Article

Take to the skies – key trends and developments in the aviation finance market

17 January 2018

The aircraft market is expected to flourish in the next few years thanks to the growing demand for air transport. Prospective investors who are considering to lease or buy an aircraft should consider the trends and benefits of aircraft leasing.

Countries:

The aircraft market is expected to flourish in the next few years thanks to the growing demand for air transport. Some of the main factors that have led to this growing demand are: the increase of passenger traffic due to the recovery in the travel and tourism industry, the growth of the middle-class in emerging markets, and the rise of low-cost carriers in Asia.

Along with fleet renewal and expansion, the aircraft market is expected to drive a significant growth in the latter part of the decade. The global commercial leased aircraft asset class is predicted to reach a portfolio value of approximately US$500 bn by 2024. As a result of these market trends, there is an increase in the need for supporting financing resources.

Industry growth and trends

According to research from Airbus, in the next 20 years, the growth in revenue passenger kilometres (RPK) will mainly come from emerging countries and regions, such as China, India, Africa and Latin America. By 2036, these regions will account for a yearly increase of 5.8% in RPK, whereas advanced regions – Western Europe, North America, Japan and Australia – will account for another 3.2% RPK increase per year.

In its Current Market Outlook 2017-2036, Boeing forecasts a need for new airplanes to meet the growth demand in air travel over the next 20 years. The global commercial jet fleet is projected to double in size by 2036 in order to serve an air travel market projected to be 2.5 times larger than it is now. In addition, three quarters of today’s 23,500 commercial jets are forecast to need replacement, contributing to an overall demand for over 41,000 new airplanes. 

Key regions for aviation finance

Ireland, US, China, Hong Kong and Singapore are the key jurisdictions for aircraft leasing structures. To benefit from these growth trends in the aircraft market, some of these countries have been introducing new funding requirements around aircraft leasing structures and refocusing their regimes. 

In Europe, Ireland is known as the founder of the aircraft financing and leasing industry. It has become a stable and favourable location for aviation finance thanks to its tax regime, and the number and quality of tax treaties it has entered with other countries.

Over in Asia, Hong Kong and Singapore have long been competing to attract lucrative aircraft leasing business. Last year, both jurisdictions introduced new legislation to offer various advantages to the aircraft leasing industry, including a favourable tax regime. To read more about the specific changes in Hong Kong and Singapore, go to “New legislative changes make Hong Kong and Singapore more competitive in the aircraft leasing business”. 

Leasing vs. buying an aircraft

Tax benefits and the reduced need for capital have sparked the interest in leasing as an alternative to buying an aircraft over the years. Flexibility on rental payments in aircraft leasing contracts, the extendibility of the operating lease, attractive maintenance agreements and disposal programmes for end-of-life aircrafts are all strengthening the reliability of leasing.

One key condition to note, which is true for almost all countries offering favourable regimes for aircraft leasing structures, is that the central place of management should be in-country and substantial activities in the region must be demonstrated, including establishing a local office and having employees. So, the costs of setting up shop should at least be outweighed by the benefits one can gain through said regimes.

Whether to lease or buy an aircraft, prospective investors should consider these trends and benefits of aircraft leasing.

Need more information?

TMF Group has extensive experience in providing corporate services to companies and special purpose vehicles (SPVs) that are used for owning and leasing aircraft through our Aviation Finance Services. We manage hundreds of aircraft leases in SPVs around the world. Our clients include banks, airlines, private equity, hedge funds and aircraft lessors. 

For more information, read our Air Lease Corporation case study and learn how we help our clients to establish themselves around the world.  

Find out more about how our aviation finance services can help your business reach new heights.

Written by

Kevin Butler

Managing Director

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