John Whelan argues that Ireland will have to box clever if it is to maintain its pole position for aircraft leasing

However, the penetration of operating leases as a means of financing aircraft increased most rapidly in the period after the 9/11 terrorist attacks, rising from 25% in 2000 to 40% in 2014.

The main driver of the change was as a result of the commercial banks, previously the main source of aircraft financing, reducing their airline exposure in the wake of 9/11. This was to happen again in aftermath of the Lehman Brothers collapse.

Globally, aircraft lease financing companies recorded sales income of approximately €38 billion in 2014. Lease operators based in Ireland accounted for 21% of this global total, with a sales income recorded of €7.8 billion.

The large size of the aircraft operating lease industry is partly a function of the historical poor profitability of the world’s airlines — Ryanair being a notable exception. In most cases the poor balance sheets, exacerbated by the change in EU regulations of state aid to bail out failing airlines, and precluded them from buying and funding new aircraft.

Early pioneer

Tony Ryan was an early pioneer who spotted the potential for exploiting the lease-finance business model as a means of improving the return for airlines. His GPA company was able to offer airlines with surplus or under-utilised aircraft an opportunity to off-load them by placing them on lease to other areas of the globe where there was a shortage.

GE Capital Aviation Services (GECAS) — which bought out GPA’s assets has continued the Ryan legacy in aircraft leasing in Shannon. With 1,840 fixed-wing aircraft on lease, GECAS is currently the largest lease finance operator globally. Aercap, the second largest player globally, is also located in Shannon, but as with GECAS, is increasingly trading from its Dublin facility.

Domhnal Slattery added to the Irish aircraft leasing scene with his Avolon Inc. company which he set up in 2010. Within five years Avolon had built up a lease fleet of 145 aircraft, generating estimated sales revenue of €830 million before selling out in 2015 to the Chinese Bohai Corporation. However, the Dublin office continues as the operating office for the lease company.

Air travel demand forecast to double

Global air travel demand has grown by an average of 5% per year over the last 20 years. Published forecasts by IATA, the global airline trade body, indicates that air travel demand will double over the next 15 years. The continued growth is expected to be by increasing wealth in the Asia–Pacific and emerging markets.

However, the picture is even more promising for the lease business, with all the industry sources estimating that aircraft lessors will increase their penetration of the commercial jet market from the current 40% to an estimated 60% of the flying fleet.

This would see the global lease market exceed €100 billion by 2033, and Irish aircraft lease income forecast to rise from the expected €8.9bn in 2015 to €20 billion by then.

Ireland is well positioned to continue to be the leading location for lease corporations to operate from. The Irish government participated in a joint venture to establish and operate the global register of financial interests in aircraft, Aviareto.

Location of choice

In the Finance Act 2011 a number of measures were introduced enhance Ireland’s status as the location of choice for aircraft leasing companies. These included the expansion of the Section 110 regime. This enabled off shore leasing companies to hold aircraft on the Irish register for financing and taxation purposes.

However, global demand is moving towards Asia and new start-up airlines are increasingly emerging in this region. Hence, in spite of the strength of the county in the aviation and financial services sectors, Ireland will have to box clever if it is to maintain itself as a global hub for aircraft financing.

The Finance Act 2013 had some measures which should help reach this goal, such as enhanced equipment trust certificates (EETCs) and the enabling asset backed securities (ABS) debt financing. This was further improved by the State Airports (Shannon Group) Act 2014 which will enable financiers to get access to their aircraft assets in the event of default or insolvency more speedily than they would under the national insolvency rules as they exist.

Once again Shannon is being asked to take the lead with the establishment of the Shannon Group which amalgamated Shannon Airport Authority and Shannon Development into a new commercial organisation with a mandate to establish and expand an International Aviation Services Centre.

But the centre of gravity for the aircraft lease and financing industry has moved over the past five years to Dublin’s International Financial Services Centre (IFSC). It will take high levels of pro-active globetrotting from the management team in Shannon to pull the rug at this stage.

However, the real battle will be to get lease financial operators to maintain their presence in Ireland, east or west.

John Whelan is a leading international trade consultant