The UAE's airlines are considering the use of Sukuk to finance new 'plane purchases according to a senior executive for Boeing.
The concept of aviation financing carried out through Islamic finance is not new, as Qatar Airways has already been down this road with its 2007 seven year Ijarah Sukuk from Qatar Islamic Bank to finance an order from Airbus for the aerospace firm's A340-600s.
Qatar Airways also used Sukuk to finance a $150m order for Boeing 777-200LR airplanes. The syndicate, led by Standard Chartered included Bank Islam and Maybank of Malaysia, DBS and Islamic Bank of Asia from Singapore, Sumitomo Mitsui Bank of Japan and Qatar's own Masraf Al Rayan. The deal also incorporated a Tawarruq cash facility, creating a pool of collateralized liquidity for the airline.
The new pique in interest from UAE airlines has come as a result of the conventional aviation finance route drying up in the face of the eurozone crisis and US budget impasse.
UAE budget carrier flydubai has financed its immediate needs through the conventional route, but CEO Ghaith al-Gaith (pictured) sees this changing in the future as global financing becomes tighter in 2012. It was rumored at the recent Dubai Airshow that flydubai will be looking to expand its fleet with the purchase of Airbus A320neo and the Boeing 737 MAX 'planes and may have to look to alternative lenders for its financing requirements.
Boeing is supportive of the Islamic banking sector's move into aviation financing. Mary Bentrott, Boeing's senior vice-president for international sales, said at a news conference that: "We have had a lot of detailed discussions with flydubai...European banks have tended to be sources of funding for commercial aircraft, and we'll have to see if the eurozone problems change that position."
She continued: "We're looking at alternatives such as Islamic finance, banks from Japan and [China's] Exim Bank."
Emirates airline is also considering Islamic financing. Tim Clark, president of Emirates airline, said to a news agency: "We were planning for finance from European banks, but it's [going to be] a bit difficult now." Nevertheless, Emirates announced its intention to order 50 Boeing 777-ER 'planes worth $18bn at the air show. This would be the largest order in Boeing's history.
Ahmed Bin Saeed al-Maktoum, president of Dubai Civil Aviation and chairman of Emirates Group, said at a news conference: "The financing is secured. We [will be] financing conventionally, as well through Islamic bonds. This order is expected to be delivered from 2015."
This won't be Emirates' first Sukuk, as in 2005 the airline closed a seven-year Musharakah Sukuk at $550m, receiving subscriptions of $824m. The Sukuk was oversubscribed by about 50% and was the single largest corporate Sukuk issued at the time.
The most popular structure used in Islamic aviation financing is Ijarah, however.
© The Islamic Globe 2011
