China's - Orient Aviation

The net result for the ever-crowdedinternational operating leasing industry,particularly with the advent of private equitybackedlessors, is that the industry is facinggreater competition from grass-roots players.“And the big concern for international lessorsis that domestic leasing companies in Chinaare willing to do business at lower lease ratesthan international counterparts are offering,”said Plueger.However, borrowing at market ratesin China is likely to be a challenge for thecountry’s leasing companies, particularlygiven that many China bank branches havelimited or no experience in asset-basedlending. Much of Chinese bank lending inaircraft finance has been overseas or in themain cities of China.In essence, experts say the reason thereare no major domestic players in the aircraftleasing business in China are:• Regulatory issues• Tax issues• Management expertise• Financing• Aircraft import regulations and duties• Legal issuesTownend pointed out there are two mainregulatory authorities dealing with the settingup of a leasing company in China, effectivelythe banking regulator and the Ministry ofFinance. “One of the biggest issues is there isconfusion about who actually regulates what.For anyone trying to establish a company inChina, either a joint venture ora stand-alone entity, one of thebiggest challenges is to workout what the requirements areand which regulator to speakto,” he said.Yet another issue is theimpor t ation of ai rcraf t.Owning an aircraft in Chinais not only expensive froma tax perspective, it is alsocomplex. All aircraft importsare controlled by the NationalDevelopment and ReformCommission (NDRC) and theCivil Aviation Administrationof China (CAAC), and allpurchases must be donethrough the China AviationSupplies Corporation (CASC).The time it takes to movethrough this process restrictsthe ability of a Chineseleasing company to be trulycompetitive.Hainan Airlines: the first Chinese airline to enter the leasing businessSo far, companies looking to makeinroads into the market have chosen differentpaths. AerCap has taken the joint ventureroute. Dragon Aviation is 50% owned byChina Aviation Supplies Import & ExportGroup Corporation, 25% by AerCap and25% by Calyon Airfinance, a division ofFrance’s Credit Agricole corporate andinvestment bank.Ferre readily concedes it hasn’t been easyand negotiations on various aspects of thebusiness collapsed several times before itcame to fruition.“We are also acting as the main trainer.It is very difficult to find fully qualified staffin China. You have good marketing people,but they don’t have experience in leasing. ItChina’s top 10 lessorsIn August there were 950 Airbus and Boeing aircraft in servicewith airlines in China. Some 44% of those, or 418 planes,are on operating leases. There are 31 companies leasingaircraft to Chinese airlines. The top 10 leasing companiesin China are:LessorAircraftILFC 147GECAS 112Aviation Capital Group 20CIT Aerospace 20Pegasus Aviation 17BOC Aviation 12RBS Aviation Capital 12Aircastle 11Babcock & Brown 10Shenzhen Financial Leasing 8Source: Airclaims, August 2007Note: Airbus and Boeing aircraft onlyis very difficult to find good legal people withan operating lease mind. It is impossible tofind good technical people who can sell tothe market. It will take two or three yearsto fully train someone who can go into anairline and complete a deal from start tofinish,” said Ferre.BOC, realising the potential in leasing,took the external route by purchasing SALE.Already a leading provider of air finance inChina, BOC began looking at the leasingbusiness in January 2006.It concluded the environment wasn’tready for a domestic entity and there werelower costs and less risks in an overseasacquisition.What was critical, according to Townend,in the purchase of SALE wasthat BOC gained immediateentry into the global aircraftleasing market as well as amodern portfolio of aircraft,management expertise and aglobal customer, financing andsupplier base.“The AerCap approachis a different approach to thesame problem,” he added. “Butprobably both will end up in thesame place.”Despite these issues, thebeginnings of a Chinese leasingindustry is emerging, sparkedby a new law. Measures forthe Administration of FinanceLeasing Companies, whichtook effect in March, allowsfinancial institutions, for thefirst time, to hold stakes inleasing companies.In September, it was learnedat least five banks have applied toNOVEMBER 2007 ORIENT AVIATION 59