Crash in aircraft premiums set to impact airlines

Bangalore: The aviation industry’s cup of woes runneth over. As if raging oil prices and falling demand due to rising fares were not enough, airlines are now facing erosion in the premium on planes they ordered for sale and leaseback deals.
Under a sale and leaseback deal, airlines sell their aircraft to a second party and then lease it back for a certain period, thus freeing capital. Many airlines in India have already ordered aircraft for future sales and leaseback deals. However, with falling premium, they may have to settle for lower earnings than they had expected from these deals.
An analyst with an Indian broking firm pointed out that just some time ago, high aircraft prices were getting airlines good premium through sale and leaseback deals. “With this erosion, that income would fall. Airlines are starved for capital and this is another blow,” says the analyst.
The drop in premiums hasn’t been quantified yet, but Parthasarthy Basu, the chief financial officer (CFO) of low cost carrier SpiceJet Ltd, pegs it at about 35%.
A May 18 report by foreign broking firm Citi’s analyst Jamshed Dadabhoy states that premiums on narrow body slots have fallen from $5 million a few months ago to $3 million today.
One way out for airlines that have already placed their orders would be delayed delivery. By deferring delivery slots, they can avoid being hit by a soft aircraft market, says an airline executive. Citi’s Dadabhoy adds that many low-cost carriers are contemplating this option. Meanwhile, most airlines are yet to assess the impact of the falling premium on their operations.
22/05/08 Praveena Sharma/DNA MONEY

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Categories: Indian Aviation- In General May 2008