Lessors take lead as airline industry seeks growing capital investment needs

The world airline industry continues to generate large and growing capital investment needs. The industry’s capital investment has grown sharply since the global financial crisis, almost doubling from 2010 to 2016. Aircraft account for by far the majority of airline industry capital spending, which exceeded $120 billion in 2016 and is forecast by Boeing to reach $185 million in 2021.

This rapid increase in investment has stimulated changes in the mix of sources of funding. There is now a good balance between cash, bank debt and capital markets. Airline profit recovery has enabled growth in cash as a source of investment funding, but the bulk of the increase has been funded by bank debt and the capital markets, now the two biggest sources. Export credit has declined as a source of aircraft delivery finance since 2010.

Bank debt’s share of funding will grow further from 33% in 2016 to 34% in 2017 and that of capital markets will grow from 30% in 2016 to 31% in 2017, according to data from Boeing Capital on the sources of delivery finance for Boeing aircraft. Boeing expects cash will provide 26% of the funds for its aircraft deliveries in 2017, down by around 2ppts versus 2016, but still high on an historic basis, particularly compared with before the global financial crisis.

Layered across all the sources of capital investment funding for the airline industry is the growing use of lessors. According to Avolon, lessor funding will account for around 40% of delivery financing in 2017 and will reach 50% in 2021. These figures compare with around one quarter in 2000 and one third in 2008.

The lessors obtain their funding from the same mix of sources as the industry as a whole, led by capital markets (forecast by Boeing to provide 37% of financing for deliveries of its aircraft to lessors in 2017) and bank debt (36%). Cash is expected to provide 25% of lessor delivery financing, an increase from around 20% in 2015. This reflects the financial strength of leasing companies and the growth of the equity investor base accessible to them.

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