Flight Plan

Will leasing aircraft pay off for Indian aviation?

Ashwini Phadnis | Updated on November 12, 2019

An aircraft leasing ecosystem has advantages but there are challenges too, say industry watchers. Ashwini Phadnis reports

In a move that is meant to have a far-reaching impact on Indian aviation, Union Budget 2019-20 talks about creating an eco-system in the country under which aircraft can be leased in India.

Airlines across the board use two types of aircraft — those that they purchase directly from aircraft manufacturers and others that they lease out from leasing companies.

Under a leasing arrangement a leasing company buys aircraft from the manufacturer and then leases them out to airlines. Till now, only foreign leasing companies like GECAS and BOC Aviation have been leasing out aircraft to airlines across the world, including in India.

Now, with the government’s new proposal, all this is set to change. So far, Indian carriers in particular have been facing a challenge in leasing aircraft because the deals are structured in foreign exchange and any fluctuations in forex affect an Indian airline's operations as it usually has to pay more for leasing an aircraft.

If the leasing companies are set up here and lease rentals are in rupees, airlines can save valuable foreign exchange. They will also be in a better position to manage their costs.

However, though the government’s move has been hailed by some as being progressive, there are going to be many challenges before it becomes a reality.

Viable proposition

But first, what are the advantages of allowing leasing aircraft within the country? Gagan Dixit, Aviation analyst, Elara Capital, points out that Indian carriers presently run more than 600 passenger aircraft, where 80 plus per cent of their fleets are funded through operating lease. “However, not a single lessor is India based and before taking funding decisions country risk profiles, which add to leasing costs of domestic carriers, matter to these lessors. Hence, it is a viable proposition to develop a domestic aircraft leasing ecosystem for ease in funding,” he says.

He further points out that domestic carriers are expected to add @60-80 aircraft per annum to their fleets. Assuming lessors are willing to fund 3-4 aircraft per market per annum, “Indian carriers will require 15-25 lessors to fund a strong fleet growth, which offers opportunity and business sense to develop the domestic aircraft leasing industry.”

A recent report by SBI CAPS strengthens the case for such a system. It points out that dollar-denominated costs form 70 to 75 per cent of the total revenues of IndiGo, which has the largest market share. While average lease rentals in dollar terms have broadly remained range bound, the rupee has depreciated to ₹70 from ₹47.5, making leasing costs go up for for Indian carriers.

According to Salil Gupte, President, Boeing India, having a leasing system in the country will also help create a more efficient market for aircraft leasing.

“It will create some very visible, very highly-paid jobs. It is a prestigious industry as it sits at the nexus of finance, airline aviation, aerospace and geopolitics,” Gupte says.

The other side of the coin

While all this sounds like the best thing to happen to civil aviation in India, this is just one side of the coin. The other side, with all the challenges and changes that will be needed, including in law, is not as optimistic and compelling.

Analysts maintain that creating this new ecosystem will require entities with deep pockets so that they are able to sustain the business through the cyclical highs and lows that the global aviation industry witnesses.

“Generally speaking, as long as you are a long-term holder of the asset, you are going to get your money back in 25 years-plus,” says an airline executive.

Another problem that a leasing company in India may face is that when the aircraft is being leased to an airline which plans to have a first and business class, then the leasing company will have to spend a considerable amount of money getting the interiors refurbished before delivering the aircraft. It is estimated that a high-end wide-body reconfiguration can cost $17-20 million not including the cost of the asset.

“In case of a default by the airline the leasing company could find itself in a lot of financial trouble," adds another airline executive. Further, since most airlines are leasing from foreign lessors at the moment, the newly set up Indian leasing companies will have to break into their clients to gain business opportunities.

Regulatory changes

However, if these problems seem difficult enough, there are others that are worse as some of these involve regulatory changes. These include changes in banking regulations. At the moment, banks are allowed to purchase and own assets on their balance sheets. Banks can lend against an asset but they cannot purchase and hold the asset on the balance sheet for some period of time. This is something that will be required for having an aircraft leasing ecosystem in the country as leasing aircraft is all about buying and holding.

Dixit believes that the leasing ecosystem will require domestic lease finance companies to develop in-house expertise to understand the risks involved in aircraft leasing, because it is more a risk to lessors who would fund the aircraft. “We expect that at least 5-7 years will be required to develop the aircraft leasing system. The process will be faster if the government provides fiscal benefits to domestic aircraft leasing,” he adds.

Then there will also be some currency risks that a leasing company will have to take if it does not lease in dollars and start conducting business in rupees and this risk will have to weighted against other investments that the company is making where there are other risks.

Another important issue is how the GST off-set will work. Currently GST is charged for lease payments. This will work if the rate is the same for both foreign and Indian leasing companies but if there is a difference in the rates, it can lead to problems for Indian leasing companies.

Published on November 12, 2019

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