Five key trends to understand in aviation finance
AW Feature * The potential of GIFT City in transforming the aviation leasing business in India. * What are the scope and challenges faced the in aviation leasing business In India. * Scope of leasing bigger aircrafts through GIFT City ? By Dr. Arun Lohiya The aviation industry, after undergoing the hiatus due to Covid-19, has started displaying signs of growth and vast potential. By 2026, the Indian leasing market is expected to increase 4.8 times of its value in 2018, making India the third largest aviation market in the world. Moreover, around 80 per cent of the total commercial aircrafts are leased in India due to various reasons like price sensitivity of infrastructure and consumers, financial fragility and operational incentives Another reason for airlines looking for lessors abroad is scarcity of proper leasing companies in India. Finding lessors locally will help in ascertaining favourable terms and conditions, thus helping the lessees. It will also give a major boost to the economy, leading to increased GDP and better retention of financial business and services. The Ministry of Civil Aviation, Government of India made ‘Project Rupee Raftar’— a working group for development of avenues for aircraft financing and leasing activities. The aim behind the constitution of this committee was to develop a strong and indigenous leasing and financing structure. The group had aviation experts, lawyers and financial institutions to ponder on policy and implementation issues. On 20 December 2019, the International Financial Services Centre Authority Act (IFSCA) was enacted by the Parliament to establish an IFSC Authority. As a result, Gujarat International Finance Tec-City (GIFT City) came into existence. Then the Central Government categorised—aircraft leases (including operating and financial leases); any hybrid of operating and financial leases of aircraft or helicopters; and engines of aircraft or helicopters—as financial products under the IFSCA Act 2014. This opened prospects for formation of an aircraft leasing market in India, particularly in the GIFT City. Leasing in GIFT City includes an operating lease, sale leaseback, novation, purchase, transfer, assignment and any other related activity. “Touted as the country’s first operational green field smart city laced with best-in-class infrastructure to strengthen business and commerce, GIFT city is located in 105 hectares of special economic zone. An aircraft leasing company can set up themselves as an LLP, or a trust with a minimum capital of US$200,000 (or equivalent) and can deal in freely convertible currency and maintain a Rupee account to defray administrative expenses.” GIFT City also offers an elaborate range of tax incentives. In the 2021-22 Union budget, the government introduced various additional tax breaks like tax holiday for lessors and exemption from payment of withholding tax concessional corporate tax rates with the aim to encourage lessors to establish their units in IFSC. GIFT also provides a financially feasible environment with assemblage of financial agencies, including public and private sector banks, asset management companies and service providers. At present, India has 700 aircraft (commercial side) and India airlines have around 800 planes currently on order that are planned to be delivered in the next half a decade. However, despite this regulatory regime, there are numerous challenges and problems, aviation as an industry relies heavily on capital expenditure and funding from banks that are reluctant in financing aircraft because of the unclear regulatory regime. Furthermore, logistical issues like lack of airports poses a crucial challenge to aircraft lessors because newly leased aircraft are required to be stationed at a proper place. According to the current regime, an aircraft lessor at GIFT is excused from custom duty. However, uncertainty among custom officials is frequent resulting in procedural postponements. Even though the aircraft leasing and finance industry in India has growth prospects, it is imperative for the sector to identify and rectify the key bottlenecks. The country is required to build a conducive tax regime supported by authorities for private enterprise to grow and contest with the existing occupants. Moving on to some of the major bottlenecks to the airplane leasing industry—Competitive Tax Regime is a major hurdle in development of leasing businesses. The effective tax rates in countries like Singapore, Hong Kong, Ireland, etc. is between 10-17 per cent. In addition, firms in aircraft leasing businesses pay taxes at an even lower tax rate of 5-10 per cent in the above mentioned countries. The corporate tax rate in India, however, is 25 per cent for domestic businesses with turnover of up to Rs 250 crore and 30 per cent for businesses with higher turnover. This is much higher in comparison with countries with established leasing industries.Decreased and competitive tax rate for aircraft leasing firms is essential to build a viable leasing and financing market in the country. Secondly, withholding tax is a crucial decisive factor for the airline operators and also attracts most of the lessors’ attention. It is a general practice that lessors pass the withholding tax burden on to a lessee in the form of five years lease rentals. Since, withholding tax is levied on lease rental paid by the lessee or operator, a high withholding tax implies high cost of leasing to the airline operators. Based on the Airline Economics and AirFinance Journal conferences held in Dublin in May 2022, some of the most common trends are as following: 1.ESG: The upgradation of fleet and numerous green initiatives by major stakeholders have helped a great deal in reducing the sector’s carbon footprint. A common census, on making more efforts towards choosing eco-friendly ways, emerged from major players. Some of these solutions include increased use of SAF as supply increases and costs come down, and eventually use eVTOLs for lower capacity, short-haul transport. 2.Emergence of Alternate Capital Sources: For lessors, expanding funding channels remains to be a priority. Private equity’s existence is ever-growing and private equity firms have brought added competition in the debt markets. Especially while conventional financiers assumed a “wait and see” method, these substitute capital providers have shown an intention and capacity to step in and meet financing needs. 3.Potential Consolidation: A