Obama sees an easy target in US aviation

By Victoria February 15, 2012 15:44

Obama sees an easy target in US aviation

Once again there is proof, if any were needed, that airlines when they start to perform well become nothing more than a taxation cash cow ready to be milked. And so it is that the White House now sees a chance to rake-in extra money from aviation. Airlines and their passengers would pay up to $32 billion in new air traffic and security fees over 10 years, and grants to big airports would fall sharply under White House budget proposals released yesterday under the banner of “deficit reduction”. The Obama administration wants major carriers, their passengers, business jets and airports to pick up the tab for infrastructure projects announced in the FAA bill last week.
Ideas quietly floated and then discarded during congressional budget negotiations last summer re-emerged in the fiscal 2013 transportation and homeland security portions of the White House budget sent to Congress yesterday. Under the proposal, ticket fees that help pay for passenger and bag security screening at more than 400 US airports would double to a mandatory minimum of $5 per one-way trip. The fee would jump 50 cents per year beginning in 2014, raising the total to $7.50 in 2018. The administration hopes the changes will yield between $9 billion and $25.5 billion in new revenues over 10 years.

The budget proposal would also permit the Homeland Security Department to raise the fee on its own – this is a worry for US airlines. The administration is also proposing a $100 departure fee for airlines, business jets and other aircraft to help cover the costs of Federal Aviation Administration (FAA) air traffic control. The new fee would raise $7.4 billion over 10 years, the administration estimates.

The budget also proposes to cut guaranteed grant funding for medium and large airports by $926m in 2013 to $2.4 billion. Instead, airports would be permitted flexibility to increase certain ticket charges to raise revenue on their own for airport construction projects. Again this is a worry that A4A needs to make very clear to Capitol Hill. We already know that airports in the US have unsuccessfully pushed for congressional authority to raise more money through higher fees, which are capped at $4.50 per passenger, per flight. This bill will allow them that freedom in time.

Whispers of problems ahead become loader – And we need to listen
So it is that the scenario that we have been warning about on this service for two years is unfolding at pace. In Europe Greece is now certain to leave the euro in some form over the next six months, we are seeing a breakdown in the country not unlike that of Germany post-first world war. Just look to the figures released last week of the number of babies being left at hospitals and centers because mothers cannot afford to feed them, for a very small taste of reality in that country. A communist government in April is likely and a euro exit from there is also likely or else they too will be out of office. Then across the rest of Europe there is Moody’s (which is starting to show that it, like most of the ratings agencies, really do not have a clue and are just trying to keep pace) putting France, Britain and Austria on “negative outlook”, which implies there is a 30% chance of a downgrade in the next 18 months. It said weak growth in Europe was hampering efforts to deliver economic reform and austerity measures. Moody’s downgraded Spain two notches to ‘A3’. Italy was cut by one notch to ‘A3’ and Portugal was lowered to ‘Ba3’.
Only now are we starting to see the effect of the European slowdown on China and India filter through into trade figures. The one country keeping both Chinese and European figures afloat is Germany. But domestic demand for goods is contracting very fast indeed across Germany, its huge manufacturing sector will power on but the point here is this – Germany and China are underwriting each other and reinsuring the same risk. As German domestic demand for Chinese goods falls so Chinese need for German goods does too – This is happening right now and it is hitting China very hard indeed.
Amid this economic slowdown, Chinese airlines have the world’s fastest growing aircraft fleets. There is likely to be huge overcapacity in the single aisle aircraft market creating a pricing war where only the airlines with the strongest cash reserves and the lowest cost base will be able to survive. So armed with this knowledge would you want to invest and/or finance aircraft deliveries? People are now starting to ask serious questions in this regard and their voices are getting louder. Airlines on the other hand such as SIA will argue that its low cost arm, in this case Scoot, will be a driver for the long haul operation and will increase the prospects for the existing business and therefore the benefits outweigh the downside of having a low cost that will struggle to break even. This is a sound argument from an airline with a strong balance sheet and large asset inventories. Can the same be said for Lion Air or IndiGo, for example? These airlines hope that their cost base will be so very low that they will win out in an all-out price war. Everyone thinks their business model is the winner. Can the APAC region put enough people into the air for all these airlines to survive? If you want to see capital market cash injections into the aircraft financing world then you are going to have to start thinking about the big questions hanging over airline’s business models and ask – Where are the cash reserves? Now that is something which is not limited to the APAC region.

Airlines will have to turn to new sources of funding for aircraft purchases as European banks pare lending and trade rules curtail the use of government-backed loans. Carriers may sell more bonds and make greater use of financing from leasing companies and Asian lenders to pay for aircraft.

Airlines boosted global debt sales 56% last year to $12 billion. The extra yield investors demand to hold dollar debt from airlines has dropped 140 basis points this year to 777 basis points, according to Bank of America Merrill Lynch’s U.S. High Yield Air Transportation index. As much as $90 billion will be needed to fund new aircraft deliveries this year, a 20% increase. Of that, as much as 25% will come from cash or equity, creating a requirement for as much as $70 billion in financing from other sources. Asian lenders are playing a greater role in aircraft financing as they expand and as European lenders retreat but they have no chance of covering the shortfall.

By Victoria February 15, 2012 15:44
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