Islamic financing set to increase

• Text size
•  
•  

With local investors coming back to the market, Islamic financing will become an important element in the aircraft industry in the Middle East, according to a senior BoeingBoeing executive.

"We believe aircraft are ideal for Islamic financing institutions as they are longer, global and flexible assets," John Matthews, Managing Director-Middle East and African Region, BoeingBoeing, told Emirates Business.

"We think there is a large pool of potential capital that has not been tapped too much so far in this region.

"And since aircraft are good assets for Islamic financing, we are hopeful that working with local financiers we can find a way to tap into that part of the market."

The aircraft manufacturer, with $6.5 billion (Dh23.87bn) worth of global portfolio of aircraft financing, expects the aircraft financing requirements of Middle Eastern airlines such as EmiratesEmirates, Etihad, Qatar AirwaysQatar Airways and budget carrier flydubaiflydubai in 2009 and 2010 to be "substantial" going forward.

"It would be quite a substantial financing requirement - billions and billions - with EmiratesEmirates, Etihad, Qatar AirwaysQatar Airways as well as budget carrier flydubaiflydubai having huge aircraft orders," said Matthews, adding he did not have exact statistics.

He said the Middle East accounts for about "one-third" of BoeingBoeing's total deliveries.

"The region continues to grow. The financial requirement goes along with the orders," said Matthews. "It is encouraging to see more and more local banks participating in transactions."

Islamic transactions
He cited an example from last year when some Islamic banks, such as Noor Islamic BankNoor Islamic Bank, did two Boeing 777 transactions for EmiratesEmirates and one for Etihad, "which were sizeable Islamic financing transactions for aircraft".

Another example is of DAE CapitalDAE Capital with 100 Boeing aircraft on order. A recent case is the joint venture between National Bank of Abu DhabiNational Bank of Abu Dhabi and German bank DVB for $1bn CHK financing.

"So there is certainly increasing activity in this area and we are hopeful that it will continue to increase. This is a part of the indication that we think the market might be picking up," said Matthews.

"BoeingBoeing does a lot of things in the region to encourage local financiers to become more active. A part of our mandate at Boeing Capital is to expand the market for financing.

"Historically, though, there has not been as many aircraft financed by the way of Islamic financing in the Middle East. Not so much now with oil prices going down and the downturn in the economy.

"But we are hopeful that as the economy recovers and oil prices stabilise, we will be able to either encourage people who are already in the market to be more active, or help people who are thinking about getting into the market to get comfortable with aircraft as assets."

Growing demand and traffic
According to BoeingBoeing's 2009 market outlook, airline industry growth in the Middle East is expected to continue over the next 20 years. The outlook valued the Middle East market at $300bn over the next two decades, which translates into the need for 1,710 commercial jets.

BoeingBoeing has a current backlog of $260 billion of aircraft.

"We are working with our customers to understand the situation. There clearly is global tightening of demand, but what is unique about this region is that air traffic is not falling," said Matthews.

"And therefore, demand for more aircraft is not falling," added Kostya Zolotusky, Managing Director of Capital Markets Development at BoeingBoeing.

The aircraft manufacturer had estimated at the beginning of this year that it might end up funding about $1bn in financing during 2009.

"It looks like we would be funding less than that, which is a good thing from our perspective," said Matthews.

"However, it is too early to project financing needs for next year," said Zolotusky.

BoeingBoeing's orderbook has changed quite a bit from what it was in the past, according to Matthews. "It used to be predominantly North America and Europe. Over the past couple of years it has changed substantially, and is much more balanced now geographically, and the Middle East has become a very important part of our orderbook," he said.

Pricing dynamics
The market for aircraft financing has been challenging over the past 18 months or so, said Matthews. "The pricing is improving and it continues to improve on almost a daily basis," he said.

"Along with prices, even liquidity in the market is improving. If we look at where we were a year ago, we are in a better place today," added Zolotusky.

Commenting on recent talks about how aircraft manufacturers are offering clients hefty discounts on plane prices, Matthews said: "There is always a little discounting, but beyond that I cannot disclose anything on the level of discounting."

Middle East airlines have benefited greatly from the export credit resources of the Export-Import Bank of the US, said Matthews. "The bank, mostly through loan guarantees backed by US Government credit, provides airlines buying US jetliners an attractive financing alternative," he said.

BoeingBoeing already has a spares centre in Dubai, but has no plans to have additional centres, said Matthews. "There are potential new joint ventures we are looking at. But there is nothing at the moment that we are ready to announce," he added.

BOEING-MASDAR study
BoeingBoeing is teaming up with Honeywell's UOP and the Masdar Institute of Science and Technology in Abu Dhabi to commission a study on the sustainability of a family of saltwater-based plants for renewable jet fuel.

Masdar Institute will lead the study, BoeingBoeing said yesterday.

The study is aimed at examining the overall potential for sustainable, large-scale production of biofuels made from salicornia bigelovii and saltwater mangroves - plants known as halophytes.

"In terms of the UAE, it would provide an additional significant source of biofuels that would allow the UAE to transition into a less fossil fuel-dependent economy," Dr Sgouris Sgouridis of Masdar Institute said.

By Shweta Jain

© Emirates Business 24/7 2009