in coming years, especially if cost-efficient financing structures such as enhanced equipment trust certificates (EETCs) grow in importance outside of the U.S. In addition, aircraft lessors will likely play a larger role in financing new aircraft as new leasing companies grow their portfolios.

We estimate that between $85 billion and $90 billion of total funding will be required in 2012 for new commercial aircraft deliveries, up approximately 20% from 2011. Assuming a 20% to 25% cash or equity component, $65 billion to $70 billion will need to come from various other sources. A significant amount of funding also will be needed to refinance existing transactions. Any significant tightening of credit conditions would, therefore, represent a major threat to the large commercial aircraft (LCA) outlook in 2012.

Deliveries of LCA, encompassing all aircraft of 100 seats or more, will grow by an estimated 15% in 2012 to 1,160 units. The forecast for 2013 calls for additional growth of 9%. Both Boeing and Airbus have substantial backlogs (approximately 7 years of annual production), and delivery growth will likely remain strong over the next few years as global passenger traffic and cargo volumes expand.

Global aircraft demand will be supported not only by new orders from emerging market carriers but also by replacement-order demand from developed market airlines with aging fleets. Replacement aircraft demand will likely establish a floor for LCA production in coming years, even if slower global growth cools emerging market fleet expansion.

Commitments by both Boeing and Airbus to re-engine existing narrow-body models ? meeting strong demand by airlines for fuel-efficient aircraft with low unit operating costs ? could drive further growth in orders and deliveries through the end of the decade. As a result, a well-functioning and globally diversified aircraft financing market will remain critical as airlines continue to face heavy capital commitments.

For a detailed analysis on the 2012 outlook for aerospace and defense firms, see Fitch's "2012 Outlook: Global Aerospace and Defense," dated Dec. 20, 2011.

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