Last week, Indian operators, Air India and IndiGo, were stars of the Paris Air Show with their combined 970 firm aircraft orders. This was 84 per cent of the total firm orders. A frequent question has been whether the market can accommodate the growth, but another question is how these aircraft will be financed. The short answer is leasing.

However, until recently, India was not a very accommodating place for lessors. Fifteen years after signing the Cape Town agreement, India is finally drafting a bill to enforce it, attempting to change that reputation.

The Cape Town Agreement, which streamlines the repossession of aircraft in foreign jurisdictions, has a typical resolution timeline of 60 days. By contrast, the average bankruptcy resolution in India takes 600 days. This is particularly galling to lessors when entities like Go First can restart in a matter of weeks without having resolved their creditors’ claims.

Also read: GoFirst saga: Will the crisis-hit airline fly again?

This is an important step for Indian operators as 74 per cent of the total Indian fleet is leased, 90 per cent in the case of IndiGo. Air India has the cash injections of the Tata Group to perhaps help them buy aircraft, but IndiGo’s 985 aircraft backlog will be heavily reliant on Sale-and-Leaseback transactions. This is also the case with new growing airlines, such as Akasa Air.

The large scale of orders allows airlines superior purchase prices. If then committing to a Sale-and-Leaseback transaction for smaller quantities of aircraft, the aircraft can be transacted back to a lessor at a higher price. As well as greatly reducing the initial cash outlay, this even locks in a profit for the carrier at the start of the lease. In recent large narrowbody transactions, this is estimated to be in the order of 2 years’ worth of lease rentals.

With a superior repossession mechanism, lessors are essentially taking on less risk. They can then reflect this in their rental pricing, enabling greater profitability and, by extension, growth for Indian operators. Ironically, with fewer loopholes for the government to protect the Indian operators, the carriers may be less willing to take on the risk, the research firm said.

Also read: The economics of aviation

Kapil Kaul, CEO, Capa India, an aviation research firm, said lessor financing is most critical for all Indian airlines, especially for narrow body fleets. Wide body financing is strategically different. India has to align the repossession mechanism to international standards and the appropriate legal framework is likely to be approved by the Parliament very soon. Both the cost of leasing and the terms and conditions will have to reflect the risks and hence, it may somehow impact on growth, he said.

Aviation expert, B Govindarajan, Tirwin Management, says leasing aircrafts will continue to be a preferred route for India’s aviation growth. Though Air India and Indigo have made huge orders, it may eventually turn into sale and lease-back arrangements. The need of the hour is to operationalise a national legislation that provides a win-win opportunity for all stakeholders for hassle-free leasing and repossession of aircraft since such an arrangement can only truly support the Indian aviation growth.

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