Airlines to drive surge in Islamic financing

Middle East airlines seeking to refinance debt or diversify their funding sources will fuel a surge in Islamic financing in the near to medium term, according to a senior Fitch Ratings executive.

Within Fitch’s rated portfolio that comprises $100 billion sukuk globally, most of which are in the Arabian Gulf, more than 65 per cent will mature in the next five years. It expects much of this debt to be refinanced, illustrating potential opportunities ahead.

“Islamic financing will be driven by Mideast airlines’ refinancing needs or some carriers opting to change their funding structure away from a reliance on governments and more towards capital markets,” said Bashar Al Natoor, Fitch Ratings’ global head of Islamic financing. “Even if it’s not on the expansion side with new debt, we’ll see growth on the refinancing side in the near to medium term for Islamic loans and sukuk.”

Oil price volatility, intensifying competition, currency swings, and geopolitical tension have affected airlines

Major aviation operators such as Emirates, Etihad Airways, Saudi Arabian Airlines, Pakistan International Airlines, SriLankan Airlines, Garuda Indonesia, Malaysian Airlines, Turkish Airlines, Ethiopian Airlines and Air Asia have issued Islamic bonds or sukuk to finance the acquisition or leasing of new aircraft.

Oil price volatility, intensifying competition, currency swings, and geopolitical tension have affected airlines.

“A slowdown in growth in some airlines will definitely have the element of a fall in new Islamic issuances, because it does not operate in a cocoon,” Mr Al Natoor said.

The International Air Transport Association, the industry body representing 290 airlines, or more than 80 per cent of world traffic, has repeatedly warned that escalating trade tension between US and China is hurting air freight volumes – a measure of global economic health – and slowing down demand for air travel.

In the GCC, sukuk issuance has mainly been dominated by sovereigns, and has yet to trickle down to corporations.

“The growth hotspots is efforts of governments to build their yield curves and diversify their funding,” Mr Al Natoor said. “This would trickle down to the corporate sector to have more diversified funding rather than being reliant on the banking sector. That will be a key driver for the growth of the Islamic financing industry.”