Financial times

The range of finance packages aimed at the aviation industry is constantly increasing. Whilst traditional leasing methods maintain their popularity, the concept of Islamic finance is also on the rise, gaining the support of heavyweights such as Emirates Airline and the Dubai Department of Civil Aviation.

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By  Barbara Cockburn Published  October 10, 2006

|~||~||~|The range of finance packages aimed at the aviation industry is constantly increasing. Whilst traditional leasing methods maintain their popularity, the concept of Islamic finance is also on the rise, gaining the support of heavyweights such as Emirates Airline and the Dubai Department of Civil Aviation. The process of conventional financing involves a bank or other financial institution providing a loan, which must be repaid by the customer, together with a certain amount of interest. However, explains Andy Beyer, business development manager at Dubai Aerospace Enterprise, this procedure is not compliant with Shari’ah principles, as Islam prohibits interest being charged to customers. “To avoid this conflict, the financer owns the aircraft for the duration of the lease, but allows the customer to keep everything by paying rental instalments,” he says. During the early 1990s, the availability of Islamic financing was limited, with the aviation industry expressing some confusion about how the process worked. However, companies have since educated themselves about the benefits of purchasing aircraft through Shari’ah compliant packages. Indeed, with Middle East airliners expected to invest billions over the next decade to increase their fleets, experts believe the popularity of Islamic finance could potentially skyrocket. “Islamic financing has become very popular, not only in the Middle East, but worldwide,” says Chris Walsh, a consultant at the international law firm Ince & Company. “There’s been an explosion in demand for such schemes and the aviation industry is experiencing extra liquidity for the purpose of Islamic finance.” Walsh was involved in the legal aspects of Emirates Airline’s financing deals between 1990 and 1996. He claims that 85% of the international carrier’s fleet was financed at the time, with the remaining purchased through company profits. “Most aviation companies borrow money on a long-term basis to purchase their aircraft,” he says. “This creates opportunities for Islamic finance companies to capitalise on the market, especially in the Middle East, where the business community is more familiar with the concept.” Emirates has used Islamic finance on numerous occasions and believes the concept can provide a competitive alternative to traditional leasing packages. However, warns Nigel Hopkins, the company’s executive vice president for service delivery, companies need to educate themselves before commiting. “The learning curve for new users is steep, because of the structural issues necessary for Shari’ah compliance,” he says. “For Emirates, the standards for Islamic lease documentation have been established over the last couple of years and structuring is now relatively straightforward. One of the main issues is finding longer-term investments to match the maturities in traditional aircraft financing.” Although Emirates continues to use conventional financing methods, Hopkins believes it has been “in the forefront of sourcing Islamic funding in the aviation industry,” raising over US$1 billion to date. This includes over $600 million financing the acquisition of seven aircraft, as well as the first ever Sukuk (Islamic bond) held by an airline, valued at $550 million. “There are no specific restrictions in the aviation industry in terms of availability for Islamic funds, other than the usual credit review process,” says Hopkins. “It has become a reliable, sustainable source of funding and should help finance some of our future fleet expansions.” Emirates’ success provides an interesting case study for other airlines to analyse, highlighting the benefits that Shari’ah compliant loans can offer. Major international manufacturers, such as Airbus, have also flagged the market as one to watch. “Some carriers are known to have a mixture of financing vehicles, including Islamic financing,” says Justin Dubon, regional press officer at Airbus in the Middle East. “Over the years, Islamic financing has become more and more sophisticated in structure. Although Airbus does not normally get involved in aircraft financing itself, we believe Islamic financing provides customers with a competitive alternative to conventional methods. Perhaps, one day, we may even see a non-Middle Eastern carrier benefiting from Islamic finance too.” Rival manufacturer Boeing has created its own financing arm, Boeing Capital Corporation, aimed at providing customers with financing solutions for its products. “Airlines in the Middle East use global sources of financing, in addition to region specific opportunities, such as Islamic financing structures,” says John Matthews, Boeing Capital Corporation’s managing director for the Middle East and Africa. “In fact, for the most part, airlines select Shari’ah compliant financing to diversify their funding sources.” Aviation companies typically base their decisions regarding financing on the cost and availability of deals, as well as individual balance sheet requirements. Once the airline’s application has been evaluated by a financial institution, it is accepted or declined based on several different factors, such as debt-to-equity ratios, business performance and, most importantly, the quality of airplane being financed: good airplanes equal good financing. “Since aircraft are excellent assets to finance, you find that Islamic investors are willing providers,” says Matthews. With the number of airline carriers considering Islamic finance on the increase, companies offering such deals to the aviation industry would benefit from upgrading their presence on the market. “There is still some mystery surrounding Islamic finance, which will change as more deals are struck and more players enter the market,” says Joel Hussey, head of direct global marketing at Oasis International Leasing. “However, it’s partly because of increased confidence and understanding that Islamic financing is making a strong showing now, which should continue well into the future.” ||**||

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