Gulf Banks Help Underwrite Region’s Aviation Boom

Cash-rich Gulf banks are becoming bigger players in the region’s aviation boom, helping carriers like Emirates, Qatar Airways and Etihad Airways to fund their fleet expansion.

Figures from European planemaker Airbus show that 47 per cent of its aircraft deals in the Middle East in the first 11 months of last year were funded by local banks, up from 17 per cent for 2013 as a whole.

Flush with huge cash deposits estimated by Reuters at $1.15 trillion, Gulf banks have the firepower to be increasingly competitive in aviation lending markets.

It gives the region’s carriers access to cheap capital while posing a threat to the dominance of global banks and aircraft lessors which have thrived on the accelerated growth of the Gulf aviation industry.

Long-standing critics of the Gulf’s state-owned carriers, including some North American and European legacy airlines, may feel such financing from local lenders — many of whom are also partly or fully state-owned — offers an unfair advantage. But Gulf lenders and airlines alike say deals are done only on a commercial basis.

After years of piling lending into the region’s volatile property sector, local bankers see aircraft financing as a way to diversify risk into an asset class where the likely pitfalls are smaller.

Opportunities for further funding are huge; Emirates has about $107.5 billion worth of aircraft on order from Boeing and Airbus over the coming few years. The order books for Qatar and Etihad are about $57.7 billion and $28.59 billion respectively at list price.

“Liquidity was good [in 2014], the local and regional banks participated very strongly, certainly as far as airlines from region were concerned,” Ricky Thirion, group treasurer of Etihad, said at a conference in Dublin.

“But they also spread their wings and started offering transactions outside our region, which is good to see.”

National Bank of Abu Dhabi (NBAD), for example, says it is exploring aviation deals with Asia Pacific rim airlines across multiple financing structures.

“We see indeed that banks in the Middle East are playing an increasingly important role in aircraft financing, in line with the region’s growing influence in air traffic worldwide,” said Yann Ballet, head of project and structured finance at Airbus.

DIVERSIFIED FUNDING, TIGHT MARGINS

Airlines traditionally relied more on leasing firms, export credit agencies, international banks and capital markets or just cash for their financing needs. But as their order books have swollen, carriers have widened their sources of financing in order to secure competitive rates and diversify risks.

Dubai’s flag carrier Emirates has been tapping U.S. capital markets through equipment trust certificates and received a guarantee from the French export credit agency for its floating-rate capital market bond. However, it recently began drawing more funding from local banks.

At the same time, some funding options are less readily available than they were in previous years. Export credit — once a cost-effective mainstay for the big three Gulf carriers — has been pushed towards market rates as a result of changes to international financing rules.

Globally, funding from some international banks has also been less abundant since the 2009 global financial crisis, although a number have made a return to the market.

French banks’ contribution to commercial bank debt financing for airplane deliveries is expected to be around 10 percent in 2015, nearly half the level of 2009, according to Boeing. The proportion of funding from German banks will also be lower over the same time period.

Munawar Noorani, London-based managing director of Aviation and Industrials for Europe, Middle East and Africa at Citi, expects however that new monetary policies in Japan and Europe could allow greater and more competitive lending from banks.

“There is a lot of liquidity available from which particularly the three major Gulf airlines are benefiting – this has allowed the local and regional banks to grow their aviation portfolios,” he said.