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Since the creation of the commercial aircraft sales and leasing company, Guinness Peat Aviation (GPA), in the 1970s, Ireland has developed a reputation as a centre of expertise in aviation financing, with a deep pool of skilled arrangers, managers and advisers.

In recent years a number of significant M&A transactions have been executed by Irish leasing groups. A large number of new leasing companies have been established in Ireland and there has also been significant investment by Asian investors, US-based private equity firms, pension funds and institutional investors, amongst others, in Irish aircraft leasing companies. 

Tax environment in Ireland

There are a number of tax factors which contribute to the success of Ireland as the global leader for aircraft leasing: 

  • Ireland has a 12.5% rate of corporation tax on trading profits, which is one of the lowest corporation tax rates in Europe. It has maintained this rate for over 20 years and the rate has broad political support across all the main parties in Ireland. Unlike Singapore, this is not a concessional tax regime and it offers transparency and certainty to leasing companies based in Ireland. 
  • Ireland allows tax depreciation on aircraft purchased by lessors over eight years on a straightline basis. Ireland also allows companies to carry forward unused tax losses indefinitely. Given that the useful life of an aircraft is typically between 20 and 25 years, this tax depreciation and tax losses policy provides for a significant deferral of cash tax for Irish-based aircraft leasing companies. In contrast, the new aircraft leasing tax regime established recently in Hong Kong does not allow for cash tax deferral and this is a significant drawback for to that regime. 
  • Ireland has an extensive double-tax treaty network, with over 74 signed double-tax treaties in place. While having a significant number of treaties is important, what is key for aircraft leasing is the quality of those tax treaties, i.e. do the treaties eliminate withholding tax on cross-border lease payments. The Irish double-tax treaty network is best in class in this respect. It provides Ireland with a competitive advantage over other jurisdictions, such as Singapore or Hong Kong, and it is the most important tax factor behind the success of aircraft leasing in Ireland. Developing a high-quality tax treaty network is an arduous process that takes years. As such, it is unlikely that other jurisdictions will be able to match Ireland’s offering in the medium term. 
  • Ireland offers a number of withholding tax exemptions for interest and dividend payments made to non-residents. Generally, we exempt withholding tax for any residents based in EU countries or in countries which have signed a doubletax agreement with Ireland. 
  • Ireland has a stamp duty exemption for the transfer of aircraft.
  • Ireland does not currently have any thin capitalisation rules which restrict the tax deductibility of interest payments. (These rules are likely to be amended in 2021 on foot of the EU’s anti-tax avoidance directive). 
  • Ireland has an attractive securitisation tax regime for leasing and, it is also possible to achieve tax neutrality in certain regulated investment vehicles here. 
  • Ireland has no outbound withholding tax on lease rentals. 
Table 1: Aircraft delivery financing breakdown

Table 1: Aircraft delivery financing breakdown

Business environment in Ireland

While the tax environment in Ireland is a key factor supporting its number one position in aviation finance, there are several non-tax factors that strongly support the sector’s development and growth: 

  • The primary factor for Ireland’s success is a deep pool of local expertise that has developed here since the 1970s. This includes both highly experienced leasing groups in all facets of the business – C-level, marketing, finance, technical, legal, commercial – and also a highly developed professional services infrastructure, which has grown here in recent decades. 
  • All of the major lessors have operations in Ireland, and most of the largest aircraft lessors in the world (AerCap, Avolon, GECAS, SMBC) are headquartered in Ireland. Over 4,000 of the world’s leased aircraft and engines are owned by Irish companies and there are over US$140bn of assets under the management of Irish-based lessors. This scale of aircraft leasing operations is unparalleled across the globe. 
  • All of the aircraft asset-backed securitisation (ABS) vehicles in the world are based in Ireland. This is a market that has grown very strongly in the last five years. There was more than US$7.5bn of aircraft acquired into ABS structures in 2018. 
  • Ireland has a young, well-educated workforce and is generally viewed as politically stable, with a pro-business environment.
  • Ireland is a member of the Cape Town Convention, which aims to harmonise the legal framework for the provision of finance, leasing and sale of aircraft, aircraft engines and helicopters, internationally, with the intention of reducing finance costs. Ireland was one of the first countries, and the first EU state, to ratify this convention. The International Registry of Mobile Assets is based in Dublin. 
  • The Irish Stock Exchange (ISE) has plans to create a dedicated exchange for aviation-related debt and other instruments. The ISE is already home to a number of aviation debt and equity listings. These have a total value in excess of US$12bn (which includes Ryanair and Aer Lingus listings). 
  • Ireland is an English-speaking jurisdiction, located in a favourable time zone for dealing with the East and West. This is particularly helpful given that the majority of investors in aviation finance are split between North America and Asia. 
  • From a legal perspective, Ireland has a common law system. It offers Chapter 11-10 type protection for creditors that are lending against aviation assets, and it can facilitate ECAbacked or other orphan financing. 
Table 2: Growth of aircraft leasing 1970–2020

Table 2: Growth of aircraft leasing 1970–2020

Aviation finance market overview

Ireland’s place at the centre of aviation finance is clear, but looking at the broader global aviation market, there are generally positive macro factors for air travel: 

  • The commercial aviation industry has been resilient to external shocks, with traffic growing by 230% since 2000. In line with this, revenue passenger kilometres have doubled every 15 years. 
  • Revenue passenger kilometres grew by 7.5% in 2018. This shows that an impressive 4.1 billion passengers were carried by air in 2018. 
  • It is projected that global annual air traffic will increase by an average of 4.4% in the next 20 years. 
  • According to the Airbus Global Market Forecast 2018-2037, the commercial passenger aircraft fleet is forecast to more than double in the next 20 years. It is forecast to rise to approximately 48,000 aircraft. In order to achieve this number, over 37,000 new aircraft will be required (with 10,850 older aircraft required to be replaced). 
  • The financing forecast for global commercial airplane deliveries (per Boeing’s 2019 Current Aviation Finance Market Outlook report) is US$143bn for new aircraft in 2019, growing to US$181bn by 2023. The total amount required to fund the delivery of new commercial aircraft from 2019 up to 2023 is estimated at over US$800bn. 

That said, there are a number of headwinds in the aviation industry which give rise to some concerns: 

  • The growth in air travel has, over the long term, broadly followed a two-time multiple of global GDP growth. A slowdown in the macro economy will have a negative impact on the aviation sector. Factors such as the ongoing global trade disputes and Brexit are contributing to a slowdown in global GDP growth and this is a concern for the aviation sector. 
  • Airlines continue to face issues relating to rising labour and maintenance costs. The worldwide shortage and age profile of pilots is also an increasing concern. 
  • Airlines are susceptible to volatility in oil prices and interest rates. Both have been relatively benign over the course of 2019, but spikes in either area could adversely impact the sector. 
  • The climate change and sustainability agenda is having an increasing impact on the aviation sector. Flight shame is cited as one of the reasons for decreased domestic air travel in Sweden. Improvements are being made through the efficiency of new aircraft technology and significant investment is being made into both battery technology and alternative fuel sources. However, the sector needs to better promote these technical innovations as well as highlighting the social benefits that air travel brings. 
  • The grounding of the Boeing B737 Max aircraft is having an impact on the supply side. The longer the aircraft remains out of service, the greater the impact it will have on overall growth in air travel. 

So, while there are headwinds to consider, on balance, there should continue to be a significant demand for aviation finance, and the aircraft finance industry remains in a healthy state: 

  • There is a diverse range of funding options available in what continues to be a highly liquid sector. Aviation financing has become more mainstream and attractive. 
  • On the banking side, new and old banks have returned to the aviation banking sector, tempted by margin and fee income from bank debt and capital market products. 
  • One of the defining characteristics of the aviation financing market is the ability to continually innovate and create efficient and suitable funding to meet the market’s needs. 
  • Intensified competition, increased M&A activity, an abundance of liquidity pushing down margins and regulatory changes threaten to change the face of the aviation finance industry. 
  • Commercial bank debt and capital markets will continue to finance the largest share of aircraft deliveries. This trend is expected to continue as airlines and lessors strengthen their credit rating and can tap into the unsecured debt market at competitive rates. 
  • With markets remaining healthy and numerous financing options available, export credit volumes saw another year of decreased use. 

In the context of the above, it is important to note that aircraft leasing continues to grow in relative size and importance, and the total percentage of aircraft that are owned by lessors (by number) is expected to reach 50% in 2020. 

While the number of publicly listed lessors remains relatively small, aircraft leasing has become more mainstream. This can be seen from the increased number of aircraft lessors that have achieved investment grade status. 

This has allowed aircraft lessors to better access the capital markets, with increased levels of unsecured debt and ABS issuances being used to finance their portfolios. Unsecured funding now represents more than two-thirds of the debt being raised by aircraft lessors. This reflects increased market confidence in the business model.

Conclusion

In a world where air travel will continue to grow and where significant capital is needed to fund aircraft deliveries, the outlook remains relatively optimistic for the aircraft leasing sector. 

Given Ireland’s current place at the centre of the aviation finance world and the supporting factors that exist here, Ireland should continue to prosper as a global hub for aviation finance. 

This article first appeared in the World Leasing Yearbook and is reproduced here with their kind permission.