Boeing pushes Cape Town Treaty on aircraft transactions

PUBLISHED : Friday, 05 November, 2010, 12:00am
UPDATED : Friday, 05 November, 2010, 12:00am

Aircraft-maker Boeing has called on the aviation sector to unite behind the so-called Cape Town Treaty, which it says will help establish a legal framework for commercial aircraft transactions and make them easier to finance.

Based on an industry meeting in the South African city in 2001, the Cape Town Treaty is intended to standardise commercial transactions involving movable property, particularly aircraft and aircraft engines. About 35 countries, including China, have already signed the treaty.

Kostya Zolotusky, Boeing's managing director, capital markets development, said yesterday that the cost of financing aircraft deals would increase next year because both Europe and the United States were considering cutting export credit funding for aircraft to pre-crisis levels. This would include raising the margins, or effective interest rates, for export credits significantly.

Boeing believes capital markets, including bond securitisations, are the most significant and innovative way to finance aircraft, said Zolotusky.

However, an international framework agreement was needed, he said.

Aircraft securitised bonds, in which income generated by aircraft is paid as interest to bondholders, has been used by mainly US carriers since 1994. Up to 40 per cent of all new aircraft delivered to US carriers have been funded by securitised bonds since 2001, according to one estimate.

But the financing method had yet to be widely adopted by other countries, and only the United States had the solid legal framework to secure the rights of bondholders and creditors in the event of an airline bankruptcy, he said.

Export credit funding from the US, Germany, France and Britain has been a lifeline to the industry, providing liquidity to the sector after commercial banks pulled back from the aircraft financing market because of the financial crisis.

As a result, in terms of value, aircraft purchases that were funded by export credits exceeded commercially funded aircraft deals for the first time in 2010, Zolotusky said.

Some US$20 billion worth of aircraft, mainly manufactured by Boeing and Airbus, was financed by the government-backed funding and US$16 billion was commercially funded through debt markets in 2010, according to Boeing's findings.

'The commercial banks, which have sufficient money to lend now, are not happy and want the export credits to exit the market rapidly,' Zolotusky said.

One proposal was to make export credits significantly more expensive than commercial funding, he said.

Government aid

This is the value, in US dollars, of government-backed aircraft purchases made so far this year: $20b