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The key to reducing turbulence in aviation finance

Apr 22, 2018
Ireland has long enjoyed a distinctive role in aviation innovation that belies its size. From pioneering duty-free shopping in the 1950s to blazing a trail in low fares in the 1990s, Ireland has been to the forefront of improving the customer experience in air travel. Less well known is our position as the birthplace of aviation finance, beginning with the launch of Guinness Peat Aviation (GPA) in the 1970s. 

Today, the country is firmly established as a major global hub in aircraft leasing, with a significant number of major global players based here. Nine of the world’s top 10 lessors are headquartered in Ireland, while in excess of 30 global aircraft leasing companies operate from here. A staggering 50%+ of the world’s leased aircraft are owned and managed from Ireland. 

Significant growth in the aviation industry has been a feature of the last decade, increasing the demand for the services of these Irish-based companies. Major investment from the Middle East and the demand for specific financing structures to support airlines in new and emerging markets have helped fuel this growth. Against that, the global financial crisis over the last decade has certainly had its impact on a sector that has always been particularly sensitive to political and economic turbulence, not to mention fluctuating oil prices. On balance, however, the general prospects for global aviation remain overwhelmingly positive. While some of the aftershocks of the last decade are still being felt, the picture in the coming decade is one of significant and sustained investment in aviation across the globe. This spans from new, more environmentally friendly airplanes, to the next generation of airports and terminals. That said, there is little room for complacency in this fast evolving but often volatile industry. 

Safety-centred, protocol-heavy experience

We all know from our personal experience of flying, that it is a safety-centred, protocol-heavy experience. At a certain level of turbulence, for example, specific controls will automatically kick in, such as seat-belt signs coming on. Should the problem become more serious, the captain may make an intervention to calm passenger nerves. ‘Proactive’, ‘anticipatory’ and ‘responsive’ could be used to describe a flight experience and effective strategies for aircraft leasing companies that want to maintain a strong, competitive advantage in the market. This means ensuring risks, whether at macro- or micro-level, are constantly clarified, identified managed and, ultimately, mitigated where possible. 

Risks and challenges

In a sector where stakeholders and investors expect ‘best in class’ when assessing how organisations are managed, this extends to the robustness and durability of governance structures. These are reflected through clearly defined policies and procedures, distinct roles and responsibilities, and strong  and practical risk management frameworks. These structures will be central to managing uncertainties, emergencies and transformations. Of course, particular risks and challenges are always evolving in tandem with developments within this composite industry. Here are a few that would currently be rated as of high priority: 

  • GDPR 
  • Attraction and retention of talent and expertise;
  • Contract management and lease revenue recovery;
  • Access to capital and the cost of debt;
  • Financial model governance;
  • Internal and external fraud risk; 
  • Cybercrime or malicious attacks; 
  • Insider trading risks or reputational impact;
  • Strategic initiatives and change or project management expertise;
  • Regulation compliance (KYC/AML, etc.);
  • Over-supply, market demand and the impact on margins; and
  • Geopolitical uncertainties, economic growth and terrorism.
These issues are often complex and, in some cases, outside an organisation’s control. What they underline however is the absolute importance of having a robust governance model that is supported by a strong ethos of risk management. There is a huge peace of mind to be gained from having such structures in place, not to mention the additional resilience against adverse events that they may bring.

Staying awake

Like the airlines they serve, aircraft leasing companies must continue to develop their governance frameworks, to mitigate risk and ensure problems do not escalate into crises. If we continue the analogy of flight, not paying attention to your governance structures could be like dozing-off during the safety demonstration.

David Devereux is the Senior Manager in Risk and Advisory Services at BDO.