The global aviation industry is expected to be on the verge of explosive, long-term secular growth. Over the next 20 years, 20,000 new commercial aircraft worth about $4.5 trillion dollars will be built, according to Investing Daily. For the tens of thousands of middle market companies in the aircraft supply chain, this growth will significantly impact their equipment financing needs.
There are two primary drivers behind this growth. First are the great strides that have been made in fuel efficiency, which is making the continued operation of old aircraft extremely expensive by comparison. According to Airbus, while passenger traffic has risen 50% over the past decade, fuel consumption is up just 3%, indicating how much more efficient the industry has become. These fuel advancements, combined with aging fleets, will induce airlines to refresh their aircraft after many years of retrofitting and minor enhancements to existing aircraft.
The second reason behind commercial aviation's growth is the continued development of the emerging markets. Industry analysts report demand is expected to continue from Asia and the Middle East as operators retire obsolete, less fuel efficient airplanes. In value terms, China comprises the biggest regional market. The Civil Aviation Administration of China announced they will build 70 new airports and rebuild or expand 101 others over the next five years. At the same time, China's state-run airline fleet, currently about 2,600 aircraft, is expected to grow to 4,500 by 2016.
These trends are all impacting the aviation supplier base, which is largely comprised of middle market companies, defined as those with annual revenues from $10 million to $1 billion. If they want to sustain their businesses and effectively compete, they will likely need to invest in new technologies and upgrade operations. This retooling of facilities will, for many companies, require them to secure new or additional financing.
These middle market companies will understandably want competitive interest rates when financing new equipment. However, a decision about which financing partner to select should not be based solely on whether a lender can shave a few points off the interest rate. An effective specialty lender adds value by becoming a long-term advisor to the company. There are at least four areas where a specialty lender gives aviation suppliers a competitive edge.
A lender with domain expertise can "speak the language" of the industry. Executives don't have to waste time explaining their business to a specialty lender; instead, they can have a meaningful dialogue from day one. This fluency also helps to reduce "cycle time"—the time it takes for a lender to complete a financing transaction—from the initial request, to negotiating the term sheet, to securing necessary documentation, to the closing and then the actual funding. In other words, a lender with a deep understanding of the industry can deliver funds faster. This is critical in today's fast-paced environment. When a supplier signs a long-term agreement with a manufacturer to make a certain number of parts in a certain amount of time, the supplier needs the necessary equipment to make that part on site as quickly as possible. The sooner the company can finance the equipment and have it delivered the sooner it can start making money.
Like many industries, the aerospace industry goes through cycles in which demand naturally rises and falls. A specialty lender in the aviation industry understands the industry's cycles, is familiar and comfortable with certain risks and is thus more likely to offer credit. Conversely, the less a lender understands an industry, the less it's usually willing to lend. That's especially true today. Coming off the financial crisis and given the regulatory environment, banks are often cautious and reluctant to lend if they foresee any potential financial difficulties or risks on the horizon.
A lender with broad industry-wide knowledge has a thorough understanding of aviation suppliers' challenges and opportunities and can draw on its expertise to help companies in a variety of areas. Having the right relationship in place can help. A specialty lender may be able to provide additional resources that will take businesses further. This could include insight into best practices for machine tool operation and cell manufacturing to improve a supplier's standard operation procedures. It may also help a company assess lighting, heating, cooling or water usage in order to develop strategies to reduce consumption. Lowering costs is becoming increasingly critical for suppliers who can't pass along increases to customers.
A specialty lender is also "networked" with manufacturers, other suppliers and professionals who specialize in the aerospace and defense industry. Depending on the company's need, a specialty lender can open doors and suggest options for everything from accountants, attorneys, investment bankers and even private equity professionals. These networks may prove especially valuable in today's mergers and acquisitions environment.
Aviation suppliers need more than a banker to compete in today's growing, global industry—they need a strategic ally. A lender's domain expertise will give the supplier access to know-how, insights and resources. In the long run, the company gets more than financing—it gets an advocate who can help grow the business.
By Gib Bosworth (email@example.com), Vice President—Equipment Finance, specializing in Aerospace and Defense suppliers at GE Capital, Corporate Finance, a leading provider of commercial loans and leases to mid-size U.S. businesses. GE's rich heritage serving the aviation industry also includes GE Aviation, a jet and turboprop engine manufacturer, GE Capital Aviation Services, a commercial aircraft financing provider and GE Capital, Corporate Aircraft Finance, providing business jet financing.
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