Emerging markets boost investor confidence

posted on 12th June 2018

The last two years have not been the best of times for business aviation. However, a recent International Corporate Jet & Helicopter Finance Conference in London suggested that the industry is edging back to better times. Perhaps it is a matter of geographical positioning, with a number of emerging markets that seem set to change the face of business aviation, writes Don Parry

There are marked differences between the commercial airline market and the business jet market that are virtually incompatible in terms of financing. The airline market is generally predicated on cash structures and is highly disciplined. In contrast, the business jet market is less structured with a wide range of contrasting knowledge and experience.

Luis Pinto, Chief Financial Officer, NetJets, notes that the recession slowed growth and shifted the focus to efficiency and forward planning. NetJets is now increasingly seeing a market derived from ash clouds and commercial airline disruption. Growth has resumed and Pinto considers that there is great potential in several markets such as Germany, Central Europe and the Balkans, Russia and North Africa; enough to make the majority of European dealmakers cautiously optimistic about the year ahead.

Eddy Pieniazek, Global Head of Consultancy, Ascend, casts his net a little wider, acknowledging that the BRIC (Brazil Russia India & China) collective is not the answer to overcoming all ills just yet but is the one to watch.

In reviewing current deliveries, Brazil is seen as “small is beautiful” with 36 of 57 deliveries being Phenoms, three Mustangs and four CJ2/3s. Russia has only accepted five but they’re all for long haul aircraft – Falcon 7Xs, Global Expresses and Challengers. Pieniazek considers that India remains a mixed promise, with 10 aircraft delivered including the G550, Falcon 7X and Global Express all the way down to Lear 60 and Phenom 100. In the case of China, distance is the key, reflected in 22 aircraft delivered of which seven are Gulfstream 450/550s, three Falcon 7Xs, two Challengers and four Hawker 4000s. The Middle East is simply seen as “bigger is better” with 21 aircraft delivered of which four were Gulfstream 450/550s, five Challengers, four Falcon 7Xs and three Globals.

Pieniazek notes that the average wealth of the 1,000 wealthiest Chinese grew 26% in the last year. This year there are 1,363 Chinese individuals with US$150 million, compared with 1,000 individuals last year and only 24, 10 years ago. However, the lack of airport infrastructure in China has limited the development of business and general aviation, though more are now being built.

High import taxes are a concern and can be more than 20% of the purchase price in some cases. The situation is further exacerbated by the lack of personnel expertise, ranging from flight instructors to FBO managers, engineers and maintenance facilities, brokers and air traffic controllers. Recruiting and building facilities are underway and the government has started to address the issues. How the Government and Military will change their attitudes is very uncertain. However, a start has been made with the recent announcement that China will open parts of its low-altitude airspace to promote the country’s general aviation (GA) sector.

Apparently, lower airspace in China will be divided into three sections. These being: areas under control, areas under surveillance and areas where aircraft can fly freely, after reporting their flight plan in advance. Original test points were Pearl River Delta (Southern China), Northeast China and the GA Industrial Park in Xian. The open airspace reform will be initially trialled in Changchun and Guangzhou this year and includes the setting up of lower airspace in controlled airspace that is different to the one that covers the majority of China. Other areas are also now being tested, such as the tropical island of Hainan.

These facts and figures are reiterated by Zhang Bo, Vice President, Minsheng Financial Leasing Company Limited (MSFL). MSFL was set up in April 2008 as one of the first five financial leasing companies approved by the China Banking Regulatory Commission (CBRC) in China. The focus is on GA, the company currently owning 32 corporate jet aircraft and with a declared intention of “vigorous” expansion into the helicopter business this year. The intention is to become the top GA leasing company with plans for rapid expansion of the business jet fleet to 50 aircraft and 20 helicopters.

At the end of 2010, there were 56 corporate Jet and 206 Helicopters in mainland China (excluding military operations). Compared with the development of Chinese economy, Chinese GA is still in the initial stage.

Zhang Bo said the intention to develop Chinese GA is the most important strategy for MSFL and it has taken on the vital financing role for the GA market. MSFL will provide financing and operating leasing services, such as: aircraft evaluation, importation, aircraft management, consultancy, operational support and disposal. MSFL is willing to develop diversified and multi-level cooperation with all manufacturers of corporate jets and helicopters, sales agents, aircraft management companies and financing institutions, and to promote the development of Chinese GA.

Aircraft ownership is not an easy task. Financial and legal considerations are no places for the feint hearted and expert opinion is vital. This is true of another of the “recession proof areas” – the Middle East. Aoife O’Sullivan, Partner in Gates & Partners, says that prospective vendors should be less afraid of Islamic finance. “In terms of Sharia law, we can’t beat them so let’s join them,” she says.

O’Sullivan points out that UAE courts, for instance, will not honour any provision that is contrary to Islamic Sharia, public policy or other mandatory law in the UAE. Where the UAE courts have jurisdiction they will apply UAE law to the dispute, irrespective of any choice of law provisions in the contract. To Western minds the basic problem in structuring Islamic deals is that payment and receipt of interest is forbidden, though there are other economic similarities with traditional finance. However, it would seem that this does inhibit interest by western banks. O’Sullivan emphasises that there are other ways of doing things; it’s a case of restructuring procedures to reflect local interest and a need to compile “customer friendly” contracts that recognise local traditions which include other costs that balance the equation. Perhaps the best advice is to ensure that the prospective vendor has as good a lawyer as accountant.

The importance of India to this corporate jet market cannot be ignored. Alok Wadhawan, Director of Investec – a company with extensive experience in financing both new and pre-owned aircraft for commercial airlines, leasing companies, corporates and individuals – points out that India is now the second fastest growing economy with a GDP growth rate of about 9% per annum. The domestic aviation industry has been growing at over 15% per annum since 2004, with passenger traffic increasing from 16 million in 2004 to over 50 million in 2010. The total number of commercial aircraft in India is ~400 with capacity having nearly doubled since entry of the private airlines in 2003.

Business jets constitute a fast growing market with, currently, 143 aircraft that represent less than 1% of the global business jet market. An indication of future growth can be noted by a market forecast compiled by Bombardier. This implies a compounded growth rate of 13 and a business potential of ~ US$8billion. It is noteworthy that, in India, the business jet is seen as a tool for increased productivity, rather than a luxury. Large companies have built landing strips near manufacturing facilities to connect to their businesses. Wadhawan says that flying point to point in a private aircraft to destinations off the scheduled carrier routes will become increasingly common over the coming years. Currently, the market is dominated by corporate ownership, with very few charter companies. Nevertheless, charter is now a fast growing segment and significant demand is expected from this segment in the future.

Such activity can only be healthy if adequately financed and Wadhawan is largely optimistic about the ability of domestic banks to provide major sources of financing. His view of international bank financing is coloured by the fact that only a few of these banks have been active since the 2008 financial crisis.

The final word must go to William Kelly, Chief Executive Officer of Milestone Aviation Group, who describes his company as a boutique helicopter and private jet lessor, founded just nine months ago and having secured $500 million in equity to start the business. Milestone is said to be unique in that it is solely focuses on helicopters and private jets and “we have operator backgrounds”.

The Milestone product offers finance at 100% of the asset, taking 100% of the residual risk. Kelly stresses that “we are quick and decisive dealing with new/pre-owned and sale-leaseback, short or long term leases, fixed or floating”.

Kelly admits that, although the private jet market has bounced back slightly from the lows of the past few years, financing remains scarce. Milestone’s focus is on new and near-new large cabin and super mid-size private jets. While finance leases are available on new aircraft, Milestone’s 100% financing is very rare. Kelly concludes: “The last downturn taught the market that you can never have too much cash.”