Flying Weather

Kommersant “Leasing”. Annex
№179 (5210)
02.10.2013

The aircraft-leasing market is one of the most capital-intensive and dynamically developing markets. In 2012, the amount of new business in this segment was about 107 billion rubles. It increased by about 22% from a year ago. A specific feature of aviation leasing in Russia is a high concentration of the market. We can name five companies that are systematically involved in aviation leasing: VEB-Leasing, VTB-Leasing, Sberbank Leasing, the State Transport Leasing Company (STLC) and Ilyushin Finance Co. (IFC), with other companies conducting only individual transactions. Competition is developing between the first three companies. As far as STLC and IFC are concerned they occupy more specific niches working with regional aviation. Limitedness of the market is caused by the fact that companies can raise cheap long-term money. For objective reasons a small company can’t raise money more cheaply than a large one, it loses price competition, so, competition is bound to increase between the largest companies. It’s not a secret that now many major banks have excessive liquidity and it’s profitable for them to fund aviation business. Nevertheless, a new major player is unlikely to appear in this market.

A strong tendency in the development of the aviation leasing is the introduction of operating leasing. Even three years ago it was not possible to talk with Russian leasing companies about this sort of leasing. And now leading players are already ready to form a certain share of their portfolio in this segment. Operating leasing as opposed to financial leasing provides for an airline to return aircraft to a leasing company upon expiry of a leasing agreement. The accumulated experience and market realities make it possible for the largest leasing companies to operate using this scheme , the more so, this scheme is in demand by airlines and is suited for selling products of Russia’s aviation industry, the secondary market of which has not been so far established

Changes introduced in Regulation №1212 regulate the practice of extending subsidies for Russian aviation companies to compensate some of their expenses on leasing payments for aircraft leased out to them for domestic regional and local airborne transportation. Due to introduced changes, since early August of 2013, the Regulation has been applicable to domestic aircraft An-148 and Sukhoi SuperJet 100. They received a quota of 30% of funds under the subsidizing program. These changes are expected to increase demand for Russian-made aircraft by Russian airlines and this in its turn will stimulate aircraft makers. Another important change is that unitary state enterprises can also become participants in the leasing subsidizing program and this will increase the number of potential operators of Russian-made aircraft.

But if we assess the changes from a position of a leasing company we can say that not everything is so rosy. First, leasing transactions on aircraft are substantially extended in time that is why financial indicators of a potential lessee and its capacity to fulfill its obligations under a leasing agreement within a whole period of this agreement’s validity period play a key role in taking a decision on leasing out an aircraft. Unfortunately, nowadays there are very few Russian airlines with acceptable indicators. An airline’s readiness to make an advance payment in the amount of 10-20% is sure to have a positive impact on terms and conditions of a leasing transaction but at the same time will not be a decisive factor in making a decision on conducting a transaction with an individual lessee.

As far as foreign-made aircraft are concerned the situation is better because a leasing company can place risk on a leasing subject due to its sufficient liquidity on the secondary market and a possibility to determine its residual value. As far as such new Russian-made aircraft as Sukhoi SuperJet 100 are concerned we can’t apply these mechanisms as they have never been sold on the secondary market due to the small number of manufactured aircraft and the recent launch of their production as this makes it impossible to make projections with regard to their residual value.

Second, subsidies are made available provided that a financial leasing agreement has been concluded and this limits significantly the number of potential customers of SSJ100. As the practice shows airlines prefer to close operating leasing transactions with regard to new Russian-made aircraft. Under operating leasing transactions upon expiry of a leasing period a leasing company retains title to an aircraft and the aircraft is to be returned. In such cases an aircraft manufacturer acts as a guarantor of residual value and can repurchase it upon expiry of a leasing period. This is a negative factor for a manufacturer but as it has to promote its products the manufacturer is ready to take an additional burden. Naturally, in time a secondary market will be put in place and these problems will be resolved but in the current market conditions it would be quite appropriate to make the Regulation applicable to operating leasing too.

Third, both leasing companies and airlines call into question a provision of the Regulation that obliges a company that lays claim to a subsidy to start operating an aircraft no later than six months from the date of leasing agreement. Maybe these terms are acceptable for aircraft that are not new and were in operation before but as far as new aircraft are concerned we should increase this period to at least two years – a period needed to manufacture an aircraft.

Vyacheslav Solovjev, OJSC VEB-Leasing Director General