ECA-backed aircraft finance expected to decline

The aviation industry will take delivery of $3.5 trillion of new commercial jets aircraft over the next 20 years, with an average of $125 billion of funding required annually over the next decade alone.

This paper, by Dick Forsberg, head of strategy at Avolon, the aircraft lessor, examines the scale of the financing challenge and suggests how the various funding channels will develop over the next ten years.

Interestingly, export credit agency (ECA) activity, which provided essential market support through the financial crisis, is expected to decline over the coming years to less than 15% of total delivery funding (remaining flat in dollar terms at around $20 billion per annum) from a peak of 30% of total funding.

Low interest rates, discounts associated with Cape Town and newly developed ECA bond products (already accounting for around 15% of ECA volume) have kept the product competitive. Nevertheless, demand for ECAs is expected to decline from recent levels, due in part to the recently implemented 2011 Aircraft Sector Understanding (ASU).

The ASU has placed more restrictive conditions upon ECA support and made it more expensive. Instead, growth will come in large part from increased activity amongst operating lessors. Secured lending will still be significant (though reduced) and the capital markets will continue to be important, albeit only for certain issuers.

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