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The takeoff trouble facing India's plane lease plans

A large number of aircraft leases are expected in the near future. There will be opportunities for deals to materialize via the International Financial Services Centre at GIFT City.Premium
A large number of aircraft leases are expected in the near future. There will be opportunities for deals to materialize via the International Financial Services Centre at GIFT City.

  • A new route via GIFT City was fashioned to make it easier to lease aircraft domestically. What’s holding it back?
  • Most prominent international leasing firms are yet to make any firm commitment about setting up a unit at GIFT City. All big lessors globally are on a ‘wait and watch’ mode

NEW DELHI : On 18 August, a Hawker 800 XP—a mid-sized twin-engine jet corporate aircraft—landed at the Nagpur airport in Maharashtra, much to the relief of its lessee, a prominent private jet aggregator. The aircraft, which was imported from the United Kingdom, was the first to be leased through the International Financial Services Centre (IFSC) at the Gujarat International Finance Tec-City (GIFT City). This happened barely six months after the Centre announced a set of incentives and tax holidays in the Union budget for aircraft leasing companies that are based in the special economic zone (SEZ) in Gandhinagar, Gujarat.

But getting this first “domestically leased" aircraft into the country seemed, at one point, to be a daunting task, as the lessee, JetSetGo Aviation Services Pvt. Ltd, had to navigate through various challenges that threatened to derail the transaction. Although plans to lease an aircraft from GIFT City were set into motion in February (right after the announcement related to aircraft leasing) by the firm, the final set of approvals came only in August—a few days before the aircraft was scheduled to be brought into the country. A major issue initially was the lack of GIFT City-cleared airports that can be used to land the aircraft. Later, the government notified two airports, Nagpur and Hyderabad, for landing such aircraft, which however, took some time to materialize.

“Our aircraft was supposed to come in July, but we postponed this to August as there was no clarity on the regulations and we initially didn’t know where to land the aircraft," said Kanika Tekriwal, chief executive officer and co-founder of JetSetGo Aviation. “It came to the point that the seller told us that (we) either buy the aircraft or scrap the deal." After the intervention of a slew of agencies, JetSetGo finally secured all the necessary approvals to land the aircraft. By then, it was 14 August, just days before the scheduled landing.

“We actually wanted to land the aircraft at the GMR-operated MRO (Maintenance, Repair and Overhaul) unit in Hyderabad, but they were not prepared for it. Nagpur city and airport authorities were helpful to allow us to land there," Tekriwal said.

The whole idea of “domestic leasing" came about because most Indian flight operators are compelled to lease their aircraft from outside the country—say, Ireland or Hong Kong. The reason: the transaction can be US-dollar denominated and currency risks could be minimized. This is where GIFT City enters the picture, which through a legal sleight of hand effectively functions as a foreign jurisdiction on Indian soil.

The Centre’s move is meant to bring down leasing costs for Indian airlines and benefit the growth of one of the world’s fastest-growing aviation market. If all goes well, customers will start reaping benefits. That is why the experience of the early adopters of the GIFT City route holds wider significance.

For instance, JetSetGo’s Tekriwal says that customs (at Nagpur) didn’t even know how to deal with GIFT City assets. She added that domestically leased aircraft should ideally be allowed to land at any airport in the country to facilitate ease-of-doing business. For an aircraft aggregator such as JetSetGo, leasing an aircraft from hubs such as Ireland takes about four weeks. Through the domestic leasing route, it took the firm about six months to get the aircraft delivered after the initial planning. Such delays add to the cost.

“These are early days, and a lot of the regulation still has to be ironed out," Tekriwal said. However, these hiccups could be attributed to the fact that this was the first leasing transaction that was done at IFSC, GIFT City. Similar deals in the future are expected to conclude quicker.

Dynamics of leasing

Most aircraft operated by commercial aviation entities such as airlines are leased since operators prefer to transfer the risk of ownership to lessors. Increasingly, a large number of aircraft under the ambit of general aviation, which include smaller operators who fly private jets and helicopters, are also being leased for similar reasons.

Interestingly, most Indian commercial airlines lease aircraft from lessors based in countries such as Ireland, Hong Kong, Dubai, Sanghai and others. Ireland is a preferred route because there is a double taxation avoidance treaty between the two countries. Ireland also has a huge ecosystem in place for leasing activities, which helps operators complete their transactions quickly.

As things stand, India’s largest domestic airline IndiGo has placed one of the largest orders globally for narrow-body aircraft from Airbus SE.Like most no-frills carriers, IndiGo finances most of its aircraft through a sale and lease back (SLB) model. An SLB is a financial transaction wherein the owner (airline) sells the aircraft, and then takes it back on lease from the buyer (lessor). This kind of deal typically removes the aircraft, and its associated debt, from the carrier’s balance sheet. Other Indian airlines also follow a similar model and have a large outstanding order book.

As leases for a large number of these incoming aircraft will have to be executed in the near future, there will be ample opportunities for at least some of these deals to materialize through the IFSC at GIFT City.

Ground reality

However, most prominent international leasing firms are yet to make any firm commitment about setting up a unit at GIFT City. All big lessors globally are on a ‘wait and watch’ mode, said a person associated with the leasing industry while requesting anonymity.

“The first few leases at GIFT City are likely to be smaller aircraft like helicopters, as these are smaller assets," the person cited above said. “As the regulations are continuously being fine-tuned, things will only get better, which will pave the way for bigger lessors."

There is apprehension among international lessors over setting up shop in GIFT City due to the perceived bureaucratic hindrances in India, the above-mentioned person said, adding that these concerns come from the generic view that things can take a long time in India due to inefficiency and red tape.

“IFSC and its regulator is actually fighting against this image of India. They have tried to match their offering from a tax standpoint to what is available to leasing companies in Ireland. But will that be enough, or will they have to go the extra mile, that remains to be seen," the industry expert mentioned above said.

Prominent global aircraft leasing companies such as Avolon Aerospace Leasing Limited, SMBC Aviation Capital, CCB Financial Leasing Co. Ltd, among others, didn’t respond to queries. A spokesperson for BOC Aviation said that the company has no intention at present to establish an onshore leasing presence in India.

A spokesperson for GE Capital Aviation Services said that the company doesn’t comment on confidential customer information.

There is already pressure on some Indian airlines to lease a few aircraft from GIFT City, said the person mentioned above, adding that many carriers are currently reviewing such an option. When contacted, spokespersons of IndiGo, SpiceJet, Vistara, AirAsia India and GoFirst didn’t comment on whether they are exploring options to lease aircraft through GIFT City.

The country’s top public sector lenders, such as the State Bank of India (SBI) and Punjab National Bank (PNB) are also contemplating a presence at GIFT City to facilitate the financing for leased aircraft. “Once the (aviation) sector improves, we will look at partnerships as we don’t have any prior experience in the aviation leasing business," said a senior SBI official, who spoke on the condition of anonymity.

So far, about six licenses have been issued for aircraft financing and leasing companies to operate from the International Financial Services Centre in GIFT City, while about 20 companies have shown interest, and quite a few of them have also applied for the license, said an official with the International Financial Services Centre’s Authority (IFSCA). “IFSCA along with (the) government of India have proactively sorted out a majority of the teething issues," said an IFSCA official, who didn’t wish to be identified. He said that the regulator is actively engaging with the industry to understand what measures are required to enable further development of the ecosystem.

“Our aim is to make the (India-based leasing) platform competitive, both commercially as well as from the ease-of-doing business perspective," the IFSCA official added.

The Gift City route

Leasing aircraft via GIFT City is currently as competitive as Ireland in terms of tax-related benefits, according to an industry expert.

Aircraft leasing and financing companies operating from the IFSC in GIFT City, can avail income-tax exemption on the basis of business income for a consecutive period of 10 years out of a block of 15 years (the tax holiday period), said Sunil Badala, partner and head of financial services tax, KPMG, in India.

“Further, income-tax exemption can be availed for capital gains arising from (the) transfer of aircraft during the tax holiday period. For availing the capital gains exemption, the aircraft leasing unit will have to be set up on or before 31 March 2024," Badala said.

According to Badala, it might be easier to substantiate IFSC income-tax exemptions compared to similar exemptions provided to lessors in Ireland. Double taxation treaties and other complications don’t enter the picture since IFSC, though nominally international territory, is within India.

From the indirect tax perspective, if the lessor and lessee are both based in IFSC, goods and services tax (GST) will not be applicable, said another tax expert, who specializes in indirect tax and spoke on the condition of anonymity. “FEMA (Foreign Exchange Management Act) provisions don’t apply to units at IFSC, so they will not be subjected to transaction taxes," the tax-expert said further.

“The idea is to create a substitute for Ireland’s leasing market at IFSC," the person added.

The road ahead

The global aircraft leasing market size was valued at about $306.9 billion in 2020 and is expected to grow at a compound annual growth rate (CAGR) of 7.3% during the forecast period (2021-2028), according to Polaris Market Research. “The narrow body segment (single-aisled planes) is expected to hold the highest share over this period due to its (inherent) benefits, such as fuel-efficiency and lower economical risk," Polaris said in a 21 June report.

Meanwhile, the recovery of air passenger traffic is expected to be gradual, with the domestic passenger traffic expected to reach pre-covid levels only by FY24, according to rating agency Icra Ltd. International passenger traffic is expected to pick up much later and would depend on when and whether countries start lifting the restrictions on travel that are currently in place.

However, as travel picks up, and airlines fly more planes, aircraft leasing activity will soar globally.

Since this is the first time that there is a platform available for aircraft leasing within India, there’s bound to be some initial hiccups, said Vishok Mansingh, chief executive of aviation consultancy and asset management firm Vman Aero Services LLP. “These are more in the nature of procedural issues and likely to be sorted out," he said.

Vman Aero hopes to conduct leases for regional aircraft such as ATR, turboprop planes and narrow-body aircraft from the IFSC in the future. “Currently, our focus is on leases pertaining to general aviation, which include helicopters, turboprops, trainer aircraft and, if the opportunity arises, then regional aircraft like ATRs," Mansingh said.

“With airlines like Akasa and Jet (Jet Airways 2.0) starting operations, there will be opportunity to lease even narrow-body planes in the future through a competitive bidding process," he added.

Mansingh said that if Vman Aero succeeds in executing some of these leases via IFSC, it would demonstrate that the bidding costs for a lessor is competitive in India (as compared to Ireland).

He, however, added that creating a vibrant leasing ecosystem in India is a long-term plan and may take at least a few years to fructify.

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