BY ROHIT SINGH TOMAR
The much anticipated Budget 2021 was recently announced by the Finance Minister of India Nirmala Sitharaman. Pre-budget months had seen a significant push from the Prime Minister for the Aatma Nirbhar Bharat Abhiyaan. It is expected that under this prerogative, manufacturing and in-country capabilities to perform aircraft maintenance would see a significant boost in the arm. With these expectations among the many aviation players, it was disappointing that the aviation sector did not find a mention in the budget. The incentives and policy to support India’s aircraft leasing industry were the silver lining in the budget speech. The aviation leasing market controls more than 65 per cent of the global fleet as of today. More than 35 per cent of the international deliveries in the next ten (10) years will be absorbed in Asia. While Singapore and Hong Kong continue their push in the aviation leasing sector, it seems an apt time to move into the aircraft leasing business.
Recently, IFSCA (International Financial Services Centres Authority) published the draft regulations for aircraft leasing and opened it for public comments. Further, the Union Budget of 2021 explains Indian government’s interest in this sector. However, we still have a long mile to walk in meeting the global standards required to make aircraft leasing attractive in India. Among the many things, an independent aircraft registry managed under Gift City with records of aircraft asset owners and parties with a financial interest in the asset is an important starting point. The Gift city’s ability to succeed in setting up its own securities and trading company will be critical for the aircraft leasing company’s access. Lessors deploy a significant amount of debt and for India to be seen attractive, will have to offer competitive cost of debt. For comparative numbers, Air lease raised debt in November 2020 via an issue of 10 years bond with a coupon of 3.13 per cent which is 200 basis points lower than the Indian Government G-Sec bonds with a yield of above 5 percent.
Strong Competition Among Lessors
An aircraft like A320 Neo with a typical purchase price of about 54 Million USD is leased at a monthly lease rental factor (LRF) of 0.65 per cent ~ 0.7 per cent. Even at these LRFs, there is strong competition among lessors. At such low LRF’s, the average return per year on the value of an asset is estimated to be about 8 per cent. This return is inclusive of the various risks, including country risk, operators risk, and other risk adjustments. Of this 8 per cent, the Lessors have to provide for the expenses of running the leasing organization plus returns to the equity holders (which is typically upwards of 20 per cent). The net available return to apportion towards cost of debt has a small margin of 0.5 to 1 per cent. For banks and investment firms in India, a 10-year G-sec bond issued by the Government of India provide yields above 5 per cent, compared to the Hong Kong government’s 10-year bond yield of 0.8 per cent.
At this juncture, we have not even factored in the currency fluctuation risks between the freely tradable currency as proposed (in USD or EUR) Vs INR. While the policy’s objective and the incentives are to bring foreign lessors to India, the government must learn from the past mistakes in aviation and realize that such movement will only be possible if and only if domestic banks are incentivized to lend capital at lower preferred rates. Incentivisation on lending is crucial for domestic capital being deployed and made available to leasing companies at par with international standards.
Moving away from leasing, the budget fell short of implementing much-needed reforms and policy changes for developing the MRO infrastructure in India. With more than 90 per cent of the aircraft component MRO business being outsourced to companies outside India, it is high time that developing in-house capabilities becomes a strategic objective of the Aatma Nirbhar Abhiyaan. Large scale policy and reforms are needed in the MRO capability development in India. The UDAAN scheme, under which India was successfully able to upscale and make operational many regional airports across India, also provided the strategic objective for the government to develop far-flung regional airport alternatives to existing defence airports, which adds the flexibility of movement of defence forces at the shortest time across these airports.
Value Incentivisation Approach
Global OEMs have realised that success in this space is because of the strategy of playing one OEM against the other. Pursuant to which, China-a country with the perennial perchance to emerge as a leader, has aggressively entered into the aircraft manufacturing sector, aiming to share the market space with Boeing & Airbus. To ward off such future challenges, OEMs across the aviation value chain have started acquiring & consolidating the competition. Such consolidated entity wins a monopolist position placing it at a strategically stronger position to negotiate with both the customers and the governments alike. China with its competitive wage rates will be the only new entrant in this space in the forthcoming years leaving India behind with significant opportunity to encapsulate in this space. The government needs to get its think tank together on how and what policies need to be implemented to create a value incentivisation approach for these OEMs and build a strong, robust, resilient and self-reliant MRO ecosystem in India.
While the government has reduced GST on MRO Services to make them competitive, it misses building long-term objectives. As time passes by for India, the only lever it has are the endusers of these OEM’s, that is, the airlines. The need of the hour that a comprehensive policy is developed which works on incentivizing the airlines for the work they carry out in India. For airlines, the opportunity for cost reduction should not only be limited to the labor cost arbitrage but also towards developing and supporting the transfer of work from their supplier to Indian players.
For the last many years, government policies have been aimed at improving different parts of aviation sectors one step at a time. However, the government needs to develop a comprehensive Strategic aviation eco-system policy, which is a united policy that is economically viable in the short term for all the players involved.
The writer is Managing Director of Caladrius Aero Consulting LLP, an aviation data and consulting firm to provide research and consulting services to airlines and airports. Views expressed are personal.
