Asian banks are filling the void in the aircraft financing market left by squeezed European lenders, but Middle East tensions and the sheer scale of Asia's aviation growth look set to leave the industry's funding on a knife-edge, experts said.
Banks from Singapore, China and Japan have stepped up their activities in the lucrative sector. The realignment has pushed back immediate concerns of a crunch in the $100 billion market for aircraft dominated by Airbus and Boeing, but airlines' thirst for funds is growing and the newcomers may not be able to satisfy the demand.
BOC Aviation, the aircraft leasing arm of Bank of China, predicts a 42 percent increase in funding needs over the two-year period until 2013.
The Asian banks have started playing. That certainly brought it to an even level, but the problem is, we have a 42 percent increase and this is where the problem is coming from, Robert Martin, chief executive of Singapore-based BOC Aviation, told Reuters at the Singapore Airshow.
When you look at what is going on in the market, we are seeing export credit agencies under pressure (and) European banks are definitely under pressure. So something has to replace it even to keep the market flat.
Any shortfall in funding creates the risk that EADS
Another key issue, according to bankers and credit experts attending this week's airshow, is the stand-off over Iran's nuclear activities and the threat of a possible Israeli attack, dampening demand for travel and pushing up fuel costs.
There are a number of question marks over the market which people concerns about, the most recent one of course if there is something happen with Iran, Martin said.
Asian banks outside Japan are among the best capitalized in the world in contrast to their counterparts in Europe and the United States, which are struggling with tough market conditions.
Analysts said three banks in Singapore, DBS Holdings Ltd
Last month, Japan's Sumitomo Mitsui Financial Group (SMFG) <8316.T> and Sumitomo Corp <8053.T> paid $7.3 billion for the aircraft leasing business of Royal Bank of Scotland
Randy Tinseth, vice president of marketing for Boeing Commercial Airplanes, said the airline and leasing industry would need almost $100 billion in financing for new aircraft deliveries in 2012, up from roughly $75 billion last year.
Airlines and lessors around the world are expected to buy as much as $4 trillion worth of new aircraft over the next 20 years according to Boeing, and the bulk of that amount will be funded by banks or leasing companies.
Passenger jets are bought and sold in U.S. dollars. To be part of the specialist club of lenders, banks need access to a natural supply of dollar deposits or have to raise them in the market.
French banks have historically played a major role in financing passenger jets, but have found their access to liquidity in dollars restricted since late last year because of market concerns over their exposure to Europe's debt crisis.
Even without market shocks, the availability of finance is expected to tighten and rates are set to rise as banks reduce their balance sheets to comply with new capital requirements.
Standard and Poor's analyst Shukor Yusof said airlines would try to secure as much financing as possible this year before the Basel III regulations come into effect starting from 2013.
There will be a shortage in financing next year as Basel III kicks in, Yusof said. So cheap money will still be around this year and that's why there is a rush among airlines going to the U.S. Export-Import bank, the (other) export credit agencies and also the commercial banks.
Boeing this week finalized a record deal worth $22 billion at list prices to sell 230 jets to Indonesia's Lion Air with backing from the U.S. export credit arm.
The deal has raised concerns that the Ex-Im Bank could run out of money unless lawmakers act quickly to raise its $100 billion credit exposure cap.
(Additional reporting by Kevin Lim and Saeed Azhar; Editing by Matt Driskill)