India’s commercial aviation sector has, arguably, been built on the back of favourable aircraft finance for its airlines, but could it follow to become the next air finance powerhouse?
The Federation of Indian Chambers of Commerce’s Vision 2040 report on the country’s aviation industry, co-authored with KPMG, asserts that it is “no more an option, but a necessity” for India to become a major player in air finance.
It calls for major policy and tax reforms, efforts to make doing business easier, and even suggests that the government provide seed funding to establish aircraft leasing enterprises that, along with foreign companies opening in India, will “leverage opportunities in India, South Asia and beyond.”
The document makes the recommendation that by 2040, “almost 90% of aircraft being ordered in India should be financed by entities based in India.”
The picture painted is a stark contrast to the status quo, with Indian financiers barely a blip on the global air finance radar.
The report lacks any analysis of the global air finance market, and solid, workable suggestions for how India could gain a seat at the table against the likes of Singapore, Ireland, Hong Kong and China. Similarly, there was no mention of the balance sheet strength of Indian banks to be able to step into aircraft financing, nor any other barriers to entry and how they could be overcome.
It appears that the driving force behind the call for India to become an air finance hub seems to be a desire for local carriers to be able to tap rupee financing and leases.
“The aircraft finance products in India could be denominated in both foreign and Indian currency,” states the report, “The latter would be extremely helpful to new domestic airlines that may not have international operations and foreign exchange earnings in their early years.”
But that fails the first rule of Lease Club (OK, it may be the third rule), which is to never accept lease revenues in a currency other than that of the asset, which for now remains the US dollar.
Some Chinese carriers have been able to demand yuan-denominated leases from domestic lessors, but that remains firmly the exception rather than the rule. It also helps that the yuan – for now – remains largely controlled by Beijing, even with some relative volatility.
The report points to China’s rise as an air finance powerhouse as something of a leading light for India. “China has successfully been able to create a local aviation leasing industry with strong support from its government and the government-owned banks. It is not impossible.”
The authors fail to recognize that Chinese banks were involved in aerospace and aircraft financing for at least 30 years prior to the opening up of financial leasing in 2007. Add to that, the Chinese air finance industry exists within a greater aerospace ecosystem in a centrally-planned economy, with much greater policy aims at play, alongside the famous long-term orientation of Chinese enterprises.
By contrast, the policy instability caused by changes in India’s government make it unlikely that an administration that seizes the opportunity and implements policies aimed at fostering the air finance industry will be adopted by a future government. More often than not, a change in government in New Delhi leads to a ripping up of former policies, the implementation of new ones, and a bureaucratic nightmare that frustrates most investors.
To even contemplate being on an even keel with Singapore, Hong Kong, Dublin, and Tianjin, New Delhi would need tax reforms, a network of zero-rated double taxation treaties, and a path through India’s stifling bureaucracy. Getting all this done seems near impossible.
FOCUS ON FIXING THE NEAR-TERM ISSUES
To its credit, FICCI does make a number of recommendations to New Delhi to fix deficiencies in the existing regulatory frameworks for operating lessors.
“There is a need to have a sustained dialogue with the leasing companies to and via media so that their legitimate concerns around lengthy paper-work and delays in aircraft repossession are addressed. The status quo has to end.”
Key to making that easier is fully ratifying the Cape Town Convention. While India is a signatory to the agreement, its implementation has been piecemeal, and lessors have had issues when repossessing their aircraft. That has increased the risk and thus premium that Indian carriers have to pay.
Few in the industry will forget the difficulty in repossessing aircraft from Kingfisher Airlines when it collapsed in 2012 – not only for the difficulty in locating parts harvested and used on other aircraft, but also for the glacial pace at which the Directorate General of Civil Aviation deregistered aircraft.
Some say that the situation is better after recent High Court precedents that direct the DGCA to process deregistration requests much faster than in the Kingfisher case. And, to be fair, the recent deals that the likes of GoAir, Jet Airways and SpiceJet have cut with lessors such as CDB Aviation Lease Finance, SMBC Aviation Capital and Jackson Square Aviation, seem to indicate that the risks are manageable.
Further reforms to bring India more in-line with world’s best practice will be welcomed by the global finance community, and will ultimately benefit its airlines by allowing them to realise their growth potential through more competitive financing. Modest reforms require less investment than a government led effort to build a new air finance ecosystem.
The Modi administration’s ‘Make in India’ policy sounds great in theory, and ‘Lease in India’ also has a nice ring to it. But from this point, it looks nearly impossible to achieve over the next two decades.