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Aircraft finance on cloud nine as new money pours in

An Allegiant Air MD-83 passenger jet takes off from the Monterey airport in Monterey, California, February 26, 2012. REUTERS/Michael Fiala
An Allegiant Air MD-83 passenger jet takes off from the Monterey airport in Monterey, California, February 26, 2012. REUTERS/Michael Fiala

By Victoria Bryan and Tim Hepher

DUBLIN (Reuters) - Crisis, what crisis? The good times are rolling in the aircraft finance industry as yield-hungry investors gamble on growing demand for air travel, banishing recent jitters over funding.

Despite new concerns over emerging markets that mounted on Friday, an annual gathering in Dublin this week attracted record numbers of lawyers, bankers and lessors who keep the $100 billion a year jetliner industry aloft with funding.

Just a few years ago, tougher capital regulations triggered fears that airlines would be unable to find the funds needed to pay for record numbers of aircraft being ordered from Airbus and Boeing , as European banks scaled back.

But Asian banks helped fill the void and financiers in Ireland, the world's leading hub for aviation finance, said new money was pouring into the promising sector in their wake.

"I don't think there's a sector of the financing space that isn't open for business. Everything is very robust right now," Jude Bricker, treasurer of low-cost U.S. airline Allegiant Travel , said at the Airline Economics conference.

With U.S. airlines back on a more stable footing and oil prices relatively calm, aviation is luring interest from longer-term investors such as insurers and pension funds, who hope to boost weak returns dictated by low interest rates.

"We've seen the pensions, endowments looking to make up lost investment time, and more hedge fund investors looking for stable spread over time but not necessarily a super-sized return to make it work," said Daniel Hartnett, partner at law firm Kaye Scholer.

Capital markets such as that in Enhanced Equipment Trust Certificates (EETC), a secured corporate bond structure typically used by U.S. airlines, are increasingly opening up to foreign airlines because of a recent treaty to protect lenders.

In a landmark transaction, Air Canada last year issued an EETC backed by five Boeing jets. More investors are also placing funds privately with airlines to avoid dilution when such public offerings are over-subscribed.

"The choice of where to go to refinance or finance used to be more guided by what was open, but now everything is open," said Eric Eugene, head of transportation finance at BNP Paribas. "Our clients have a much wider variety of options than there used to be."

Leasing firms, which own or manage 40 percent of the fleet, remain active. And an ample supply of competitive financing means fewer airlines are resorting to guarantees from U.S. and European export credit agencies, which have raised their fees.

"We are in a very healthy market but these are changing markets. We are using less export credit but replacing a lot of that capacity with capital from multiple markets," said Kostya Zolotusky, a managing director at Boeing Capital.

REFINANCING BOOM

The resulting competition across the aviation industry means yields aren't as high as they were and that is pushing investors to look at new areas to fund, such as older aircraft.

"There's a lot of money chasing a few assets," said Tom Tuggle, executive managing director at CMC Capital Markets.

But despite concerns that rates could rise as central banks ease off printing money to stimulate the economy, delegates said it has rarely been a better time to be an airline treasurer - traditionally a nerve-racking job.

"Any CFO should be looking at refinancing everything they've got right now," said Ron Wainshal, chief executive of Aircastle , whose key shareholders include the Ontario Teachers' Pension Plan, a major Canadian pension fund.

Cheap money has in turn indirectly boosted the manufacturers who are now sitting on record order backlogs.

They are exposed to risks that airlines will not be able to pay for jets they have ordered, but say they are confident others will step in and funding will remain readily available.

The most worrying spot on the horizon is emerging markets, which have dominated aviation's growth in the past five years.

The Dublin gathering took place in the shadow of the World Economic Forum in Davos where bosses warned the "gold rush" of upstart economies was over. The rise of a new middle class has been driving much projected aviation growth.

A flight from emerging market assets accelerated on Friday, sending the Turkish lira to a new low and setting global shares on course for their worst week this year.

Political instability in Turkey and Thailand, both big markets for aircraft, were cited as risks by two aviation industry chiefs in Dublin, speaking on condition of anonymity.

One banker reeled off a list of "red flags" from currencies in Venezuela and Argentina, to growth in Brazil or India.

For now, China - whose domestic market is by far the fastest-growing air travel segment - is on everyone's watch list but is not dramatically slowing, delegates said. Jetmakers are said to have dozens of unannounced orders on their books.

A less tangible concern is whether the airline industry that underpins an eight-year waiting list for new planes, and generates the need for finance, has changed for the better.

Shares in European airline stocks <.TRXFLDEUPUARLI> have risen 42 percent over the last year, while U.S. airlines stocks <.TRXFLDUSPARLI> have almost doubled over the last year.

Yet despite talk of fundamental improvements in the way airlines are run, with capacity restraint improving the profits of U.S. carriers, the industry operates on razor-thin margins.

"The margin for error is non-existent. A lot of things can go awry," CMC's Tuggle told Reuters. "Cheap money can sustain the industry, but things can get very different when it turns."

(Additional reporting by Conor Humphries and Alexandre Boksenbaum-Granier; Editing by Anthony Barker)

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