Money talks

Boeing Capital is confident in future investment from the Middle East as the region continues to order more aircraft.

While turbulence in the global financial markets is raising challenges for plane giant Boeing, its financial subsidiary Boeing Capital Corporation (BCC) is banking on orders from the Middle East - the only region set to continue its insatiable appetite for new aircraft orders.

Boeing recently announced a 7% drop in its revenues - declining to US$15.3 billion from $16.5 billion - due to a labour strike and supplier production issues. In its third quarter results, the company also revealed that earnings per share declined 33% to $0.96.

However, Boeing's management says its backlog of orders is secure, as 90% of demand comes from outside the US.

The BCC says it is still confident for the future and that many opportunities exist for Middle East investors. The region has an increasingly important role to play as a new source of capital for aircraft financing and BCC is looking at changing its model of financial development to fit in with the region's rapid growth.

"We recognise that the Gulf's rapidly developing financial markets are becoming important centres for aircraft finance and there are significant opportunities for willing financiers in the region to invest in long-term and mobile assets," John Matthews, managing director of BCC's Middle East and Africa region, explains.

"We have worked with regional investors to make them more comfortable with airplanes as an investment class, and to see the advantages planes offer when compared to alternatives."

As Boeing's aircraft financing unit, BCC oversees all commercial products and services. "Investors who have capital available and are willing to enter the aircraft financing market will find much less competition now," says Matthews.

"Investors can take advantage of short-term financial market dislocations to enhance the returns of their longer-term aircraft portfolios. From my perspective we have certainly been encouraged by the growth in the Middle East and to a lesser extent by the growth in the economies of Africa. Various countries on the continent are improving (Kenya, Nigeria, South Africa) and they are able to order more aircraft as a result."

The role of BCC is to research lines of credit and provide options which allow airlines to purchase their products to keep planes moving. An important part of Boeing Capital's mission is to expand the markets.

"It is true the more financiers we can get into the marketplace the more funds there are available for our customers and the more efficient the market will be," Matthews explains. "We call roundtables to get financiers comfortable with discussing aircraft and the asset class to try and get them on a level."

One of the ways BCC is helping clients to finance aircraft is by partnering with Islamic financial institutions to broker finance deals compliant with Sharia law.

This requires assets and BCC believes aircraft are ideal for this type of structure. "Aircraft are ideal for Islamic financing, since a fundamental criterion is that such investments be asset based," Matthews says.

While Boeing Capital cannot administer Islamic finance itself, it has vast contacts in the area. The company's latest focus is to see if aircraft financing can be included in the Islamic Sukuk, or bond market.

The finance structure is based on a recent transaction in which an Islamic financier secured a mortgage portfolio in the Sukuk market, similar to how aircraft investments are structured in the US using a security instrument known as the Enhanced Equipment Trust Certificate (EETC).

"There have been a few aircraft deals done Islamically and although this is not quite as large a segment as we'd like it to be, it seems there has been a slight increase and we would like to continue," says Kostya Zolotusky, managing director of markets development at BCC.

"We want to get airlines to work with Islamic banks, as that provides them with finance. If they are willing to adopt this financial approach then it makes it more competitive."

Emirates has already financed two 777 aircraft in such a way, worth around $250 million. "Other carriers have done Islamic financing from time to time but that is the most recent and largest I have seen," points out Matthews.

BCC's perception is that the Middle East is doing better than other parts in dealing with the effects of the credit crunch and they are looking to get investors in the region to put their money into purchasing aircraft.

The company is also scouting the Middle East for other means of investment. "We are looking at all sources of funding," Matthews says.

"Regional banks in the Middle East have not been affected and they will put down a significant amount for local deliveries. So there has been regional banking to ensure there is adequate availability of capital for aircraft finance."

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