Aircraft Financing and Leasing - Considering the Operators Options & Potential Return on Investment

SofemaOnline takes a look at the pros and cons of aircraft lease options

The acquisition cost of aircraft is a significant undertaking with Boeing & Airbus Narrow Body Jets around the million USD.

Serious discounts are on offer for multiple purchases and with the buying power of the large leasing companies typically able to order aircraft well into double digits the leasing companies are able to generate interesting options for operators whereby the cost of acquisition can be more competitive from a leasing company than going to the manufacturer directly.

Note - Whilst this applies of course to new aircraft and the leasing companies have the added advantage of a portfolio of pre-owned aircraft.

Such potential arrangements (to deal with leasing companies rather than the Original Equipment Manufacturer (OEM) provides the operator with alternative options and possibilities.

So is it better to Buy Or Lease?

The reality is that buy vs. lease is not a binary choice and it is quite normal for airlines to have mixed fleets of leased and owned aircraft.

Leasing companies are able to not only achieve better prices from the manufactures but to also borrow funds at better rates so clearly they hold an advantage,  but it is still nevertheless a case by case decision whereby the operator should consider the options and make a value decision based also on accounting and legal considerations.

Note New Accounting Standard from 2019

IFRS 16, fundamentally changes lease accounting, requiring lessees to bring previously unrecognized operating leases on-balance sheet.

On the balance sheet, lessees will recognize a new asset representing the right to use the underlying leased asset, and a new liability, the obligation to make lease payments. Essentially, a lease will be accounted for as if the company had borrowed funds to purchase a portion of the asset under lease. Companies will recognize both depreciation expense on the leased asset and interest expense on the related liability.

How long to Wait?

The Leasing Companies have jumped the queue! Whilst leasing provides airlines with greater flexibility regarding reacting to market demand. Leasing companies also have the advantage of aircraft availability, instead of waiting for 2 or even 3 years it is possible to negotiate an aircraft to be available within a shorter period of time through a lease arrangement.

Typical Leasing Arrangement

An example leasing agreement would typically involve a minimum of seven years, the operators make an initial down payment equivalent to 3 months lease costs.

Followed by monthly payments calculated as a percentage of the value of the aircraft (with an additional goodness factor benefiting financially stable airlines).

Provisions in the contract will identify the various responsibilities related to maintenance and overhaul.

Customization may also be possible at this stage - however, take careful note of the cost and potential for return on investment.

Financial Considerations

Airlines may raise capital from banks or investors through the marketing of their aircraft as an investment asset.

Typically ownership of the aircraft will be transferred to a separate legal entity that investors can buy into.

In this way, the investors receive a regular dividend over the years, with the aircraft acting as collateral.

Protection for the venture means that if there was a problem the aircraft can be repossessed by investors (note the myriad of potential problems in this regard - not an easy path to follow).

Other options include investors placing money into a trust that purchases the aircraft and then leases it to the airline. Variations include structuring the loan in several tranches or tiers, each with different levels of seniority. The lower the tier, the higher the expected return (and of course the risk)!

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