The aircraft finance sector has gathered pace again in 2021, with capital markets providing strong levels of liquidity to finance new commercial aircraft, with cash and sale and leasebacks just as popular. There is a long-term commitment from investors and financiers to aircraft financing, Boeing Capital Corporation reports in its 2021 review and 2022 outlook. Boeing sees a strong commitment to aircraft financing. In its Commercial Aircraft Finance Market Outlook (CAFMO) released on May 2, the 100-percent subsidiary of Boeing reports that aircraft delivery funding stood at $64 billion last year. This compares to $59 billion in the first year of Covid and $98 billion in 2019. Although an higher, financing is still a long way off the $126 billion seen in 2018 and $122 billion in 2017. Aircraft delivery funding recovered somewhat in 2021 but still lags behind 2018. The split of funding sources has changed. (Boeing) Spotting the trends in aircraft financing, there is a marked difference in bank finance between 2021 levels and those before. During the pandemic, banks have shied away from the airline industry, resulting in a significant drop in their share from 35 percent in 2018 to 15 last year. The alternative for airlines to get their aircraft financed was turning to lessors for a sale and leaseback (SLB): 29 percent of all aircraft were financed like this and this grew the delivery finance volume to over fifty percent. Cash payments (26 percent) and proceeds from capital markets (20 percent) were the two other most popular means of financing. In 2021, not a single aircraft delivery was financed by the manufacturers compared to one percent in 2020. Interesting is how delivery funding has developed by region. While all regions have been down during the pandemic, the collapse of the African and Chinese markets is significant. In Africa, all funding came to an abrupt stop in 2020. In China, bank financing and sale and leasebacks were non-existent in 2021, and capital market and cash were at minimal levels compared to 2018. This is in sharp contrast to North America and Europe. A slide showing the delivery funding for aircraft in China, with a sharp drop in 2020 and 2021. (Boeing) The delivery funding market in North America looks a lot different, with financing through cash, capital markets, and sale and leasebacks. (Boeing) Looking at how Boeing's own 340 deliveries were financed, cash was the top source at 35 percent as airlines looked at deleveraging their balance sheets. Funding from capital markets comes next at 27 percent and increased again over 2020, with SLBs the next popular option at 23 percent. In total 4.7 percent of direct purchases were financed through US and UK export credit facilities, the highest number in five years. Bank financing (11 percent) was the most popular with airlines in the Asia-Pacific region (39 percent), ahead of North America (29 percent). Market share lessors is now at 47 percent Together with direct purchases, lessors almost support forty percent of all of Boeing’s deliveries. The airframer has seen lessors competing hard to gain market share in times when aircraft deliveries were comparatively low, giving airlines good opportunities to negotiate beneficial deals. According to Boeing, 47 percent of the industry-wide fleet is now owned by lessors, one percent up from 2020. This number is lower than what some lessors are saying. For example, Avolon reports 48 percent and BOC Aviation even 51 percent. In 2020, it looked like the leasing bubble was about to burst. Despite new entrants, leasing market fragmentation has actually decreased and consolidation increased, notably with the acquisition of GECAS by AerCap. While capital markets showed continued interest in aircraft financing, Boeing noted increased interest from institutional investors that backed leasing platforms and new venture funds compared to previous years. They benefitted from discounted asset prices and widened credit spreads. But also banks seem to return to the market again. “Although risk tolerance and activity levels were below pre-pandemic levels, we see pockets around the world where bank debt is increasingly looking for business”, says Ben Faires, Managing Director of Capital Markets and Outreach at Boeing Capital, in a video. Capital markets provide $123 billion in funding to the industry Capital markets provided $123 billion in financing to the airline and leasing industry, with a notable shift in borrowers from US airlines to lessors from 2020 to 2021. Non-US airlines were the largest issuers at over $52 billion, just ahead of $51 billion by lessors. Boeing remarks that almost half of the $123 billion last year was related to the AerCap/GECAS deal. Without this, borrowings would have been on par with previous years. Asset-based securities made a significant comeback last year to $8.7 billion, almost reaching 2019 levels again after a deep drop in 2020. The instrument was used by lessors who took the opportunity of favorable market conditions. Demand for Enhanced Equipment Trust Certificates, a tool used to secure debt, dropped 75 percent year on year to $2.3 billion. The explanation is again the deleveraging of capital structures by the airlines as they tried to recover from the Covid-crisis. Expected to gain popularity is enhanced credits, which is financing backed by a non-payment insurance policy. This was increasingly used for the secondary market of Boeing aircraft. As Boeing Capital president Tim Myers said in the media statement: "Financiers and investors remain committed to the long-term fundamentals that continue to make aircraft a valuable asset class. Despite the changing landscape since the emergence of the Covid-19 pandemic, the industry remains resilient and there continues to be sufficient liquidity in the market for our customers with increasing opportunities as traffic recovers."
