Dublin's status as a centre of aviation leasing is likely to survive the downturn, but local operators will not be unaffected by the tumult in the global industry.
Lessors have been attracted to Ireland partly because of its favourable corporation tax rate, which is running at 12.5%, compared with 28% in the UK and 39.5% in the USA. Another draw is the country's extensive tax treaty network, a legacy of the Irish government's efforts to support aviation leasing pioneer Guinness Peat Aviation (GPA) two decades ago. "They did a very good job," says Colm Barrington, formerly of GPA and now chief executive of lessor B&B Air as well as chairman of Aer Lingus. "That is one of the reasons why Ireland is such a good centre - and that's not going away." Also, other potential locations would struggle to offer the pool of professional aviation expertise available to Dublin-based lessors.
 |
|---|
According to research conducted by KPMG and published by the Federation of Aerospace Industries in Ireland (FAEI) in June 2008, 994 people were employed by Ireland's cross-border aviation leasing industry - 614 of them direct employees, 380 indirect. The value of assets managed by this industry was listed as €82.9 billion and its contribution to the Irish Exchequer - via corporate tax, income tax and VAT - was calculated at €308.6 million. A survey conducted during the research found that 97% of industry respondents considered a supportive tax regime "very important" in their choice of location, and 68% considered their business to be "very mobile".
The impact of the global financial crisis and economic downturn has been particularly severe in Ireland, which in September became the first nation in the eurozone to enter recession after a spectacular construction boom gave way to an equally dramatic bust, and a glut of job losses ensued. In April, Ireland's unemployment rate rose to 11.4%, with the number of people claiming unemployment benefit exceeding 384,000, leaping from less than 196,000 in April 2008. So the closure of SR Technics' Dublin plant is part of a wider story.
Ratings agency Standard & Poor's has downgraded Ireland's credit rating from AAA to a AA+, and the local impact of the banking crisis has led the Irish government to create a national asset management agent to buy up to €90 billion ($120 billion) of toxic debt, a measure announced in April's emergency budget - the second inside six months.
That budget also raised the rates of a progressive system of income levies created under the previous budget. Effective from 1 May, the rates now stand at 2% on the first €75,036, 4% on the next €99,944, and 6% on the balance. The FAEI's research recorded a figure of €111,956 as the average salary earned by those directly employed by Ireland's cross-border aircraft leasing industry, so many in the sector will have seen their take-home pay shrink.
Some lessors, including AWAS chief executive Franklin Pray, have raised concerns that hikes in personal taxation have made it more difficult to recruit talent to Ireland. "The Irish are doing a lot right now to encourage us to pack up and move somewhere else," Pray told Flight's sister financial news service Commercial Aviation Online in December, citing "the high cost of living in Ireland [and] the increased personal tax burden". He added: "You need to have access to a pool of talent to run a business like this, because you're dealing with - to a large extent - fairly specialised talent. Attraction of that talent to Ireland is becoming more difficult."
 |
|---|
Barrington brands Ireland's latest budget "a pretty significant hit for people", but gives this assessment of the impact of the economic crisis: "Overall, with deflation in the economy, interest rates down, mortgages a lot less and house prices a lot less, things are better for people in many ways, financially, than they were two years ago." But he is fiercely critical of the decision to impose a €10 air travel tax on passengers departing Irish airports ("stupid") and, more generally, of the social partnership agreements negotiated by the Irish government, employer groups and trade unions. Pointing to SR Technics' demise, he says: "The government has again, through the social partnership, put these companies out of business by allowing us to become uncompetitive. We have one of the highest minimum wages in Europe, higher labour rates... If you're competing on an international stage, it's just not competitive, and we have similar issues we have to face in Aer Lingus."
The spectre of economic depression looms over Ireland, but it is problems in the global financial system, rather than local difficulties, that are of gravest concern to the aircraft leasing sector. After all, Irish banks were never a major source of financing for the nation's lessors.
No player in leasing would be unaffected by the sale of the world's largest lessor, ILFC, which fell into the US government's hands after the bailout of AIG and is now earmarked for divestment. At least one Ireland-based lessor faces being sold because of problems at its corporate owner - RBS Aviation Capital has been deemed non-core by its banking parent's new majority shareholder, the UK government. As such, it is in the shop window.
Meanwhile, Babcock & Brown Aircraft Management, parent of B&B Air, is set to leave the Babcock & Brown Group once a buyout involving a yet-to-be-revealed investor has been finalised.
Uncertainly surrounds the future of US lessors' Irish outposts. The American Jobs Creation Act, passed in the USA in 2004, removed the requirement for US-registered companies to pay tax in the USA on overseas profits, and so encouraged American lessors such as CIT, GECAS and Bank of America to set up Irish subsidiaries, but now the sands are shifting. Barack Obama has repeatedly stated his intention to clamp down on tax loopholes, so the prospect of American lessors closing their Irish offices appears very real.
Beyond structural change, Ireland's aviation leasing industry must steel itself for the domino effect of the recession's impact on the airline industry. Lessors must cope not just with aircraft returning unexpectedly because of default or bankruptcy (causing lease rates to soften, particularly on older aircraft types), but with a spike in requests for payment holidays or rental cuts. "We've had to do a few restructurings and give people some concessions - reducing winter rentals and getting the money back in the summer, things like that," says Barrington. "We've had to do that many times over the last 20 years, because it's just the nature of the game that some of these airlines are relatively thinly capitalised. The airline industry is very difficult at the moment. The yields are awful."
Many in the leasing market appear to be delaying investments amid uncertainty over how far aircraft values might drop, and B&B Air is among them. "We have a few transactions in the pipeline, but we're not actually going to close anything in the next month or so - we're waiting to see what happens," says Barrington. "We don't have any commitments. We have the flexibility to use the money we have for whatever opportunities might come along. Maybe two years ago, that didn't look like a very good strategy because aircraft were short in supply, but now it looks like a pretty good strategy because future orders are, I think, liabilities rather than assets, particularly when the price is locked in."
STUCK ON AMBER
Some of Ireland's lessors are hamstrung by the difficulties of a distressed parent; some are simply struggling to access liquidity. In the wider market, about 40% of the total lessor inventory by value is currently being traded, raising the prospect of significant structural change.
 |
|---|
Against this backdrop, most requests for proposals going into the market are attracting only two or three bids, whereas a year ago there would have been 15 or 20 pitching in, says one Ireland-based aviation financier.
Barrington sees the possibility of new business models emerging in aircraft leasing. "One of the reasons why ILFC has managed to do so well over the years is basically that they leased long and funded short, and GECAS is the same," he says. "They both lived off their parents to a certain extent. That may no longer be a way of doing business - you may have to match your funding much more directly in the future. If companies don't have the confidence that they can match the funds, they might not be able to make big, speculative orders in the future, which will mean they won't be able to get the same price discounts. It may actually in some ways be good for the smaller guys and may allow some diversity."
In the meantime, a wait-and-see attitude prevails. John Leech, head of marketing at Orix Aviation, says: "The aircraft leasing industry, both globally and in Ireland, is going through what I call an amber period - it has stopped, but it is ready to go. There is little movement at present because the trading environment is largely dependent on the debt markets and these are still not open for business... It remains difficult to predict a market floor. And the old maxim still remains: the day you buy is the day you sell. If you don't buy right, then it's a no-win game of catch-up."
Source: Flight International
