"Ireland is renowned globally as the birthplace of aircraft leasing," says Marina Efthymiou, assistant professor in aviation management at Dublin City University (DCU). Since the industry's genesis with Guinness Peat Aviation in the 1970s, Ireland has retained the position as a global hub for aircraft leasing and management.
"Nearly half of the world's commercially leased aircrafts are managed via Ireland, and the number of aircraft-leasing companies based in Ireland is constantly growing," says Efthymiou. "Ireland is now home to 14 out of 15 global aircraft lessors. PwC [2018] suggest that the aircraft-leasing industry contributes €541 million to the Irish economy and supports nearly 5,000 jobs."
With substantial contributions in terms of income and employment, alongside the trend of continued growth, the importance of the industry has long been recognised and supported within Ireland. A number of factors have contributed to Ireland’s position as the global leader: “The most important are the taxation regime, which provides for a low headline rate of corporation tax and a depreciation write-off period of eight years,” says Efthymiou. “Four decades of experience also preserves Ireland as a hub for leasing and finally, but importantly, the multidisciplinary skilled labour market is one of our fundamental competitive advantages.”
The growth is also supported by global trends, which can also dictate difficult times ahead. "The industry has experienced robust growth in recent years, backboned by strong demand for air travel which has grown on a yearly basis above the long-term trend of 5 per cent," says Philip Greene, head of aircraft-leasing coverage, HSBC. "Macro conditions have been favourable with a low interest rate environment, relatively low oil, healthy load factors and record levels of airline profitability.
“The core fundamentals of the industry remain strong, however, there are headwinds to be faced in 2019 in the form of rising oil prices, interest rates and airline operational costs as well as a strengthening US dollar and doubts about global growth prospects.
“These factors could soften passenger growth in the near term. A strengthening dollar is particularly impacting airlines in emerging markets given that the aviation finance industry is mainly denominated in USD.
“However, it is important to stress that these issues should be viewed as a normal part of the industry cycle and the aircraft-leasing companies with solid credit fundamentals, diversification and scale should still perform well given a combination of strong demand for aircraft and leasing, diverse sources of funding and solid airline fundamentals overall.”
Stiff competition
While Ireland is currently difficult to compete with in global terms, there are several factors to be aware of over the next decade, suggests Anne Flood, head of capital markets at Intertrust Management Ireland. “Ireland faces stiff competition from other aviation hubs that have emerged in recent years such as Singapore and Hong Kong,” she says.
“During 2017 both of these jurisdictions changed their tax code specifically to attract the growth in the number of aircraft-leasing companies that have established in Asia in the last decade. As many of the world’s top leasing companies have already established in Ireland and, in turn, have created strong employment in the sector, one of the disadvantages Ireland has over other competing jurisdictions is our personal tax regime which is significantly higher than our competitors.
“This can be a deterrent for foreign-based lessors who may be looking at assigning some of their key employees to this jurisdiction.
“The growth in aviation finance and leasing is set to continue over the next 20 years,” suggests Flood. “In particular, by 2037, India is predicted to be the third-largest aviation market in the world, driven by strong growth in India’s middle class. This will be a very important market not just for Indian and Gulf airlines but for all international carriers.”
As passenger traffic is predicted to continue to grow, the demand for new aircraft will also continue – where this finance comes from is a key part of understanding the future of the industry. “This growth in the demand for air travel translates into demand for approximately 40,000 new aircraft over the next 20 years,” says Philip Greene of HSBC.
“To fund this future growth a whopping average of $170 billion [€149 billion] of finance is needed each year. The aircraft-leasing sector will play a significant part in funding these aircraft deliveries.
“Lessors’ strong credit ratings drive has improved access to unsecured borrowings – via both the commercial bank and capital markets – in recent years and there has been a major shift in favour of unsecured debt,” says Greene. “For an aircraft-leasing company, borrowing unsecured has many attractions, being more flexible and having lower transaction costs than borrowing on a secured basis, though usually at the cost of higher coupons or margins.”
According to Tom Woods, head of aviation finance and leasing, KPMG: "The industry continues to attract more investors as it matures. The quality of information available and the level of transparency will improve as transactions become more commoditised. This should create a much more efficient trading market, which should benefit most companies in the sector. The interests that investors hold and how they are traded will evolve over the next 10 years."
While new technology and aircraft designs will play a part in the future of aviation, what really drives the industry forward is demand for air travel and the mechanisms to finance that.
“It is estimated that between $5.8 billion and $6.3 billion will be required to finance new deliveries over the next 20 years,” says Woods. “There will also be a significant number of refinancings during the period. We will, therefore, likely see more innovative structures in the financing markets to attract more investors to the sector to support its capital demands.”