Chinese aircraft lessors can be seen preparing for the industry's next growth phase, fuelled by a continuing boom in air travel in China and across Asia Pacific.
The growth of China's aviation finance industry over the past decade is a success story by most measures.
Between 2007 and 2017, Chinese aircraft leasing majors have grown in number from only four to more than 20. In the same period, Chinese firms' ownership of all leased planes in the country shot up from 5% to over 50% while their share of the global aircraft leasing market rose from near zero to 10%.1
Now, with an eye to the future, Chinese lessors can be seen preparing for the industry's next growth phase, fuelled by a continuing boom in air travel in China and across Asia Pacific.
Growing at home
China is slated to be the world's fastest-growing air travel market (by passenger numbers) for the next two decades.2 To meet this demand, the country is estimated to need about 7,000 planes worth over US$1trn.3
This translates into a huge business opportunity for China's aircraft lessors, especially after accounting for airlines' growing preference for leasing planes instead of buying them. Indeed, over 50% of aircraft worldwide are now leased.4 Aiding Chinese lessors in mining this growth are various government initiatives introduced over the years.
In 2007 the China Securities Regulatory Commission allowed local banks for the first time to establish leasing companies.5 This was followed by the launch of the Dongjiang Free Trade Port (DFTP), which conducted its first aircraft leasing transaction in 2009.6 Since then, it has enabled the industry's growth with business-friendly policies such as offering tax rebates and allowing lease payments in foreign currencies. As of June 2018, the DFTP has facilitated the delivery of 1,200 aircraft worth over RMB450bn.7
Success at home has prompted Chinese leasing companies to look for growth in foreign markets.
Their overseas ambitions also have received the government's support in the form of a decision, in 2015, to provide subsidies to and streamline regulatory and tax frameworks governing cross-border financial leasing services.8
Since then, all major Chinese lessors have built up a sizable presence abroad, typically starting their international operations in Ireland or Hong Kong, or a combination of the two. These locations offer significant benefits to lessors considering and comparing various international leasing and financing platforms.
Ireland, with its 72 double tax treaties,9 is the global hub for aircraft leasing and an ideal place for Chinese firms to base their foreign business. Hong Kong is becoming a regional draw with its rule of law, low regulatory barriers and recent tax reforms aimed at promoting aviation finance. The city also offers benefits to companies from the mainland such as geographical proximity, a shared language and business culture, and access to new growth markets such as the Greater Bay Area.10
Lessors can also maximise their reach and profitability by factoring the location of their current and potential clients into the decision on where to base their foreign operations.
There is plenty of room to grow. The International Air Transport Association predicts global air passenger numbers will double to 8.2 billion in 2037 and the Asia Pacific region will account for over half of this growth.11 So far, business has been good with the value of the fleet managed by Chinese lessors growing by over 15% from the previous year to more than US$40bn in 2017.12
Coping with challenges
The healthy growth has unleashed a fresh wave of competition at home and abroad, and Chinese lessors can expect to face some crosswinds as they seek to expand in the years ahead.
Along with a spurt in the number of leasing companies, China's evolving aviation market is following a natural growth trajectory similar to those seen in markets across Europe and the Americas over the past decade. This includes a move by airlines, buoyed by the strength of their local balance sheets, to raise funds on their own. Increased competition has hurt lease rental rates and bottom lines, bringing consolidation to the industry and forcing Chinese leasing companies to work harder for market share.
Chinese lessors looking to succeed in foreign markets also have to contend with operational challenges such as opening a bank account - a basic yet pervasive issue affecting leasing companies across jurisdictions. Additionally, lessors also face staffing issues and cultural differences abroad that can hobble smooth, linear growth.
To cope with these issues, Chinese lessors are closely examining and rationalising their operations to improve efficiencies, become more competitive and enhance profitability. This exercise can be effectively tackled with the help of a partner providing the right mix of industry expertise, global networks and local knowledge.
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TMF Group, with its capital markets team in all major leasing hubs is perfectly positioned to serve as your global one-stop shop, providing core services such as accounting and payroll, as well as operational and consultancy support, to assist aviation leasing companies expand to - and succeed - in foreign markets.8
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