AIG’s woes sends tremors down the aviation industry's spine
17 Sep 2008
Though the US Federal Reserve may have stepped in to take control of the world's largest insurance company, American International Group, by authorising the Federal Reserve Bank of New York to lend as much as $85 billion, it did have the aviation industry sweating uncomfortably for a short time.
The scenario of a potential collapse of AIG had briefly raised the spook for the global aerospace industry, given the insurer's debt problems, and its ability to find a buyer for the aircraft leasing arm, International Lease Finance Corporation (ILFC).
The two-year, $85 billion loan forces AIG to give a 79.9-per cent stake to the government which has the right to veto the payment of dividends to common and preferred shareholders. Additionally, AIG must sell off assets to raise capital to meet its staggering debts.
ILFC is one of the largest aircraft lessors in the world. It was also amongst the assets that AIG planned to sell to raise much needed $14.5 billion in cash to avoid its own bankruptcy, since it had the potential to raise an estimated $8 billion.
ILFC's involvement in AIG's woes has the potential to disrupt the global aviation business. If it gets overtly tangled in AIG's problems, its ability to maintain purchase and financing terms with bankers, lenders and manufacturers may be compromised, resulting in cancelled orders that would in turn impact civilian aircraft manufacturers Boeing and Airbus.
Boeing rates ILFC as a priority customer, given its 102 firm orders for commercial aircraft. Any trouble at AIG that trickles down to ILFC could see an impact on Boeing's order backlog that is 3,600 planes strong, and runs for more than six years. The backlogged order book is valued at $263 billion.
The story could be the same on the other side of the Atlantic, for Airbus, which is reported to have around 50 firm orders from ILFC.
Analysts say that any unwanted change to ILFC's credit quality would be a major risk for aircraft manufacturers, since weakening of credit would force the lessor to pay higher prices for the new planes. That in turn would result in involuntary cancellations.
That scenario would pressure the already stressed aviation industry, impacting manufacturers who are reeling from the winding down of the current aircraft-order cycle. Analysts suggest that by 2009, aircraft manufacturers' book-to-build ratio would come down below 1, with more planes being built than replaced in the industry's backlog.
The Wall Street Journal has reported that Steven Udvar-Hazy, ILFC chairman could mount an effort to buy back his Los Angeles company, which he founded 35 years ago. However, the final ownership issue could still be a story yet to be told.
