Aircraft leasing is big business today

By Sangeeta Saxena

New Delhi. John Travolta and Jackie Chan bought their own aircraft but if your company's cash flow is limited, GECAS , ILFC, Air Lease Corporation,Aviation Capital Group, AerCap, Babcock & Brown Aircraft Management, China Aircraft Leasing Group Holdings Ltd. ,RBS Aviation Capital and many other such names could buy one and lease it out to you. Even your favourite airline could have availed this facility. Today it has become more likely that the planes you fly on will be on a lease. Next time you fly, remember you could be on board a hired aircraft.

Aircraft leasing is big business and Farnborough Airshow just proved this. The industry's largest ever single firm order by a leasing company for single-aisle aircraft was placed by leasing firm SMBC Aviation Capital which signed a firm order for 115 A320 Family aircraft with Airbus, including 110 A320neo, and five A320ceo. Avolon , BOC Aviation, CIT Aerospace , Falko, China Aircraft Leasing Group Holdings Ltd GECAS ,  ILFC and other such lessors made the OEMs rush laughing to their banks, post the show , by placing heavy orders. Today after nearly two and a half decades, aircraft lessors ruled the roost at the show , confirming the reviving health of the aviation industry.

Behind the brightly-coloured liveries that differentiate each airline, there is a financial surprise - nearly half of all commercial aircraft in service are not owned by the airlines. Instead, they are leased in a process that gives carriers options and flexibility in fleet management. Aircraft leasing allows airlines to fly new aircraft at a reduced cost. The reduced cost is easier to finance and allows the carrier to conserve cash rather than invest it in a depreciating asset.

Newly started airlines are usually not in a financial position to afford factory direct aircraft and established carriers who prefer to maintain flexibility by leasing rather than owning their aircraft, will typically work with a leasing company to locate and procure used aircraft for lease or finance. The aircraft may be provided to the airline on the basis of an operating lease or a finance lease. A number of commercial banks, hedge funds and financial institutions are active in the aircraft leasing business.

The last few years have been a good example of why leasing planes can be a better alternative than owning them outright. When demand is unstable, the more flexibility you have in your fleet levels, the better. Long leases are better for the lessor than shorter ones. Other considerations are maximum takeoff weights (MTOWs), repainting the aircraft, and inflight entertainment systems. So if we can place the aircraft in 2 ten year leases, rather than four 5 year leases – this is incredibly beneficial to the leasing entity. Like commercial airlines, their planes don’t make money when they are sitting on the ground, so they also try and keep lead-in times between leases to an absolute minimum.

Aircraft leasing is growing in popularity. This is because airlines general find it hard to maintain the high profits needed to purchase aircraft outright. Carriers are working hard to keep themselves liquid and to keep their obligations off their balance sheets. From a legal perspective an aircraft needs to be placed with airlines that aren’t surrounded by red-tape. Certain jurisdictions are typically avoided, as the red-tape to get the aircraft on lease and out at the end of the lease is too onerous and costly.

Lessors have numerous important roles. To manufacturers, they are customers, offering a crucial distribution channel to airlines. To airlines, they supply an essential means to acquire aircraft under a more affordable method. Also, their role as a capital source deserves special attention. An operating lease is a financing agreement where the term of the lease is shorter than the actual useful life of the equipment. For example, an airplane with an economic life of 25 years may be leased to an airline for five years on an operating lease. In business, operating leases are most commonly used to allow the business the use of equipment on a relatively short-term basis.

Aircraft leases typically come either as a ‘wet lease’ where leasing firms provide the aircraft, crew, fuel and other operating considerations or a ‘dry lease’ consisting of only the aircraft itself. Either way, the lessee turns to a lessor to provide the aircraft for a fixed period of time, after which its obligations end, and the aircraft is typically redeployed elsewhere.

In the proper aircraft leasing arrangement, the lessee has the ability to either own the aircraft at the end of the lease or to send the aircraft back to the lessor.  Depending on the needs and goals of your program, you may want to own the planes or you may not.  Another advantage of leasing is that if you have owned your aircraft for twenty something years you are probably thinking about upgrading you can transition out the old aircraft when bringing in the newer aircraft, without disrupting current operations. 

Aircraft leasing began in the 1970s as commercial air travel grew in popularity. General Electric Capital Aviation Services and International Lease Finance Corporation are the two largest aircraft leasing companies in the world. To the surprise of some analysts, aircraft leasing companies survived during the recession of the early 1990s, which held some of the airline industry's worst years. Demand for leased fuel-efficient planes remained stable, as airlines were less willing than ever to commit large sums of capital to aircraft purchases. Leasing companies are boosting their fleet and expanding across Asia as the region is set to overtake the U.S. as the world’s largest plane market, spurred by demand from China, India and Southeast Asia.

ILFC, which leases the entire range of Boeing and Airbus commercial aircraft, boasts of owning the world's most valuable fleet of leasable aircraft -- about 930 planes. ILFC's airplane-parts management business maintains the aging aircraft in its fleet. Commercial airlines outside the US generate more than 95% of revenue; ILFC counts most of the world's airlines as customers. Parent AIG (American International Group) spun off ILFC's holding company, ILFC Holdings, as an IPO in 2011.

GE Capital Aviation Services (GECAS), a unit of GE Capital, itself part of the large conglomerate General Electric. GECAS is responsible for the leasing ofaircraft and associated equipment to airlines. GECAS buys aircraft from manufacturers like Airbus and Boeing and then leases them to airlines, typically on three to five year leases, usually on dry lease contracts. It also buys aircraft from airlines and leases them back. The company has two global headquarters, located in Shannon, Ireland and Stamford, CT.

A UK lessor Falko owns and operates several Bombardier aircraft, including three CRJ-900 regional jets and two Q400 turboprops. Yet it is the firm’s fleet of 57 Avro RJ85/RJ100, three BAe 146s, and eight Boeing 717-200s that make this order particularly significant. These aircraft are a key target market for the CSeries as a replacement aircraft, and Bombardier were excited at the prospect of reaching more such replacement customers in partnership with Falko.

China Aircraft Leasing Group Holdings Ltd. (1848) seeks to expand in Asia after becoming the first plane lessor in the region to go public last month. Despite overseas expansion, a majority of China Aircraft Leasing’s business continues to come from its home market. The company, which counts Air China Ltd. (753), China Eastern Airlines Corp. (670) and China Southern Airlines Co. (1055) among its customers, has said it has a 3.1 percent share of the business in the country.

Ireland, you may be surprised to find out, is a bit of a hub for aircraft leasing. Nine out of the top 10 leasing firms in the world operate here. One of the first major players in the aviation leasing industry was Guinness Peat Aviation. After its dramatic demise, several companies rose from the ashes and ever since, Ireland has been a major player in global leasing.

Operating leases also have four disadvantages. A lease can place restrictions on the operations of the aircraft. A lease may restrict where you can base or how you can operate the aircraft. A lease may restrict geographic regions to which you can fly. A lease may prohibit commercial operations.

When returning an aircraft from a lease, you must return it in some pre-agreed state of condition. The lessee is likely pay a penalty for high utilization, or for engines that are not on a guaranteed maintenance program, and wear and tear beyond that accepted in the lease. When you own it, you can fly it as much as you need as you, the owner, accept the residual value risks. Early returns from a lease can be costly. If you break a lease, you may be responsible for the remaining lease payments. With a lease, you may loose tax advantages. Despite all this leasing an aircraft is still a booming business.