Airlines the Latest to Suffer Euro Crisis Blues
Airlines including Boeing (NYSE: BA) and Airbus SAS will have to find new sources of funding for plane purchases, with European banks seriously reducing lending and trade rules curtailing the use of government-backed loans.
According to Bloomberg, Airbus CEO Tom Enders told reporters in Singapore that, “We are not facing a general shortage of financing for airlines, but we are in the period of re-orientation,” before adding that traditional sources are “more scarce than before.”
In an effort to seek out those non-traditional lenders, carriers may be forced to sell more bonds and turn to financing from lessors and Asian lenders in order to pay for planes. This may well become the norm for airlines. These are, after all, incredibly difficult times for European banks and everybody in every industry is having to tighten those belts until they cut into the stomach a little.
“European banks will step back a little in terms of financing this year,” Randy Tinseth, marketing vice president for Boeing's commercial airplanes unit, said in a briefing. “The capital markets will play a more and more important role in financing new deliveries.”
Global debt sales was boosted by airlines in 2011 by 56 percent to $12 billion, according to Bloomberg. However, approximately $90 billion will be required to fund plane deliveries in 2012, an increase of 20 percent.25 percent of that will be paid in cash, leaving $70 billion in financing required from those non-traditional sources.
That is not a small amount of money, and it highlights the mess that Europe is leaving a lot of businesses in. It is very difficult for companies like BA to accept the fact that its source of funding up to this point has just been cut off almost completely.
Enders says that he is still optimistic though, because, “There is a lot of money around”. That might be more than a slight overstatement, but there are options. Sumitomo Mitsui Financial Group agreed a deal to buy Royal Bank of Scotland's leasing unit for a fee of approximately $7.3 billion last month.
2013 will see further changes, with a new Aircraft Sector Understanding affecting everyone in the industry by governing export credit agency lending for plane purchases.
Last week at a conference, Boeing CEO Jim McNerney said that 2011 was a pivotal year for BA, and that it made substantial progress on its business strategies and delivered strong operating performance across our core production and services programs. Commercial airplanes, he added, generated almost 10% margins, 9.7% to be specific; delivered 477 airplanes and recorded net orders for 805 airplanes.
“While global economic growth slowed during 2011, air transportation remained notably resilient on balance, adjusting to various regional economic impacts throughout the year,” McNerney said. “Passenger traffic grew at a pace slightly above the long-term average, while cargo traffic was flat for the year and even saw some declines in recent months. Emerging markets continue to fuel worldwide airline fleet expansion. Demand in developed markets also remains high, driven by retirement and replacement of older, less-efficient airplanes.”
On Friday, Imperial Capital said in a research report that BA generated revenue of $68.7bn, EBITDA of $7.4bn, and adjusted EPS of $4.77 during the latest 12 months (LTM) ended 12/31/11. “We are maintaining our Outperform rating and establishing a one year price target of $85 (previously, our valuation range was $76-78 per share) compared to the recent price of $75.90 (potential upside of 11%). We look to higher commercial aircraft production rates to drive free cash flow and earnings over the next couple of years.”
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