Spreading wings

BANKING

HILTON S. CLARKE

Hilton S. Clarke is executive deputy chairman of Charterhouse Japhet and Xhomasson, and a director of the Charterhouse Group. He is a former principal of the Discount Office of the Bank of England.

Merchant banks and other institutions have re- cently become increasingly interested in the air- craft leasing market. This is seen as a growth market worth some £60 million during the next few years—and in addition should provide a useful shot in the arm for both the independent airlines and the aircraft manufacturers.

For the next five or more years the develop- ment and extension of private enterprise air services in the UK is likely to be influenced largely by the amount and quality of leasing finance that can be made available.

There are at present about thirty independent operators in the UK. This total includes not only major independents like BUA, but also helicopter operators as well as companies that are linked by common ownership. However, the industry as a whole is still in a state of flux.

Some companies are of recent formation, and it is yet too early to pronounce on the success their venture is likely to meet. Independents are also very prone to liquidations, mergers and re- groupings. For instance, the list of Airlines of the World, published annually by the magazine Aeroplane, shows that as many as twenty-three small UK companies either regrouped or went out of business between 1966 and 1967. Mr Alan Bristow, the chairman of BUA, has let it be known publicly that his company is prepared to consider expansion by means of the acquisition of smaller operators. What, therefore, the industry will look like in five or ten years' time is something of a matter for conjecture.

One important factor limiting the develop- ment of the independents is the difficulties of re-equipping with new, modern aircraft. Even if we leave aside questions of operational effi- ciency, it is obviously a strong marketing advan- tage to be able to advertise the availability of an up-to-date fleet. And, of course, the best of air- craft do have a limited operational life—an operator cannot exist indefinitely on a couple of Dc3s. The underlying problem in re-equipping for many of the independents is the weakness of

their balance sheets. Usually they are under- capitalised and often they are short of liquid cash. On the other hand, aircraft are expensive. Rightly or wrongly, the tendency of British manufacturers is to build aircraft to Rolls- Royce standards (compare, for instance, the cabins of a vc10 and Dc9), and this, of course, affects the selling price. The cash price for a BAC One-Eleven is about £11 million with spares, while a long-range aircraft such as the Super vc10 can cost over £3 million with spares. These are sums that cannot easily be raised by means of the usual banking facilities.

Currently the only real alternative is to lease aircraft. In the United States the growth of air transport has depended heavily on this form of financing. Needless to say, a variety of factors have contributed to the growth of us air lines, but the existence of relatively sophisticated financial facilities has enabled them to re-equip and expand more quickly than their British counterparts. As a result about one third of the world's operators- are now us companies. Not all of these are Pan Ams or Twas—in fact, some eighty operators have fleets of five or fewer aircraft.

In the UK, the leasing of aircraft is relatively new, since it is only during the last two or three years that strongly based financial facilities have become available. Prior to this a certain amount of leasing finance was available. Urn, for instance, had a specialist department—but the lessees were mainly private individuals or organisations rather than established airlines.

Several organisations are now active in the leasing market. They include some of the mer- chant banks, as well as organisations with an interest in HP finance, and specialists in the heavy equipment leasing field. The size of the leasing market among British operators is thought to be worth at least £60 million during the next five years.

The experience of the us finance houses has proved useful to the British organisations active in leasing. In particular, they now have con- siderable experience of assessing both the operational life and residual values of aircraft of different types and ages. One result of this experience has been to limit the range of British-manufactured aircraft considered suit- able for leasing. Unfortunately, not all British aircraft have a wide enough market for the owner to obtain a good resale price in the event of the operator's defaulting. Equally, it must be stressed that problem does not arise with many British aircraft—including, for instance, good sellers such as the BAC One-Eleven, the ns125 and the ns748.

Leasing does have definite attractions for British companies wishing to make use of the appropriate aircraft, largely because of tax con- siderations. As with any leasing operation, the lessee cannot eventually assume ownership of the asset and therefore cannot claim deprecia- tion allowances. He can, however, claim for leasing charges, and this can be a major con- sideration for the operator.

The cost of leasing will take into account the standing of the operator and, as already im- plied, the suitability—i.e. likely resale value—of the aircraft. The prime leasing period for air- craft in the ux. is between eight and twelve years, and a major independent wishing to lease a suitable aircraft for a fixed period of ten years could currently expect his leasing charges to include interest at a rate of about 81 per cent per annum. A less well-established operator might expect to pay somewhere more. In both cases, 100 per cent finance is available. No operator would be expected to pay in. terest at much more than 9 per cent since at this level it probably becomes cheaper for him to import an aircraft from the us and finance the deal through one of the cheap sources of us export finance, such as the American Export Import Bank.

Finance is also available from ux sources for imported aircraft, but in this case Bank of England permission has to be obtained. Equally, British finance companies can make arrange- ments for the leasing of a British aircraft by an overseas operator. Such an arrangement might also qualify for the preferential interest rate of 51 -per cent made available through the joint- stock banks. The tax advantage to the owner is that he can write off anew aircraft over four years, and can claim the tax loss. Unfortunately, no investment grant can be claimed as aircraft do not qualify for this type of assistance. By amending this point the Government—which has often professed its desire to help the aircraft manufacturing industry—could' materially en- courage British manufacturers.

The authorities could take other steps to stimulate home sales. For_ instance, a scheme similar to that operated by the Ship Mortgage Finance Company Limited could be introduced. The purpose of this scheme, which is backed by Treasury guarantee, Is to assist British owners to purchase ships manufactured in British yards by making loans on the delivery of a ship. This could be equally well applied to the aircraft industry. To ensure that it did not detract from overseas sales effort, a limiting element could be built into the scheme through the finance houses —for instance, a 'one-at-home-for-one-away' type of arrangement, whereby a home sale would qualify for a loan only when the provider of funds could show that he had recently financed a similar export sale also.