Who will finance China’s business jets?


China is expected to be the fastest growing business jet market. But, asks Alasdair Whyte, can buyers find finance?

[nonmember]China is expected to be the fastest growing business jet market. But, asks Alasdair Whyte, can buyers find finance?::join::[/nonmember][ismember]

Let’s save time and assume that Bombardier’s forecast will be proven right. So 600 corporate jets will be delivered to China in the next 10 years. Minsheng Leasing, the leasing division of China Minsheng Bank, estimates that 70% of these aircraft will be financed. This means that Chinese customers will be looking to finance about 420 business jets in total or about 40 business jets a year.

This may not sound like a lot compared to North America or Europe, where banks finance more than 420 corporate aircraft each year, but it is worth remembering that the total Chinese business jet fleet was about 50 aircraft at the end of 2009.

Locals versus foreigners

You can split potential business aircraft financiers into two groups: Chinese leasing companies and international banks.

Chinese leasing companies see business jets as a natural extension of their business – particularly the ones that are already commercial aircraft lessors.  The ones that are owned by Chinese banks also want to be able to offer business jet finance to their existing customers. It is worth pointing out that at the moment they are all offering finance rather than operating leases.

Foreign institutions just know that they cannot ignore China. The country has the fastest growing population of high net worth individuals in the world and is a market they want to be part of. While they may have more experience in business jet finance they will have to compete hard deals.

“Foreign banks can try but they will meet fierce competition from us,” says one Chinese aircraft lessor.

Chinese leasing companies

All of China’s leasing companies are relatively young but it has not stopped some of them growing quickly. It was only in 2007, that the China Banking Regulatory Commission (CBRC) relaxed the rules that regulated leasing following problems with the industry in the 1990s. The first banks to take advantage of the ruling were Industrial and Commercial Bank of China, Bank of Communications, China Merchants Bank and China Minsheng Bank. Others have since followed and there are now over 10 domestic leasing companies.

As well as being amongst the first to get licenses ICBC Leasing and China Minsheng have been the first to close business jet deals, however, the two banks have very different strategies.

ICBC Leasing, a subsidiary of the world’s largest bank and one of China’s four so-called policy banks, is already one of the leading Chinese commercial aircraft lessors and sees business aircraft as a natural fit.

It is also keen to be one of the country’s most active financiers of business jets. In July this year it became the first domestic leasing company to finance a corporate aircraft for a Chinese customer when it closed a lease on a Gulfstream G450. It is set to close finance leases on two more business jets in 2010 and should finance about 10 more jets next year.

ICBC Leasing will originate its own deals as well as working with ICBC Private Bank and encouraging referrals from the bank’s 18,000 branches. “With ICBC’s relationships we aim to be one of the leading finance providers for Chinese customers,” said Johnny Lau, head of aviation finance at ICBC Leasing. “We will be very competitive.”

Minsheng Bank was the first Chinese bank not to be majority owned by the state and does not offer commercial aircraft leasing. It sees business jets as a good way of servicing its private banking customers.

Minsheng Financial Leasing is the first Chinese lessor to order aircraft from business jet manufacturers.   It has signed contracts for 17 aircraft — Gulfstream 450s, Gulfstream 550s and Bombardier Challengers – through its own orders with manufacturers and sale/leasebacks with customers who ordered directly. Is believed to have placed all of its order.

Minsheng Financial Leasing is looking to finance around 15 business jets a year going forward. The bank took delivery of its own corporate Gulfstream G450 in June.

“We offer clients a one-stop shop. Most of our customers are not aviation specialists so we also provide expert advice,” said Zhou Wei, president of Minsheng Financial Leasing.

One other leasing company to have financed general aviation aircraft so far in 2010 is AVIC Capital the leasing division of Aviation Industry of China, the state owned aircraft conglomerate. It financed two Cessna 208 Caravans for state-owned aviation companies.

“We have a very long relationship with AVIC, so it is very natural to call on this facility for finance support in China,” said Tom Aniello, Cessna vice president of marketing when the aircraft were delivered.

While they have yet to close deals several other lessors – including CCB Leasing, a subsidiary of China Construction Bank, another state policy bank – are looking to move into the market. This happened with commercial aircraft leasing. At the start there were just a few leasing companies chasing airlines for deals. Now there are at nearly 10.

Foreign lenders

Over 10 foreign banks have told Corporate Jet Investor that they are keen to finance business jets in China in the last few months and one major US private bank is believed to have recently financed two deliveries.

“We recognise China is complicated – but then every deal is complicated,” said one head of business jet finance at an international bank. “There are lots of issues that are difficult for foreign lenders but one advantage we have is easy access to dollars. We have heard that some buyers have had trouble getting money out for construction finance and with our strong relationships with lenders we may be able to help with pre-delivery payments.”

Foreign banks have been active financing aircraft registered in Hong Kong and Macau and this is expected to continue – even though lessors like ICBC are becoming increasingly international.

“They will able to do aircraft registered in Hong Kong or the US but they do not have our tax advantages for Chinese registered aircraft,” said one Chinese lessors. “And there are issues with flying a foreign registered aircraft internally so we don’t see many people choosing to do this.”

Operators of foreign registered aircraft need to submit flight plans much earlier and pay double the landing fees of aircraft on the Chinese register so it is only attractive for owners who expect to fly internationally a lot. “The Chinese market is very different to the US or European one,” said one European financier. “Most Chinese owners will do 90% of their flying in the region with occasional trips to Europe or the US for business or to visit their children at foreign universities.”

With Minsheng and ICBC Leasing looking to finance at least 20 aircraft a year; other Chinese lessors looking to move into the market; and international banks keen to get involved; finding finance for 40 aircraft a year looks relatively easy.

That may be why Minsheng’s Zhou thinks that more than 800 aircraft will be delivered, not Bombardier’s 600 jets. That is not a problem for anyone. The Canadian manufacturer would be very happy to be proved wrong.