David Berkery, Vinson & Elkins partner and co-head of our Aviation Finance practice, talks through the firm’s venture into Ireland and the macrotrends shaping the industry.
David, you’re leading Vinson & Elkins’ new aviation finance office, which opened in Dublin last week. Why this venture — and why now?
There are numerous layers to the decision. But put simply: Aviation finance is a fast-growing business, and Dublin is increasingly where the action is.
In recent years, the industry has shifted — from airlines primarily owning their fleets to primarily leasing them. Ireland is the global hub of this leasing activity, and setting up shop in Dublin positions us to deliver even better counsel and service to our clients — whether they’re aircraft lessors, banks, private investors, airlines, or any other dealmaker.
The global hub point — it really shines through in the data.
It does. As you’ve probably seen, roughly 60 percent of the world’s leased aircraft are managed through Ireland, and more than 30 aircraft lessors — including some of the world’s largest — call Dublin home. Ireland-based companies own or manage more than €120 billion in aircraft assets, up from about €27 billion in 2007.
Why has Ireland emerged as this global hub — is this just because of the competitive corporate tax rate?
That’s important, no question. But even more so is the country’s extensive network of double-taxation treaties. These treaties, which Ireland has agreed with more than 70 countries, reduce or eliminate the withholding tax that airlines would otherwise pay on their aircraft lease payments.
Going back to the 1970s, Ireland’s supportive policy environment has encouraged robust investment in aviation, giving the country a head start on cultivating the types of knowledge, skills, and expertise that enable an industry to thrive long-term.
Combine that with a stable political and legal system — and a strategic position between the United States and continental Europe — and you have a highly attractive jurisdiction for doing international business.
What about the market environment? Just thinking about the rebound in air travel since the depths of the pandemic, it would seem to be an interesting time to be working in aviation finance.
Definitely. All signs are that global passenger demand this year will set a new record, finally surpassing the high we saw in 2019 before the pandemic hit.
But here’s the catch: Just as passenger demand is rebounding to its strongest ever, airlines are struggling to increase their capacity to meet this demand, because of a major shortage of aircraft and engines.
Why the shortage?
Several factors are at play: One is that Covid-related halts in aircraft production lines have created a global order backlog of up to 12 years, and some of the backlogged aircraft will likely never be built.
Then you have the supply-chain and outsourcing issues facing original equipment manufacturers, especially issues involving engines, which are taking longer than anticipated to resolve.
And complicating matters further, hundreds of aircraft have remained stranded in Russia since its invasion of Ukraine in February 2022, as many legal proceedings against insurers are still working their way through the courts.
These factors must be having some pretty significant knock-on effects.
For sure. Now that airlines can’t just call up Boeing or Airbus and place an order with any near-term delivery timetable, leasing has become even more attractive.
This dynamic has put lessors with aircraft on their books in a position of negotiating strength, enabling them to lease more aircraft — at higher lease rates and more favorable terms in general — to airlines looking to expand their fleets.
A bright outlook for lessors.
Yes, especially when you factor in the interest-rate environment.
How so?
Well, just think about the fundamentals of the business: Nearly all airlines and lessors depend on financing to buy aircraft. But lessors have a key advantage: They can generally access financing at a lower cost than airlines can.
With this advantage, a lessor can buy aircraft in bulk and rent them out to airlines. The lease rate it charges will — A — exceed the interest rate it pays to finance its purchase of the aircraft, while — B — undercutting any interest rate that an airline could get from a bank to finance a purchase of comparable aircraft.
Essentially, with the cashflow they earn as rent payments, lessors can service their debt and keep the excess as profit, ultimately converting it to equity.
So, when interest rates rose sharply in 2022 and early 2023, lessors must have gotten squeezed.
Some did. Having entered into long-term leases when interest rates were historically low, lessors saw their debt-service costs rise rapidly. But their monthly rental income largely remained fixed, cutting into their profit and thus the cash that they could convert into equity.
Then, as interest rates plateaued over the past year, prevailing rates for new leases and extensions caught up with lessors’ higher debt-service costs. At these current levels, returns have once again been attractive for lessors and their investors.
And now that we’re entering a period of interest-rate cuts …
… The value proposition looks likely to become even more compelling: Meaning, lessors can expect their debt-service costs to fall, increasing their profit and thus the share of their rental income that can go to equity.
Tremendous upside potential at the minute, it sounds like.
That’s how we see it. There has been a lot of recent interest in this space, especially from private equity firms, as they seek to deploy capital to rewarding investments. Vinson & Elkins has deep, longstanding relationships with private equity firms, and advising them on how best to seize the many opportunities in aircraft leasing is an important part of our practice.
The practice ranges far beyond leasing, though.
Far beyond leasing, yes. We advise on nearly every type of aviation-related transaction — not just leasing, but also M&A, financing, trading, joint ventures, restructurings, asset-backed securitizations, sale leasebacks, and more. And as I alluded to earlier, we work with nearly every type of company that participates in these deals.
You must be delighted to be on the ground here in Dublin.
We are. The city is a perfect fit for the strengths of our practice and the goals we aim to help our clients achieve. We’re fortunate to have an extraordinary team — both here in Dublin and our colleagues in New York — who continue to strengthen our client relationships and build new ones. I look forward to splitting time between our offices on both sides of the Atlantic.
Being where your clients are — so important in any industry.
Indeed. When I lived in Dublin earlier in my career, I came to realize how much the city resembles a village, and how central aviation is to it. I remember taking my kids to the playground. And often by the swings, the seesaw, or the jungle gym, I would bump into aviation executives doing the same.
Connecting with people is important to us, and doing so is easier when you can see people in your day-to-day life, especially outside the office. The phrase can sometimes be overused, but ours really is a relationship business. And living among the people we work with will only help us strengthen it.
| Meet David
Office: Dublin and New York Legal qualifications: New York, England and Wales, and Ireland Hometown: Tough to say. Can I have two? Some favorite activities outside of work: Nothing makes me happier than just hanging out with my wife and four kids at home. But I also love to clear my head with a morning run — Sandymount Strand in Dublin and Central Park in New York are my two happy places. If I hadn’t become a lawyer, I would have been: A pilot (or a flight attendant like my mother). I’ve been so fortunate that my career has enabled me to travel the globe; I think I would have needed to find another way to scratch that itch, and I won’t hold my breath for an offer from LIV Golf. |