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Lion Air’s $23bn plane order confounds many

REUTERS

SINGAPORE

HOW do you stump up the money for a $23 billion aircraft deal? The answer in the case of Indonesia’s Lion Air, which finalised a record order with Boeing this week, is typical of many mega-aircraft deals: with a little help from the taxpayer.

The US government is offering loan guarantees to help the low-cost carrier buy 230 jets, under a system operating on both sides of the Atlantic to promote exports of strategic goods such as the jetliners built by Boeing or rival Airbus.

In theory, it means US taxpayers could pick up part of the tab if the deal falls through. Bankers and officials involved in such transactions say experience suggests this is unlikely to happen, or any losses could be recouped by recovering assets.

Indonesian entrepreneur and Lion Air co-founder Rusdi Kirana blazed a trail at the Singapore Air Show, signing deals for 259 aircraft worth $23 billion this week, including Boeing and Hawker Beechcraft jets and European ATR turboprops.

The three-day splurge left some wondering how an airline little known internationally, and banned in Europe over safety concerns, could afford to pay for the planes. Lion Air says its inclusion in a ban on several Indonesian carriers is unfair.

Similar questions swirled in 2005 when Lion Air placed what was then considered a huge order for 60 aircraft. This has since propelled its growth to become Indonesia’s top domestic airline.

A senior US official familiar with the deal dismissed concerns about the airline’s ability to pay.

“We believe Lion Air has a good business model and a management team that is successfully implementing it,” Robert Morin, vice-president of the transportation division at the Ex-Im Bank, said.

“Rusdi Kirana won’t have trouble financing Lion Air’s new big order because the deliveries are stretched over several years and he will probably tap a variety of sources of financing.” The methods cannot be verified in detail, because Lion Air has declined to open up its finances. US airlines says deals involving US backing should be more transparent.

“We are the custodians of US taxpayers’ money and we take that role very seriously,” Morin said. “Rest assured, Ex-Im Bank does its homework.” In practice, industry sources say only a fraction of the $22 billion touted for the Boeing deal will be paid any time soon.

So how does it work? It is no secret that airlines often get discounts. But Boeing and Airbus never comment on them and buyers are sworn to secrecy over their deals, so their size is hard to determine.

Classified documents released by WikiLeaks gave glimpses of aircraft deals as seen by US diplomats, and spoke of discounts as high as 50 percent, though industry sources dismiss this.

Lion Air can expect a hefty discount for two reasons: it has placed the largest commercial order ever received by Boeing and it is a launch customer for the revamped Boeing 737 MAX 9
On the other hand, airline industry sources say, launch pricing can mean airlines get a less generous support package.

One person familiar with industry practices speculated the discount for part of the Lion Air order could reach 40 percent, but acknowledged the real amount was anyone’s guess.

Airlines mainly pay for aircraft when they take delivery, not when they order them. Deliveries won’t start until 2017.

By the time the later planes are delivered, some of the previously ordered ones may be coming up for retirement, which means they can be parked, scrapped or sold, potentially releasing equity to go back into the purchase of later planes.

Kirana said he would take delivery of 30-40 planes a year. Initially, all Lion Air is likely to have to pay is a deposit to secure slots on the production line in Renton, Washington. Deposits are typically 5 percent or more, experts say.

Airlines have to make further downpayments as the clock ticks down to delivery, especially from about 24 months out.

However, some banks offer financing products even for these pre-delivery payments (PDPs). By delivery day, an airline has typically paid 20 percent of the aircraft’s net value but this can be as high as 50 percent.

Since they eat into cash flow, PDPs are an important item for the health of an airline.

“More than one airline has gone bankrupt just because of PDPs,” an industry banker said.

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