Othman Chaoui is an Aviation Executive, with over two decades experience in aircraft financing,
and extensive experience in Africa’s regional aircraft market. Here, he discusses strategies to navigate
African airlines through the challenging course of aircraft acquisition and fleet improvement.
Mr. Othman Chaoui, Aviation Executive & Aircraft Finance and Leasing Expert
The Best Approach For African Airlines To Finance Their Aircraft
The unprecedented COVID-19 crisis has been harsh for all airlines, but even more for African airlines as it has exacerbated their structural financial fragility. Some of them, essentially the State owned, have received government support through State guarantee loans or subsidies which so far has helped them survive the pandemic, but the majority remains extremely fragile and badly need urgent financial support to keep them alive. Sourcing financing to support fleet growth or renewal remains a significant hurdle to address, particularly when there is a lack of profitability.
Governments should play a role. They could work closely with their operators eager to source aircraft financing, by enabling a more favorable business environment and jurisdiction, including through charges and tax relief.
We saw a better appetite from some financiers to finance aircraft for African carriers recently; but overall, international banks still remain reluctant to finance acquisition of new aircraft in Africa. Typically, they evaluate credit risk in addition to assessing political risk.
More generally, financiers, as well as lessors, are assessing local jurisdiction, political stability, currency transfer including level of difficulty in repatriation of funds, potential barriers on insurance coverage policy requested by lessors or financiers, and level of country default, particularly when Sovereign Guarantee is required for State-owned airlines.
African airlines also need to play their role if they want to attract investors. They need to readapt their strategy in the light of this new global environment, build an attractive and sustainable business plan, including a realistic forecasted cash flow projection, a strong management and good governance as well as an adequate fleet plan.
High geopolitical instability and economic uncertainties call for reinforcing resilience capability, which means that business plan assumptions should consider various external shocks and breaking point scenarios. For instance, a conservative scenario provided by operators contribute to comfort investors by demonstrating capacity to anticipate te potential external shocks.
Operators should also be able to disclose annual audited accounts and recognized practice translated statements, when investors start to perform their due diligence process.
A thorough preparation, including providing a full and comprehensive information to financiers, can definitively help improve the airline business perceived risk.
Airlines must also look at different path to leverage sourcing. Despite the pandemic, investing in aircraft has remained attractive. Interestingly, we saw during this period many new entrants and new more diversified schemes of financial structure for aircraft acquisition. OEMs themselves have been developing new mechanisms together with insurance companies to replicate the export credit mechanism of the ASU (Aircraft Sector Understanding) to support airlines financing through premium reduction.
They could also tap into local banks or international banks subsidiaries which can play an important role through bridge financing, down payment or PDPs (Pre-Delivery Payments) for new aircraft financing.
How African Operators Could Overcome The Challenge Of Risk Assumption To Gain Access To Aircraft Finance
Indeed, risk connotation is an issue and, except for few carriers, prevent airlines from getting access to finance. In many cases, international banks are reluctant to finance acquisition of new aircraft in Africa or when they accept, they impose a high premium, which adds additional cost for airlines that are already struggling with various other cost factors, including operational costs. But things are changing. Over the last years, including during the pandemic, some investors and lessors, instead of following a generic view of the continent business environment, are now having a more granular approach, looking closer and locally to each of the 54 African jurisdictions.
Again, governments should take actions to support sustainable and profitable aviation development. These include for instance, removing the spare parts import tax, easing the transfer currency process and reducing the airport charges. Ratifying the Cape Town Convention is also a critical step towards a more favorable jurisdiction, one that is essential to raise potential investors and lessors’ appetite to finance or lease aircraft to the African operators. Ratification is however not enough. Implementation is key which means the Cape Town Convention be approved by local parliaments so that it takes precedence over local laws in case of conflict linked with aircraft repossession.
Regarding the particular case of State owned companies, governments should support the airlines as a referee or a guarantor to ensure a good and transparent corporate governance. This requires providing Sovereign Guarantee to ease the aircraft acquisition or lease new or young aircraft. It is also very important that the State, as the main shareholder, does not interfere on either the company’s management, or aircraft acquisition process and type evaluation.
One of the promising solutions to secure easier access to financing could come from local institutions – local banks or subsidiaries of international financial institutions. Typically, they have a better knowledge of the local environment and thus are in a more favorable position to assess and understand airlines’ profile, and eventually accept the associated risk, particularly for smaller airlines or new entrants.
The role of local banks and subsidiaries has been on the rise recently, but too few African banks are today involved on aircraft financing, surely not enough to meet the volume of finance needed in the continent.
In the medium term, a Pan African approach to establish a new aircraft leasing platform could be a promising solution. It would indeed enhance African airlines’ access to finance and reduce costs associated with aircraft acquisition through operating lease or aircraft financing. It will also help deal more easily with local constraints, including the possibility to deal under local currency and avoid the exchange rate risk. This approach currently under development by the African Development Bank (AfDB) and Afreximbank, together with several other players would help to meet the forecasted market demand over the next 15 years, and boost African regional connectivity.