February 20, 2012 / 4:07 PM / 6 years ago

Aircraft financing costs seen close to peak

FRANKFURT (Reuters) - The cost of financing new planes may come off current highs for some carriers as lenders step up competition for creditworthy debtors, a top supplier of aircraft financing told Reuters.

“I think we are reaching a ceiling now (and) may even be seeing prices slip slightly,” Bertrand Grabowski, who oversees the aircraft financing business at Germany’s DVB Bank DVBG.F, said in an interview.

Banks’ profit margins had gone up by 50-70 basis points over the last 12 months, he noted, signaling some room for more competitive pricing.

Grabowski said airlines with top-notch credit ratings would be the main beneficiaries. These include firms like Australia’s Qantas (QAN.AX) and U.S.-based Southwest Airlines (LUV.N).

Spreads for loans to second and third class borrowers, in contrast, were likely to increase, he added.

DVB, owned by Frankfurt-based cooperative DZ Bank DGBGg.F, ranks among the top five aircraft financing banks worldwide. Excluding loans guaranteed by government agencies, DVB says it is “probably the biggest aircraft financing commercial bank.”

Airlines and aircraft leasing companies around the world are expected to buy as much as $4 trillion worth of new aircraft over the next 20 years, according to Boeing, and the bulk of that will be funded by banks or leasing companies.

DVB expects a record volume of new aircraft deliveries worth more than $90 billion in 2012 and roughly $110 billion in 2013. Demand will mainly be driven by Asian low-cost carriers, Middle Eastern airlines and the U.S. re-fleeting program.

“From 2013/14 we expect a period of consolidation,” Grabowski said, declining to give a specific outlook.

An industry source said he expected a market volume of $60 to $70 billion from 2014 onwards.

While Grabowski expects carriers to have sufficient loans available to buy new planes this year, the field of lenders is shifting from Europe to Asia.

Formerly leading players like RBS (RBS.L), Germany’s HSH HSH.UL, BNP (BNPP.PA), Societe Generale (SOGN.PA) and Credit Agricole (CAGR.PA) are exiting or downsizing their aircraft financing businesses.

The gap is being filled in part by Asian lenders like DBS (DBSM.SI), United Overseas Bank (UOBH.SI) and Oversea-Chinese Banking Corp (OCBC.SI).

There will also be a stronger role for so-called export credit agencies (ECA), which supply government guarantees on aircraft financing, Grabowski said.

“ECAs will write a much larger cheque in 2012, accounting perhaps for as high as 40 percent of the total market, up from 30 percent in 2011,” he added.

Hamburg-based export credit agency Euler Hermes, however, expects a lower level. “In 2012, we expect ECA volume to rise, but not above the 33 percent level reached in 2010,” said Stephan Cors, who heads Hermes’ aviation risk unit.

New aircraft models like Airbus’s A380 and Boeing’s 787 - expected to account for $11 billion of deliveries this year - are also playing a role in the rise of government-backed loans.

“Commercial lenders tend to take a wait and see stance when new technology arrives,” Grabowski said, adding he was not too alarmed by recent technological glitches.

“We have full trust that Airbus and Boeing will solve their problems with the A380 and 787. It is normal to have adjustments to new aircraft models at early production stage. Demand for these machines will not suffer from that,” he said.

Editing by Mark Potter

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