10/08/2021

Aviation Intelligence - India's First Gift City Leasing Company

Vman aviation services have launched in India. Read our analysis of the first aircraft leasing company in the 'Gift City'.

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The Indian aviation market saw tremendous air traffic growth before the Coronavirus pandemic. As of June 2021, India has the fourth largest domestic aviation market according to IATA. According to IBA's InsightIQ, as of July 2021, there are 737 aircraft in India, of which 72% of these are leased. This is higher in comparison to 36% in Asia and a 46% leased share globally.

It is amidst this dynamic market, and powered by the Atmanirbhar Bharat Abhiyaan ('Self Reliant India') initiative, that India's first leasing company, Vman, has launched. The Indian government aims to develop a domestic aircraft leasing hub in the Gujarat International Finance Tech City, also known as 'GIFT'.

Vman Aviation Services IFSC Pvt Ltd (Vman) is India's first aircraft leasing company in the GIFT city. Vman placed their first order with Airbus Helicopters for one H125 helicopter on the 7th July 2021, with delivery of the asset expected between September and October 2021. The H125 has been a preferred choice for lessees in the region, including Himalayan Heli, UTair India and Global Vectra Helicorp for heli-pilgrimage, rescue, airborne missions and charter services. Vman's future plans involve acquiring a more varied aircraft portfolio, and offering reasonably priced leased equipment in India.

Penetration of Leasing in the Indian Market

As per the Indian civil aircraft register, there are currently 176 helicopters, of which 32 (18%) are leased. This is twice than the global share of approximately 9% of helicopters leased.

The chart below shows that the top 10 carriers in India are leasing approximately 80% of their fleets on average as of July 2021. This figure has remained consistent in the past five years, and despite the notable leasing trend, there appears to be no notable commercial aircraft leasing company based in India.

Chart Showing Top 10 Indian Operators - Leased and Owned Fleet

IBA's leading online aviation intelligence platform, InsightIQ, illustrates the geographical distribution of the lessors in the Indian market. Local operators rely heavily on lessors based primarily in the Europe & CIS market. Lessors from North America and APAC also feature, primarily from Japan. According to InsightIQ, the majority of fixed wing aircraft lessors used by Indian operators are based in Ireland, with a market share of 51%. The United States and Ireland were also the most common bases of lessors to the Indian helicopter market.

Pie charts showing geographical distribution of lessors in India

Addressable Market Value of India's Leased Fleet

According to the CEO of Vman, their launching H125 transaction was valued at approximately EUR 5 million (USD 6 million). IBA's InsightIQ shows the total current half-life market value of Indian fixed-wing leased aircraft at USD 15,304 million as of July 2021, while the total current half-life market value of leased helicopters stands at USD 132.4 million.

Pie chart showing market value of leased helicopter and fixed wing aircraft in India

Home-based lessors - a benefit or a risk in India?

Until recently, Indian banks have prohibited from financing leased equipment. This has recently changed with the official introduction of 'aircraft leasing' as a formalized financial product in 2020. This service can be offered by entities in the Gift City with the flexibility to transact in foreign currency. As a result, foreign lessors are enticed to set up businesses there. Alongside Vman Aviation, Ireland's Acumen Aviation, business charter JetSetGo and London-based Investec Aviation have also shown interest in setting up a leasing business in the GIFT city.

Further tax incentives grant a tax holiday for Indian lessors, and a tax exemption for operators who lease aircraft from those lessors. These benefits provide a competitive edge for Indian based lessors, and the support is likely to see an upsurge in new entrants. Despite this, the authorities still face a challenge in persuading well-established foreign lessors to extend their leasing business to India, mostly because India has yet to fully implement the Cape Town Convention's laws on insolvency and bankruptcy.

The entry of Indian lessors such as Vman Aviation bears benefits for airlines and the wider economy. Businesses are less exposed to foreign exchange risks, local contributions and the risks of diverging into a new and underdeveloped segment. Furthermore, a home-based lessor means better accessibility and local market knowledge for operators.

Due to Covid-19, many operators have been forced to attempt to renegotiate their leasing terms. Vman could potentially benefit from this conflict with foreign lessors if they are able to expand their aircraft portfolio and provide better leasing terms (though the financing and expansion capability at Vman is uncertain at this stage) If recent developments are successful, current foreign lessors are at risk of losing market share and negotiation power over their lessees.

Conclusion

Whilst these recent movements in the market are positive, India has some way to go towards becoming a truly successful leasing hub. The developments in the Gift City are a start and may pave the way for new investors to extend their business in India. With the financial fragility among airlines and helicopter operators under current market conditions, a strong level of support from the government and a well-regulated jurisdiction is required for Vman to succeed and for India to be a viable and appealing option to lessors.

insightiq driving actionable data

IBA's InsightIQ analysis platform flexibly illustrates multiple asset, fleet and market positions, actual and potential, to inform client choices and identify acquisition opportunities. Immediate access to crucial aircraft, engine, lease rate and fleet data eases appreciation of historic and future aircraft concentrations and operator profiles.

Carbon Emissions Calculator: Opportunities for Lessors

There are various strategies lessors can adopt to reduce their fleets' carbon emissions and, in doing so, potentially benefit from lower financing costs, strengthen their investor relations' story and develop a greater competitive advantage with lessees. IBA outlines two key strategies: purchasing new technology planes with lower emissions levels and committing to offsetting a proportion of the emissions their lessees generate. 1. Buying new technology planes with lower emissions Airframe and engine OEMs are working on many initiatives that will improve technology and produce more efficient and potentially carbon free aircraft, but this is evidently a longer-term proposal. In the medium term, buying new gen technology planes will potentially provide a good investor relations story, fit with many airlines long term strategies and also potentially provide a 'Greenium' benefit, with access to lower cost finance. 2. Offsetting proportions of carbon emissions generated by the lessee There are three offsetting options, the impact of which can be calculated using rich intelligence from the InsightIQ platform and newly launched Carbon Emissions Calculator (CEC). Voluntary offset schemes at $3/tonne High quality offset schemes at $13/tonne Buying and holding emissions allowances from the EU Emissions Trading Scheme (ETS) Source: IBA InsightIQ CEC Read the full case study here Based on calculations and analysis from InsightIQ CEC, we conclude that buying and holding Emissions Allowances from the EU ETS may be the most efficient carbon reduction strategy for lessors. Although upfront costs are higher, buying emissions allowances at the start of a lease and holding them until lease end is an investment. Current market expectation is that these assets will appreciate in value by 70% - 75% by 2030. Investors will therefore have an opportunity to profit from their re-sale at lease end. Emissions trading also enjoys high environmental integrity as a regulated market. To understand the maths behind this conclusion, we have created the following Case Study: Case study- Airbus A321 neo (Non-ACF/ACTs) with LEAP-1A33 Engine A lessor can commit to offset emissions as a competitive differentiator in a bid to win a lessee. Using the example of a new A321neo narrowbody bought in April 2021 for US$ 56M and offered on a 12-year notional US$ 360K monthly rental, its residual asset value will be US$ 35M at lease end. We can mine the emissions information our CEC generates to calculate the following CO2 outcomes to calculate the offset costs and impact on IRR. All Data used and displayed in this article is derived from IBA's proprietary data platform IBA InsightIQ. If you have any further questions or comments please contact: Ian Beaumont Sign up for a demo

image from inside an aeroplane, from the back looking forward

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