AIRCRAFT LEASING AND FINANCE

Aircraft Leasing and Financing is a service offering, given that the airline business is hugely capital intensive and a fledging airline company may not have sufficient funds to acquire aircraft on its own. Or an established carrier like Emirates for example may want to go for an expansion and approaches a Leasing company for aircraft leasing.

An aircraft operating lease places full operational and maintenance responsibility for the aircraft on the airline, together with legal liability and insurance responsibility during the lease term. The aircraft however remains the property of the Lessor (or owner) who will seek to maximize asset value and income-generating potential over the full useful life of the aircraft, which will usually span multiple lease periods and Lessees.

A KPMG report says that around 15% of the global aviation fleet was leased by airlines in 1999. 20 years later, the number has risen to almost 50%. In total, leasing companies around the world own more than 12,000 aircraft ranging from the Airbus A380 to smaller Business jets like the Bombardier CRJ200.

For an airline looking to expand its fleet but does not have the cash to purchase an aircraft outright especially at the inception stage, the pragmatic thing to do is to start operations using leased aircraft taken from a lessor company.

Another situation in which an airline may reach out to a leasing firm would be when the entity has just come out of bankruptcy and is looking to save some money, while still needing to augment its operations.

There are options that airline companies may choose from like wet, dry, and damp leases that Leasing and Finance companies offer with different terms and conditions.

Wet Lease – There are times when large and established airline brands need to enter into such agreements.

Wet, Dry, or Damp lease, whatever type of lease agreement could be for a long or short-term, customised to the specific needs of airline companies.

Aircraft Leasing BOEING CAPITAL CORPORATION

Wet lease – A wet lease entails a leasing company entering into an agreement with an airline that includes – the aircraft itself, pilots, and cabin crew. Such a lease deal is comprehensive and includes maintenance and insurance of the asset under lease. Thus, a wet lease agreement can allow a company to operate an airline without owning an aircraft! Yet they operate under their own air operator’s permit.

A short-term wet lease is effective during seasonal requirements. A tourist summer destination may be hardly popular say, during the winter months, but shores up high tourist numbers during the summer. An airline operating on such routes is best served with short-term wet leases for the high season, as it gets to augment its fleet and network to match tourist numbers. Off-season, their very own fleet may serve them well.

Airlines with robust networks and assured passenger demand, find long-term agreements more suitable. However, in case an airline files for bankruptcy, their lucrative routes become available to other airlines. The most sought-after routes are to the Middle East. An airline bankruptcy can cost a lot of money for aircraft lessors, but that airline’s best routes were taken up by other airlines. These airlines that pick up the new-found routes, in turn, approach leasing companies to work out long-term wet leases, as they need to quickly augment their fleet to fill up the gaps. A leasing company can provide an aircraft within months, whereas a new aircraft order would take a few years to materialize.

Dry Lease

On contingencies and disastrous situations, such as mass grounding due to maintenance requirements, staff and union workers going on strike, and grounding of a particular aircraft variant due to a crash or accident, leaving airlines with a much-curtailed fleet and lots of available pilots and cabin crew. The lack of aircraft then can be overcome by taking on aircraft dry leased from leasing companies for a short-term lease.

Airlines with large crew facilities, or companies starting out operations opt for dry lease agreements. The airlines’ own crew gain experience and get trained to deliver the highest quality of service.

With waiting period for a new aircraft can be up to a few years. If an airline is expanding, time is of the essence. So, the company can opt-in for a long-term dry lease, with their crew already in place.

Damp lease

A damp lease is a mix of both dry and wet lease. And hence the name. This type of lease is customized to offer lessees with aircraft along with cockpit crew, as well as insurance and maintenance personnel. However, this type of agreement does not include cabin crew. This is typically tailor-made for airlines that have a pool of trained cabin crew from fresh hiring. Such an agreement works out more economically as the charges levied by leasing firms are comparatively less.

The Need for Leasing Aircraft

An airline’s urgent requirement for aircraft from an OEM like Boeing or Airbus may mean waiting in line for say couple of years. Whereas from a leasing firm, the wait time is cut short to a few weeks or months, depending on urgency and availability.

Leased aircraft help mitigate exigencies like fleet groundings and strikes by workers, and in such situations, an airline can do with short-term leases in such a case. It is necessary to normalize operations even in the face of crises.

Seasonal requirements have been explained earlier in the article.

How do Leasing companies function

According to Proficient Market Insights, the global Aircraft Leasing market size has been valued at USD 48677.08 million in 2023 and is expected to expand at a CAGR of 4.78% during the forecast period, reaching USD 64406.47 million by 2031.

With the aviation business witnessing expansion in areas like the Asia Pacific region and emerging economies (pre/post-pandemic years) leasing companies have grown with the tide on account of owning large numbers of narrow-body aircraft. These aircraft, for the leasing firm, tend to give a better profit margin. The cost of preparing a narrowbody aircraft for a new lessee customer from the last one is less expensive than another bigger variant.

Leasing companies that place bulk orders with an OEM like Boeing or Airbus and work out a discounted rate, whereas an airline ordering aircraft in smaller numbers may end up paying the rack rates.

Going by a KPMG report, GECAS, one of the biggest leasing companies, had 369 aircraft on order. With such large numbers, the Leasing company can negotiate a special rate from the manufacturer. This results in a better profit margin for that Leasing firm.

A leasing company decides the time period it can hold onto an aircraft. Usually after the life cycle during the time with the lessor, the aircraft is sold. On account of aircraft being properly maintained due to regulatory mandates and an airline company’s own safety thresholds and MRO standards, the asset does not depreciate so much. The resale value in such a case is such that the Leasing company does not lose out to that extent monetarily. If a buyer is not found, then the aircraft is sold in the scrap market for aircraft parts. Here too, with an active market for aftermarket parts, a company can recover some amount of value /money from that aircraft.

Policies relating to the aircraft leasing lifecycle, from delivery/redelivery standards to aircraft parts replacement and back-to-birth records are developed by the Aircraft Leasing Technical Group (ALTG).

IATA’s Guidance Material and Best Practices for LLPs Traceability includes topics right up to back-to-birth traceability of aircraft life-limited parts (LLPs).

Market Risks for Leasing Companies

According to Boeing’s market outlook for 2019, in 2002 less than 100 leasing companies were active, and that has grown to over 150 that offer leases to airlines globally.

While demand is not seen to tank hugely, with rising numbers there is a risk of overcapacity. As they get competitive, some of these companies may offer lower rates and end up with insignificant profit margins. Big players may end up losing customers and a market position which may affect market viability.

When an airline is financially weak, it may not be able to pay the full loan amount to the lessor. Here the lessor too is at risk of losing money. If an aircraft is grounded, the airline in any case is not earning revenue from that aircraft.

Following are the Key market players in the aircraft leasing business.