'Glut of metal' as planes come off lease

Hope is not a strategy for the Irish aviation industry, Stephen Kelly of Global AVX told a Tully Rinckey interactive panel discussion on the theme of the ‘aviation re-build’.

Global AVX was built for bankrupted airlines to have a means of efficient and transparent disposal of assets.

Its platform allows these assets to be bought and sold, from a home screen, anywhere in the world. The global market, rather than the platform, determines the price, Kelly said.

A total of 1,300 commercial passenger planes are coming off lease in 2021, he elaborated.

“For the first time ever, the majority of them do not have an onward home to go to,” he said.

And an unprecedented 32.5% of commercial passenger aircraft were on the ground on 25 August.

Unsustainable debt

By the end of this year, a full 2,000 planes will never fly again, said Kelly, up from 680 in 2019.

And the International Air Transport Association (IATA) has also said that airlines will hold an unsustainable $634 billion of debt.

Airlines and second-tier lessors face bankruptcy, Kelly said, and financial institutions will have to appoint receivers, administrators and bankruptcy trustees in order to recover as much of this debt as possible.

The maintenance, repair and operational costs of grounding the aircraft indefinitely are prohibitive.

“These planes were meant to live in the air, and only on occasion visit the ground. Unfortunately, it’s the opposite way around.”

Clever restructuring

The market is offering payment holidays, leasing holidays, maintenance holidays and insurance holidays, he said.

Companies are also taking equity and offering a sale and leaseback arrangement for airlines to free up some well-deserved cash.

There have also been clever restructuring models, he said. CityJet successfully exited examinership and Nordic Aviation Capital, a regional lessor, has entered a scheme of arrangement.

He said that Global AVX wants to allow the global marketplace to determine the price and value of aviation assets, in an open and transparent auction.

With the ‘glut of metal’ coming back on the market, the AVX platform is designed to mitigate against litigation with a ‘cloak of transparency’ and due diligence on the assets in question.

The pandemic is a 100-hundred-year event, Kelly said, but the explosion of online e-commerce throws up the opportunity of buying up wide-bodied planes and reconfiguring them for cargo.

And 2,000 planes on the ground can be bought for parts and sold into the maintenance, repair, and overhaul (MRO) market, which is estimated to be worth $50 billion this year.

The populous emerging markets can also be tapped, and Global AVX is in talks with a client in Myanmar planning for future population growth.

“This as a crisis, it’s a turning point, and an unbelievable opportunity down the line,” he said.

Business-friendly

Aaron McGarry of Tully Rinckey said the 21st century had seen a rapid expansion in the Irish aviation market.

Of 26,000 commercial aircraft, 40% are leased and half of that number is owned or managed in Ireland, while 15 of the top 50 lessors are headquartered here.

This is the result of a business-friendly environment in which to hold and manage large assets, while experts in the space help ensure the smooth running of these businesses.

One of the tenets of the Cape Town Convention, which governs moveable assets, is that the registry of aircraft equipment is based in Ireland and all related legal disputes are heard in the Irish High Court.

Uniformity with the US financial system also gives comfort to creditors about the 60-day terms for repossession of valuable assets.

The common law system further emphasises Ireland as a stable and certain place in which to do business, McGarry said.

Planes parked up

All of these factors have allowed Ireland to ride a wave of unprecedented growth in the aviation sector up until the start of this year, when both Boeing and Airbus predicted 35,000-42,000 new aircraft requiring delivery over the next 20 years.

Airports hit by COVID-19 have now reported 80%-plus falls in traffic, he said, with airlines running at 20-30% capacity and no plans to change that in the near future.

Vast numbers of aircraft are parked up and won’t see service again.

It’s unlikely we will ever fly again on Boeing 747s, McGarry said, as the crisis has led to their retirement.

An industry consensus is for a three-to five-year timeframe before volumes recover to 2019 levels.

The industry will be smaller, McGarry predicted, with fewer airlines and fewer lessors, but a correction was due since margins had been getting tighter in the last few years.

A return to better margins may well make it a more profitable place to invest in the future, said McGarry.

“In the meantime, airlines are burning through cash to stay afloat.”

Increasing consumer confidence is the number one hurdle, he said, and health passports could help in this.

Tax treaties

Panellist Angela Fleming of BDO Ireland said that Ireland’s competitive tax regime for aircraft leasing is a direct result of Government policies spanning several decades.

Unlike some other jurisdictions, this is not new and it’s not temporary, she said.

Successful aircraft leasing ranges from aircraft acquisition, lease finance negotiation, and ongoing management of rentals, technical and maintenance, to lease-end negotiations and re-marketing.

These activities in Ireland are untaken by highly-experienced teams, supported by a framework of strong legal and professional services.

Ireland’s extensive double tax treaty network is another factor in the industry’s success, Fleming said, with 73 of 74 currently fully in effect.

“It takes years and years to negotiate a tax treaty, so the idea that another jurisdiction can come along and replicate that overnight is simply unrealistic,” she said.

The UK has 130 double tax treaties, but Ireland’s are better quality, and specifically negotiated with aircraft leasing in mind, she explained.

A full 80% provide for zero withholding on lease rentals, which makes the Irish treaty network stand out.

Treaties are key because airline leasing is by its nature an international business, Angela Fleming explained.

A tax deduction for the cost of acquiring an aircraft means depreciation losses can be carried forward and used against profits.