LONDON, 22 April — Today’s economic downturn is tomorrow’s business opportunity, especially for the innovative. Take for instance the world airline industry. While the global airline industry post-Sept. 11 undoubtedly took a serious knock, with US and European airlines bearing the brunt of the downturn, other carriers including those from the Gulf and Middle East and North Africa (MENA) countries were generally less affected.
Many analysts stressed that the market correction was due anyway, given a looming US economic downturn pre-Sept. 11 and the highly protectionist nature of the airline industry even in North America and the European Union. As such, the launching last week of the $800 million Millennium Aircraft Leasing Company (MALC) by Kuwait Finance House (KFH) and Muzun Partner Limited (MPL), an aviation investment company backed by a group of Gulf investors, is opportune in more than one respect. The rationale behind MALC is that prices for aircraft, especially second-hand, are at their lowest level for ages, and therefore now is a good opportunity to purchase such aircraft.
The industry expects the current trough in the economic cycle to peak over the next two to three years, with a revival in the sector projected in six to seven years. Not surprisingly, MALC has a projected investment life of seven years, by which time an attractive capital gains would have kicked in.
The flipside of the argument is that just as the airline industry is in trouble, carriers have been forced to restructure their balance sheet, cutting costs and rationalizing their business and services. Leasing is an off balance sheet financing, and companies have a propensity to go off balance sheet during economic downturns.
Moreover, MALC, according to Jassar Al-Jassar, general manager of KFH, is not only the first of its kind in the Middle East but also sets the precedent for a regional aircraft leasing entity. Middle East carriers either lease directly from the manufacturers financed through ad hoc leasing facilities arranged by regional and international banks, or through the major international operating leasing firms such as the International Lease Financing Corporation (ILFC) and General Electric Capital Aircraft Services (GECAS) — by far the two largest in the world.
However, from an operating lessor market point of view, MALC is essentially a fund with a projected investment life of seven years, and as such is not a dedicated aircraft operating lessor such as GECAS, ILFC, GATX , Ansett, Babcock & Brown, Pegasus, Boullion and other lesser operators such as Pembroke, Sunrock, Oasis and Orix.
In the Middle East, a number of aircraft leasing funds and entities have been mooted (such as the Islamic Aircraft Leasing Company first promoted in July 2001 by the Riyadh branch of Gulf International Bank and by international auditor Ernst & Young, subsequently to be delayed indefinitely because of Sept. 11) or established firms such as Aviation Leasing & Finance Company (ALAFCO), a former Kuwait Airways company (acquired in 1999 by KFH). ALAFCO, however, had a narrow mandate marketing only to Gulf public and private carriers.
The difference this time is that MALC will acquire aircraft with attached leases, then re-leasing these to creditworthy airlines globally. The regional Middle East carriers of 28 is a very small market anyway. MALC will source assets from various manufacturers including Airbus and Boeing.
To market more effectively, MALC has appointed ALAFCO and the Geneva-based Novus Management and Consulting SA as co-managers. Novus has a long experience in the sector and already manages a portfolio of 150 aircraft with a total value of $3 billion, including MPL’s own Muzun International Aviation Fund.
At least one major international manufacturer concurs with MALC’s market perception. The French-based European aircraft manufacturing consortium, Airbus Industrie, in its latest market report, reiterated that having foreseen a cyclical downturn long before the events of Sept. 11 exacerbated its effects. Airbus had already begun to slow its production ramp-up in the summer of 2001.
"Such downturns are a regular feature of the aviation industry and the economy overall, and Airbus had therefore been preparing to adjust to such a situation for some time. Moreover, before the recession began, the company had been in a growth phase, rather than scaling down production like its competitor (Boeing) and Airbus was therefore able to stabilize its production rates at current levels when the events of Sept. 11 occurred."
Airbus of course is familiar to KFH. Last year KFH put in an order for a $200 million order for four A320-200 single aisle family aircraft, to be managed and marketed regionally by ALAFCO. Other new customers include Royal Air Maroc, while Qatar Airways has ordered an additional A320-200 and an A330-200.
The relatively small number of carriers in the Middle East means that the market is still underdeveloped. But with rising populations; the fact that even countries such as Saudi Arabia, Dubai, and other Gulf states are now promoting tourism; increasing liberalization of the sector and subsequent increased competition; the opening of new air routes especially to long-haul destinations such as South America, South Africa, China and Australia, means that demand for passenger travel into and from the region is set to increase substantially over the next two decades.
Airbus, for instance, had forecast demand for large jets in the Middle East region would be about $50 billion over the next two decades; its US rival Boeing’s forecast was even higher at $63 billion.
This means potential future sales of up to 700 new aircraft. In fact, both manufacturers have earmarked the Middle East as the only region where they would expect substantial new business over the next few years.
MALC, which has an equity of $200 million, of which KFH has subscribed $50 million and MPL $5 million, is also a Gulf manifestation of globalization, offering aircraft leasing to a global market.
KFH and MPL are the lead sponsors and are in the process of finalizing the remaining equity uptake. Initial indications are that this equity offering will be heavily oversubscribed. MALC will seek an additional $600 million lease financing to bring the total assets under its management to about $800 million.
MALC, of course is an Islamic financing vehicle, and according to KFH’s Jassar Al-Jassar is "a leap forward for the Islamic banking industry" and its (and KFH’s) ability to structure innovative products to the market.
In fact, in some respects, it has been the Islamic banking sector that has added a fillip to the aircraft lease financing sector in recent months. Following its recent $100 million Islamic leasing (Ijara) facility arranged by HSBC Investment Bank for the leasing of an Airbus A330, Emirates, for instance has given a fresh mandate to the bank to arrange another $90 million facility for another A330 aircraft.