Providing finance when the banks can't

Some prudent financial planning by BOC Aviation's CFO Thim Fatt Phang allowed the company to capitalise on the downturn.
Thim Fatt Phang
Thim Fatt Phang

There were few aviation success stories last year. BOC Aviation was one of them.

The global downturn hit everybody where it hurt -- in the chequebook. Some once-big names declared bankruptcy (Japan Airlines this January) and losses at others required major state-backed capital infusions (China's big three). In total, the International Air Transport Association (IATA) estimated airlines globally lost $9.4 billion.

While the airline industry bled cash and aircraft financing from banks dried up, Singapore-based BOC Aviation had a record year. In 2009, the company, which leases aircraft to airlines around the world including Australia's Virgin Blue, Hong Kong's Cathay Pacific Airways and the US's Alaska Airlines, bought more aircraft than it ever had in a single year -- increasing its fleet by 50 planes to 142 -- and reported a record profit of $137 million, up 28% year-on-year.

"In our previous financial planning, we anticipated there might be a downturn," said Thim Fatt Phang, deputy managing director and chief financial officer of the company. "Last year, we were able to take advantage of this planning."

A good plan it was. Airlines are notorious for ordering during market upturns and taking delivery of aircraft in the downturn, however in 2006 and 2007, about the time Phang and his finance team decided to plan for a market downturn, most experts predicted only big things for Asia. Passenger numbers in China and India were growing annually by double digits, airlines could not order enough planes and US carriers were fighting over route authorities to China. Considering the backdrop, Phang's decision was quite prescient.

"In 2008, we sold quite a number of aircraft and we had arranged liquidity at hand so when the [liquidity] dislocation took place in the first quarter of last year we had sufficient liquidity to go in and do purchase and leasebacks with the better credit airlines," he said. "In better times, they would have been able to obtain loans from banks, but at that point in time, liquidity was very tight."

"We were glad that we had liquidity at hand."

A purchase and leaseback agreement is when an airline sells an aircraft to a creditor, typically a leasing company or financial institution, for an upfront lump-sum payment and immediately leases it back. The deals are strictly financial in nature and planes typically never leave the airline's service.

At the end of last year, BOC Aviation had $175 million in cash and $1.3 billion in backstop lines on-hand. A net increase over 2008 when it had $184 million in cash and $855 million in backstop lines.

Phang was originally seconded to Singapore Aircraft Leasing Enterprise (SALE) from Singapore Airlines in 1996 before he became CFO in 1999. SALE was renamed BOC Aviation in July 2007 after Bank of China purchased the company. Today he oversees a team of 17 Singapore-based finance professionals split into finance and accounting, portfolio management, tax and treasury functions.

While BOC Aviation's expanded aircraft portfolio was the main driver of profit growth last year, the company's treasury played an important role. "The profit increase was principally due to the increase in our aircraft portfolio," said Phang. "Treasury contributed by reducing our interest via effective hedging of interest exposure [and] by using cash very efficiently."

"Our biggest exposure is to interest rates because we borrow at floating rate and when we price our aircraft leases they can be either a floating-rate or fixed-rate rent," he explained. "This is exposure that we have to manage. For instance, in the current environment more airlines want to have fixed-rate rents but that creates an exposure for us. For a fixed-rent term of 10 years, we've got to do the hedging so the question is how far [forward] do we want to hedge." Phang added that a fixed-rent lease could also affect an aircraft's sale price if the company decided to sell it with the lease attached.

All of BOC Aviation's aircraft are priced using the London interbank offered rate, better known as Libor.

Managing interest-rate exposures, in addition to cash, is the domain of BOC Aviation's treasury. Working with banking partners Citi and HSBC, Phang said the Singapore-based centralised treasury function conducts all of its trading and cash management through both institutions' online portals. Internally it uses a system from vendor Sungard.

Looking ahead, Phang said he hopes 2010 will be as good a year as 2009, but acknowledged competition will be stiff. "The banking market has improved considerably since 2009," he said. "With the improvement in the banking market, airlines and competitors have access to this market for financing again."

"Even though more banks are coming into the market, there are a lot of aircraft scheduled for delivery between now and 2012," continued Phang. "The airlines still need a lot of financing." And with manufacturers targeting over 1,000 commercial aircraft deliveries this year -- on par with totals from the past few years, but up considerably from a decade ago -- demand for funding will undoubtedly remain strong. 

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