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After months of appeals for export credit agency (ECA) support to return to the flagging aviation sector, the French government has announced it will boost state guarantees for airline exports.

As part of a €15bn rescue package for the aerospace sector, the government says that it will bolster its export credit guarantee scheme, with Toulouse-based plane maker Airbus set to benefit.

The firm had previously made clear that it wanted the French state to provide backing to its customers, as concerns grow that airlines – who have seen a sizeable drop in revenues due to a plunge in air travel as a result of the coronavirus pandemic – will increasingly seek to defer or even cancel orders.

Speaking to investors at a Q1 results webcast at the end of April, Airbus CFO Dominik Asam said that on the issue of funding its customers, the firm was starting to re-engage in “much more intensive dialogues” with ECAs.

The month prior, chief executive Guillaume Faury issued a video statement calling for the “support of governments for the complete ecosystem across the industry, for our suppliers and customers”.

France’s recent move marks a sea change for the industry, which has seen ECA support for planes made by the two biggest manufacturers on the planet – Boeing and Airbus – unavailable or strained for large parts of the last decade.

In 2012, for instance, the Export-Import Bank of the United States (US Exim) provided support for nearly a third of Boeing’s deliveries. By 2013 this figure had dropped to 17%, and by 2018, it had fallen to zero.

US Exim support for Boeing was long hindered by a congressional dispute, which left the ECA without a voting quorum from mid-2015 to May 2019, unable to provide financing and loan guarantees for projects over US$10mn.

Meanwhile the British, French and German ECAs cut off export credit support to Airbus for two years from 2016, after a corruption probe was launched into the company’s use of overseas agents.

In January, the manufacturer agreed a settlement worth €3.6bn with French, British and US authorities on the back of this.

Meanwhile Airbus’ Asam said in the recent webcast that ECAs have been “crowded out” by lessors and only covered 2% of their deliveries in recent years.

Kevin Butler, managing director for UK and Ireland at TMF Group, a provider of business support services to financial institutions, corporations and hedge funds, notes in a recent article that “aircraft leasing has been growing dramatically”.

According to Butler, airlines now lease almost half the aircraft they fly, up from 10 to 15% 30 years ago.

Another reason ECAs haven’t been hugely necessary for the past five years is that the aviation market has been “flushed with liquidity”, Bertrand Dehouck, head of aviation for Emea at BNP Paribas, tells GTR.

He says that banks operating in aviation finance have increasingly turned away from export financing because of this, and that BNP Paribas has itself provided “extremely limited” ECA-backed financing for aviation for two or three years now.

“Every quarter, you had more financiers interested in this asset class, because it had maturity over the last two decades, and it had resilience through crises. So, because of that, there were greater levels of liquidity and the ECAs were not really needed.”

Nevertheless, Dehouck says that the current downturn caused by the coronavirus could see ECAs return to the industry.

“This is a crisis that has hit transport and aviation particularly hard. So because of that, we’ve seen a large array of financial investors – that had pulled in recently –  now pulling out. Is it a phenomenon where they pull out forever or just wait on the sidelines? It is still very much a moving situation and we’re not at the bottom of it,” he notes.

Dehouck adds: “I think export financing could rapidly become an important way for airlines and lessors to gain financing. For us, it’s just a question of whether or not the pricing level correctly reflects the new environment.”

 

“Terrible year” for airlines

Airlines have felt the immediate impact of the pandemic which, according to aviation tracking site FlightRadar, has seen the number of global passenger flights drop by 77% since January 2020.

Virgin Australia went into administration in April, while Europe’s second-largest airline – Lufthansa – was given a €9bn bailout from the German government towards the end of May.

A host of airlines have announced there will be forced redundancies, with EasyJet saying that it would cut as much as 30% of its staff last week.

Meanwhile, a research report released by trade credit insurer Euler Hermes this week says that up to 30% of the workforce in the sector as a whole is “at risk of looming layoffs”.

With global demand in air travel looking unlikely to return to its pre-Covid-19 level before 2023, Euler Hermes adds that 2020 will be a “terrible year”.

It expects airlines’ aggregate revenues to fall by US$310bn, to US$525bn, while profitability is set to turn negative with a “staggering US$60bn operating loss”.

Problems for airlines and lessors will in turn hurt manufacturers, as customers defer deliveries or even cancel orders in a bid to minimise outgoing costs.

Fitch Ratings’ analyst Craig Fraser tells GTR that demand for Boeing deliveries is likely to be down by at least a third this year, for instance. Meanwhile another analyst at Fitch, Tom Chruszcz, estimates that Airbus deliveries will fall by at least 25%.

For the meantime the pair say that export credit support isn’t needed just yet, given the lack of demand.

But, going forward, ECAs will need to “step in” and provide backing to airlines who aren’t as strong financially.

Fraser says: “At the end of the year and into next year, deliveries should pick up and at that point, the form of financing will be more important. In the past, the export credit agencies have stepped up during downturns and have financed as much as a third of the deliveries during the trough of downturns.”

However, he adds: “Most of the work done by the export credit agencies is actually credit insurance. And the actual money is provided mainly by commercial banks or in some cases, the capital markets. You’re still going to need some financial institutions to step up and actually lend, but they’ll be lending based on the credit of the ECAs rather than the credit of the airline.”