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Still flying high

Ireland’s aviation finance industry continues to scale new heights

Ireland is the location for 65 per cent of the world’s leased aircraft fleet. Photograph: iStock

Ireland is the location for 65 per cent of the world’s leased aircraft fleet. Photograph: iStock

 

For the past three days, Dublin has played host to the top names in global aviation finance. Now in its final day, the Global Airfinance Conference at the Convention Centre, Dublin, has attracted well over 1,500 industry professionals from dozens of countries around the world to discuss the latest trends in aircraft finance.

The fact the conference is being hosted in Ireland is no coincidence – it is due to Dublin’s position as the acknowledged global leader for the aircraft leasing industry. The figures here are quite staggering. According to industry bible Airfinance Journal’s Fleet Tracker, some 38 per cent of the global fleet of more than 25,000 aircraft is leased at present and it is estimated that if historic growth trends continue, that share will reach 50 per cent in the next 10 years.

While some disagree with that estimate and put the likely eventual share at somewhere around 45 per cent, there is no real dispute about Ireland’s share of the leasing market. “Ireland is the location for 65 per cent of the world’s leased aircraft fleet,” says PwC aviation finance practice partner Brian Leonard.

That represents assets worth hundreds of billions of dollars. And the trend is only going in one direction. PwC’s Taking flight 2018: An economic & employment analysis of the aviation leasing industry in Ireland report puts Ireland’s aviation-leasing industry contribution to the economy at $660 million (€541 million) with nearly 5,000 jobs supported.

“The industry in Ireland experienced exceptional growth of 36 per cent in aircraft numbers in the five years to 2016 and is expected to show further significant growth to 2021,” Leonard adds.

Leasing companies across the globe continued to grow their businesses, according to KPMG partner Tom Woods. “In 2015, there were approximately 33 companies with assets worth in excess of $1 billion and five companies with assets worth in excess of $10 billion,” he says. “In 2017, the number of leasing companies with assets in excess of $1 billion stood at over 50 and the number of companies with assets in excess of $10 billion almost doubled.”

This growth is underpinned by strong economic and other factors. “The most recent projections published by the International Air Transport Association suggests the global airline industry net profit will rise from the $34.5 billion expected in 2017 to $38.4 billion in 2018,” says Deloitte partner Jim O’Callaghan. “The boost in net profit is being fuelled by robust demand, reduced finance costs and operational efficiencies, and will translate to the fourth consecutive year of sustainable profits for the airline industry.”

A new report from KPMG, The Aviation Industry Leaders Report 2018: Navigating the Cycle, also projects sustained industry growth. It projects that the worldwide commercial fleet will expand by almost 40 per cent to 35,000 over the next decade. “The question remains whether the industry can continue on this upward trajectory or whether we will see a moderation or downcycle in the next few years,” Tom Woods notes.

This was among the questions which the KPMG report attempted to answer by surveying a variety of industry leaders in three areas of the aviation market – lessors, airlines, and bankers –in Ireland, the US, and Asia over a four-month period towards the end of 2017.

Bullish

The survey found that lessors are bullish about the global demand for aircraft and the relative health of airlines around the world. Despite some airline bankruptcies, mainly in Europe, and other areas of stress around the world created geopolitical events, the airline industry remains profitable and passenger demand continues to rise, boosting demand for lift.

That would support the quite startling growth projections for the industry over the next 20 years. “It is estimated that demand for new aircraft will reach $4 trillion over that period,” says Woods. “And this will run at between $140 billion and $170 billion annually.”

With up to 50 per cent of those aircraft financed by leasing and about two-thirds of leases currently going to Irish-based lessors, the future looks bright indeed for the industry – both globally and here in Ireland.

Funding for the global industry isn’t a problem either, according to Aergo Capital chief executive Fred Browne. “There is a lot of money from China and Japan and elsewhere in Asia coming into the market,” he says.

But the availability of cheap money is presenting its own challenges, he notes. It is driving up demand for new aircraft which in turn is driving up prices, thereby squeezing lease-rate factors or margins. “Lease-rate factors have come down significantly in recent years,” Browne points out.

O’Callaghan believes underlying demographic and global GDP growth factors are far more important to industry growth, however. “Aircraft as an asset class is still seen as very attractive,” he says. “Banks are more amenable to offering credit to airlines for aircraft purchases. And this is despite the fact of a number of European airlines, including VIM, Alitalia, Air Berlin and Monarch, going out of business.”

The KPMG survey concurs: “The relatively muted impact of the recent airline bankruptcies in Europe – Alitalia, Air Berlin and Monarch – is demonstrative of the current robustness of the aviation sector,” it states. “Despite all three airlines failing within a short space of time, the aircraft were quickly taken up by other carriers, mostly in Europe, which is seen as a healthy development by lessors and airlines that view this as ‘back-door’ consolidation, which most respondents say is still needed in the European market.”

While most commentators anticipate interest-rate rises sooner rather than later and continuing increases in oil prices, there is a consensus these factors will not unduly dampen growth. “Growth in air travel is being driven by good economic fundamentals,” says O’Callaghan. “The airlines need to put aircraft on the tarmac to meet the growing demand and they are looking at ways to finance that.”