Foreign firms fly high leasing planes
By Olivia Chung
HONG KONG - There is an old saying in America about leasing: "If it
appreciates, own it. If it depreciates, lease it."
Aircraft and high-technology equipment such as computers and telecommunication
systems are lucrative leasing markets because their resale value depreciates
relatively quickly.
Although leasing is a relatively unknown business in China, almost all of the
Chinese airlines lease their aircraft because it's an economical way for the
airlines to both keep their fleets up to
date and expand them quickly for less money. According to an estimate by
Shanghai-based China Business News, between 60% and 80% of the country’s
commercial airplanes are leased. At present China has more than 900 aircraft.
In 2005 alone, leasing contracts for aircraft, worth more than US$16 billion,
were made in the country.
"The airlines are the most advanced of the Chinese organizations in terms of
leasing," said Niall Morrissey, regional managing director of Macquarie
Capital’s leasing business and head of Macquarie Leasing China, "They have been
leasing for years because airplanes are expensive items and very re-leasable,
and change maybe every eight to 10 years although they still have good value."
Aircraft leasing will grow along with the fleet expansion in China as carriers
expand capacity to handle surging passenger traffic.
China will need about 3,400 new airplanes worth about US$340 billion over the
next 20 years, and the country’s fleet will quadruple to 4,460 by 2026,
according to a Boeing company report last month. The forecast was revised
upward from Boeing’s estimate last year of $280 billion in spending on about
2,900 planes. The financial leasing market will be about 750 billion yuan
(US$100 billion).
China’s huge potential aircraft leasing market has attracted foreign financial
institutions such as General Electric (GE), and the Aircraft Investment Group,
which owns International Lease Finance Corp, the world's largest aircraft
leasing company with hundreds of aircraft ranging from Airbus A319s to Boeing
747s, and the United States-based commercial jet aircraft leasing company
Aviation Capital Group. Combined, they have a 90% share of the Chinese market.
GE Commercial Aviation Services, the commercial aircraft financing and leasing
business of GE, now leases aircraft to 13 different airlines in China,
including East Star Airlines, China’s fourth registered private airline,
according to GE’s website.
Morrissey said the aircraft leasing market in China was dominated by foreign
companies because they take an equity position in the aircraft they lease,
which means they have ownership risk in the aircraft whereas most Chinese
leasing companies typically don’t have the expertise or risk appetite to do
this.
"Taking lessee’s risk means we take some position ourselves and that’s why we
could offer our products or equipment to our clients at extremely attractive
rates," he said.
Another competitive edge the foreign leasing companies have enjoyed over their
domestic rivals is that they have global client resources and institutional
networks in China as well as overseas.
"When our clients return the engines or equipment to us, after refurbishing it,
we know where we sell it for the best money and this is one of the reasons we
can offer our clients extremely attractive rates. So far Chinese leasing
companies do not have the same level of specialization or level of risk,"
Morrissey said.
Australia’s Macquarie is another aircraft leasing success story. It began its
leasing business in China in the middle of 2006 and it has already sealed
several transactions for aircraft engines with Chinese airlines. Last year,
Macquarie bought the whole aviation portfolio from the Chicago-based GATX Corp,
which gave it about 80 aircraft, some of which were also leased to Chinese
airlines.
One industry expert said Chinese regulatory barriers have also prevented many
domestic firms from going into aircraft leasing because the companies cannot
buy an airplane with official approval and without paying higher taxes. Qu
Yankai, an official at China’s Association of Enterprises with Foreign
Investment, said compared with other countries, domestic leasing firms have to
pay as much as 22.8% imported value added tax if they import planes.
Morrissey echoed Qu’s views, saying leasing companies need to get approvals
from the National Development and Reform Commission and Civil Aviation
Administration of China or China Aerospace Corporation before buying an
airplane. He said this not only hinders the development of China’s aircraft
leasing industry, but also makes Chinese airlines pay more money.
"As the leasing companies find it very difficult to buy a plane, the aircraft
leasing in the country so far have been cross-border, which means the Chinese
airlines must pay withholding tax as they need to send the paper out of China,
on the top of lease payment," he said. At present, domestic airlines have to
turn in 7-10% of leasing fees as withholding tax.
"As the aircraft leasing dealings are cross-border, Chinese airlines have to
pay in foreign currency, which might also cause inconvenience to small domestic
airlines which receive their revenue in the yuan," Morrissey said.
In a bid to nurture the development of the nation’s aircraft leasing industry
as it prepares for foreign investment, the Chinese government lowered the
capital requirement for financial leasing companies to 100 million yuan in
February from the original 500 million yuan.
Five banks were listed in a pilot group when the Measures for the
Administration of Finance Leasing Companies took effect on March 1. China
Construction Bank (CCB) and Bank of America have won approval to set up a joint
venture, with registered capital of 4.5 billion yuan.
A tie-up between CCB and Bank of America would follow Bank of China’s purchase
last year of Singapore Aircraft Leasing Enterprise, Asia’s largest plane
lessor.
Qu said the Chinese government is encouraging the Chinese banks to expand into
aircraft leasing because it not only helps domestic financial leasing companies
to diversify into non-interest income and grab a market share of the industry,
but also helps to reduce the trade imbalance as billions of dollars of lease
fees paid by Chinese airlines are not counted as imports.
John Duffy, head of transportation Asia for HSH Nordbank, said China is
becoming extremely competitive due to high liquidity of banks, and this will
increase as Bank of China and ICBC establish their own leasing subsidiaries.
HSH was one of the first aviation banks to place a team of leasing experts in
China (in Shanghai) and their recent deals include China Eastern and Xiamen
Airlines.
Olivia Chung is a senior Asia Times Online reporter.
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