Flight financing: how Political Risk, Credit & Bond facilitates the financing of new aircraft

Authored by Eric Zandvliet, Head of Political Risk, Credit and Bonds for France and Benelux at AXA XL

The aviation industry was one of the hardest hit by the COVID-19 crisis as thousands of flights were grounded and people unable to fly. But over the course of the pandemic, investment in new aircraft has continued, driven in part by a need to replace aircraft with more efficient models as the industry works towards reducing its greenhouse gas emissions. Eric Zandvliet, head of Political Risk, Credit & Bond for France and Benelux at AXA XL, discusses the role PRCB coverage plays in facilitating investment in new aircraft and helping the aviation industry prepare for the post-pandemic recovery.

The COVID-19 pandemic had a very immediate and visible effect on the aviation industry. As governments put in place restrictions on the movement of people to try to curb the spread of the virus, airline fleets were grounded, and many thousands of flights cancelled. According to aviation data firm Cirium, air passenger traffic fell by 67% in 2020 compared with 2019 and airlines cut flights by almost half – 49% - to 16.8 million during 2020 from 33.2 million the previous year.

But even while flights were grounded, investment in and delivery of new aircraft could not – and did not – stop. Not only had many airlines already signed contracts for new planes, the fact that it can take about six years for a new aircraft to be delivered, meant that airlines had to continue with plans to buy new vehicles in anticipation of a return to frequent flying in the coming months or years.

During this period when fewer planes were flying, it made economic and strategic sense for many airlines to retire older aircraft and continue to take delivery of newer planes. The aviation industry, like many others, has been set ambitious targets for reducing greenhouse gas emissions. For example, as part of the European Commission’s ‘Fit for 55’ package of proposals aimed at achieving the EU goal of reducing greenhouse gas emissions by 55% in 2030 compared with 1990 levels, the ‘ReFuel EU Aviation’ proposal introduces targets for the use of sustainable aviation fuels and synthetic aviation fuels between 2025 and 2050. As part of their efforts to meet emission-reduction targets, many airlines have plans to take older, less efficient aircraft out of service and replace them with newer models which consume less fuel.

This investment, however, was taking place against a backdrop of considerable uncertainty. There was no definite end point to the pandemic in sight and no guarantees as to when many flights would be permissible or commercially viable. Insurance coverage played a hugely important role here. Political Risk, Credit & Bond insurers stood by the aviation market during this challenging time and continued to support aircraft deliveries at a time when financing capacity was constrained.

Routes to recovery

Willie Walsh, director general of the International Air Transport Association (IATA), this month said that the airline industry’s losses are predicted to be about $11.6 billion in 2022, contributing to a cumulative loss of slightly more than $200 billion over the three years of the COVID-19 crisis.

But he also said that, while the airline industry will likely be smaller in future than before COVID-19, it is now over the worst of the pandemic’s effects and he highlighted the resilience and competitive nature of the industry.

According to a recent white paper by McKinsey on the future of the aviation industry post-COVID-19, aircraft original equipment manufacturers are now ramping up production in anticipation of an uptick in demand for new planes.

The role of PRCB

Investment in new aircraft is big money. According to the non-profit Air Transport Action Group, the world’s airlines purchased 12,000 new aircraft between 2009 and 2020 at a cost of $3 trillion.

Airlines wishing to buy new aircraft can at times face capacity constraints as many financiers, such as large international banks, already have a relatively big exposure to major airline carriers. Airlines in emerging markets too may face capacity challenges. To help solve this problem, we worked as part of an insurer panel, alongside Airbus, a leading insurance broker and a legal advisor, to develop a non-payment coverage to facilitate the sale of new Airbus commercial aircraft.

Typically, credit insurance is purchased by a broker on behalf of a lending bank and this is not disclosed to the airline borrower.

As part of the consortium, we developed a new insurance-backed aircraft financing solution, known as Balthazar, under which the original equipment manufacturer – in this case Airbus – actively markets the insurance panel’s capacity and pricing to its airline customers and to a pre-agreed selection of aviation banks. This means the existence and the pricing of the policy is disclosed to both the airline and to any other approved banks that might wish to join the banking syndicate, increasing the competitiveness of the aircraft financing portfolio and making the solution cost-effective for the client.

Moving forward

As the French author and pioneering aviator Antoine de Saint-Exupéry noted, “a goal without a plan is just a wish.” As airlines work towards their goal of recovering from the COVID-19 crisis, resuming flights and meeting greenhouse gas emissions targets, we expect to see continuous increased investment in new aircraft.

According to data from Cirium, the nine months to September 2021 saw 902 new gross orders, compared with 672 for the whole of 2020.

Not only are airlines replacing older planes with newer models, many large airlines have announced investments in start-ups and technologies that are exploring the potential for zero-emission aircraft powered by hydrogen and electricity, for example, that they hope could be capable of making longer distance commercial flights in the not-too-distant future.

As airlines continue to ramp up their investment in new aircraft, we expect to see increased demand for PRCB solutions like Balthazar. The insurance market has an important role to play in helping the aviation industry recover from the tumultuous years of the pandemic and look towards a brighter, greener future.