Irish aircraft leasing sector gears up for surge based on Asia growth
Strong growth in passenger numbers in the Asia Pacific region continued into 2016, and there's no sign yet that the market has reached its peak.
In fact, according to the International Air Transport Association's (IATA) 20-year forecast, the Asia-Pacific region will see 7.2 billion airline passengers in 2035, up from the 3.8 billion estimated for 2016 - and China is set to overtake the US as the world's largest aviation market.
Why is this significant to Ireland? Approximately 40pc of the world's commercial aircraft are not owned outright by airlines, but are leased, and forecasts show this figure will increase by 50pc by 2020.
More than half of these leased aircraft are owned and managed from Ireland. Thus, a growth in international traffic numbers in all markets, but particularly in Asia, presents a massive opportunity for Irish lessors and the wider Irish economy in this high-value industry.
Ireland is regarded by many as the birthplace of the aviation finance industry, dating back to the foundation of Guinness Peat Aviation (GPA) in the 1970s, and is now firmly established as the leading global hub for the sector. Nine of the world's top 10 lessors have their headquarters here.
There is more growth to come and the opportunities lie in the East. While this presents a real opportunity for Ireland, the country must ensure it maintains its market-leading position and protect itself from competitors.
The reasons for Ireland's success are many. Ireland offers a unique pool of talent with specialist expertise and commercial experience. Support provided by successive Irish governments has helped meet the evolving needs of the industry.
This support has created a favourable tax regime consisting of the availability of the 12.5pc rate of corporation tax on leasing profits, tax depreciation for aircraft over an eight-year period, and access to over 70 double tax treaties, many negotiated with aircraft leasing as a target, and thus offering either zero or reduced rates of withholding tax on lease rentals.
By its nature, aircraft leasing involves the movement of high-value assets into and out of Europe as well as into and out of other jurisdictions on a global basis. Ireland provides a business friendly customs jurisdiction, common law legal system and flexibility in financial reporting, which allow easier integration with international organisations.
In 2015, Bohai Capital, a Chinese company listed on the Shenzhen Stock Exchange, bought Irish-headquartered Avolon. The acquisition completed in the first quarter of 2016, and less than a year later Avolon announced the acquisition of the aircraft leasing business of the CIT Group to place it as the world's third largest aircraft leasing platform, behind GECAS and AerCap, who also operate in Ireland.
Recognising all that Ireland has to offer in the aviation finance space, Chinese and other Asian banks have decided to establish their European headquarters in Ireland. In 2012, ICBC Leasing, the leasing arm of ICBC, the largest bank in the world, and CDB Leasing (Sinoaero), the leasing arm of China Development Bank, both established European headquarters in Dublin.
In 2014, the IDA announced a third Chinese leasing company, Bank of Communication Financial Leasing (JY Aviation), had chosen Ireland for its leasing operations. In 2015, China Construction Bank announced the establishment of its leasing arm's international headquarters in Ireland.
Ireland has been so successful in attracting Chinese lessors, it has an unrivalled pool of talent with specialist aviation skills and experience. That includes those employed directly by the lessors, and experienced professional advisers, including technical advisers, corporate service providers, non-executive directors, legal advisers, auditors and tax advisers.
Ireland cannot be complacent, however.
To retain a high-paying industry, reform of the personal tax regime and a lower top rate of income tax would significantly enhance Ireland as an FDI location.
Ireland must remain a great place to do business, full of highly experienced and qualified people, with a tax, regulatory and political system that is stable and certain.
The authors are members of BDO's Aviation Finance Team