China's - Orient Aviation

SPECIAL REPORTAircraft Leasingput Mainlandcompanies at a disadvantagein China’s growing aircraftROADBLOCK:Regulationsleasing marketInterest in the aircraft leasingsector is high in China, but untilthere is tax reform and morechanges in the financial andregulatory environment the localindustry will struggle to competewith big Western players, sayexperts. TOM BALLANTYNEreports.In China, financing for aircraft leasesis no problem, according to leasingindustry experts. Neither is demand.After all, of the approximately 950Airbus and Boeing jets currentlyoperating in China, some 44%, or 418, arebeing flown on operating leases. And withChina forecast to add 2,300 more planes by2024, the aero-leasing market is expectedby that time to be worth at least US$108billion.The problem for local lessors right nowis that winning a serious slice of that pie isvirtually Mission Impossible. Some 90% ofthe commercial aircraft leased by Chineseairlines have come from the 31 foreigncompanies leasing jets into the country,including ILFC, GECAS and the AviationCapital Group.Why? The handful of specialist localfinancing companies operate at a distinctdisadvantage to overseas competitors,according to Steven Townend. He is deputymanaging director and chief commercialofficer of BOC Aviation (Bank of China),the former Singapore Aircraft LeasingEnterprise (SALE) bought by the bank inDecember last year for $965 million.“No China-based leasing company hastaken delivery of new aircraft from Airbusor Boeing,” said Townend. Indeed, nearly allthe aircraft handled by domestic firms areChinese-built planes.“Import duties are different for adomestic leasing company in China and thisis one of the keys to the competitive strength,to date, in foreign leasing companies. If youare a domestic lessor you could pay up to22% of the aircraft price up front. A foreignlessor is not subject to import duties because‘No China-based leasingcompany has taken deliveryof new aircraft from Airbus orBoeing’Steven TownendDeputy Managing Director and ChiefCommercial OfficerBOC Aviation>>>>>>>>>>>>>>>>>>>the airline is deemed the importer. It payspreferential 1% custom duty and import dutyof only 4%, which is payable in instalments,”he added.It doesn’t end there. Townend pointsto high corporate income tax in China – itwill be 25% from January 1 next year – andcompanies have to pay 5% business tax ongross turnover.“The competitors you are dealing with arepeople based in Dublin or Singapore, whereyou are paying 10% or 12% corporate income‘The big concern for internationallessors is that domestic leasingcompanies in China are willing todo business at lower lease rates …’John PluegerChief Operating OfficerILFC>>>>>>>>>>>>>>>>>>>>>tax. It immediately puts you at a competitivedisadvantage if you are trying to operate aleasing company in China,” said Townend.The roadblocks are almost endless.“Another important issue is how to deal withmoney transfers,” said Soeren Ferre, head ofEurope, Middle East, Africa and the Asia-Pacific region for AerCap Aviation Solutions,the European lessor that in October last yearbecame the first foreign company to forge ajoint venture leasing operation in China.“Sometimes you have to pay [money]outside your country to aircraft manufacturers,maintenance providers and the like. In China,it is not so easy to transfer foreign currencybecause you have to go through regulatoryprocesses. If you have to explain to someoneyou can’t pay them because it takes twomonths to get the right approvals, you mighthave some frustrated customers,” he said.And even though AerCap’s joint venture,Dragon Aviation Leasing, is based in Beijing,a separate company, AerDragon Aviationpartners, also had to be set up in Ireland “fortax reasons”.Financial leasing has existed in China fortwo decades, but has failed to take off in abig way. According to government statistics,at the end of 2006 there were 12 financialleasing firms with a combined net profit of$17.3 million. Their total assets were $1.9billion, with debts of $1.5 billion. Thesefigures are miniscule by global standardsand much of the leasing involves other itemssuch as shipping and machinery, rather thanaviation.This is beginning to change andbig leasing companies are watchingdevelopments closely. ILFC chief operatingofficer, John Plueger, said earlier this yearthat while China has not produced an aircraftleasing industry yet to compete withinternational players, the operatinglease market is moving into anotherstage. Domestic financial institutionsand leasing companies in China arestarting to source capital needed toacquire Western-built commercialaircraft to be leased to their homecountry carriers.58 ORIENT AVIATION NOVEMBER 2007