In a recent Cirium LIVE webinar: India Briefing – Aviation Finance & Investment – guest speakers from IFSCA (International Financial Services Centres Authority) and aircraft valuation experts from Ascend by Cirium explored opportunities in financing and investments within the Indian aviation sector.
Here are the key messages from Dipesh Shah, Head Development & International Relations; Ashutosh Sharma, General Manager of IFSCA; Rob Morris, Global Head of Consultancy and Thomas Kaplan, Valuations Consultant, ISTAT Appraiser from Ascend by Cirium. The session was moderated by Varun Keskar, Cirium.
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Aircraft leasing is an emerging segment well supported by the Indian government
“The Government is committed to make the International Financial Services Centre (IFSC) in GIFT City a global financial hub. In addition to the tax incentives already provided, I propose to include, among others, tax holiday for capital gains for aircraft leasing companies, tax exemption for aircraft lease rentals paid to foreign lessors; tax incentive for relocating foreign funds in the IFSC; and to allow tax exemption to the investment division of foreign banks located in IFSC” said Finance Minister of India during the Budget Speech 2021-22.
Support from the Government of India has made it very viable and feasible for aircraft leasing entities to set up in Gujarat International Finance Tec-City (GIFT), which is the emerging hub for aircraft leasing & financing business.
Every stakeholder in India is acting swiftly to facilitate Aircraft Leasing at IFSC
“India has created a highly effective system for aircraft leasing and financing which is comparable to that of Ireland, China, Singapore, Hong Kong and elsewhere. The purpose is to grow India’s financing market which is critical to the development of aviation industry, creating high aspirational jobs in the sector and in turn propelling India’s growth” said Civil Aviation Minister at India Aircraft Leasing Summit 2021.
IFSCA has issued the first aircraft leasing license in May 2021 and the first aircraft leased from IFSC has landed in India in Aug 2021.
Dipesh said “that has made a unique proposition from the regulatory changes to the operationalizing of aircraft leasing, everything has now become a reality. As an authority, IFSCA has already licensed five aircraft leasing entities and are seeing a tremendous interest of close to 15-20 entities to set up base in the IFSC zone.”
Opportunities for market participants at IFSC
While IFSC is a recent platform, in joining the other players, Aushtosh said, one of the primary reasons the industry is taking a keen interest on IFSC is the simplicity and ease of doing business. IFSC provides opportunities for entities to set up with a well-regulated, light touch regulation with tax benefits. While IFSC is in India, the platform has been designed such that lessors can lease into India as well as globally.
Rob and Thomas continued the session to share considerations and the why, what and how of investing in commercial aviation.
Returns from investing in aircraft are stable and uncorrelated to other alternative investments
Despite cyclicality in the aviation market, investment in aircraft leasing has shown remarkably stable returns. Annualised average returns have typically been in the 6-9% range. Though the return has fallen for now as a consequence of COVID-19, the worst is now past and recovery expected in 2021 and beyond. Market is expected to go as low as it were in 2001 before turning back up.
Leasing has shown the best risk adjusted return and on a risk reward basis, investment in aircraft has outperformed many other asset classes including shipping, precious metals and investment trusts.
Leasing is a long-term game – risk management and asset selection is key
Returns can vary with portfolio strategy which can be adjusted to reflect risk appetite and reward requirement. There are several risks in investment in commercial aircraft.
Understanding and managing risk is essential to deliver the right return. This coupled with prudent asset selection is key to investment success.
When you are investing in an asset, you are looking for the flexibility, the best possible range, with the best highest possible payload which airlines will use to generate the highest possible revenue.
For an airline, it is important to have the lowest possible cost and one of the key drivers is fuel. Interiors and equipment can fundamentally impact an aircraft’s liquidity. As an investor, it is important to be advised about the right technology fit for my aircraft.
“We are trying to acquire an asset which has the greatest potential in liquidity that will not be distressed if it is returned to the lessor at any particular time. It’s all about liquidity. It’s a word we cannot use enough as appraisers, to talk about what creates good asset value protection is liquidity,” said Rob.
Maintenance condition—a critical consideration for an aircraft lease
“Maintenance moves in a zig-zag pattern over time. It’s very important as a financier or a lessor to understand that your value is not depreciating like it does in your accounting book, in a straight line over time. Maintenance alone will have a swing of volatility, which can be predicted. Any aircraft will have a different profile depending on its utilization,” said Thomas.
Older and least fuel-efficient aircraft values are the most affected in this pandemic
Aircraft values have definitely been impacted by the pandemic. Some aircraft types’ value have decreased by 30% – 50%. In general, the worse affected now are mostly the older generation aircraft, particularly the ones that are least efficient. In the face of lower demand and increasing supply, and the restrictions on international and long haul travel, the older, least fuel-efficient and wide-body aircraft have suffered the worse impact in this downturn. Newer generation aircraft were more insulated.
Optimistic long term outlook for B737 Max
In the US, the Boeing 737 Max is fully restored to service, and it is the same in Europe. In Asia, there is only one jurisdiction which presently returned the aircraft to service. Indications in India are that the DGCA are close to, if not ready to re-certificate the aircraft.
Longer term, we are confident in the Max, in its competitiveness vs the A320 Neo family. We still see sales of many thousands of Maxs, which will make it the second most successful aircraft, selling more than the B737 NG probably. Thomas talked about how aircraft values have changed during the pandemic, but the Max family value has changed very little. Lease rates have remained stable. Long term, our analysts are confident the aircraft have the values that support the finance of the Max today.
The on-demand Cirium Live: India Briefing – Aviation Finance & Investment may be watched here.