Helping an industry soar 

As a sector, the airline industry continues to see profits soar year on year, as growing demand for air travel spreads across the globe. A growing middle class want to take to the skies and airlines are only too happy to welcome them on-board.

Indeed, last December, the International Air Transport Association (IATA) announced that it expected the global airline industry to make a net profit in 2017 of $29.8 billion. So it’s all rosy in the skies right? Well yes…..and no.

As Pieter Burger, tax partner at Deloitte explained, growing profits can’t hide the fact that average passenger revenue per kilometre (known as passenger yields) has been falling steadily. And airlines are facing a rising cost base as fuel, interest rates and labour costs are expected to increase in the years ahead.

Burger told The Sunday Business Post “the airline industry is in great shape, achieving record return on capital in recent years, but it has to be noted that net profits appear to have peaked in 2015 / 2016, and is expected to decrease this year. And we’ve had some high – profile airline failures in recent times, from Monarch to Air Berlin and Alitalia, among others.”

Still though, demand from investors in the aviation industry is incredibly strong and Burger expects it to continue. “Passenger growth shoes no sign of slowing down. Indeed, in Asia there’s a huge need for more aircraft to meet demand. These emerging markets are the main drivers of passenger growth and increasingly investors are seeing the real value and becoming more familiar with aircraft as an asset class” he said.

As the world’s largest professional services provider, Deloitte offers clients expert assistance across the entire aircraft leasing and finance advisory spectrum.“We have a global presence and work with some of the largest aircraft lessors and aviation investors on the planet, but similarly we help smaller entities and also new entrants looking to gain a foothold in the industry, or finding their niche” said Pieter Burger.

Indeed the full range of specialist advisory services cover areas such as taxation, financial advisory and consulting (in particular, human capital and talent advisory). Deloitte can literally assist the client from the point where an aircraft-leasing platform is established to building strategy and up to the point when the lease ends and the aircraft is remarketed or parted out.

Burger said: “In a time when there is a drive for international tax reform and more than a thousand double tax treaties are being amended, lessors need to ensure they have proper ‘substance’ in the jurisdiction from which they are leasing aircraft. We assist with this in targeting and attracting the best people and advising on everything from the availability of office space, housing for staff, best-in-class performance management programmes, organisational structure design and devising growth strategies for expanding scale.”

And it’s an industry which is buzzing at present, driven by a number of key factors. “It’s incredibly active as the purchase of aircraft portfolios with in-place leases are seen as safe and attractive. Apart from aircraft portfolio acquisitions and aircraft securitisations, the market has also seen continuing consolidation and major M&A activity. We expect this to continue. Some commentators believe that in as soon as five years from now, we could have 20 major aircraft lessors in the world with balance sheets of $10 billion each, driven by strategic objectives. And because of all of that activity, our professional services are sought after more than ever.”

But there are changes afoot. The EU Anti-Tax Avoidance Directive (ADTAD) will come into effect broadly from 2019 onwards. Also the OECD’s Multilateral Convention was signed in June 2017 and will start taking effect likely from 2019 onwards. Such international tax reform gives rise to the possibility of an even further increase in costs for the aviation industry. But Burger believes the impacts, while not insignificant, will not blow the sector off course.

He said: “We carried out a survey of more than 400 senior executives from the aviation finance industry. Additionally, in-depth interviews were conducted with senior industry executives and independent experts. One of the main messages that came out of the survey was that while there was a general consensus that BEPS (the OECD’s Base Erosion and Profit Shifting plan) and the EU ATAD will have a widespread effect on aviation finance, the majority of respondents felt the impact would be largely moderate.”

Inevitably, though, these changes in legislation may trip up some in the industry. As Burger pointed out: “Given the speed with which international tax rules have changed and lingering international tax uncertainty, it is becoming increasingly challenging for businesses to see around the corner and make informed proactive decisions.”

According to the survey published earlier this year entitled Game Changer Not Game Over, close to 60 per cent of airlines and lessors are already implementing actions to prepare for tax reforms or are planning to make changes. About 70 per cent expect that new anti-tax avoidance measures will ultimately drive up costs for the aviation industry through higher taxes, increased compliance costs, or both. And another development to be mindful of is the period 2019 to 2022 is the expected marked increase in the number of narrow-body aircraft which will come off lease.

“Competition in the aircraft leasing market has increased significantly in recent years due to new market entrants, which has resulted in a reduction in lease rates and returns made from aircraft leasing. As we look forward to 2019 and beyond, we need to be mindful of further increased competition and aircraft re-marketing and refinancing pressures at a time when international tax changes will start taking effect, the new leasing standard (IFRS 16 which will bring operating leases onto the balance sheet of airlines) will take effect, and all against the backdrop of a rising cost base experienced by airlines,” said Burger.

To assist companies in navigating these choppy business waters. Deloitte is able to scenario plan with clients, taking into account all likely factors on the horizon. In addition to audit services, Deloitte offers specialist services to the aviation finance industry in technical accounting, technology, corporate treasury, and tax advisory, together with corporate finance and financial modelling assistance. Deloitte advises on nearly all aspects of M&A transactions in the aviation finance industry and also assists with the liquidation of aircraft leasing legal entities after the asset has been sold.

“It’s a hugely exciting and fast-paced sector to be in and it’s constantly changing,” said Pieter Burger. And with Ireland expecting to be one of the fastest growing jurisdictions over the next five years as a location of choice for the establishment of aircraft leasing operations, it is clear our country will continue to play a leading role in the expansion of the sector across the world.” And there every step of the way will be Deloitte – using its expertise and experience as the world’s leading professional services firm – to advise, guide and make an impact that matters for its clients around the world.

This article first apperared in the Sunday Business Post on the 12 November 2017.