The aircraft leasing companies may see India as a risky proposition after the Go First saga, but airlines with strong financial backing in the world's fastest growing aviation market are too big an opportunity to look away, according to analysts.
The bankruptcy protection provided to troubled Go First airline led to strong pushback from lessors, who described India as a "risky" market and highlighted gaps in compliance with the international law.
SMBC Aviation Capital, which is among the lessors challenging admission of Go First's voluntary bankruptcy, went as far as saying that admitting the budget carrier's petition would shake the confidence of the international aviation industry.
The statement by one of the world's largest aircraft lessors may be true for some, but others may have a different assessment of the risks involved in the Indian aviation business.
"It won’t shake the confidence of the market because India is a fast-growing market, and there are far worse regions out there than India when it comes to issues of aircraft repossession," Rishi Jain, managing director at Jain Aviation Consultants, said.
The Aviation Working Group—a group of aircraft manufacturers, lessors and financiers—put India on a watchlist notice. It said failure to de-register the planes leased to Go First results in a "negative" outlook for India for non-compliance to the Cape Town Convention, an international treaty designed to protect high value assets such as an aircraft.
India has acceded to the convention in 2018, but it is yet to make it a law in the country, meaning that any other Indian law—including the Insolvency and Bankruptcy Code—will have primacy over the convention's clauses.
The aviation leasing watchdog is co-chaired by Airbus SE and Boeing Co., and some of the largest aircraft leasing companies are its members.
After the suspension of operations by Go First, several media reports talked about how this might lead to higher leasing rates for other airlines in the country. The watchlist notice from AWG might just be a confirmation.
Risks And Rewards
"AWG needs to be unbiased, mature up and face facts," Mark Martin, chief executive officer of Martin Consulting, said in a Go First press release criticising AWG's warnings to India. "India is a tough leasing market and aircraft leasing in Asia comes with extreme high rewards with risks."
However, the market in which an airline operates is not the only factor that decides these leasing rates.
Lease rates take into account multiple factors, including the country risk, jurisdiction risk, airline credit risk and repossession risk, according to an aviation consultant, who spoke to BQ Prime on the condition of anonymity.
Another crucial factor that is not highlighted as much is the competition among lessors, even if a majority of them are concentrated in countries like Ireland, Singapore and the U.S.
Jain said it's each to their own with lessors. "Some will pull the plug at the first sign of trouble, while others will be willing to wait and see what happens," he said. "It's like with lenders."
Therefore, even when a risk-averse lessor may stay away from the Indian airlines or offer higher leasing rates, another one with its own independent assessment of risks can swoop in instead.
The credit rating of an airline is also a crucial factor, perhaps the most important one for a few lessors.
Leading airlines, such as Air India Ltd. and IndiGo (Interglobe Aviation Ltd.), are backed by financially strong promoters with good credit ratings. The two airlines, which control more than three fourth of the market, are unlikely to get higher leasing rates.
But a low-cost carrier like SpiceJet Ltd. may find itself in a market with higher leasing rates due to the airline's relatively weaker financial position.
Jain said the current tight availability of certain aircraft types means it's a lessor's market for the newer aircraft and airlines are not calling the shots at the moment.
Game Of Perception
The AWG's warnings may have an impact on how the market is perceived by the aviation players looking to fly in.
The AWG notice will impact the risk profile and risk perceptions for aircraft financiers. Other than impact to airlines, this also doesn't bode well for the Gujarat International Finance Tec-City and the attempt to promote it as an aircraft financing hub, according to the aviation consultant quoted above.
In its bid to make India an aviation powerhouse, the Union government has ramped up efforts to encourage everyone—from plane manufacturers and aircraft lessors to parts makers—to set up shop in India. The dream of making India an aircraft leasing hub through the GIFT City was along the same lines.
The National Company Law Appellate Tribunal will pronounce its order on the appeal challenging Go First's bankruptcy protection on May 22.
The judgement and how it is worded will ascertain the impact of the case on Indian aviation's future. While an unfavourable ruling may raise India's risk profile, the rewards on offer will continue to force the lessors' hand for placing a bet on the country's growing market.
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