For many years Africa has been seen as a high-risk investment. Access to structured finance has been hard to break through, but are things changing? From modernising fleets to introducing new business aircraft, international markets are responding.
With this background, an industry panel discussed a number of questions about aviation finance on the last session of the first day.
Leonard Favre, managing director of 1Blue Horizon Group, moderated the session with Graeme Shanks, vice president sales, Middle East and Africa, CIT business aircraft finance, USA; Oliver Tebbit, partner Clyde and Co, UAE; Firoz Tarapore, CEO, Dubai Aerospace Enterprise (DAE) (pictured), UAE; and Moulay Omar Alaoui, president, Palma Holding and International Airfinance Corporation, UAE.
Favre started with a famous joke: “If you are a billionaire, and want to become a millionaire, how do you do it? Start an airline!”
So why would anyone invest in the aviation industry?
He said Africa's economic growth is accelerating. GDP has increased four percent annually over the last decade, compared with 2.2% per annum in the 90s, and by 2020 the total African workforce will exceed that of China.
But Favre said that there is still an impression that is difficult to get financing for aircraft in Africa.
Graeme Shanks, CIT business aircraft finance, said that finance is out there for companies and individuals who want to buy aircraft.
“There is money available, depending upon an organisation's assets and liquidity,” he said.
“We will take a conservative view on the value of the aircraft over a period of time and make an offer accordingly.”
He added that as its money rests in the aircraft the bank is keen to ensure that it is well serviced and looked after.
“Having a snatch-back arrangement in place gives us more confidence in supplying finance. A lack of an established financial track record can also cause problems,” he said. “And on an ongoing basis, does an operator have sufficient income available to make its payments?”
Oliver Tebbit, Clyde and Co, said banks look at credit risk as well as asset risk. “New airlines look particularly risky for financiers,” he said. “The Cape Town Treaty, and its aircraft protocol, which was drawn up in 2001, allows for a uniform methodology for looking at assets.
“This offers a much more predictable approach to asset security and it really helps to quantify an asset's risk.”
He said that countries that have ratified the Cape Town agreement generally have strong aviation industries.
“More companies are ratifying Cape Town each year and benefits can be gained very quickly,” he said.
Firoz Tarapore, CEO, Dubai Aerospace Enterprise (DAE), said it had clients in 20 countries and works mostly in the dry lease business.
“Being based in this part of the world, our clients are from many emerging economies. Africa is probably our least penetrated region.
“In jurisdictions where they have adapted the Cape Town agreement it works better for us. It is easy for countries to start an airline, but once it starts, cash-flow issues can come into play.
“Once we make a decision, it is legally binding for 12 years, so we have to make the best judgement we can. One of the things we spend our time on is an airline's strategy – has it chosen the right fleet and the right routes?
Moulay Omar Alaoui said that South African Airways has a fleet age average of nine years. But go to Air France and the average fleet age is 13 years. In the USA it is even older.
“What is important is not the age of an aircraft, but the number of cycles and the way it is maintained,” Alaoui said. “It is not just the asset that is important, but the quality of the airline and its management are equally important – it is a package.
“The financials of many African airlines are better than many other regions and their management teams are very impressive.”
Oliver Tebbit agreed and added that most operators in this region like to have a mix of conventional and Sharia-based Islamic funding.