Kingfisher Airlines collapse: Leasing companies reluctant to do business with Indian carriers

MUMBAI: Global leasing companies have hiked lease rentals on their planes in India after they found it difficult to repossess planes following defaults by Kingfisher Airlines. The higher rental may hit the fleet expansion plans of Indian carriers who typically either directly lease planes or get into sale and leaseback agreements with leasing companies after receiving deliveries of aircraft they have purchased.

“Kingfisher Airlines’ collapse unravelled the inherent difficulties of leasing into the Indian aviation market and consequently will drastically increase the cost associated with operating aircraft in an industry where the overhead costs are already extremely high,” Paul Thibeau, vice president, communications at the International Lease Finance Corporation, told ET in an interview over email.

Thibeau added that the current regulatory environment, wherein leasing companies find it difficult to recover their planes from customers in case of defaults, “will have a medium- to longterm impact on India’s aviation market and will limit the availability of future aircraft financing”.

Nirvan Veerasamy, managing director of Mauritius-based lessor Veling, said the only protection against the high risk of dealing with Indian carriers is to charge higher rentals.

“Other things being equal, because of the various regulatory issues surrounding India’s leasing market, the rentals charged here would inevitably be higher than any other country,” he said.

A top executive at a budget carrier that is looking to lease planes, said rentals are already 5-7% higher than before the Kingfisher episode. Air India that has been looking to lease 19 Airbus A320 planes hasn’t received an adequate response to its call for tenders. After extending the bid date till September 3, the airline has now decided to rework the tender and float it again, said an executive.

Jet Airways, which is soon set to close a 24% stake-sale deal with Abu Dhabibased Etihad Airways, plans to expand its fleet. The airline plans to immediately link several Indian cities to its new hub in the Middle East for which it will need to bolster its current fleet. Jet has appointed aviation consultant Seabury to prepare a 10-year market report, based on which it will decide on fleet expansion. The airline’s chief financial officer Ravishankar Gopalakrishnan, however, said the airline hasn’t yet faced any problems with lessors.

Malaysian carrier AirAsia plans to soon set up a low-cost budget airline in India and while its immediate fleet will consist of deliveries diverted from global plane orders, the Indian unit will, on its own, look to scale up its fleet size soon, most likely through leases. The hike in rentals will add to the burden of the depreciating rupee that has already hiked the cost of leases, paid in dollars. The rupee has slumped about 20% against the dollar this year, on concerns about India’s widening current account deficit.

DIFFICULT TO SEIZE PLANES

The difficulties in recovering aircraft came to the fore after Kingfisher defaulted on payments to leasing companies. Leasing companies such as Germany’s DVB Bank SE and ILFC repossessed their planes but found it difficult to fly them back as other agencies such as airport operators wouldn’t let the planes go unless their dues from Kingfisher were cleared.

ILFC was embroiled in court cases against Kingfisher and the Delhi airport over the transfer of planes. The Supreme Court on August 23 directed the leasing company to clear Kingfisher’s dues worth Rs 2.4 crore to GMR-controlled Delhi International Airport Ltd, if it wanted to repossess four of its planes parked at the Delhi airport. While India is part of the Cape Town Treaty 2008, which protects the rights of lessors to repossess planes, the government hasn’t notified rules in its own aircraft laws which would make this easier.

The DGCA is currently working to frame rules that will ease repossession of planes by leasing companies.

“ILFC as part of the Aviation Working Group (AWG) in consultation with the Federation of Indian Airlines (FIA) are engaged with the DGCA and its agents to assist to ensure that the Cape Town Convention is effectively implemented in India,” said Thibeau.