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No frills airline AirAsia turn to Islamic finance for aircraft financing

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Points of Essence:

  • Unperturbed by the prevailing credit crunch, Air Asia, the largest Asia’s low cost airline continues with its expansion plans. It found support in the Islamic finance as it sought US$336mil (RM1.21bil) in the form of syariah-compliant French Single Investor Ijarah facility to fund the purchase of 8 new aircraft. The Ijarah facility features RHB Islamic Bank Bhd and Bank Rakyat as two of the arrangers. The French based BNP Paribas and Natixis Transport Finance are the lead arrangers. The first of its kind deal, the Islamic French-Malaysian transaction marks the venture of Malaysian financial institutions in the business of aircraft financing which may further stimulate the promotion of Malaysia as the hub of Islamic financing. The Star has the story.

By CECILIA KOK

JUST when it seems almost impossible for airlines to obtain financing to buy aircraft these days, given the prevailing credit crunch, AirAsia Bhd has once again defied market trend.

The budget airline has announced some major financing deals that it has secured for the 2009 and 2010 deliveries of its aircraft order since late last year. These include the US$336mil (RM1.21bil) syariah-compliant French Single Investor Ijarah facility, whose lead arrangers are BNP Paribas and Natixis Transport Finance, for the purchase of up to eight new aircraft; and a deal with Barclays Capital – the investment banking division of UK-based Barclays plc – to finance the purchase of 15 new planes worth US$700mil (RM2.5bil) for delivery up to early next year.

According to AirAsia head of corporate finance Aireen Omar, the group had acted swiftly prior to the height of the global economic crisis to lock in deals that offer competitive terms to ensure that its orders of new aircraft can be delivered as scheduled.

“Timely delivery of aircraft is critical for AirAsia to meet its projected expansion growth,” Aireen explains.

Growing business

AirAsia has been expanding its services and adding on new routes to grow its business even as other airlines are scaling back and reducing flight services due to the current economic slowdown. AirAsia and its sister company AirAsia X have been seeking to launch new destinations not only within the region, but also to as far as Europe and the US.

AirAsia’s expansion trail has also made the group one of the world’s largest customers for Airbus. In December 2007, AirAsia placed an order for 175 A320-200 aircraft, with an option for 50 more.

Deliveries of these aircraft are expected to run up to 2014. Thus far, 56 units have been delivered to AirAsia, with 14 more units to be delivered this year and 24 units next year.

Having already secured financing for its aircraft order for deliveries up to 2010, Aireen says her focus now is on finding cost-effective financing for the remaining new aircraft for deliveries from 2011 to 2014. However, she does not want to reveal the amount of financing needed for the remaining aircraft orders.

“We are exploring all options to ensure that we secure good deals,” she says.

Aireen foresees that securing aircraft financing for AirAsia for 2011 and beyond will not be as tough as it had been for 2009 and 2010 – the years regarded as the most challenging in the face of the current economic downturn, where the aviation sector seems unprofitable to the point of being vulnerable.

Financial institutions have been extremely cautious when it comes to extending aircraft financing during this period, and they have now become more client-centric and selective in their lending, Aireen explains.

“But the fact that we have managed to secure financing even in the toughest years of this downturn reflects the confidence that the international financial community has in our business model – as one that is thriving and works through the hard times,” she says.

Also, working to AirAsia’s advantage is the support that it has from the Export Credit Agencies of Britain, France and Germany. Being a major customer of Airbus (an European company), AirAsia’s growing business will ultimately translate into the economic well-being of the region as well.

Local role

Going forward, Aireen says she hopes that more local financial institutions would be able to play a bigger role in supporting AirAsia in the area of aircraft financing.

“AirAsia is a local brand that is growing globally … it will be nice if local banks can grow together with us and build new skills in an area that is globally in demand,” she says.

In AirAsia’s recently secured French Single Investor Ijarah facility, RHB Islamic Bank Bhd and Bank Rakyat were featured as two of the arrangers.

The deal is the first Islamic French-Malaysian transaction of its kind and signifies the foray of Malaysian financial institutions in the business of aircraft financing.

Aireen believes that aircraft financing is a venture worth exploring for the local financial institutions. She feels that there is huge potential in the business, particularly in the area of Islamic financing structure to further promote Malaysia as the hub of Islamic financing.

On whether AirAsia’s future financing deals would feature more involvement from local financial institutions, Aireen says she is very positive about it.

“We are currently trying to work out a viable structure with some local banks to see how huge volume of finances can be taken out, so that they won’t come in to finance just one or two aircraft, but they can take a whole year’s aircraft,” she says.

Indeed the business of aircraft financing is complicated and risky, but it can be very lucrative if conducted properly. In addition, this could probably revolutionise the Malaysian financial sector.

Source: http://www.thestar.com.my

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Written by Suapi Shaffaii

April 4, 2009 at 1:22 pm

Posted in General Issue

Tagged with , ,

One Response

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  1. very good have nice day

    domainscom

    April 5, 2009 at 12:08 am


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