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DATE:22/01/08
SOURCE:Airline Business
Chinese banks poised to enter leasing market
By Leithen Francis
Lessors from overseas have long dominated the aircraft leasing market in China, but Chinese banks are poised to enter the scene and shake things up
Chinese financiers look set to embrace the enormous potential of the country's aircraft leasing market in a big way, taking on the foreign leasing firms that have traditionally dominated the sector. Up until March 2007, Chinese banks were barred from operating financial leasing businesses, but following a change in the law there is now a huge local appetite, as well as significant cash reserves, to invest heavily in the aircraft leasing market.
Western lessors, which have until now been enjoying strong and unchallenged demand for their services in China, generally believe that Chinese banks could eventually become major players in this market. "I don't see why not," says Soeren Ferré, head of aircraft marketing for Europe, Middle East, Africa and Asia Pacific at lessor AerCap. "Chinese banks are cash rich, the Chinese economy is growing and the Chinese people are looking for new areas to invest."
HSH Nordbank head of transportation in Asia, John Duffy, is even more bullish, saying it is inevitable that some Chinese banks will become major international players in the aircraft lease market. "It is a matter of when rather than if," says Duffy, who likens the Chinese move into aircraft leasing to China's push up the value chain in other industry sectors.
robert martin
"China has realisedthere is a lot of potential in the aircraft leasingand finance business"
Soeren Ferré
Head of aircraft marketing for Europe, Middle East, Africa and Asia Pacific, AerCap
The Chinese banks already provide bank guarantees "to other people's aircraft deals and help to arrange debt, so leasing is the next inevitable step", adds Duffy. He says 20% of all commercial aircraft produced today are delivered to customers in China. He predicts the two banks to watch out for are Industrial and Commercial Bank of China and Bank of China.
Access to leased aircraft is arguably more important in China than in many other countries because Chinese carriers need to lease aircraft to meet their ambitious growth plans. Ordering aircraft direct from manufacturers is insufficient because the central government decides how many aircraft the country will order and how many aircraft each airline will get. If an airline fails to sway the government, it turns to the lease market and in nearly all cases this has meant dealing with a foreign-controlled aircraft leasing firm. However, this now seems set to change.
The reasons behind the expected change include: central government reforms to promote the emergence of local players the central government's desire to end the virtual foreign monopoly wealthy Chinese firms looking for new areas to invest and Chinese banks looking to move into asset management. In the past there were enormous impediments preventing local players from entering the leasing market. But from March last year the government changed the laws and, almost immediately, ICBC, Bank of Communications, China Merchants Bank and China Minsheng Bank applied to the China Banking Regulatory Commission. ICBC, China Minsheng Bank and several others have since received *approval to establish financial leasing arms.
The financial clout of China should not be underestimated and, despite the fact that the Chinese currency is under-valued, China already has the three largest banks in the world by market capitalisation (see graph on p52). However, the extent to which Chinese banks move beyond finance leasing and into operating leases remains to be seen, according to Ferré. "Chinese banks would find it easier to move into debt financing because it requires less infrastructure," he says. The only exception would be if the airline customer defaulted, then the bank would need to get involved directly or through aircraft management and/or remarketing companies, he adds. "If Chinese banks try to enter the operating lease market themselves, then these banks would have to take responsibility for the full management of the aircraft", and that means "marketing, technical, legal and other capabilities would have to be made available to ensure *efficient management of operating leases".
For its part, ICBC has registered its aircraft leasing business in Beijing's port city of *Tianjin. HSH Nordbank's Duffy says that whether ICBC can become a major international player within the next two years depends on whether it buys an aircraft leasing company from overseas. "If they are going to grow aggressively they will buy one of the smaller aircraft leasing companies," says Duffy, adding that there are plenty of leasing companies ranked between 10 and 20 in the world that may be willing to sell. He believes another way to acquire a large fleet of aircraft quickly is to buy from China's top four carriers, but says this is unlikely because there may be problems in placing these aircraft with airlines overseas.
"If you are an airline in the USA and this lessor comes to you with seven-year-old aircraft that had all been maintained in China, would you be interested?" asks Duffy, although he adds that airlines in emerging markets such as Africa might be. Coincidentally, such markets are exactly where the Chinese government is working hard to develop *political and trade ties.
While ICBC's strategy for entry into the market has yet to unfold, BOC has already pounced. Rather than build a leasing company from scratch, BOC paid $965 million in December 2006 to acquire Singapore Aircraft Leasing Enterprise. SALE continues to be headquartered in Singapore but has since changed its name to BOC Aviation.
BOC's acquisition of a foreign aircraft leasing firm meant it avoided some of the pitfalls holding back development of home-grown aircraft leasing firms in China. It also gave BOC exposure to the international aircraft leasing market because SALE has airline customers around the world. The leasing company has benefited too because BOC has decided to grant it a $1 billion credit facility for *purchasing aircraft.
BOC Aviation chief executive Robert Martin says Chinese banks are moving into not just aircraft leasing but leasing of all sorts of assets because they can see there is a gap in the market. In the USA and Europe, leased physical assets account for about 35% and 30% respectively of all capital assets, but in China it is just 1%, says Martin. He adds that there were leasing companies in China 10 years ago, "but the market was not properly regulated so a lot of these companies got into financial trouble".
Market reforms
To ensure that local leasing companies can compete on more of a level playing field, the government is looking to introduce a number of major reforms to the tax system. Leasing companies overseas are generally located in jurisdictions where they minimise tax. But in China the value-added tax is much higher. One of the reasons BOC Aviation is keeping its headquarters in Singapore is because "the Singapore government gives good incentives to lessors of aircraft with a 5% tax rate for 2007, compared with 33% in China, although it is coming down to 25%", says Martin.
Ferré at AerCap says: "It seems to me that China has realised there is a lot of potential in the aircraft leasing and financing business, and will ensure the Chinese environment is favourable to this business." He adds that some changes to the tax and legal system may still be required to improve the competitiveness of China, and such changes will likely occur once a consensus is reached between the various government entities affected. But Ferré suggests the reforms will definitely happen because the biggest change that has taken place already "is the change of mindset of the Chinese institution regarding the *potential of aircraft leasing and financing".
Besides taxation, another issue leasing firms in China have to deal with is the transfer of money. Companies are prevented from taking Chinese currency out of the country, so firms in China often pay for things in foreign currency. Ferré says this could cause a problem for a leasing company in China because it might receive lease payments in local currency but pay aircraft manufacturers or maintenance firms overseas in foreign currency.
Nevertheless, one of the first new players to seize on the opportunity is Shanghai Electric, a state-owned electricity power firm. In 2006, Shanghai Electric established its SE Leasing unit and signed a memorandum of understanding with AVIC 1 Commercial Aircraft to acquire 20 ARJ21 regional jets. The ARJ21 was rolled out in December and deliveries are scheduled to begin in 2009 to launch customer Shandong Airlines.
New players
Other new players to emerge are more closely linked to the aviation industry. China Aviation Industry Corporation I, the largest manufacturer of Chinese aircraft, recently took over CATIC International Leasing and renamed the business AVIC I International Leasing. Since the AVIC I takeover, the leasing arm has signed a deal to lease 10 Xian Aircraft MA60 turboprops to Okay Airways, a privately-owned carrier based in Beijing's port city of Tianjin. The company, which offers finance and operating leases, plans to lease aircraft from other manufacturers, such as China *Aviation Industry Corp II and Boeing.
China Aviation Supplies Import & Export Group is another state-owned company responsible for exporting Chinese aircraft and materials overseas. It has teamed up with Dutch aircraft leasing firm AerCap and French financial house Calyon to establish Dragon Aviation Leasing, which is the first foreign joint venture leasing company in China and the first leasing firm from China to buy direct from Airbus. In September, Airbus China announced that of the 150 Airbus A320s China had ordered in October 2006, 15 had been allocated to CASCG's new leasing arm. The company also has an offshoot in *Ireland, AerDragon, meaning it can avoid some of the Chinese tax system.
Chinese carriers have generally steered clear of investing in aircraft leasing companies, but Hainan Airlines Group is a major exception. Hainan has its own aircraft leasing arm, Yangtze River Leasing, which it has used to offload some of its debt commitments by doing aircraft sale and leasebacks.
Hainan last year also bought 23% of Shenzhen Financial Leasing from China's Three Nine Group, making it SFL's largest shareholder. SFL claims to be the first aircraft leasing company in China. It started in the mid-1980s leasing heavy equipment and then in 2000 branched into aircraft leasing by buying a Boeing MD-82 from China Northern Airlines and leasing it back. That year SFL announced an order for 60 MA60s, a minority shareholder in SFL. Despite this, SFL ended up only buying a handful of MA60s. The other 16 aircraft in its portfolio are a mix of Boeing 737NGs, Airbus A320s and A330s.
Chinese leasing companies generally acquire aircraft through sale and leaseback deals rather than direct from the manufacturer because they have to get government approval. But SFL says it has entered talks with western manufacturers, and this year plans to order narrowbodies with widebodies coming later.
There will soon be at least 10 Chinese players offering aircraft leases, going by the number of local companies already offering leases and the number of banks that have applied to establish leasing arms. But the Chinese banks seem to have the potential to be the biggest because they have the funds. They may lack the specialised leasing experience but, as BOC has already proven, that can be bought. Whether any of the banks can build up a large portfolio of aircraft within the next one to two years will depend on their appetite to grow quickly through acquisitions.
For a snapshot listing of the world's top 50 aircraft lessors with company details visit http://www.flightglobal.com/leasingsurve
SOURCE:Airline Business
Chinese banks poised to enter leasing market
By Leithen Francis
Lessors from overseas have long dominated the aircraft leasing market in China, but Chinese banks are poised to enter the scene and shake things up
Chinese financiers look set to embrace the enormous potential of the country's aircraft leasing market in a big way, taking on the foreign leasing firms that have traditionally dominated the sector. Up until March 2007, Chinese banks were barred from operating financial leasing businesses, but following a change in the law there is now a huge local appetite, as well as significant cash reserves, to invest heavily in the aircraft leasing market.
Western lessors, which have until now been enjoying strong and unchallenged demand for their services in China, generally believe that Chinese banks could eventually become major players in this market. "I don't see why not," says Soeren Ferré, head of aircraft marketing for Europe, Middle East, Africa and Asia Pacific at lessor AerCap. "Chinese banks are cash rich, the Chinese economy is growing and the Chinese people are looking for new areas to invest."
HSH Nordbank head of transportation in Asia, John Duffy, is even more bullish, saying it is inevitable that some Chinese banks will become major international players in the aircraft lease market. "It is a matter of when rather than if," says Duffy, who likens the Chinese move into aircraft leasing to China's push up the value chain in other industry sectors.
robert martin
"China has realisedthere is a lot of potential in the aircraft leasingand finance business"
Soeren Ferré
Head of aircraft marketing for Europe, Middle East, Africa and Asia Pacific, AerCap
The Chinese banks already provide bank guarantees "to other people's aircraft deals and help to arrange debt, so leasing is the next inevitable step", adds Duffy. He says 20% of all commercial aircraft produced today are delivered to customers in China. He predicts the two banks to watch out for are Industrial and Commercial Bank of China and Bank of China.
Access to leased aircraft is arguably more important in China than in many other countries because Chinese carriers need to lease aircraft to meet their ambitious growth plans. Ordering aircraft direct from manufacturers is insufficient because the central government decides how many aircraft the country will order and how many aircraft each airline will get. If an airline fails to sway the government, it turns to the lease market and in nearly all cases this has meant dealing with a foreign-controlled aircraft leasing firm. However, this now seems set to change.
The reasons behind the expected change include: central government reforms to promote the emergence of local players the central government's desire to end the virtual foreign monopoly wealthy Chinese firms looking for new areas to invest and Chinese banks looking to move into asset management. In the past there were enormous impediments preventing local players from entering the leasing market. But from March last year the government changed the laws and, almost immediately, ICBC, Bank of Communications, China Merchants Bank and China Minsheng Bank applied to the China Banking Regulatory Commission. ICBC, China Minsheng Bank and several others have since received *approval to establish financial leasing arms.
The financial clout of China should not be underestimated and, despite the fact that the Chinese currency is under-valued, China already has the three largest banks in the world by market capitalisation (see graph on p52). However, the extent to which Chinese banks move beyond finance leasing and into operating leases remains to be seen, according to Ferré. "Chinese banks would find it easier to move into debt financing because it requires less infrastructure," he says. The only exception would be if the airline customer defaulted, then the bank would need to get involved directly or through aircraft management and/or remarketing companies, he adds. "If Chinese banks try to enter the operating lease market themselves, then these banks would have to take responsibility for the full management of the aircraft", and that means "marketing, technical, legal and other capabilities would have to be made available to ensure *efficient management of operating leases".
For its part, ICBC has registered its aircraft leasing business in Beijing's port city of *Tianjin. HSH Nordbank's Duffy says that whether ICBC can become a major international player within the next two years depends on whether it buys an aircraft leasing company from overseas. "If they are going to grow aggressively they will buy one of the smaller aircraft leasing companies," says Duffy, adding that there are plenty of leasing companies ranked between 10 and 20 in the world that may be willing to sell. He believes another way to acquire a large fleet of aircraft quickly is to buy from China's top four carriers, but says this is unlikely because there may be problems in placing these aircraft with airlines overseas.
"If you are an airline in the USA and this lessor comes to you with seven-year-old aircraft that had all been maintained in China, would you be interested?" asks Duffy, although he adds that airlines in emerging markets such as Africa might be. Coincidentally, such markets are exactly where the Chinese government is working hard to develop *political and trade ties.
While ICBC's strategy for entry into the market has yet to unfold, BOC has already pounced. Rather than build a leasing company from scratch, BOC paid $965 million in December 2006 to acquire Singapore Aircraft Leasing Enterprise. SALE continues to be headquartered in Singapore but has since changed its name to BOC Aviation.
BOC's acquisition of a foreign aircraft leasing firm meant it avoided some of the pitfalls holding back development of home-grown aircraft leasing firms in China. It also gave BOC exposure to the international aircraft leasing market because SALE has airline customers around the world. The leasing company has benefited too because BOC has decided to grant it a $1 billion credit facility for *purchasing aircraft.
BOC Aviation chief executive Robert Martin says Chinese banks are moving into not just aircraft leasing but leasing of all sorts of assets because they can see there is a gap in the market. In the USA and Europe, leased physical assets account for about 35% and 30% respectively of all capital assets, but in China it is just 1%, says Martin. He adds that there were leasing companies in China 10 years ago, "but the market was not properly regulated so a lot of these companies got into financial trouble".
Market reforms
To ensure that local leasing companies can compete on more of a level playing field, the government is looking to introduce a number of major reforms to the tax system. Leasing companies overseas are generally located in jurisdictions where they minimise tax. But in China the value-added tax is much higher. One of the reasons BOC Aviation is keeping its headquarters in Singapore is because "the Singapore government gives good incentives to lessors of aircraft with a 5% tax rate for 2007, compared with 33% in China, although it is coming down to 25%", says Martin.
Ferré at AerCap says: "It seems to me that China has realised there is a lot of potential in the aircraft leasing and financing business, and will ensure the Chinese environment is favourable to this business." He adds that some changes to the tax and legal system may still be required to improve the competitiveness of China, and such changes will likely occur once a consensus is reached between the various government entities affected. But Ferré suggests the reforms will definitely happen because the biggest change that has taken place already "is the change of mindset of the Chinese institution regarding the *potential of aircraft leasing and financing".
Besides taxation, another issue leasing firms in China have to deal with is the transfer of money. Companies are prevented from taking Chinese currency out of the country, so firms in China often pay for things in foreign currency. Ferré says this could cause a problem for a leasing company in China because it might receive lease payments in local currency but pay aircraft manufacturers or maintenance firms overseas in foreign currency.
Nevertheless, one of the first new players to seize on the opportunity is Shanghai Electric, a state-owned electricity power firm. In 2006, Shanghai Electric established its SE Leasing unit and signed a memorandum of understanding with AVIC 1 Commercial Aircraft to acquire 20 ARJ21 regional jets. The ARJ21 was rolled out in December and deliveries are scheduled to begin in 2009 to launch customer Shandong Airlines.
New players
Other new players to emerge are more closely linked to the aviation industry. China Aviation Industry Corporation I, the largest manufacturer of Chinese aircraft, recently took over CATIC International Leasing and renamed the business AVIC I International Leasing. Since the AVIC I takeover, the leasing arm has signed a deal to lease 10 Xian Aircraft MA60 turboprops to Okay Airways, a privately-owned carrier based in Beijing's port city of Tianjin. The company, which offers finance and operating leases, plans to lease aircraft from other manufacturers, such as China *Aviation Industry Corp II and Boeing.
China Aviation Supplies Import & Export Group is another state-owned company responsible for exporting Chinese aircraft and materials overseas. It has teamed up with Dutch aircraft leasing firm AerCap and French financial house Calyon to establish Dragon Aviation Leasing, which is the first foreign joint venture leasing company in China and the first leasing firm from China to buy direct from Airbus. In September, Airbus China announced that of the 150 Airbus A320s China had ordered in October 2006, 15 had been allocated to CASCG's new leasing arm. The company also has an offshoot in *Ireland, AerDragon, meaning it can avoid some of the Chinese tax system.
Chinese carriers have generally steered clear of investing in aircraft leasing companies, but Hainan Airlines Group is a major exception. Hainan has its own aircraft leasing arm, Yangtze River Leasing, which it has used to offload some of its debt commitments by doing aircraft sale and leasebacks.
Hainan last year also bought 23% of Shenzhen Financial Leasing from China's Three Nine Group, making it SFL's largest shareholder. SFL claims to be the first aircraft leasing company in China. It started in the mid-1980s leasing heavy equipment and then in 2000 branched into aircraft leasing by buying a Boeing MD-82 from China Northern Airlines and leasing it back. That year SFL announced an order for 60 MA60s, a minority shareholder in SFL. Despite this, SFL ended up only buying a handful of MA60s. The other 16 aircraft in its portfolio are a mix of Boeing 737NGs, Airbus A320s and A330s.
Chinese leasing companies generally acquire aircraft through sale and leaseback deals rather than direct from the manufacturer because they have to get government approval. But SFL says it has entered talks with western manufacturers, and this year plans to order narrowbodies with widebodies coming later.
There will soon be at least 10 Chinese players offering aircraft leases, going by the number of local companies already offering leases and the number of banks that have applied to establish leasing arms. But the Chinese banks seem to have the potential to be the biggest because they have the funds. They may lack the specialised leasing experience but, as BOC has already proven, that can be bought. Whether any of the banks can build up a large portfolio of aircraft within the next one to two years will depend on their appetite to grow quickly through acquisitions.
For a snapshot listing of the world's top 50 aircraft lessors with company details visit http://www.flightglobal.com/leasingsurve