Amid emerging turbulence, leasing remains a viable option for Indian carriers

Amid the apprehensions over potential turbulence due to the grounding of flights by Indian airlines, statistics from the Directorate General of Civil Aviation (DGCA) have brought some good cheer.  They indicate that the domestic airlines carried 4.38 per cent more passengers during the January-March period and this is an encouraging sign. However, what cannot be overlooked is the rise in the number of passengers affected by flight cancellations and delays. As per the regulatory body, over 9.5 lakh passengers were affected by cancellations and delays in the first three months of the year, compared to 2.7 lakh during the same period in 2023.

The cancellations are linked to reactionary delays due to flight and crew unavailability, as well as supply chain issues. In a recent report, ICRA also warned about the turbulence that Indian carriers are likely to face due to supply chain issues. In its March 2024 Business Outlook report, the credit rating agency said that supply chain issues and engine failures have collectively forced Indian airlines to ground nearly 30 percent of flights by the end of March 2024.

In this scenario, aircraft leasing can be a strategic solution to manage supply chain disruptions and maintain operational efficiency. Around 80 per cent of the total commercial fleet in India is leased, compared to 53 per cent globally. The leasing market is expected to flourish further in the coming months mainly due to increasing travel demand in India and the global supply chain issues that will cause delays in the delivery of new planes.

One of the major advantages of aircraft leasing is that it provides airlines with access to aircraft even without owning rights. This ensures uninterrupted operations and helps meet any delays in the delivery of new aircraft from the manufacturers. Among the lease options, wet leasing is emerging as the most popular choice among Indian carriers. According to DGCA, it has sanctioned two of the major domestic operators to wet-lease 20 aircraft during the festive season in 2023 alone.

Unlike dry leasing, wet leasing is an arrangement where the lessor provides aircraft along with a complete crew, maintenance and insurance (ACMI).  Leasing also enables airlines to gain access to technically advanced and modern aeroplanes with improved fuel efficiency, reduced emissions and better performance.

Challenges ahead

Airlines are likely to incur additional expenses due to the grounding of airplanes in the form of maintenance costs, storage fees, and, of course, the loss of revenues due to non-operations. However, to compensate for the grounded capacity, when more carriers opt for leasing as an option, the increased demand can drive up lease rental prices. In some cases, when airlines need to quickly lease additional aircraft, they may be forced to accept older or less-fuel-efficient aircraft available at short notice. These factors can collectively impact an airline’s cost structure and present financial challenges.

Another issue is related to the legal hurdles in the repossession of assets during insolvency issues. Asset recovery is a vital component in leasing and the process should be devoid of layers of legal complexities. This calls for the need for the implementation of Cape Town Convention (CTC), the global treaty that guarantees the rights of lessors to repossess leased aircraft, engines and helicopters in case of payment defaults. However, it is a decision that must be ratified by the Indian Parliament.

India as a leasing hub

At present, most of India’s lease agreements are arranged with units based in Dublin, Dubai, Hong Kong and Singapore. However, the Indian government has already announced its plans to transform Gujarat’s GIFT City into a major aircraft leasing hub, similar to Dublin. Being India’s major international financial services centre (IFSC) with robust infrastructure and a conducive regulatory environment, it can potentially be an ideal hub, subject to addressing some other factors as well.

The Government had already taken a few key steps, such as offering tax benefits for 10 years from business profits, exemption from capital gain tax and stamp duty and relaxation of GST on transactions carried out through IFSC GIFT City. Recently, it made amendments to the Insolvency and Bankruptcy Code (IBC) to exclude transactions related to aircraft, engines and helicopters from the moratorium upon an insolvency plea, which is also a favourable decision for lessors.

However, while this is a strategic opportunity for India to capitalise on the growing demand for aircraft leasing services, it is also essential to compare and align the regulatory and operational environment of the IFSC with global standards and practices. This support may include regulatory reforms to establish a robust financing ecosystem, especially for the aircraft leasing segment which can boost investor’s confidence.

This article has been authored by Mr. Jaideep Mirchandani, Chairman, Sky One. All views are personal and do not necessarily represent those of Logistics Insider.

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