Ireland enjoys a tremendous market advantage in that it is the most recognised global aircraft leasing hub.
14 of the 15 largest aircraft leasing companies operate in Ireland and most of them are headquartered here. Irish-based aircraft lessors manage in excess of 5,000 commercial aircraft, comprising more than $130 billion by asset value. This concentration accounts for one in five of the global fleet of aircraft and more than half of all leased aircraft worldwide.
Ireland’s strengths in aircraft leasing are deep rooted and very well-established: Supportive Corporate Tax Regime: A double-tax treaty network which is both extensive (with over seventy treaties in place) and lessor-friendly.
Robust Legal Jurisdiction: Suitable for ownership and cross-border leasing with well-established legal structures. Geographic Location: Favourable time zone, and English language base, all add to Ireland’s ability to trade globally on a daily basis.
Quality and Depth of Experience: Ireland’s greatest strength lies in the people who work in the sector. Ireland has been generally accredited as one of the founding hubs for aircraft leasing developing, as it did, in tandem with the U.S.A. where Steve Udvar Hazy the founder of ILFC established aircraft leasing as a business almost 40 years ago. During that period Dr Tony Ryan leased the first aircraft from the Aer Lingus fleet to supplement revenues in the airline. Since then, Irish leasing industry expertise and people have gone from strength to strength. Today, Ireland’s vast network of aircraft leasing experts in commercial, technical, financial, and legal areas further reinforces this jurisdictions credentials as a centre of aviation leasing.
The core of ORIX Aviation’s strength also lies in its depth of experience. Between them, the ORIX Aviation senior management team holds in excess of 200 years of industry experience. ORIX Aviation has been based in Ireland since its inception in 1991 and currently manages a fleet of 170 aircraft and engines. It is a 100% subsidiary of ORIX Corporation, Japan’s largest non-bank financial institution. Our business model is based on a three pronged approach, being to develop our (a) owned aircraft business, (b) joint venture business opportunities and (c) asset management and tax based leasing business. We are ranked as an aviation asset manager and service provider by Standard & Poor’s, achieving the highest possible ranking for our lease administration. Our strategy is to be adaptable to every market opportunity and to operate in different market segments so as to maximise value and potential. In 2013 ORIX Aviation closed 100 transactions. In 2014 we project to secure and close 106 transactions.
Despite the success of the Irish aircraft leasing industry and renewed global growth trends, economic uncertainty remains one of the greatest threats to aviation. That said, the industry has remained surprisingly resilient with air travel consistently outpacing GDP growth by 2% over the last 30 years.
The continued success of aircraft leasing relies heavily on healthy flows of capital, through various channels including equity investors, bank debt, capital market funding, export credit agencies or other structures such as Japanese operating leases. At present there is no shortage of equity, however a threat to the industry is a disruption in either bank debt funding or to the capital markets. In 2014 $112 billion in capital is needed for new aircraft purchases, rising to $125 billion in 2015. Half of this capital is due to come from the capital markets and bank debt combined. Accordingly, a sudden rise in real interest rates could negatively impact capital accessibility. Tapering and speculation of accelerated US interest rate rises has resulted in a stronger US Dollar. This is hurting emerging markets which are experiencing fairly rapid currency devaluations and damaging economic growth.
Other aviation financing hubs are developing such as Singapore, the Middle East and if developed fully for the benefit of Chinese lessors, the Tianjin Free Trade Zone. Irish based lessors should also prepare for the development of the OECD Base Erosion Profit Sharing ("BEPS") action plan preventing the misuse of double taxation treaties. This is an international issue that will impact on aircraft leasing companies globally. There is a risk that a set of prescriptive measures designed to deal with treaty abuse across multiple industries will be implemented which do not take account of the nuances of the aircraft leasing industry and financing structures used. This could be further complicated by uncertainty as to how different jurisdictions will interpret OECD recommendations and the difficulty this may cause for a truly international industry such as aircraft leasing. However provided these initiatives are correctly designed and implemented, it should present a strong opportunity for Irish based leasing companies of substance. Therefore, we need to emphasise to investors, capital market, banks and airlines the benefits of continuing to transact with Irish based leasing companies of substance and standing with well developed Irish platforms.
In terms of the fiscal landscape, It will be critical for Ireland to maintain its competitive position in terms of our double tax treaty network by continuing to expand and develop that tax treaty network, particularly in growth regions such as Asia, South America and MENA countries. Preservation of Ireland’s 12.5% rate of corporation tax has been a noteworthy success to date because it maintains loyalty to Ireland, though with adequate capital allowances, and deductions for financing costs, this rate is not the core issue in aircraft leasing.
With a highly mobile work force, Ireland cannot afford to increase its personal tax rates or the CGT rate. The current marginal rate of 50% plus is damaging the ability to retain highly mobile staff or to attract expertise from abroad. Other high cost factors such as rental accommodation, both office and residential is becoming an issue in prime areas of Dublin though still manageable compared to Tokyo, New York, London or Singapore. The recently announced Budget 2015 attempted to address some of the issues faced by this highly mobile Irish and international workforce. The removal of the ceiling for earnings under the Special Assignee Relief Programme (“SARP”) is a particularly encouraging development. It should assist Ireland in remaining competitive in attracting key foreign talent by ensuring that foreigners who add value in this country are not subjected to unacceptably high rates of income tax, their choice is clearly to work elsewhere. The Foreign Earnings Deduction (“FED”) is a potential tool in retaining Irish talent that is particularly mobile. Budget 2015 extended the FED to additional qualifying countries and reduced the number of qualifying days required to avail of the relief. Although these amendments are a step in the right direction, unfortunately the very tight restrictions applying to the maximum relief available means that those highly mobile employees that remain outside of Ireland for protracted periods of time during the working year are not incentivised by this relief to return to Ireland.
Air passenger traffic has consistently grown at about 5% per year since the early 1970s and this will continue for many years to come. Over $5.2 trillion worth of new aircraft are needed in the next 20 years and aircraft leasing companies are expected to finance $2.0 to $2.5 trillion of this amount. To illustrate this, at the 2014 Farnborough Air Show, Irish headquartered lessors placed the two top aircraft orders at the event, in total 8 aircraft lessors announced orders with a value of more than $35 billion. At the other end of the spectrum, we also see prospects for massive growth in the end-of-life aircraft market with 40% of the 37,000 new aircraft required over the coming 20 years to be used as replacement for the existing aging fleet.
Due to ORIX Aviation’s three pronged approach, we see opportunities not just in new aircraft purchases, but also in mid-life aircraft and we invest heavily in both segments. We look for pockets of value in the market thereby allowing ORIX Aviation to be in a position to capitalise whether on its own book, through a joint venture or as an asset manager on behalf of a client.
Our team strive to provide customers with customised solutions which both meet their needs or requests and take maximum advantage of every opportunity to ensure we add value to the transaction, for us “Answers, Custom Fit” became our motto, and now is engrained.
David Power
Chief Executive Officer, ORIX Aviation
