Financing and Leasing of Aircrafts

Aircraft are expensive. A Boeing 737-700, the type Southwest uses, is priced in 2008 USD in the range of $58.5–69.5 million (although very few airlines actually pay this much). Airlines also typically have low margins so very few airlines can afford to pay cash for all their fleet.

Commercial aircraft, such as those operated by airlines, use more sophisticated leases and debt financing schemes. The three most common schemes for financing commercial aircraft are secured lendingoperating leasing and finance leasing. However, there are other ways to pay for the aircraft:

  1. Cash
  2. Operating leasing and sale/leasebacks
  3. Bank loans/finance leases
  4. Export credit guaranteed loans
  5. Tax leases
  6. Manufacturer support
  7. EETCs

These schemes are primarily distinguished by tax and accounting considerations, particularly tax-deductible depreciation, interest and operating costs which can reduce tax liability for the operator, lessor and financier.

In May 2016, lessors had a 42% share of the market. It was increasing til 2008 but has since stagnated, and should continue so if not for a rise an interest rates, a slowing of airlines' profits, an increase in lessors' share of new airliner deliveries, and market liberalization. Lessors could also increase their market share by including more start-up airlines, more older aircraft recycling, a change in views on residual values, and lower returns acceptance.

Direct lending

As described above for private aircraft, an airline may simply take out a secured or unsecured loan to buy a commercial aircraft. In such large transactions, a syndicateof banks may collectively provide a loan to the borrower.

Because the cost of a commercial aircraft may be hundreds of millions of dollars, most direct lending for aircraft purchases is accompanied by a security interest in the aircraft, so that the aircraft may be repossessed in event of nonpayment. It is generally very difficult for borrowers to obtain affordable private unsecured financing of an aircraft purchase, unless the borrower is deemed particularly creditworthy (e.g. an established carrier with high equity and a steady cash flow). However, certain governments finance the export of domestically produced aircraft through the Large Aircraft Sector Understanding (LASU). This interstate agreement provides for financing of aircraft purchases at 120 to 175 points over prime rate for terms of 10 to 12 years, and the option to "lock in" an interest rate up to three months prior to taking out the loan. These terms are often less attractive for larger operators, which can obtain aircraft less expensively through other financing methods.

By directly owning their aircraft, airlines may deduct depreciation costs for tax purposes, or spread out depreciation costs to improve their bottom line. For instance, in 1992, Lufthansa adjusted its accounting to depreciate aircraft over 12 years instead of 10 years; the resulting drop in depreciation "expenses" caused the company's reported profits to rise by DM392 million. JAL made a similar adjustment in 1993, causing the company's profits to rise by ¥29.6 million.

On the other hand, prior to the advent of commercial aircraft leasing in the 1980s, privately owned airlines were highly vulnerable to market fluctuations due to their need to assume high levels of debt in order to purchase new equipment; leases offer additional flexibility in this area, and have made airlines increasingly less sensitive to cost and revenue fluctuations, although some sensitivity still exists.

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