Aircraft Leasing Flashcards
Financial Challenges
USA - Losses are greater, and getting larger
EU - Since 2008 - airlines have been struggling
Banks are careful with lending money - credit checking
State aid to airlines in the EU is not allowed - Cyprus Airways = bust. Other airlines are buying shares/part of failing airlines eg, Etihad and Air Malta.
Minimising unit costs, maximising unit revenues
Airlines grouping up to compete against each other (IAG, AF/KLM, LH)
Only 2 ways to make money: tickets sales or reducing costs
Leasing
Lease - A contract between the lessor and lessee
Allows lessee to use equipment owed by the lessor for a pre-agreed period of time against monthly lease payments
Much cheaper to lease an aircraft than buying one
More flexible when leasing an aircraft = when the market is poor an airline can cancel a lease
On balance sheet = adds value to the airline, tax relief on the asset
Off balance sheet = not owned by the airline, no tax relief
36% of the world’s aircraft are leased - SW = 20% and US Airways = 80%
Leasing is becoming more popular today
Aircraft, Crew, Maintenance and Insurance (ACMI)
- Lessor - provides aircraft and crew
- Lessee - provides maintenance and insurance
- Lessor charges by block hour
- Lessee may have to pay a minimum guaranteed block hours
Wet/Damp Lease
Wet:
- Including fuel/flight crew/cabin crew
Damp:
- Provides everything except cabin crew
Dry Leases
Most popular lease, long term leases
Lease the aircraft and no more
Airline/lessee has to put the aircraft onto its AOC and give it a registration- airline is responsible for the aircraft
Two types of Dry Lease:
1. Operating lease: Just for the airline to use the aircraft
2. Finance/Capital lease: Lessee has the option to buy the aircraft, lease payments are more than 90% of the market value of it and the term of the lease is 75%+ the aircraft’s usable life.
Dry Leases: Operating Leases
Less than 10 years
Owned by the lessor with the lessors spec
Off the balance sheet of the airline
Dry leases: Financial/Capital leases
Like Hire Purchase - can purchase the aircraft after the lease
Goes onto the balance sheet as an asset - values up the airline
Airline can set the spec
Sale and Leaseback
Airline buys an aircraft
If it experiences financial problems, the airline can seek a plane back to a leasing company
Once they own it, the airline can lease back the aircraft
A good way of paying down debt from the aircraft sale - improves the airline’s balance sheet
Air India Case:
Planned to sell 7 Dreamliners and lease them back - Asian Business News 2013
IndiGo:
Bought 100 aircraft and set up a leasing company part of their airline. Leasing aircraft to other airlines - Flightglobal 2013
Cross Border Leases
Used to avoid high import tariffs on aircraft when purchasing them
Aeroflot - leasing 7 A321 from a leasing company in France
Leverage lease
Type of sale and leaseback involving a third party lender
Airline orders the aircraft on paper, lender buys the aircraft from the airline immediately when delivered and leases it back to the airline
Advantages of leasing
- Provides more flexibility
- Ability to introduce new aircraft types and models
- No requirement for heavy pre-delivery cash payments to OEMs
- Conserves working capital and cash flow
- Off-balance sheet treatment
Disadvantages of leasing
- Conditions of return
- Early return penalties
- Operating restrictions
- Tax disadvantages
Changes in aircraft financing
Becoming harder to buy an aircraft because prices are going up and banks are less likely to lend - leasing is becoming more popular
Leasing companies have better credit ratings than airlines usually and have better margins usually - easier to borrow money
Ryanair - world’s highest rated airline - S&P and Fitch
Leasing Case Study - India - Indiantimes 2015
Air India - Asking the government permission to buy Dreamliner’s rather than leaseback due to the cost
Kingfisher - Defaulted on debts for its entire fleet
IndiGo - Usually leases aircraft on 6 year contracts - may extend to 10-12 years
Lessors are not confident of Indian airlines hence the cost of risk is higher
Wet Lease Case Study - Canada - CTV News 2013
Sunwings Airlines wet leasing aircraft and crew from Portugal’s EuroAtlantic Airways with Portuguese crew
