KPMG is optimistic for the continued success of the aviation finance sector in Ireland, which is one of Ireland’s greatest success stories. “We are in the process of interviewing the chief executives from most major aircraft leasing companies for our annual Aviation Leaders Report, which will issue in January,” said Head of Aviation Finance, Joe O’Mara.
“The report will gauge how the sector has performed over the past year and the industry outlook for 2020. The overall message coming back so far is that, while there are macro headwinds, the outlook is broadly positive. Key areas such as oil prices and interest rates, two of the largest drivers of cost in the sector, have been relatively benign and in a world where air traffic continues to grow and an increased amount of aircraft are owned by leasing companies, aviation finance should continue to prosper.”
KPMG was an original advisor to GPA (Guinness Peat Aviation) in the 1970s and has been involved in the sector for over 40 years. It is recognised as one of the most influential companies operating in the global aviation sector worldwide. The company’s team of 150 experts have incomparable experience within the sector, providing a range of audit, tax and advisory services and assisting across a range of issues. It has the biggest concentration of aircraft leasing clients of any firm in the world, including the major deal-makers and deal-doers in the global aviation finance market.
20 years ago, aircraft lessors owned about 25 per cent of the world’s fleet. This has grown to over 45 per cent and more than 60 per cent of those leased aircraft are owned or managed out of Ireland.
KPMG’s aviation finance team has had a very busy year so far said O’Mara. “This is reflective of the activity in the sector, which is having a record run of profitability. Commercial air travel grew by 7.5 per cent last year, with over 4 billion passengers being carried by air in 2018. Global airline profitability is expected to be $28 billion this year, the fifth highest amount on record. The long-term forecast is for air travel to grow at an average of 4.5 per cent for the next 20 years. In the medium term, there will be a requirement to fund over $800 billion for the delivery of new commercial aircraft in the next five years.”
This is happening at a time where the percentage of aircraft that are leased has continued to increase. “Aviation finance will play a critical role in funding these new deliveries. Rewind to 20 years ago, and aircraft lessors owned about 25 per cent of the world’s fleet. This has grown to over 45 per cent and Ireland has been at the centre of that growth, with more than 60 per cent of those leased aircraft owned or managed out of Ireland,” said O’Mara.
These activity levels, driven by broader investor interest in and growth of the sector, have created some challenges and opportunities. “Aviation finance has become a lot more mainstream in recent years and there is increased market confidence in the business model. More aircraft lessors have achieved investment grade status and we have seen a significant increase in the level of funding that lessors can now raise in the debt and equity capital markets,” said O’Mara.
This influx of capital into the sector has resulted in a more competitive environment for lessors said O’Mara. “We have seen more and more entrants come into the leasing sector and this has put pressure on the pricing of transactions and the ability to source aircraft at the right price. While that growth has been positive for Ireland, where we have seen an increase in jobs in the leasing sector, it does make for a more challenging environment for lessors.”
The industry is conscious of its environmental impact and it is making efforts to cut carbon emissions, with improvements in the efficiency of new aircraft and significant investments being made into alternative fuel sources.
One of the other challenges that faces the entire aviation industry is climate change, which has led to the concept of flight shaming and could have a significant impact on air travel in the future. This is an area of increased focus for the aviation industry said O’Mara. “The industry is conscious of its environmental impact and it is making efforts to cut carbon emissions, with improvements in the efficiency of new aircraft and significant investments being made into alternative fuel sources. We also have seen major commitments from airlines such as IAG and Qantas in pledging to slash their carbon emissions to net zero by 2050. It will be very interesting to see how the climate change agenda will impact the aviation finance sector over the coming years.”
Aircraft leasing in Ireland is worth around €550m annually and it supports over 5,000 skilled jobs to the Irish economy. However, Ireland faces increased competition to maintain its place as the world leader in aviation finance. “Aircraft are a mobile asset class, and the likes of Singapore and Hong Kong are constantly looking to challenge Ireland for market share. We have a positive tax environment for aircraft leasing companies in Ireland, particularly with respect to our tax treaty network, but what offers us the greatest competitive advantage over other jurisdictions is the people that we have here. We can’t be complacent about building on that talent pool,” said O’Mara.
When people join this industry they rarely leave.
A deep pool of expertise in aircraft leasing has built up in Ireland since the 1970s and this is supported by a highly developed professional infrastructure said O’Mara. “We have been delighted to support the UCD’s Masters in Aviation Finance which has gone from strength to strength. It is also great to see the work that the Irish Aviation Student’s Association is doing in educating second and third level students about how rewarding a career in aviation can be. When people join this industry they rarely leave. But attracting the best talent in the first instance into the sector is critical in keeping Ireland where it is today.”
This article first appeared in The Sunday Business Post and is reproduced here with their kind permission.