Avolon CEO Domhnal Slattery predicts Singapore will become the next aerospace hub. Mr Slattery spoke exclusively to CAPA and explains five reasons why this development is inevitable and key factors an aerospace hub needs, based on Ireland's positioning as a global centre for aircraft leasing.
Why an Asian aerospace hub will develop
“Where’s it going to be is the big question. Is it going to happen? I think the answer is undoubtedly, yes, and I think the macro reasons why it will happen include the fact that the number of operating leases being written in Asia have grown dramatically and will continue to grow. Second reason, you have the development of more Asian-based lessors, including BOC Aviation, and you have the rise of Chinese lessors who wouldn’t have been on the scene even five years ago. I think that’s very relevant, as recently ICBC ordered 42 A320 aircraft. This is important as a milestone because it’s the first time a Chinese based lessor has ordered aircraft in that scale. So I think it’s the first of many that will come from China over the coming years.
"Number three reason I think we are beginning to see Asian-based financial institutions, which have historically not been investors in aircraft leasing debt, appreciate benefits of lending to the lessor community, from a risk perspective and a margin perspective. The fourth thing we are seeing from a macro theme is the development of the capital markets richly in Singapore where a lessor like BOC has issued bonds, specifically for the aviation business in Singapore. Three years ago that would have seemed far-fetched, however, today it’s probably the beginnings of a leading source of capital relative to the US. The fifth theme is the development of the IPO market in Hong Kong. As a general matter we are seeing Hong Kong become a major player for the issuance of new IPOs and therefore you could assume that over time that aircraft lessors, on the back of the success of the Air Lease Corporation IPO, could or should look at listing in Asia. That tells you there is a draw, not just for business with the airlines, but source of capital into the region."
Where in Asia will this hub be?
"There are three options: Hong Kong, Singapore and China (Beijing or Shanghai). One of those three will become a primary hub."
What do you need to develop a hub like Dublin?
"What does Dublin have that has turned it into the centre of excellence worldwide? Dublin has three unique differentiators. The three reasons why aircraft leasing has developed in Dublin are:
- The global withholding tax treaty network;
- An attractive corporate tax regime.
"Of these three, people is the most important. This includes the executives with experience running the leasing businesses and the service providers that support these businesses. This includes tax gurus, legal gurus, technical support people – all of the people that are needed to support a global leasing platform. As a consequence of Guinness Peat Aviation (GPA) there was a lot of people left from GPA who went and started their own businesses. If you track that family tree you will see that those individuals have gone on to spawn, build, work in aircraft leasing businesses as either lessors or support businesses. That has taken 20-25 years to develop and is the really unique piece [to creating a hub]. That expertise brings in new expertise through recruitment and training. The people requirement is very difficult to replicate."
The global withholding tax treaty network
"This is critically important because when you are structuring aircraft operating leases between jurisdictions, you need to have a withholding tax treaty network between those countries. So between Ireland and Singapore, Ireland and Australia etc it effectively allows payment of the rentals for the lessor free of withholding taxes. If the airline had to pay these withholding taxes it makes the operating lease more expensive. And so therefore having a global, multi-jurisdictional withholding tax treaty network for aircraft rentals is a must-have. Other countries have these treaties, it is not unique to Ireland, what is unique to Ireland is the number of countries it has treaties in place with. Each treaty can take years to negotiate. Now if we look at the three jurisdictions; China, Hong Kong and Singapore, Singapore’s withholding tax treating network is pretty good. It’s not as good as Ireland’s but that is not to say it won’t get there over time with the hard work and focus of the Singapore government. Hong Kong’s network is not as advanced as Singapore’s and China’s is somewhat behind again."
The corporate tax rate
"Ireland’s tax rate is well rehearsed globally, it’s 12.5%, and lessors can effectively write of their aircraft assets over an eight year period – a very effective tax jurisdiction. This can be replicated by other countries if a government choses to do so. What we are seeing is that Singapore in particular has taken a major step forward in how it taxes aircraft leasing businesses and the depreciation rates. In the context of that item alone Singapore, when compared to Ireland, is actually more attractive today."
Singapore looking likely
"Considering all of these points, Singapore starts to quickly come to the fore. Of the three, what Singapore is currently missing is the people piece. I believe we are going to see a migration of lessors setting up regional offices in Singapore and I think within the medium term (five to 10 years) you will see lessors’ headquarters develop there. From my knowledge the only major lessor based in Singapore is BOC, which has always been in Singapore. We have not yet seen a lessor uproot itself and move to Singapore but I feel there is an inevitability about that because Singapore itself, at the governmental level, has identified aircraft finance, aircraft leasing and aerospace as a sector they want to be a major player in as a service provider."
"In the next six to 12 months I think you are going to see several things happening with us: we are going to do more business in Asia, we are going to put more people in the region and I see us opening at least one other office in Asia (Avolon currently has offices in Hong Kong and Shanghai). The issue for us in the medium term is where is our hub office – we are in the middle of thinking about that right now. It could be Singapore but we are still evaluating this."