Take-off time for airline financial services sector
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European aircraft maker Airbus said it was seeking a closer partnership with Chinese banks and financial institutions, including the possibility of creating new financing structures.
The move comes as more carriers are relying on Chinese financial services firms to fund aircraft purchases.
"The Chinese financial leasing market has a bright future," said Laurence Barron, Airbus China president. "It comes at just the right time when liquidity is reduced in the US and Europe. It is absolutely in our interest to work with the financial community in China."
The ascent of Chinese financial services firms from local funding suppliers for airlines to a global stage could be one of the most eye-catching trends from last year, in addition to the country's dazzling domestic air traffic growth rate of 20 percent despite the global economic slowdown.
The China Banking and Regulatory Commission approved commercial banks to have finance leasing companies in 2007 and that has resulted in the growth of local aircraft lessors.
Singapore-based BOC Aviation, acquired by Bank of China three years ago, has been one of the most active lessors in Asia. BOC Aviation signed agreements with Air Berlin last week for the purchase and leaseback of three Boeing 737-800 airplanes scheduled for delivery in February, July and August this year. Last year it entered into sale and leaseback transactions with Southwest Airlines for six Boeing 737-700 aircraft, with Air France for two B777-300ER passenger aircraft and two 777-200LR freighter jets, and with Cathay Pacific for six B777-300ER aircraft.
Last year, Industrial and Commercial Bank of China Leasing also completed its first international leasing transaction by signing sale and leaseback deals on two B777-200ERs with British Airways.
Other overseas airlines that benefited from Chinese financing in recent years include Qantas Airways, Deutsche Lufthansa AG and Alaska Airlines.
The current global financial crisis has allowed China's healthy and active banking community to fill a void left by the exit of many US and European banks.
"It reminds me of Japan in the early 1980s," said Barron, who served as Airbus' vice-president for customer finance in charge of the company's whole financing team for 10 years from the mid 1980s to the mid 1990s.
"Japanese banks started to get involved in aircraft financing at the end of the 1970s. By the 1990s almost half of the global aircraft financing was conducted by Japanese banks and financial institutions. I see the same pattern happening in China and the potential here is even bigger."
Aircraft manufacturers usually act as intermediaries between airlines and the financing side when airlines try to get support from commercial banks for a purchase. A single-aisle airplane has a list price between $50 million and $90 million.
Airbus signed an accord last month with CDB Leasing Co, of which China Development Bank (CDB) is a major shareholder, for financing support to Airbus' airline customers. CDB Leasing will provide up to $4 billion over the next five years in financing for airlines buying Airbus aircraft through sale and leaseback transactions.
US aircraft maker Boeing is also forging links with Chinese banks. It signed agreements with CDB Leasing and China Construction Bank in November, bringing to six the number of Chinese financial organizations working with the US plane manufacturer. CDB Leasing's agreement with Boeing includes an intention to offer up to 25 billion yuan for financing and leasing Boeing aircraft over the next two years.
"Right now, there are fewer banks in this market competition and it gives Chinese banks a greater access to the market and also enables them to charge a higher premium to good-credit airlines," Foster Arata, Boeing Capital's vice-president and senior managing director for Asia-Pacific and Greater China Region, said in an earlier interview.
New areas
Encouraging Chinese based aircraft financing and leasing is part of Airbus' efforts to expand its presence in China by developing not only manufacturing but also new business and service fields.
"We are looking at developing our presence in China outside the traditional industrial areas. We must think out of the box," Barron said.
Since delivering its first aircraft to China in 1985, Airbus has built four joint ventures in the country. These range from training pilots and engineers to designing and producing composite materials components for the company's latest model A350 that is scheduled to enter service in 2013. The highlight of its industrial cooperation with China has been the A320 final assembly line in Tianjin, which is the company's first aircraft final assembly line outside Europe.
"We are looking at a much wider area than just pure industrial projects while we have got our hands full and must make sure all works perfectly," Barron said.
To be sure, Airbus plans to work with China in new areas include aircraft financing and leasing, logistics, air traffic management, aircraft maintenance, repair and overhaul (MRO), and onboard wireless communication connectivity, Barron said.
Market outlook
Airbus outperformed US rival Boeing last year as the top producer in the world with 498 deliveries and 310 orders.
Barron said the company does not expect to sell more aircraft this year than it did in 2009 as airlines continue to battle with the effects of the economic crisis.
"There might be slow improvement globally but we won't see a return to a pre-crisis level in terms of air traffic and airline profitability until 2011 or even 2012," Barron said.
It will take at least three years for the global airline industry to recover after the worst recession in six decades, Giovanni Bisignani, chief executive of the International Air Transport Association, said.
The Geneva-based body, which represents 230 airlines worldwide, said that international scheduled air traffic ending 2009 was the largest ever post-war decline. Passenger demand was down 3.5 percent with an average load factor of 75.6 percent while freight declined 10.1 percent with an average load factor of 49.1 percent.
But China is expected to get back to the pre-crisis level faster than the rest of the world mainly due to the country's massive economic stimulus packages, Barron said.
Chinese airlines posted total net profit of 212 billion yuan last year, a huge improvement over the record 28 billion yuan loss in 2008, according to figures from the Civil Aviation Administration of China.
Airbus plans to deliver more than 100 new aircraft to Chinese airlines this year, about one-quarter of which will be produced in Tianjin, Barron said.
The Tianjin factory rolled out 11 A320 family aircraft last year as scheduled and is now ramping up production capacity.
"The airline demand for the A320 family aircraft remains strong. Many Chinese airlines have kept asking me if they can get earlier deliveries," Barron said.
Airbus delivered 78 airplanes to China last year, accounting for 16 percent of its total deliveries worldwide.
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