I’m still on paternity leave, but today I have an interesting post on the world of leasing from someone on the inside.
The aircraft leasing business is an integral part of the aviation world, yet the travelling public knows relatively little about it. Currently about 38% of the world’s commercial fleet is leased. This figure is expected to grow to over 40% in just the next few years.
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. This is due to a few factors. We have favourable corporation tax rates and tax treaties that allow leasing companies to be competitive. In addition to this, there is a big pool of aviation expertise in our country. 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.
But first, why do airlines need to lease planes – can they not just buy them, you might ask? Well yes they can, but owning your own aircraft can present problems.
Aircraft are not cheap. You only need to look at the list prices of Airbus and Boeing to see just how pricey they can be. Therefore some airlines might not be able to afford aircraft, or in a bid to keep their balance sheets looking healthy might not want to have such large outlays. Leasing allows airlines a relatively cheap way of getting aircraft, as there isn’t the same extent of expenditure, and it stops their balance sheets from looking too asset heavy, tying up capital. Also from an operational point of view, it allows airlines access to newer planes and more fuel efficient aircraft. Cranky Air might be able to buy a 737-200 on the market, but could afford to lease a newer 737-800.
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.
Take for example Cranky Air, based in Long Beach. They buy 5 aircraft from Comac, yet owing to a major corporation opening a plant nearby they now have enough demand to have 8 aircraft in service – this is where a leasing company can be the airline’s best friend. They can step in and relatively cheaply (relative to buying an aircraft) provide them with aircraft to cater for the spike in demand.
Conversely, let’s say the largest employer in Long Beach were to shut up shop and Cranky Air now only needs 3 aircraft for the next two seasons. If they own the 5 aircraft they would find themselves in a major problem, trying to fill the aircraft or lease them out. However if their fleet was composed of a few leased aircraft, they could arrange for the early return of the aircraft, and with some penalty payments, address their capacity issues.
Here’s the view from the lessor’s perspective.
When dealing with a potential new customer, there will always be risk analysis done on the airline. Do they have a good safety record or have there been any incidents in their past? What are the chances they might not pay us? If a customer is risky, there are mechanisms to protect yourself as a lessor. This would be done by getting guarantees or large deposits that you can access in the event of default by the airline. If they are too big a gamble as an operator – don’t put your aircraft in there in the first place.
Long leases are better for the lessor than shorter ones. The fewer changeovers an aircraft does during its life the better! When an aircraft comes off lease with Cranky Air, in an all business class configuration (owing to a misplaced opinion that an all business class Long Beach – Topeka route was a guaranteed success), and we want to place the aircraft with a new operator, Concierge Air, who want it in an all economy lay-out, reconfiguring the aircraft comes at a huge cost to us. Lessors try to avoid bespoke aircraft lay-outs like this, a colleague of mine refers to them as “Aircraft with a sushi-bar and split galley.”
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, our planes don’t make money when they are sitting on the ground, so we also try and keep lead-in times between leases to an absolute minimum. Ideally, we like to have a new customer lined up for an aircraft before it even comes off lease with the previous operator. In an ideal world you would look to find a customer who wants the aircraft in its current configuration, but that isn’t always possible.
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. For example, sometimes you see airlines across the world operating aircraft that are on the Irish register (EI-XXX), as their own national registers might be a nightmare to deal with.
The airline industry is unpredictable by its nature and despite all these checks, sometimes leases do not work out. The lessee might not maintain your aircraft as agreed, or simply not pay. If this happens you could negotiate with the airline for an early return, or if the relationship becomes hostile, you can use national/international authorities to seize the aircraft in a friendly jurisdiction who will be receptive to your plight. This could be done by an airport authority or someone like Eurocontrol, who may also be owed fees for the use of the same aircraft. It is typically easier to negotiate a compromise as seizing aircraft can get litigious and can restrict the use of the plane until it is all settled. A country’s aviation authority might not take kindly to you barging in and taking planes back, hence they could make your life hell trying to get the aircraft off the local register or drag you through the local courts.
In the future, it will become more likely that the planes you fly on will be leased as this area of the aviation world grows. Next time you fly, consider for a moment that you could potentially be on board a hired aircraft.
David is a self-professed aviation nerd- he blames this on both his parents who worked in the airline industry. He is a Business and Law graduate from UCD Dublin. Currently he is working as a legal intern in an international aircraft leasing firm in Dublin. You can find him on Twitter @davidwilliamp.
I can confirm that plenty of aircraft in Russia have EI-XXX registration. It was funny to me at the time.
I think there are two points to be added to the article.
1) Major airlines almost always purchase new aircraft from the OEM. When time comes to take delivery, the airline will then decide what financing is more attractive (or whether a “basket” of financing options is preferred), and either borrow $, or do a sale-leaseback transaction with a lessor (recent AA deal where they flat out said “we have no $, so we will lease ’em” is an exception).
2) A risk on residual value. The rate airline pays is dependent on many factors, but of of those is lessor’s view on what the aircraft can be sold/re-leased at when the original lease is over. As an example, you can buy a new 737-800 from Boeing for almost the same price as 737-900ER–but you can get a much better lease rate on 737-800s than 737-900ERs, because the former aircraft is is demand and the latter aircraft has sold fairly poorly, and is likely to have a lower RV.
When aircraft makers announce new orders there many times large numbers go to a leasing company. Where are they getting money to purchase all those airplanes from, it can’t be all from money made from leasing their planes out can it?
Good article. I think a few comments about “wet lease” and “dry lease” would also be useful as I see that all the time in articles.
Thanks for the comments- Financing for leases can come from the firms themselves, or from financial instiutions and investment-funds, to name a few. It depends on the structure of the deal.
Leasing companies nearly exclusively use “operating leases”- which in theory are dry-leases. Wet-leases tend to be intra-airline, and hence not a feature of this section of the industry.
Hi Cranky — I really enjoyed today’s guest post by David Soffe. I have worked in the airline industry for over 30 years, and have never gotten such a clear concise answer to this ever-present question of WHY DO WE LEASE!!
Congrats on the new addition to your family.
To clarify, can a US-flag airline, say UA, use an Irish-registered airplane, one showing an “EI-xxxx” number on its side, to provide US domestic service, as IAD to ORD?
My experience as an amateur aircraft broker was several years ago on a kids’ soccer field. I knew a person who leases and had some spare DC-10s, and an embassy official whose national airline needed to update its trans-oceanic capability. My role was to get the parents together between scores. The transaction on the soccer field was facilitated by the fact that in the cold weather we had both kids juice for the players and “adult” juice. Before you know it, your offspring might be playing soccer or some other sport –and who knows what may transpire on the field.
Hi interesting post – can you tell me where you got the statistic 38% of the worlds commercial fleet are leased? I’d love to find out what % of those are leased from Ireland
I got that figure in the firm I was working with from a colleague who had just given a presentation on the area. I haven’t come across a definitive figure as per what percentage are leased through Ireland, however you only need to look at the big players in the industry and most if not all have a presence here.
Have you done a comparison between purchasing and aircraft vs leasing, cost involved based on different number of operating block hours?
hope u can help me out
i have a project on aircraft leasing and i am finding it a little diffiuclt to find my resources,hope u can help me out a little
the question is
WHY HAS THERE BEEN A STEADY INCREASE IN RECENT YEARS IN THE SHARE OF AIRCRAFT BEING FUNDED UNDER AN OPERATING LEASE? WHY DO OPERATING LEASE COMPANIES GENERALLY FAVOUR INVESTING IN MID SIZED, SINGLE AISLE AIRCRAFT LIKE A320 AND 737 FAMILIES?
Can you please email me with your contact information.
Very interest post!
I might have an opportunity to enter in the aviation leasing world in Ireland but I have no idea about this sector. Would it be possible for you to enlighten me about it? Is it a good sector to work at? Work conditions, salaries etc..
Thanks a lot!
COULD YOU BE KIND ENOUGH TO SHARE SOME GOOD LESSORS CONTACT WITH ME.THANKS
Hi, Dave, COULD YOU BE KIND ENOUGH TO SHARE SOME GOOD LESSORS CONTACT WITH ME.THANKS
I am looking contacts in the aircraft industry. As contacts with the airports, airline, factories. If you are seriously interested in hearing from you.
I am a start up company looking into doing commercial flights. I don’t have an AOC so I am looking to lease an A330. Could anyone tell me what the requirement are to commence my operation.
I have just started a new business on aircraft and my client would like to lease 3 aircraft (Boeing 737-300) for commercial use. Now I’m about to put the 2 parties together but I don’t know how much is my cut or how much must I charge them as its my first time to have this kind of deal.
Just like Omisore and Patrick pointed out. I am also new in this aviation world but some I have learnt in a short while. Could you please inbox me contacts of some lessors who I can have direct dealings with as I have been mandated by two airlines to source aircrafts for them.
hi guys, anybody knows how the wet leasing can work between non operator companies?