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Global credit crunch spells uncertainty for Airbus

Latest update : 2008-09-16

The financial crisis that began in the US mortgage market could have far-reaching effects for Airbus, the European aerospace giant.

Seen from the  busy Airbus assembly lines in Toulouse and Hamburg, the financial crisis rattling Wall Street and the worldwide  financial  sector seems far away.

But the credit crunch will hit the European airplane maker hard: if any proof of that was needed, EADS, the owners of Airbus, saw its share price fall around 5 percent on Monday in the wake of Lehman Brothers' announcement  that it was filing for bankruptcy.

Why the concern?

In the same way that high-street banks are now reluctant to lend to customers who want to take out a mortgage, airlines now face big challenges getting banks to lend them hundreds of millions of dollars to buy new aircraft.

Banks know perfectly well the airline sector is not in good shape.

The industry is reeling from high energy prices. Around a dozen airline companies have folded in the past 6 months, mainly because of soaring fuel prices.

According to aerospace analysts Alix Partners, around 50 or 60 more airlines will go bust in the next 12 months unless kerosene prices fall further.

And many of those airlines based in India and the Far East have already put in orders with Airbus. The airplane maker likes to boast it has a backlog for new aircraft for the next three years, but now many of those orders could become cancellations.

AIG woes = headache for Airbus

The latest dark cloud on the horizon is the huge American insurance company American International Group (AIG). One of the three biggest insurers in America, AIG has lost around 19 billion dollars in the past nine months in the subprime mortgage market. It is now desperately trying to raise cash to stay afloat.

One of its more profitable businesses is its aircraft leasing arm. Its subsidiary International Lease Finance Corp (ILFC) has around 900 airplanes worldwide, which it bought from Boeing and Airbus and then leased to airlines that cannot or do not want to buy aircraft themselves.

ILFC is one of Airbus's biggest single customers, and has reportedly been in talks with the plane maker to buy more than 100 new aircraft.

If AIG sells ILFC, that order could be reduced or even abandoned. For the time being, both EADS and Airbus won't comment on the matter. But one thing is clear: globalisation means a crisis that started in the US mortgage sector 15 months ago has now made its way to Europe's aerospace sector.

Date created : 2008-09-16