China showing the way on aviation investment

Irish aviation is at the centre of powerful changes and it is having consequences for investments and the direction of companies in the sector.

China showing the way on aviation investment

Last week a major deal was announced by the aircraft leasing company Avolon which involved a huge amount of assets managed from Ireland.

The lessor, which is now owned by a leading Chinese conglomerate but led by an Irish management team, bought CIT which is a competing aircraft owning company.

The numbers involved are eye boggling.

CIT contains assets valued at about $10bn (€9bn) and the combined Avolon-CIT business has no less than 910 aircraft in its fleet with a value of over $43bn.

The deal is so large it had to be checked with the US Federal Reserve before being announced.

To put the newly merged entity in context it has a fleet that is about three times larger than Ryanair and about 20 times bigger than Aer Lingus.

The merged company will be the third largest lessor in the world, behind GECAS and Aercap, both of whom are now led and managed from Ireland.

This remarkable transaction is a reminder of how Ireland remains a pivotal location from which commercial aircraft leasing and financing is managed.

Despite huge shifts in the flow of capital beneath various aircraft-owning companies, with a pronounced advance by Asian investors in the past four years, Ireland has kept its status as a critical cog.

A set of unparalleled aircraft ownership tax treaties, linked to a world- class group of Irish legal, tax and financial professionals, has helped maintain Ireland’s standing despite repeated attempts by other jurisdictions to raid the sector of talent.

Pernicious campaigns to sully Ireland’s reputation around corporate tax and governance have also posed challenges to the role Ireland plays but the aircraft ownership sector continues to not only hold its own but thrive.

Aircraft leasing companies ultimately rely on the health of end-user airlines to prosper, and in that context important developments were evident in Europe last week too.

EasyJet issued a material profit warning about trading conditions in the key EU marketplace.

Brexit, excess capacity and intense competitive pressures were all cited for the profit warning which included guidance that average fares could fall about 9% in the October-December quarter of 2016.

Other airlines are struggling too.

The charter carrier Monarch is in protracted talks with the UK regulator about its future amid fears over its financial condition.

Air Berlin in Germany has announced a swingeing restructuring to stem heavy losses. That includes shifting assets to Lufthansa and negotiating a deal with equally challenged TuiFly.

Alitalia has indicated another restructuring amid tough Italian market conditions while Air Malta is warning of difficult trading.

In the thick of all this is Ryanair. It, too, is pointing to fares falling up to 12% over the next six months as it grapples with economic and industry headwinds.

However, while this battle is taking place Ryanair has ordered enough aircraft to add almost 18m passengers over the next 18 months.

That is like adding two times the size of Aer Lingus’s entire short-haul volume in just one and a half years.

To fill those seats Ryanair will have to manage its industry lowest costs shrewdly while growing market share aggressively across Europe.

Aer Lingus is competing in this maelstrom too within the ambit of the huge IAG group.

Imagine what state that airline would be in now, amid fare collapses of over 10%, if it had rejected the IAG bid last year. Instead of plotting new transatlantic routes it would, I suspect, be scrambling to manage weaker revenues.

Operating within IAG it has partner airlines BA, Iberia and Vueling together with the key strategic investor Qatar to manage its way through.

One key point emerges from the hyper-activity in the leasing and airline worlds — demand for air travel is continuing to grow.

That circles us back to the last piece of the Irish aviation jigsaw worth noting — airport capacity.

It is beyond belief that the second runway project in Dublin is being questioned by anyone presently.

This crucial piece of infrastructure is key to moving forward an island economy which is disproportionately dependent on air travel for access.

It needs to be built urgently.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal

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Saturday, November 27, 2021

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