ISTANBUL—Aircraft financing firms are voicing concerns that some kind of downward correction to commercial aircraft demand is likely and that there could be a corresponding effect on the number of aircraft cancellations or postponements.

“Somehow the stars are aligned, something has to happen,” Gordon Welsh, Director of Aerospace at the U.K. Export Finance, said at the International Society of Transport Aircraft Trading (ISTAT) Europe conference here.

Christian McCormick, Managing Director and Global Head of Aviation Finance at Natixis, said he is “a little bit concerned. There are huge amounts of funds coming in and that could contribute to over-ordering.” He points out that “we still have to really figured out whether this is double counting”–several airlines ordering aircraft for the same markets.

Not even manufacturers are certain they may have to deal with some of that effect. John Leahy, chief salesman at Airbus and normally one of the industry’s optimists, throws in a note of caution. “Three airlines tell us they’re going to improve their market share by 10% to 15%. But someone is going to be very successful, someone very unsuccessful and someone is in the middle. So two or three don’t need all the planes they ordered.”

And Leahy in a characteristic comment said of Boeing and its plans to raise production rates for the 737 to 52 aircraft per month, “What worries me is this whole ‘Field of Dreams’ concept: build it and they will come.” 

Boeing’s Vice President-Marketing Randy Tinseth points out that, “when we do rate decisions we take a very thoughtful view and a measured approach. We have worked very hard to ensure that demand for these planes is real. And we make rate decisions on the assumption that we’ll continue producing at those rates for a substantial period of time.” Boeing is currently producing 737s at a rate of 42 per month; that figure will climb to 47 in 2017. 

A recent UBS study concluded that Airbus and Boeing may be building too many widebodies, while the banks sees narrowbody production as being more or less in line with demand (Aviation DAILY, Sept. 18).

What is making the situation so tricky is no concrete indications exist to suggest that increased capacity is the wrong decision. Airbus itself is mulling increasing to a rate of 50 for the A320 with no firm decision in place. Leahy said right now Airbus would have the orders to accommodate a rate of 50 per month, but he doubts that every order for delivery positioned seven to eight years out is “110% solid.” He also noted additional stress on the supply chain that he would only accept if warranted by a very solid backlog.

Thomas Hollahan, Managing Director at Citi, said,“this industry is still subject to event risk and it is always good to assume another one is around the corner.”

According to Welsh, the U.K. Export Finance program is now typically getting around 80 bids by banks for its business per transaction, compared with around two to three only a few years ago. He said that some of the banks sending in financing proposals for aircraft transactions are not very well known.

Adam Pilarski, senior vice president at Avitas, has been warning that airlines are over-ordering for some time. “If Middle East and low-cost airlines succeed, someone else has to fail,” he argues. He believes that Boeing and Airbus have to assume “a huge number of retirements” in order to not end up in an overcapacity situation. On the other hand, he concedes that both manufacturers have become sophisticated in overbooking their narrowbody production, which is making shifts in delivery schedules easier to handle.

Pilarski also points to the unique set of conditions under which the industry has been operating for some years now: High fuel prices have led to the development of new aircraft, such as the A320neo and the Boeing 737 MAX, which airlines can afford to buy in large quantities because financing is so cheap and easily available. But Pilarski questioned what would happen if one or two of the underlying parameters, such as high fuel prices or cheap financing, changed over time.  

The influx of new financiers raises the issue for more-established banks of whether to participate in aggressive campaigning. 

With financing freely available to most airlines for the time being, the role of export credit finance (ECA) has greatly diminished. “That is a major difference to where we were five years ago,” Welsh said. But McCormick stresses that export credit will continue to play an important role in aircraft financing in crisis times. “ECAs need to stay, we rely on their help.” Attendees of the ISTAT conference agreed that in normal times, export credit should be used in more than 10% of transactions.