Mubadala lends to airlines

Air Berlin and Etihad Airways have signed up for $130m worth of financing provided by a new company, called Sanad Aero Solutions, controlled by Mubadala.

Air Berlin Plc airplanes are seen at Tegel airport in Berlin, Germany, on Wednesday, Oct. 14, 2009. Air Berlin Plc's September passenger numbers fell 5.1 percent to 2.71 million as capacity declined 4.8 percent. Photographer: Michele Tantussi/Bloomberg

Air Berlin and Etihad Airways have signed up for US$130 million (Dh477.4m) worth of financing provided by a new company controlled by Mubadala Development, the Abu Dhabi Government investment arm. The new entity, called Sanad Aero Solutions, will provide financing and logistical support with a focus on aircraft engines and components.

Sanad - Arabic for "support" - adds another layer to Mubadala's aerospace strategy, which includes plans to manufacture composite aircraft parts for Boeing and Airbus in Al Ain, and to build an aircraft in Abu Dhabi by 2018. The company will provide financial support to airlines outsourcing their maintenance and repair work to two Mubadala affiliates, SR Technics in Switzerland and Abu Dhabi Aircraft Technologies (ADAT).

Sanad's first contracts involve a 10-year, $100m deal with Air Berlin for 12 spare engines and a 10-year, $30m contract with Etihad for components. "While there are firms providing aircraft leasing and engine leasing, there is nothing on components," said Homaid al Shemmari, the executive director of Mubadala Aerospace. "We said 'let's go to the airlines and say we can provide you liquidity; you can take components off the balance sheet and invest in your core operations'."

Mr al Shemmari was bullish on the company's growth prospects and said it was in discussions with a handful of airlines worldwide. The new venture will be based in Abu Dhabi and is expected to grow to a staff of 25 in its first few years, with a target of breaking even within the first two years, he said. The company is targeting a $40bn market for airline maintenance globally, which is expected to grow to $60bn by 2020 as the global aircraft fleet grows by 5,000 aircraft to 27,000.

Two particular areas of growth are the Middle East, where Gulf airlines are enlarging their fleets to challenge rivals in Asia and Europe for the long-haul market, and Asia, a key reason that Mubadala announced the company in Singapore this week. Analysts agreed that the capital injection came at an ideal moment: airlines are believed to have lost more than $10bn worldwide last year due to the economic downturn.

"Abu Dhabi and Mubadala are stepping into that breach at a time when airlines need assistance more than any other time, and are competing for capital, not only with each other but with the rest of the world, because banks are short of cash," said Donal Boylan, a former consultant to aviation companies in the Gulf and the acting chief executive of Hong Kong Aviation, a leasing firm. Sanad's focus on components and engines, in conjunction with its sister maintenance firms SR Technics and ADAT, fits well with the Abu Dhabi strategy of moving into high-value, capital-intensive businesses to build the emirate's economy away from oil and gas revenues, Mr Boylan added.

By contrast, he said there was "little to no money" to be made in general airframe maintenance, a business from which ADAT and SR Technics hoped to move away from in favour of high-end components work including engines, avionics, hydraulics, pneumatic systems and landing gears. "Through SR Technics and ADAT we have two very strong MRO [maintenance, repair and overhaul] companies strategically positioned in two important regions," Mr al Shemmari said. "By offering component and engine financing solutions for airlines and original equipment manufacturers in partnership with our existing network, we are able to provide a truly integrated service."

The aerospace unit is one of the most active departments in Mubadala's portfolio, and includes partnerships and initiatives with major aerospace and defence firms including Airbus, Boeing, Sikorsky Aerospace Services, Rolls-Royce, GE and Northrop Grumman.