India Lowers Entry Barriers for New Domestic Lessors

 - February 15, 2021, 9:36 AM

As Indian aviation looks to reestablish pre-pandemic growth patterns once the Covid-19 crisis subsides, the country’s finance minister, Nirmala Sitharaman, has revealed plans to offer further incentives to aircraft leasing companies operating out of Gujarat International Finance Tec (GIFT) City in the western state of Gujarat. The move will grant Indian carriers tax exemptions for leasing aircraft from those lessors, and aircraft leasing companies will get a tax holiday on their capital gains.

An emerging global financial and IT services hub, GIFT City is India’s first “smart” city, designed to encourage people to reside within walking distance of their workplaces. 

Burdened by high operating costs and taxes, domestic carriers consider the plan a progressive step. Presently, operators must pay foreign lessors in dollars, and the depreciating rupee results in higher costs to airlines. According to consultancy Center for Aviation (CAPA), 81 percent of commercial aircraft in India operate under lease compared with 53 percent globally.

Though lease orders from India account for less than 2 percent of all orders globally, many of India’s largest airlines are either relatively new or control limited financial capacity to own aircraft themselves, resulting in the high incidence of leasing in the country, said CAPA

The top operator of leased aircraft—budget airline Indigo—added 44 aircraft in the past year. “This is a great initiative,” said IndiGo chief commercial officer William Boulter. “We welcome the provision in the budget.” Another senior domestic airline official told AIN that carriers would more likely consider doing business with lessors based in India because the new scheme eliminates the foreign exchange risk.

Despite the high demand for leased aircraft pre-pandemic, no domestic aircraft lessors exist in India. That might change. While government-owned banks finance aircraft purchases to airlines, until recently India prohibited them from financing leased equipment. Now, the International Financial Services Center Authority for GIFT City has permitted banks to enter the leasing arena.

Challenges remain, however. “We still have a long mile to walk to make aircraft leasing attractive in India,” said Rohit Tomar, managing director of Mumbai-based Caladrius Aero Consulting. “Lessors deploy a significant amount of debt, and for India to be seen attractive will have to offer competitive cost of debt…The A320neo, for instance, with a typical purchase price of about $54 million, is leased at a monthly lease rental factor (LRF) of 0.65 to 0.7 percent. Even at these low LRFs, there is strong competition among lessors.”