Based in Dublin, EY’s Global Aviation Finance Centre of Excellence, supports the full range of industry participants including lessors, OEMs, airlines, investors and funding institutions – acting as professional advisor to 71% of Top 50 Lessors and auditor to 32% of Top 50 lessors.
Alan O’Brien, partner with EY Ireland and the firm’s Global Strategy and Transactions Leader for Aviation Finance, says the sector is of significant importance to the Irish economy.
“Ireland plays a core role in the global aviation ecosystem with over 60% of the global commercial fleet managed from Ireland,” he said. “The industry directly supports significant levels of high-quality employment on the island and in-directly there is a deep pool of specialist aviation professionals across legal, accounting and finance who support the sector.”
“The industry has developed a range of third level university programmes to foster and support the next generation of aviation leaders who will be critical to sustaining Ireland’s prominence in the global industry.”
O’Brien says that on a macro level ‘Ireland’s taxation treaty network is extensive which is immensely advantageous given the global nature of the aircraft leasing industry’.
There is no doubt that the aviation sector successfully endured a turbulent few year, which resulted in a great deal of change. But O’Brien says that change is inevitable in business and learning how to successfully deal with it is key.
“The industry is constantly evolving and adapting to macro developments, but the fundamental aviation transportation thesis remains attractive to the international investment community,” he said. “Even during COVID, for the larger, investment grade lessors, unsecured debt was issued at unprecedented low interest rate levels – in 2021, c.$52.5bn was raised by lessors.”
“With interest rates rising significantly in 2022, unsecured debt offerings as a source of funding has reduced significantly. The ABS market has also been shut for much of 2022 with one ABS issued (Carlyle) and expectations are looking towards a re-opening in 2023 – we are supporting several clients with preliminary work with 2023 in mind. The absence of an ABS market has curtailed some lessors who would normally avail of an ABS to refinance existing fleets and pay down warehouse facilities.
“One would wonder how higher interest rates, if sustained, may impact on the sector’s profitability in the medium term as lessors will ultimately have refinancing requirements. There is generally a lag between increasing interest rates and corresponding up-tick in lease rate factors so given the airlines are still in recovery and Europe is facing a recession and cost of living crisis it is yet to be seen if airlines will have the means to pay for increased lease rates in face of these headwinds”
“And there is also the emergence and increasing prominence of a number of alternative aviation lending platforms – these new platforms are innovative and can see an opportunity in the market.”
According to the O’Brien, 2021/2022 was a period of heightened M&A activity with several high-profile mega deals, which looks set to continue.
“I expect the consolidation theme will continue, particularly across the mid-tier lessors, but at a somewhat reduced pace given the current debt markets dynamics and the implication for valuations,” he said. “And alongside industry consolidation there is demand for growth capital from both existing lessors and new entrants. We are seeing several interesting developments here and are supporting our leasing clients and private equity clients as they explore the opportunities.
Indeed, with our Global Aviation Finance Centre of Excellence, EY is supporting our clients from cradle to grave across consolidations, acquisitions, divestments, restructuring, ABS deals, tax structuring and assurance. It is super exciting to be working with the leading names in the sector and it is professionally rewarding for our people.
As this year comes to a close and we look towards 2023, O’Brien says the sector can expect a number of developments and trends to continue.
“The are number of recurring themes across the sector including a clear preference for new generation low emission and more fuel-efficient narrow body aircraft,” he said. “The possible longer-term implications for legacy aircraft types merits consideration but I do wonder if the OEM supply chain challenges are providing a degree of protection presently.
“We will also see the increasing prominence of leased aircraft as a percentage of the global fleet composition as airlines recognise the flexibility and benefits of focusing on their core skills of moving passengers around rather than being the owner of capital-intensive assets (i.e. aircraft) – this is particularly true following the Covid period.
“From a tax perspective, Ireland has a stable, transparent and collaborative approach to tax policy and strategy that is well established. With an increased emphasis on substance in terms of infrastructure, lessors and operators have focused on increasing substance in Ireland. Lessors and investors without substance could be at a competitive disadvantage relative to platforms and service providers that emphasis substance onshore” he said.
“In addition to this, cargo conversions slots remain in high demand, there are capacity challenges in the system, and the growing eCommerce market will require ever greater cargo lift capacity to support its supply chain.”
Also, according to the EY partner, the industry is at the heart of sustainability agenda with targets set and commitments made to deliver the necessary changes.
“There are several sectors led initiatives focused on addressing how the industry can play its part in delivering on Net-Zero,” he said. “In the near term the ability to industrialise and scale production of Sustainable Aviation fuel (SAF) would appear to offer a material step in that direction.”
