Commercial Aircraft: The New Buzz Within The Islamic Finance Community

Article by Dean Argent

This article discusses how Islamic Finance is being deployed to finance the acquisition of Airliners (such as Boeing and Airbus aircraft) that are placed under long-term leases. This High Yielding Alternative Investment Class is the new buzz within the Islamic Finance community.

As a result of the Global Financial Crisis and Eurocrisis, conventional aircraft financing sources have dried up for now. But with its long-term predictable income, growth forecasts and suitability for Islamic Financing, an immense market opportunity now exists for savvy Islamic Finance investors.

Islamic finance is growing fast. Over the next decade, the Islamic Capital Markets is expected to sustain double-digit growth to almost USD1 trillion in 2020 with CAGR of 10.6%. In 2000, there were MYR39.6 billion in Sukuk issues. In 2010 it had grown to MYR294 billion and the Malaysian Securities Commission expects further growth to a staggering MYR1331.5 billion by 2020.

The Sukuk market has been quite resilient during recent instability in global financial markets which is making conventional bond issues difficult. The resilience is a result of the Islamic investors remaining cash rich; partly due to limited supply of Sukuk; and partly since Sukuk investors tend to hold the bonds until maturity, reducing the chance of big swings in secondary market prices triggered by shorter-term speculators bailing out of positions.

No matter what the reason, Aircraft Lessors are now turning to Islamic financing to support their aircraft acquisitions and those lessors backed by Islamic Finance are growing at astronomical rates.

The aircraft leasing industry is relatively new, with the first aircraft lease recorded in the 70's. Now, around 40% of the world's aircrafts are leased. According to Boeing, 35% of the USD4.5 trillion in new aircraft deliveries over the next 20 years will be delivered to Asia - which is the global number 1 hotspot for aviation growth.

Couple this immense market opportunity with the emergence of Labuan as one of the most competitive jurisdictions in the Asia Pacific region - along with aircrafts' compatibility with Islamic Financing methods - and you have the making of the next explosive growth industry.

Despite its recent rapid rise in popularity, Islamic financing for aircraft transactions have been around for a while, here's just a sample of some large Islamic Finance transactions:

In 2005, Emirates issued a USD550 million Sukuk bond...