IndiGo taps Japanese financing for aircraft in a first for Indian aviation

IndiGo has tapped Japanese equity financing to procure two Airbus A320 family aircraft, a development which is seen as a sign of increasing confidence by global financiers in Indian laws and airlines.

This is the first time an Indian carrier is financing planes backed by Japanese equity funding, which is cheaper than other means like debt but is difficult to avail of as Japanese investors are normally very risk averse.

The Indian government recently enacted a law which conforms to the Cape Town Convention—an international agreement that allows lessors to reclaim aircraft smoothly in case of airline bankruptcies.


The transaction has been done through a structure called JOLCO (Japanese operating lease with call option) via Gujarat International Finance Tec-City, a special economic zone where aircraft leasing entities enjoy tax sops.

Under this model, Japanese investors such as enterprises and wealthy individuals fund the aircraft along with debt from Japanese banks. The planes are then leased to the airline. Like any other finance lease, IndiGo, India’s largest airline, will have the right to purchase the aircraft at the end of the lease term.

Japanese law allows investors to claim depreciation allowances that can be used to offset taxable profits.

“The investors are willing to accept a lower economic return on their equity because a significant portion of their return comes from the tax shield rather than purely from the lease income,” said a person involved in the transaction. This arrangement allows airlines to get lower lease rates than conventional methods, the person said.

IndiGo has established a dedicated aircraft leasing company, InterGlobe Aviation Financial Services IFSC Pvt Ltd, in Gift City.

JOLCO finding is usually available only to top-tier airlines, like state-owned or those with high credit worthiness. British Airways, Singapore Airlines, Cathay Pacific, Qantas, Turkish Airlines and Air France are among carriers that have tapped this route.

For a long time, Indian airlines were seen as a risky bet by global lessors due to multiple bankruptcies and the country’s insolvency laws which prevented lessors from reclaiming aircraft in case of a default. This often led to higher lease premiums for carriers increasing their operating cost.

“JOLCO transactions, through Gift City, provide an excellent opportunity to the Japanese investors in particular to participate in India’s growing civil aviation sector. This also indicates the lowering credit risk and increasing confidence in the GIFT city structures,” said Ajay Kumar, managing partner at legal firm KLA Legal that advises global lessors.

Following the bankruptcy of Go First, which led to protracted legal battles, lessors had highlighted the country as a high-risk geography. In February, the government implemented new laws which allows airlines to repossess aircraft within 60 days in case of bankruptcy.

Experts said that Gift City solved the problem of not having a double-taxation treaty between India and Japan, which was seen as a barrier for JOLCO with an Indian airline.

“Full compliance by India of Cape Town Convention has considerably reduced jurisdictional risk and strong credit profile of Indian airlines have led to increased prospects for new financing avenues,” said Lovejeet Singh, partner at law firm Chandhiok and Mahajan. “Gift City has been an enabler for these new structures as direct leasing from Japan into India earlier was not very tax friendly before.”