Emirates Airline seeks more flexible financing


Emirates Airlines will be increasingly using operating leases for financing its new aircraft and is "actively contemplating sale and leasebacks" to help phase out its old fleet, Emirates Senior Vice-President -Corporate Treasury, Brian Jeffery, said at an airfinance conference in Dubai this week.
The airline is also considering accessing the Islamic finance market more often.
'The use of operating leasing is very important. We need to take less asset risk,' said Jeffrey, adding: 'When replacing aircraft, flexibility is very important. We probably won't be doing too many tax leases in the future unless they give flexibility.' He said the airline would like to be in a position where 50 per cent of aircraft are on balance sheet and 50 per cent are off (ie operating leasing). Today, operating leases comprise 30 per cent of the aircraft portfolio, compared with 18 per cent 10 years ago.
Emirates requires diversified sources of funding with 170 aircraft set for delivery between now and 2012. Over the past 10 years, the airline has raised $12.2 billion worth of finance, of which operating leases comprise 29 per cent, commercial finance 27 per cent, bonds 11 per cent and Sukuks (Islamic bonds) 9 per cent. 'We tend not to use bond financing for aircraft but for corporate purposes,' said Jeffrey. 'We will continue to use bonds as a source of financing but we are unlikely to be issuing new bonds for at least 18 months to two years,' he continued.
Increasingly, too, Emirates is being asked to tap the Islamic finance market. 'We will tap it in the near-to-medium term,' he said. To date, the airline has raised over $1 billion through Islamic funding and six wide-bodied aircraft have been financed this way, on a variety of structures with long-term tenors. But getting long-term tenors is not easy. Getting a '10-year tenor is hard and a 12-year tenor is very difficult,' he said.
As to whether the airline will seek a rating, Jeffrey said: 'Emirates prefers not to be rated, but we must consider all sorts of financing. We will not rule it out.' He said that option would be weighed up against the cost of acquiring the rating and administering it.
The airline also holds a $3.13 billion cash balance to cover unforeseen emergencies, enough to service debt for six months, including lease rentals. 'This is maybe too low and we would like to increase this to a nine-month balance,' said Jeffrey, citing the impact of SARS on Cathay Pacific, which suffered between six to eight months of zero cash flow.
Jeffery also said that Emirates is 'increasingly looking to the Far East for funding sources.' It already accesses finance through lessors and banks throughout the GCC, US, Europe and Asia. He also dismisses any argument that running an airline in the Middle East is a risky business saying:  'Throughout all crises we have maintained a rate of increase in profits.'
Industry's 'regulatory regime has to change'
Speaking earlier at the airfinance conference, secretary general of the Arab Air Carriers Organisation (AACO), Abdul Wahab Teffaha, said the regulatory regime of the region's airline industry needs to change, to allow a wider ownership base and to enable airlines better operational efficiencies. He said: 'The intra-Arab market is opening up but the pace is slow. It needs political resolve to go beyond the stalemate.' He also maintained that restrictive pressures would increase.
The issue of government subsidies to airlines across the region would 'pop-up soon,' he continued. 'Its remedy is in levelling the playing field and in privatising the airlines.' He also insisted that airlines across the region needed to consolidate saying that 'in spite of some moves for airlines' privatisation, governments are still far from a necessary decision on ownership which would enable consolidation.'  Environmental concerns will also affect the growth of the air transport industry, he said.

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