Change is afoot in aircraft leasing: are you prepared?
Opinion 3 minute read

Change is afoot in aircraft leasing: are you prepared?

06 March 2018

Attention aircraft leasing lessors: change is coming, and you better be ready.

That was the takeaway from a panel I hosted at the Global Airfinance Conference in Dublin last month, where I was joined by Robert Kokonis, President and Managing Director of AirTrav Inc, Canada; Brian Brennan, Partner, KPMG, Dublin; and John Pritchard, Partner, Holland & Knight, New York. We discussed future proofing your business in 2018 and found that the conversation is centred on three main topics of concern right now: the price of oil, taxation reform and changes to capital requirements under Basel IV.

The biggest takeaway for me was the huge amount of change coming down the tracks. Whether you’re a lessor, an airline, a financier, or play any part in the air industry, change is coming, and it will impact everyone differently - it all depends on your own business model, strategy and priorities.

Let’s take oil as an example. Each organisation has different ages of aircraft with different fuel consumption trends. The price of oil is more important for companies with an older, less efficient fleet than for those with newer fleets - and with three-quarters of today’s fleets comprised of older aircraft, that means a major impact is coming. Some companies will see the value of their portfolio decrease if oil goes up, but those with an older fleet will see value decrease disproportionately because it’s less fuel-efficient.

Recently, a lot of lessors have been focused on narrow-body aircraft and relatively young fleets, and I expect that focus is going to continue. It’s going to be very much a case of how that will then impact prices. Then comes the question of hedging - how do airlines hedge, and if they don’t have a strong hedging policy, how exposed are they to the price of oil. You might have a lot of activity, but aren’t necessarily worried about oil prices because of your hedging policy. Really, it’s a case of what works for the airline.

Lessors must seek substance

We are in a macroeconomic environment where oil prices are increasing alongside interest rates, and there are a lot of deliveries of aircraft, both wide-bodied and narrow-bodied, due to come on stream, so there’s a lot of moving parts in the industry. Add to those moving parts a changing tax and regulatory environment globally, and the pressure on aviation starts to show.

For example, BEPS and other tax changes are likely to increase the overall cost to lessors. They’re going to need to have more substance on the ground wherever they have operations, and exactly what that substance looks like will depend very much on the amount of activity in each jurisdiction they operate. Lessors will need to demonstrate they are entitled to treaty relief, they are entitled to tax deductibility on any interest that they’re paying, and more. That’s a lot of work to do.

There really are a lot of changes coming down the tracks in relation to companies being able to avail of treaty benefits, companies having to have substance in jurisdictions, what that substance requirement is going to look like, and the scale of it. Substance is the big question for lessors right now; they must consider what airlines they lease to, where that airline is based, and how much activity they have in that jurisdiction, all of which will indicate the amount of substance needed there. If there’s just one plane leased to an airline, the level of activity in that jurisdiction is going to be a lot less than an entire portfolio allocated to one jurisdiction.

Of course, all of this will depend on the specific circumstances of a lessor, and with these moving parts and changes, it pays to seek advice from an expert in the field.

TMF Group works with tax and legal advisors and banks to help set up structures in over 80 countries around the world. Depending on the ultimate structure that comes into place, we’re a partner who can support you however you need, wherever you need it. Get in touch with our aircraft leasing specialists to discuss your specific circumstances.

Written by

Kevin Butler

Head of Capital Markets, International and EMEA

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