Back in 2007 when I wrote about the US subprime crisis and the affect it will have on aviation, I based the findings that we were all in for trouble on the fact that banks could not sustain lending. Now five years on and with the benefit of hindsight, we appear to be heading for stormy skies again but this time it looks far more worrying than in 2007. This time around it is Europe that will be the centre of a financial crisis this time in the sovereign debt markets.
Over the past five years, aviation financing would have dried up without the support of the export credit agencies. If the Euro fails and if, or maybe more accurately when, Greece defaults on its loans, European banks and funds could be in for a loss of around €130bn at current estimates through just Greece alone. If Portugal or Spain follow suit, the impact will be severe for the rest of the European Union.
Just as in 2007 commentators are saying that a few more bailouts and pressure to balance budgets will make the problem go away, but just as in 2007 it will not as the problems are too deep rooted. There is an argument that we are looking at a repeat of the Latin American bankruptcy rounds of the 1980s in which we could see a European version of the Brady bonds that helped ease that situation, either way the Euro zone would be in a serious mess with the ECB heavily curtailed, which would affect aviation finance. Even the burgeoning capital markets will not be able to maintain the entire funding needs of the aviation industry.
Against a backdrop of rising fuel costs and the fact that many airlines need to replace huge swathes of their fleets, this is a toxic mix. The US airlines, with consolidation having provided a sound footing, should be looking to lease at this point not purchase given the uncertainties on the horizon. The option to simply keep older aircraft flying is coming to an end. The European airlines need to consolidate but the EU is not helping matters and so there must at some point be failures.
At the moment there is a rush to order aircraft and fix financing for all airlines and lessors with the ability to do so. Many that are opting to wait and see, may find that unless they have the cash reserves to pay for an order, they will be unable to secure financing and the manufacturers, especially in this case Airbus and ATR (EADS), will not be in a position to help.
As we think about the possible effects on the air finance market and airlines maybe we should also expand our thinking to wonder what the effects of a full blown Eurozone crisis will have on EADS operations and sales of Airbus and ATR aircraft. The outlook is dangerous which leads me to believe that the A320neo in this uncertain atmosphere, was a very good call by the managers at Airbus. Well done to them. But the problems with the A400M and the costs on the A350XWB and A380 programmes, mean that cash infusions are an inevitable requirement in the near term. Will the EADS governments be able to inject cash this time around?
As for China and that bubble – We will look at that again tomorrow.