China A320.jpg Shimin (Wikimedia Commons)

Moving Aircraft And Parts Into China’s Fast-Growing Market Poses Special Challenges

Moving aircraft in and out of China on leases, requires some very special skills.

It has long been the fastest-growing major aviation market in the world and before too long will be the biggest aviation market globally. But dealing with China, especially moving aircraft in and out of China on leases, requires some very special skills.

Even new aircraft deliveries into China can take some time, notes Kevin Chan, senior vice president and regional manager for technical asset management at SMBC Aviation Capital. After a type certificate is validated for a new aircraft, its import into China still requires approvals by the Chinese National Development Reform Commission and Civil Aviation Administration of China (CAAC) “These can take considerable time to acquire and thus delay the delivery of the aircraft,” Chan notes.

For previously flown aircraft, there can be issues with the availability, timeliness and accuracy of utilization data and aircraft records. “In recent years, in order to compete for market share, some leasing companies were willing to accommodate off-market terms and conditions, including specifications that limit aircraft re-marketability,” Chan explains. These kinds of problems can limit a lessee’s ability to adhere to lease agreements for regular inspections, a critical obligation following the placement of the aircraft.

Another issue in cross-Chinese-border transactions arises from China’s growing position as a global manufacturing hub. “Divergences in the regulation of Chinese authorities and that of other global authorities can be an issue in the acceptance of aircraft components manufactured by companies other than the OEMs,” Chan explains. The CAAC has its own Parts Manufacturer Approval (PMA) regulations, and these differ from regulations of other national authorities. The difference makes it unlikely for CAAC to accept certain components with PMAs from non-Chinese regulators. “Given that use of local PMA parts is widespread in China, the value and transferability of aircraft can be affected if it is not managed properly,” Chan says.

There is another challenge that arises when transferring aircraft assets out of China’s Free Trade Zones. Chinese FTZs provide certain incentives for lessors and airlines when aircraft on lease are held in FTZs, so it is common to transfer aircraft from overseas into FTZs. But Chan says it is challenging to transfer aircraft out of FTZs to abroad due to the complexity of the incentives the airlines lose as a result of the transfer. This is not a technical issue, but an economic one and a matter of thoroughly understanding the legal environment and its business impact.

Delays at redelivery stage can also be an issue in China, as elsewhere, especially if the future lease agreement has not anticipated delay. SMBC generally has a pre-redelivery meeting a year before the scheduled redelivery date to agree on the high-level arrangements. Chan says this policy allows expectations of both sides to be aligned.

Chan says short supplies of engineers and mechanics are a particular challenge in China, due to rapid aviation growth and plentiful opportunities in other job markets. But along with more engineers, Chinese leasing companies will also need more experienced people in marketing and sales, contract management and legal and risk management.

What else does a leasing company need to do business in China? “Local knowledge, local language skills, good working relationship with clients and experience in Chinese asset management, including redeliveries, remarketing, risk management, acquisitions and sales,” the SMBC executive summarizes.

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