Gulf banks are set to increase funding to the region’s airlines, which have placed a record number of plane orders as part of their expansion plans, according to lenders including Novus Aviation Capital.
Airlines will be a strong driver of borrowing this year as they tap financial markets to cover their large capital expenditure requirements, the banks said. The most popular debt instruments may include finance leases, bonds, Shariah-compliant sukuk, Enhanced Equipment Trust Certificates and debt.
“There is a strong expectation that the region’s banks will play an increasing role in financing the region’s airlines,” Mounir Kuzbari, executive vice president and board member of Novus Aviation, said by email on Dec. 29.
“There is still a significant surplus of Middle Eastern airline demand for financing over Middle Eastern banks supply, indicating an opportunity for the region’s banks to play a greater role.”
Credit growth in the UAE will accelerate to 8.4 percent in 2014, up from 6 percent last year and 2.3 percent in 2012, the International Monetary Fund said in a Nov. 12 report. Airlines Emirates, Etihad Airways PJSC, Qatar Airways Ltd. and FlyDubai will contribute to that growth after announcing more than $160 billion in combined plane orders at the Dubai Airshow last month.
Middle East financial institutions provided about $4 billion for new Boeing Co. aircraft to airlines in 2012 – almost double the figure for 2011, according to the Chicago, Illinois-based manufacturer. Bank debt will provide 25 percent of financing to airlines around the world as they look to fund $112 billion in jet deliveries in 2014, Boeing said in its annual market outlook report last month.
“The trend is definitely for a more important portion of financing to come from the region,” Montasser Khelifi, a Dubai- based senior manager for global markets at Quantum Investment Bank Ltd., said by phone on Dec 29.
“Following the financial crisis, banks – especially big European banks that were involved in air financing – have shied away from the region and are back to their core markets, so there’s an opportunity to replace these,” he added.
Sovereign ownership of the major Gulf airlines could help local banks to step up their air financing, as some of those lenders are also government-owned, Khelifi said.
“When there is a government-related entity that needs financing, there was always support from the local banks,” he said. Emirates sukuk issuance last year involved four local lenders, including Dubai Islamic Bank PJSC and Abu Dhabi Islamic Bank PJSC, while Etihad obtained a $359 million loan from First Gulf Bank PJSC in April to buy two Boeing 777s.
Popular financing tools for the region’s airlines could include EETCs, bonds specifically to pay for aircraft that aren’t yet widely used locally, Sidanth Rajagopal, aviation finance partner at Clyde & Co, said by phone on Dec. 30.
“That’s the scene going forward in the next two years – airlines will be looking to access the EETC market and the big three Gulf airlines have the name recognition,” he said.
Emirates is considering the sale of sukuk to raise $4.5 billion in the financial year starting April to fund plane deliveries, Brian Jeffery, former senior vice president for corporate treasury, said in August. The yield on the airline’s 5.125 percent bond maturing in June 2016 declined 48 basis points last year to 3.01 percent.
Kuwait Airways plans to finance the purchase of 10 aircraft by issuing bonds or sukuk and through loans from local and foreign banks, its financial consultant Amani Bouresli said in December.
Middle East airlines will need 2,610 new planes worth $550 billion over the next 20 years, as traffic grows rapidly in the region, according to Boeing. Local carriers probably made a combined net income of $1.6 billion in 2013, increasing to $2.4 billion in 2014, according to the International Air Transport Association.
“Given the size of orders and aircraft deliveries, you would hope banks would start to ramp up their asset finance portfolio in aviation,” Rajagopal said.