Aircraft financing sector is looking up

The aircraft financing sector is improving, and a feared funding gap for the financing of commercial aircraft has never materialized, the head of Macquarie Air Finance said this week.

"And it doesn't look like it will — unless the problems in Europe turn into a major banking crisis," Macquarie Air Finance CEO John Willingham said on a conference call.

Airline passenger traffic growth has returned faster than expected and emerging markets have shown strong growth, he said.

Demand for Airbus and Boeing narrowbody aircraft has been steady, and lease rates have started to improve, Willingham said.

Those factors have been positive ones for the aircraft financing sector, he said.

For the airlines, there are few issues in obtaining financing for new aircraft.

Airliner financing has been helped by the support of export credit guarantees from the U.S. and European governments, Willingham said.

The "real heroes" throughout the downturn have been the export credit agencies, Willingham said.

Last year they supported more than $20 billion in financing for airlines worldwide, he said.

Recently, several new entrants have come into the aircraft financing market, such as Avalon, Jackson Square and RPK.

There is concern, however, about the impact of the economic situation in Europe.

The recent announcements by Boeing and Airbus that they plan to raise production rates on narrowbody aircraft makes sense, Willingham said, if the current airline trends continue.

Increasing rates took the industry by surprise.

But strong order backlogs and the undersupply of aircraft during the last upcycle, the rate increases make sense if the current airline trends continue, Macquarie Capital aerospace analyst Robert Stallard said in a research report.

If there is an unexpected slowdown, however, an oversupply situation may occur, Stallard wrote.

Airbus appears to be the most vulnerable if that were to happen, he said.

Willingham said Boeing and Airbus will be cautious before they decide to embark on another program involving their narrowbody aircraft, "particularly one affecting their cash cow."

Both are debating whether to put new engines on the planes or launch replacement products.

"I suspect the market is waiting to some extent to see what happens with Boeing and Airbus with their decisions on whether to improve the two narrowbody families," he said.