Aircraft financing: An unrealized opportunity

PUBLISHED BY: Islamic Finance News

According to Novus Aviation Capital (Novus), a global aircraft leasing and management company, the total aircraft fi nancing requirement for new airliners, as estimated by a major manufacturer for the year 2014, is approximately US$112 billion. Based on its estimates, this is usually provided by a mixture of commercial loans (22%), Export Credit Agency-supported fi nancing (17%), direct/ indirect operating leasing structures (24%), cash from operations (27%), capital market fi nancing and other sources (10%).

According to Novus, based on the typical six-year lifespan of an aircraft fi nancing deal, total aircraft fi nancing currently provided by the fi nancial or commercial banking sector is estimated at approximately US$175 billion. Islamic fi nancing has contributed about US$10 billion towards the fi nancing of aircraft since the fi rst transactions, accounting for less than 2% of the current overall aviation fi nance market in terms of bank lending.

In an interview with Islamic Finance news, Novus’ representatives Charles Yeterian, executive vice-president and Wesley Pollard, vice-president, shared their views.

A lucrative market for aircraft fi nancing should be the Middle East markets. Boeing has projected that the aviation industry in the Middle East is bound to grow over the next 20 years. In 2013, it pegged the Middle East market at US$550 billion over the next two decades (equivalent to the need for 2,850 commercial jets). “The estimate from Boeing is considered realistic given the outlook for global and Middle Eastern air traffi c demand within the 20-year timeframe,” said Yeterian.

He pointed out that Emirates Airline, Etihad Airways, Qatar Airways and THY Turkish Airlines are four of world’s fastest growing carriers. These airlines already have a considerable aircraft backlog between them and recent sustained growth rates suggest that they will continue to gain market share from other regions. “The concept of fi nancing aircraft appears to be in accordance with Islamic principles as aircraft s are long-life assets and charges can be fi xed so they are not connected with movements in global interest rates. There has been a resurgence in banks returning to the aircraft fi nancing sector over the past couple of years with many new entrants,” explained Pollard.

Shariah compliant structures that have been adopted in aircraft fi nancing include pure operating Ijarah or Ijarah Wa Iqutinaa’. These structures can be fi nanced by Islamic or conventional loans. Otherwise, straight Islamic fi nancing is used, with the lessee having the option to purchase the loan at a certain agreed amount during the life of the loan. Financial institutions that have been involved in aircraft fi nancing include Dubai Islamic Bank, Abu Dhabi Islamic Bank, First Islamic Investment Bank, IDB, Arab Banking Corporation, Kuwait Finance House, Ajman Bank, Al-Hilal Bank, HSBC, Citigroup, Alafco and Novus Aviation.

“Islamic fi nancing is, consequently, not only a competitive fi nancing option for airlines based in the Islamic world but also for non-Islamic global airlines such as British Airways who have reportedly actively considered the product,” said Yeterian. In line with interests of the banking community, Shariah compliant aircraft fi nancing is believed to be able to deliver higher returns in a market environment of low interest rates and instability.

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