WEDNESDAY SEPTEMBER 19 2001 Aviation industry threat exposes banks BY CARL MORTISHED, INTERNATIONAL BUSINESS EDITOR BANKS and leasing companies were yesterday looking nervously at tens of billions of dollars worth of exposure to a global airline industry teetering on the edge of financial ruin. As the US Administration wrangled over a possible $24 billion (£16 billion) rescue for an industry threatened with bankruptcy, analysts pointed to the heavy exposure of banks such as Japan’s Fuji Bank, ABN Amro of The Netherlands and France’s Crédit Lyonnais.

A spate of insolvencies could also rebound on the top two aircraft leasing companies, International Leasing Finance Company (ILFC) and GE Capital.

Airlines are asking their bankers for extra funds, said analysts at Credit Suisse First Boston. “This creates a risk to those banks already exposed to the sector,” said CSFB.

Crédit Lyonnais has the biggest exposure in proportion to its reserves, the CSFB analysts said, lending some 2.2 billion (£1.4 billion) to airlines, representing 28 per cent of the French bank’s equity and core reserves. Fuji Bank is the biggest overall lender with 5.8 billion while Royal Bank of Scotland is the most exposed British bank, lending 1.8 billion, representing 9 per cent of its core capital.

Boeing and Airbus have firm orders to build 3,000 jet aircraft at a time when the industry is rapidly shrinking, cancelling services and shedding routes.

Such a dramatic contraction of the industry will damage aircraft residual values, posing a threat to the financial health of leasing companies and the banks that finance aircraft purchases. Air Claims, a leading aircraft valuation agency, said that millions of tonnes of aluminium hardware could be parked in the desert or even headed for the scrapyard. Air France said yesterday that it would scrap 17 planes early in an attempt to counter falling demand for capacity.

“The industry was in a pretty parlous state,” said Les Weal, chief analyst at Air Claims. “We know this is going to make it worse.” Mr Weal said it was too early to make definitive judgments but he said: “Before last week we were talking a 15 to 20 per cent fall over the past year in residual values. In the last 24 hours it could be another 10 to 30 per cent.”

Mr Weal added that the industry had just seen a dash for growth with record aircraft deliveries. According to Air Claims’ case database, ILFC and GE Capital together are on the hook for about a third of the Airbus order book. ILFC is also the number one buyer of Boeing aircraft with 218 aircraft on order.

One option for lessors and airlines may be to defer purchases. ILFC, which is owned by the insurer American International, would not comment yesterday.

According to Kieran Daly, of Flight International, an industry journal, the fall in traffic could be worse than during the Gulf War, when passenger numbers fell 28 per cent. “This is not just loss of confidence. It is fear. People are targeting airplanes.” The precedent could be alarming for leasing companies. GPA, then the world’s largest aircraft lessor, narrowly escaped bankruptcy when it was bought by GE Capital in 1993. Crippled by recession and the Gulf War, the company had commitments to buy 400 aircraft but was unable to raise equity finance.

http://www.thetimes.co.uk/article/0,,5-2001324238,00.html

-- Martin Thompson (mthom1927@aol.com), September 18, 2001

Answers

If 28% of the French bank's equity is in airlines, they are in deep doo-doo.

-- Big Cheese (bigcheese@multimax.net), September 19, 2001.