Attention aircraft leasing lessors: change is coming, and you better be ready.
That was the takeaway from a panel I hosted at the Global
Airfinance Conference in Dublin last month, where I was joined by
Robert Kokonis, President and Managing Director of AirTrav Inc,
Canada; Brian Brennan, Partner, KPMG, Dublin; and John Pritchard,
Partner, Holland & Knight, New York. We discussed future
proofing your business in 2018 and found that the conversation is
centred on three main topics of concern right now: the price of
oil, taxation reform and changes to capital requirements under
Basel IV.
The biggest takeaway for me was the huge amount of change coming
down the tracks. Whether you're a lessor, an airline, a
financier, or play any part in the air industry, change is coming,
and it will impact everyone differently - it all depends on your
own business model, strategy and priorities.
Let's take oil as an example. Each organisation has different
ages of aircraft with different fuel consumption trends. The price
of oil is more important for companies with an older, less
efficient fleet than for those with newer fleets - and with
three-quarters of
today's fleets comprised of older aircraft, that means a major
impact is coming. Some companies will see the value of their
portfolio decrease if oil goes up, but those with an older fleet
will see value decrease disproportionately because it's less
fuel-efficient.
Recently, a lot of lessors have been focused on narrow-body
aircraft and relatively young fleets, and I expect that focus is
going to continue. It's going to be very much a case of how
that will then impact prices. Then comes the question of hedging -
how do airlines hedge, and if they don't have a strong hedging
policy, how exposed are they to the price of oil. You might have a
lot of activity, but aren't necessarily worried about oil
prices because of your hedging policy. Really, it's a case of
what works for the airline.
Lessors must seek substance
We are in a macroeconomic environment where oil prices are
increasing alongside interest rates, and there are a lot of
deliveries of aircraft, both wide-bodied and narrow-bodied, due to
come on stream, so there's a lot of moving parts in the
industry. Add to those moving parts a changing tax and regulatory
environment globally, and the pressure on aviation starts to
show.
For example, BEPS and other tax changes are likely to increase the
overall cost to lessors. They're going to need to have more
substance on the ground wherever they have operations, and exactly
what that substance looks like will depend very much on the amount
of activity in each jurisdiction they operate. Lessors will need to
demonstrate they are entitled to treaty relief, they are entitled
to tax deductibility on any interest that they're paying, and
more. That's a lot of work to do.
There really are a lot of changes coming down the tracks in
relation to companies being able to avail of treaty benefits,
companies having to have substance in jurisdictions, what that
substance requirement is going to look like, and the scale of it.
Substance is the big question for lessors right now; they must
consider what airlines they lease to, where that airline is based,
and how much activity they have in that jurisdiction, all of which
will indicate the amount of substance needed there. If there's
just one plane leased to an airline, the level of activity in that
jurisdiction is going to be a lot less than an entire portfolio
allocated to one jurisdiction.
Of course, all of this will depend on the specific circumstances of
a lessor, and with these moving parts and changes, it pays to seek
advice from an expert in the field.
TMF Group works with tax and legal advisors and banks to help set
up structures in over 80 countries around the world. Depending on
the ultimate structure that comes into place, we're a partner
who can support you however you need, wherever you need it. Get in
touch with our
aircraft leasing
specialists to discuss your specific circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.