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Getting The Deal Through

Global overview

Mark Bisset

Clyde & Co LLP

Thursday 30 May 2019


Aviation is one of the world’s fastest-moving sectors, combining technology, innovation, entrepreneurialism, economic development, infrastructure support, demographic growth, contribution to globalisation and a touch of glamour. Progress in this sector is impressive in its speed and diversified in its nature.

Economic and traffic growth are two of the key indicators of growth in commercial aviation globally. Economic growth in a region generally has a strong impact on the increase in demand for air service. While in aggregate this is true, the degree to which air service grows in relation to gross domestic product (GDP) is not consistent throughout the world. Typically, in developing countries, air service grows at a much higher rate than GDP. Historic experience in Western Europe and North America shows that air traffic growth in a developed country with a mature air service market is less responsive to GDP than in a developing country. By way of illustration, Boeing’s worldwide forecast for the ratio of air traffic demand growth to GDP growth over the next 20 years is approximately 1:5, albeit with regional variation. At any time and in any place, few airlines have the internal cash available to self-finance acquisitions of new or used commercial aircraft, and most airlines seek financing from a variety of sources, including traditional bank debt, export credit guarantees, tax leases, capital markets and operating leases.

There has been much commentary in recent years relating to the enormous aviation potential of the economies of Brazil, Russia, India and China. Recently, Africa and the Asia-Pacific region have been regularly added to this list, and we may add Latin America and the Middle East to the regions already mentioned. In other words, heady growth (more than 6 per cent) is predicted in almost every region of the world with the exception of Western Europe, which may be considered to have reached saturation point.

To cite growth forecasts from one of the two major manufacturers, Boeing predicts demand for 42,730 new aircraft in the next 20 years, valued at US$6.3 trillion. Half of these aircraft will replace existing aircraft, such that by 2037 the world’s commercial aircraft fleet is expected to comprise 48,540 aircraft. And, after many years of an Airbus and Boeing duopoly, new aircraft types are entering the market: the Bombardier C Series (in 2016 the CS100 was delivered to launch customer Swiss and the CS300 to launch customer Air Baltic; since the programme was taken over by Airbus in July 2018, these aircraft are now the A220-100 and A220-300 respectively), the Comac ARJ21 regional jet, the Comac C919, the Sukhoi Superjet, the MC-21 and the Mitsubishi Regional Jet. Of all these new aircraft, 40 per cent are predicted to be required in Asia-Pacific, 20 per cent in Europe and North America and 20 per cent in the Middle East, Latin America, the CIS and Africa. Boeing delivered more commercial aircraft in 2018 than any manufacturer for the seventh consecutive year and set an industry record with 806 deliveries in 2018, driven largely by the 737. Boeing booked net orders for 675 aircraft and has an overall backlog of 5,873 orders. It remains unclear what effect the global grounding of the 737MAX will have on 2019 metrics. Airbus’ commercial aircraft deliveries in 2018 were up for the 16th year in a row, reaching a new company record of 800 aircraft delivered to 93 customers. The 2018 total comprised 646 single-aisle A2/320 aircraft (of which 386 were A320neo), 49 A330s, 93 A350 XWBs and 12 A380s. Airbus achieved 747 net orders in 2018 and, at the end of 2017, Airbus’ overall backlog stood at 7,577 aircraft.

Global revenue passenger kilometres (RPKs) are expected to grow by an average of 4.7 per cent over the next 20 years. In 2018, RPKs grew by 6.5 per cent, down from 8 per cent in 2017. Passenger load factors have continued their upward trend: the average passenger load factor has reached a record high of over 80 per cent. The top 15 airlines account for about half of world RPK growth. The International Monetary Fund estimates that the world’s GDP rose by 3.1 per cent in 2018. So RPKs did better than the historic figure for air travel, growing at twice GDP. The International Air Transport Association (IATA) estimates that the world’s airlines made a net post-tax profit of US$32.3 billion in 2018, with return on invested capital of 8.6 per cent, helped for another year by the fall in fuel prices and low interest rates. The IATA expects that strong demand, efficiency and reduced interest payments will help airlines improve net profitability in 2019 despite rising costs. 2019 is expected to be the fifth consecutive year of sustainable profits. Thus, compared with previous years, these are heady times. Airlines have had many years of access to cheap finance, while intense competition between lessors in the leasing sector has pushed down lease rates. That said, there are concerns on the horizon – potential trade wars, Brexit, rising interest rates, the withdrawal of quantitative easing, slowing economies, rising oil costs, high aircraft production rates, maintenance, repair and operations and infrastructure constraints, increasing maintenance and labour costs.

The level of finance required to sustain this expansion is astonishing. The commercial aircraft finance market is already a market valued annually in excess of US$100 billion for the financing of new deliveries. (This is in addition to the secondary aircraft market, the business jets world, spare engine leasing or finance and the engine aftermarket.) Deliveries of new aircraft will require an average of US$125 billion of finance annually over the coming decade.

The purpose of this short introduction to the aviation finance world is not to predict how aviation finance will meet the challenge, but to take a snapshot of where we are now and to identify which threads are likely to be picked up going forwards.

Financing products

Commercial banks, lessors and export credit agencies account for the majority of aircraft financing, and the use of capital markets has expanded considerably over the past decade. Following the credit crunch of 2008, the availability of traditional debt was severely constrained, but has seen a resurgence over the past few years. To fill the subsequent funding gap, the export credit agencies (and, indeed, the manufacturers themselves) stepped up to the plate. However, it is expected that it is the areas of capital markets and operating leasing that will see the most financing activity in terms of volume. The emergence of a strong new insurance market since 2017 has enhanced the diversity of financing options. As the global aviation industry updates its fleet and adds capacity to meet growing demand, Boeing expects the funding requirement for new aircraft deliveries to be US$143 billion in 2019.

According to the Boeing 2019 Current Aircraft Finance Market Outlook, the sources of US$143 billion worth of finance for the purchase of aircraft in 2019 are expected to be as follows:

  • bank debt: 34 per cent;
  • capital markets: 30 per cent;
  • cash: 26 per cent;
  • export credit: 7 per cent; and
  • insurance: 3 per cent.

In this overview we shall look at:

  • enhanced equipment trust certificates (EETCs);
  • asset-backed securities (ABS);
  • export credit agency (ECA) financing;
  • commercial bank finance;
  • leasing; and
  • insurance.


An EETC is a publicly (but sometimes privately) issued rated security that relies on the credit of a single issuer and is secured by aircraft. This is usually in the form of a special-purpose company or SPV, which is created with the sole purpose of owning the aircraft. While EETCs have traditionally been issued by United States airlines, because of the availability of section 1110 of the US Bankruptcy Code, the product should now be increasingly available to airlines in countries that have adopted the Cape Town ‘Alternative A’ insolvency regime (eg, recently, Air Canada, British Airways and Virgin Australia).

EETCs were effectively closed during the financial crisis, and reopened in 2009. Recently airlines have been issuing EETCs and unsecured bonds, while lessors have been issuing unsecured bonds and sponsoring aircraft and engine ABSs. However, in 2018 only four noteworthy deals came to market, totalling US$1.8 billion: United, American Airlines, Spirit Airlines and BA (the last being the first non-US airline EETC for some time).

EETCs are well suited to repeat issuances, and carriers with established histories in the market can achieve very competitive rates. One of the key developments of recent years has been a growing cadre of non-US investors in EETCs. According to Boeing, the growth in international EETC investors over the past several years is being driven by ‘healthy airline fundamentals, a broader understanding of the strength of commercial aircraft as an asset class, and active outreach efforts by investment banks and manufacturers’. Between 2014 and 2016, investors from nine countries bought public EETC paper for the first time. Over that same period, the overall allocation to international investors jumped from 5.8 per cent to 8.3 per cent, a rise of more than 40 per cent. As global EETC issuances gain further traction, and as non-US investors learn more about the aviation industry and the value of commercial aircraft, it is Boeing’s expectation that this positive trend will continue.

All that said, capital markets actually saw an overall decline in activity from 2017 and (as mentioned) a further decline in 2018, according to Boeing ‘partly due to airlines deleveraging risk and greater access to bank debt’. In 2018, lessors accounted for 71 per cent of the volume (US$21 billion; compared to US airlines US$2.8 billion and non-US airlines US$5.8 billion) as they accessed capital markets for unsecured debt and ABS issuances to finance their portfolios. Boeing anticipates that the next years will see an upward trend in capital markets volume as lessors continue to use the space as their primary source of financing. Boeing expects new institutional investors entering the market to further stimulate the use of capital markets and EETCs. The figures below demonstrate the slowing of airline EETC volume over recent years (source: Boeing):


US$ billion














ABS are issued in the private and capital markets, secured by aircraft or lease rental cash flows. The predominant forms of ABS are transactions structured as collateralised loan obligations and collateralised debt obligations (EETCs are not characterised as ABS since they are reliant on the single issuer). The newly reopened ABS market provides an efficient means for lessors to sell off portions of their portfolios. The volume of ABS deals has increased steadily over the past few years (source: Boeing): in 2018, there were 14 deals, which is a very small part of an overall US$200 billion market. In 2018, Aircastle, SMBC, ACG and DAE all issued notes; those that are rated as investment grade can gain access to cheaper funding. An interesting deal was an issuance by CALC in January 2018, which was China’s first ABS denominated in foreign currency and listed on the Shanghai stock exchange:


US$ billion













ECA financing

ECA-guaranteed loan products covered only about 7 per cent of new aircraft financings in 2018, substantially down from previous years. This is a financing supported by an ECA, of which the primary ones are:

  • Brazil: BNDES – supports Embraer;
  • Canada: EDC – supports Bombardier;
  • France: COFACE – supports Airbus and ATR;
  • Germany: Euler Hermes – supports Airbus;
  • UK: UK Export Finance – supports Airbus and Rolls-Royce; and
  • US: US EX-IM – supports Boeing, CFM, IAE, GE and Pratt & Whitney.

ECA financings are currently regulated by the Organisation for Economic Co-operation and Development (OECD) Aircraft Sector Understanding (ASU) arrangements; however, not all aircraft manufacturing countries are subject to the ASU rules (eg, China, Japan and Russia), which will be of increasing significance as these countries develop new aircraft types and develop products. By way of example, in 2017 China’s export credit agency CEXIM financed two Airbus A380 aircraft; the transaction was a US$450 million financing for Minsheng Financial Leasing as lessor of two A380-800 aircraft on finance lease to Korea’s Asiana Airlines.

Having been of critical importance when filling the funding gap during the downturn in availability of traditional debt finance during the recent prolonged recession, ECA financing is likely to reduce over time in the light of the ASU’s requirements to impose market-level fees and rates. The 2011 ASU requires each ECA to classify its borrowers into one of eight risk categories, based on these senior unsecured credit ratings. The new ASU thereby raises the export credit premium for all buyers and borrowers.

Both Airbus and Boeing lacked access to their domestic export credit agencies since 2017 for well-publicised reasons; however, any downturn should likely see renewed usage. That said, export credit financing is likely to remain marginal for the foreseeable future as the commercial financing markets remain healthy.

The percentage of Boeing deliveries supported by US Ex-Im peaked at between 27 per cent and 30 per cent during the financial crisis 2009–2012, but currently stands at zero. The European ECAs are currently largely unable to support Airbus aircraft; UK Export Finance (UKEF) has, however, been active in supporting Rolls-Royce engines on Boeing aircraft. SACE, the Italian export credit agency, has also begun to support aviation equipment, for example recently for Turkish Airlines and SunExpress.


A new market development is the provision of insurance risk capital to aircraft finance. Aircraft Finance Insurance Consortium (AFIC) is a ground-breaking collaboration between Marsh LLC and a panel of highly rated global insurance companies to offer a new way to protect the financing of commercial aircraft purchases. Developed with Boeing and available exclusively through Marsh, AFIC’s aircraft non-payment insurance protects banks or institutional investors from payment default. Marsh launched the AFIC product in June 2017 with the consortium of insurers made up of Allianz, Fidelis, AXIS Capital and Sompo International, each of which has a credit rating of at least ‘A’ (Standard & Poor’s).

AFIC financed more than 30 aircraft in 2018. In January 2018, AFIC won the award Aircraft Finance Unique Leasing Deal of the Year for its contribution to the Credit Agricole-arranged, AFIC-supported French lease of two Boeing 777F cargo aircraft for Turkish Airlines. AFIC was also awarded Aircraft Finance Deal of the Year – Asia for supporting the aircraft financings for Korean Air. Also in 2018, AFIC closed its largest portfolio financing to date, US$600 million for Ethiopian Airlines, which comprised five 737MAX-8s and three Boeing 777F cargo aircraft. The transaction was funded by Société Générale, ING and SMBC. One commentator has remarked:

AFIC has established itself even faster than anticipated — and aviation finance banks view it as a structure with a long-term future, taking its place alongside established products. The structure has proven to be a win for everyone in the aviation finance market. Airlines view it as a new way to diversify sources of funding. For bank lenders, the AFIC product came along at an opportune moment — since many of those banks have been forced to phase in higher capital requirements for loans on their books as a result of the Basel III agreement.

For Airbus aircraft, Marsh SAS – a different team from Marsh LLC with separate reporting lines and appropriate Chinese wall barriers in place – has been working as exclusive broker with Airbus, certain lenders and a pool of highly rated insurers to launch Balthazar. Balthazar is a non-payment insurance product for lenders and investors funding new Airbus aircraft under which insurers will typically provide 100 per cent cover for up to 12 years. The first Balthazar transaction was the financing of an Airbus A321 for Turkish Airlines in February 2019.

The basic concept of non-payment insurance (NPI) is similar to export credit support except that it provides an insurance policy to lenders, rather than a guarantee. However, there are key differences: between insurance law and guarantee law, a different bank capital regulatory analysis, and a risk analysis based on a corporate credit rating of the insurance companies rather than sovereign risk. Further, with NPI, the OECD restrictions on the percentage of national content in the aircraft are not relevant. Also of crucial importance is the fact that the informal ‘home country’ rule for export credit is also not applicable, meaning that NPI can also be used by airlines in the United States, the United Kingdom, Germany and France.

Commercial bank finance

Commercial banks currently fund approximately 34 per cent of the new aircraft deliveries in 2018, demonstrating recovery from the lean years of the credit crunch. The traditional Western European (mainly French and German) banks and US banks are now joined by new market entrants in Australia, Japan, the Middle East and (in the case of financing Chinese airlines) China. China and Japan now account for 40 per cent of all bank debt for new aircraft deliveries.

The adoption of Basel IV is likely to raise the operational costs for banks, which will, of course, be passed on to customers in the form of higher margins: increased capital adequacy requirements and other changes such as the net stable funding ratio rate being phased through to 2020, and are expected to have a significant effect on the availability of commercial bank finance. Basel IV could require banks to hold more capital reserves against certain loans that they issue, though secured loans will likely continue to be assessed under the current Foundation and Advanced Internal Ratings based approach, so potentially no change. Many banks consider that pricing should be increasing to prepare for implementation but cannot die to excess liquidity in the market.

As well as traditional mortgage finance, more specialised products that remain available to a greater or lesser extent are:

  • French lease: a cross-border tax lease where the lessor is domiciled in France; this is traditionally the preserve of the French commercial banks;
  • Japanese operating lease (JOL): Japanese investors put up equity and the balance of funding is provided by a bank loan. Since the debt must be booked in Japan to avoid withholding tax, this product has historically been the preserve of Japanese banks such as the Bank of Tokyo-Mitsubishi. (A JOLCO is a JOL with a call option allowing the airline to purchase the aircraft); and
  • Kommanditgesellschaft: a product whereby the aircraft is acquired by a German limited partnership, financed by German investors and partly leveraged by bank loans from one of the banks specialising in this product (eg, NordLB).

The most popular structures in the market today are French tax leases and JOLs. A stand-out deal from 2018 that incorporated the French lease was for two B777 freighter aircraft on lease to Turkish Airlines, with debt supported by AFIC. Also in 2018, BA financed 11 new aircraft using an EETC structure that incorporated a JOLCO, the deal value being US$608 million.

Operating leases

Activity in the operating lease sector restored momentum lost in the aircraft finance sector during the liquidity crisis, and the subsequent downturn in the finance sector and in the wider economy. About 41 per cent of new aircraft deliveries are currently facilitated by way of operating lease, and most analysts suggest that this proportion will rise to 50 per cent within the next few years. In addition to traditional investors in aircraft equity, such as operating leasing companies (eg, AerCap, GECAS and DAE), hedge and private equity funds have recently become increasingly significant in this market. The ABS market remains important for lessors to finance portfolios of aircraft. According to Boeing, the sources of funding for lessors are currently as follows (for Boeing deliveries):

  • bank debt: 22 per cent;
  • capital markets: 48 per cent;
  • cash: 24 per cent;
  • export credit: 2 per cent; and
  • insurance: 4 per cent.

In 2018, the leased aircraft portfolio grew by 629 to 8,109 aircraft. The number of aircraft leasing companies has also grown: over the past decade, 100 new names have entered the commercial aircraft operating lease sector. That said, industry consolidation has continued, with DAE Capital acquiring AWAS in April 2017. DAE Capital was prepared to pay a significant premium for AWAS – bankers close to the deal say it paid a multiple of 1.15 times the portfolio’s value for the platform. The deal propelled DAE into a top 10 aircraft leasing platform, with an aircraft portfolio valued at more than US$14 billion. In 2018 GIC, the Singapore sovereign wealth fund, invested in Nordic Aviation Capital; ORIX Aviation bought 30 per cent of Avolon; The Carlyle Group bought Apollo Aviation Group; BBAM acquired Asia Aviation Capital; and Goshawk acquired Sky Leasing Ireland.

As well as consolidation, there is a trend of new entrants into the market, especially in Asia and the Middle East, where traffic has been booming and plenty of capital is available. There are now over 60 leasing companies in China. Of the top 25 aircraft lessors in the world in recent years, fewer than half were operating only a decade ago. Some are totally new, such as ICBC Leasing and CDB Leasing in China or DAE Aerospace in Dubai. Others are set up by serial entrepreneurs, such as Air Lease Corporation and Avolon (now owned by HNA Group). Some airlines with large order books have also set up leasing companies, such as Indonesia’s Lion Group, which has already leased out 737 NGs into the Chinese market. Regional concentration is continuing: for example, two-thirds of the Chinese lessor fleet is leased by Chinese carriers (the majority of Bohai Leasing’s aircraft are leased to carriers owned by HNA, such as Hainan Airlines). The balance of lessor ownership continues to move eastwards following a natural expansion of the growth in commercial aviation in Far Eastern emerging markets, with lessors in the Asia-Pacific region now owning or managing 25 per cent of the global fleet.

Sale and leaseback transactions are being used more and more by airlines owing to the competitive pricing. According to Peter Chung, CEO at CDB Aviation Lease Finance, airlines have over-ordered with the intent of flipping aircraft to lessors: by placing bulk orders, airlines can order aircraft for lower prices than leasing companies, and can then sell these aircraft to lessors in securities lending and borrowing transactions that value the aircraft at more than the capital cost, using the difference for working capital purposes. ‘We will come to the point where many lessors are providing working capital to sustain an airline.’

Also, pre-delivery payment (PDP) finance is being increasingly offered by lessors. GECAS has been a regular provider of PDP financing for its clients.

Leasing companies are increasingly securing cheap debt in large-scale facilities: some of the largest deals in 2018 were for BBAM (US$1.3 billion to support its acquisition of a pool of 65 aircraft from AirAsia), Macquarie (US$3 billion, using a pool of 133 aircraft as collateral), ALC (US$4.5 billion) and DAE (US$750 million revolver). There is a trend for warehouse facilities as lessors build up aircraft portfolios to refinance into the ABS market. Rising interest rates could cause difficulties for lessors: says Robert Korn, president of Carlyle Aviation Group: ‘A lessor who is rolling in commercial paper and has a lot of fixed rate leases is going to be hit quite hard.’

The Cape Town Convention

One of the most significant legal developments in the past decade has been the introduction of the Cape Town Convention, which established a system of recognising international rights in aircraft and certain aviation assets. It came into force in 2006 and at this time, depending on whether a particular jurisdiction has ratified the relevant sections and absorbed the principle into local law, it gives genuine rights and the ability to give effective notice to third parties of ownership and security interests. This has, in certain circumstances, provided encouragement for prospective lessors and financiers considering the financing of aircraft and engines in jurisdictions that may hitherto have been viewed as difficult. An immense debt is due to the Aviation Working Group and to all those who have worked on the Convention over the past decade.

The Convention has been ratified by 79 contracting states and the Aircraft Protocol has been ratified by 76 contracting states (the Convention also applies to rolling stock and satellites and its applicability to aviation is governed by ratification of the Protocol). The Convention will become increasingly important in international aviation finance as it gains more universal coverage, and a crucial tipping point may well be imminent ratification by all the EU member states. It is highly likely that within the next few years the Convention will be the standard reference point for the creation, recognition and enforcement of aircraft security interests in the vast majority of countries with any relevance to aviation (which, to a greater or lesser extent, means all countries in the world).

The OECD Aircraft Sector Understanding stipulates that ASU participants shall charge no less than the applicable minimum premium rate (MPR) to account for the credit risk when providing an officially supported export credit. Premium is charged in addition to the interest rate, as it is meant to cover the risk of non-repayment of the export credits. The ASU stipulates (Appendix II) that members of the Cape Town List may benefit from a reduction of the MPRs, if these countries have made appropriate qualifying declarations. Of the countries that have ratified the Convention and the Aircraft Protocol, 29 have made the required qualifying declarations to be eligible for the OECD discount, and nine countries are awaiting OECD review (as at the end of December 2018). Twenty-five countries have not adopted the recommended suite of qualifying declarations, and 10 countries have made the qualifying declarations but have implementation issues.

By way of an example of Cape Town in action: in India, evidence suggests that return of Kingfisher aircraft without benefit of the Convention took 180+ days in 2012, whereas return of SpiceJet aircraft with the benefit of the Convention took 79 days in 2015. The Indian government has moved quickly to address the shortcomings in, for example, recognition of irrevocable deregistration and export request authorisations.


Trading of aircraft leases between lessors is a very significant component of the leasing market, but lease novations are frustrating for lessees and lessors alike, often involving protracted negotiations and a seemingly disproportionate amount of time and cost. To address this, in May 2018 the Aviation Working Group announced plans for a global electronic aircraft trading system (GATS) based on blockchain technology. Under GATS, aircraft will be owned by trusts in the United States, Ireland or Singapore. Instead of using lease novations and selling legal title to aircraft, the beneficial interests in those aircraft trusts will be traded electronically. Any restrictions on lease transfer will be negotiated and agreed in the lease in the normal course no differently from the way they are today. GATS is not seeking to interfere with those negotiations. GATS uses the term ‘advance requirements’ to refer to such restrictions, and will allow such advance requirements to be uploaded to the GATS platform (either immediately prior to each transfer or at the commencement of the lease), should the lessor and lessee agree to do so in the terms of the lease. Once uploaded, and in lieu of the lessee needing to sign an acknowledgment or novation agreement (GATS provides solutions for avoiding this), the lessee will need to confirm electronically through the GATS platform that each such advance requirement has been satisfied or waived before the transfer is permitted to take effect.

Business jets

Bombardier Business Aircraft predicts up to 8,300 new business jet deliveries representing approximately US$250 billion in industry revenues from 2016 to 2025 in the segments in which it competes. Bombardier Business Aircraft expects North America will account for the greatest number of new business jet deliveries between 2016 and 2025, with 3,930 aircraft, followed by Europe, which remains the second largest market with 1,530 deliveries expected between 2016 and 2025. Business jet finance is a niche field in which private wealth banks (eg, Credit Suisse, UBS, Bank of America and Citibank) and specialist asset financiers (such as Global Jet Capital) tend to predominate, though export credit (and now AFIC Insurance) is also available.


An annual financing requirement of US$140+ billion is a daunting target by any standard, but the aviation finance community has proved itself capable of meeting the challenge in the past, and will no doubt do so again, especially with new entrant capital. This is a robust, innovative and entrepreneurial part of the global finance community, working in a fast-changing sector, and can look forward with confidence to the next 20 years. Each chapter of this book will examine the legal context within which this community works.

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