AIRCRAFT LEASING

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On today's post, we shall be discussing leasing practices in aviation.  

                             
                                          

 WHAT IS AIRCRAFT LEASING:

This is the most popular transaction structure in the aviation industry and it is important at the outset of any transaction to establish the rights and remedies available to aircraft lessors in the event of default.

Unlike in a hire purchase transaction for the sale of a motor vehicle or other entity, if there is certainty for aircraft lessors or creditors in being able to recover aircraft in the event of continued default on the part of a lessee operator, then there is a corresponding ability to predict and plan for the provision of finance. Lessors are able to reduce their costs to account for risk and are able to make greater amounts of financing available to airlines on more attractive terms. Lessees or operators benefit too as these reduced costs will be reflected in fleet leasing rates.

Airplanes are very expensive.  New airlines cannot afford to invest such large amount of money in buying planes. Existing airlines may not want to put all their money into buying one aircraft. Instead, they can operate 10 aircraft on lease and focus on growth.

Ultimately, if the country is a sophisticated jurisdiction with rights and remedies clearly defined, and the Country is a party to the relevant international treaties, the airline is in a better position to attract the provision of finance and has the ability to grow its aircraft fleet size.

                                                   

 Airlines lease aircraft from other airlines or leasing companies for two main reasons: to operate aircraft without the financial burden of buying them, and to provide a temporary increase in capacity. 

The industry has two main leasing types: wet-leasing, which is normally used for short-term leasing, and dry-leasing which is more normal for longer-term leases. The industry also uses combinations of wet and dry. For example, when the aircraft is wet-leased to establish new services, then as the airline's flight or cabin crews become trained, they can be switched to a dry lease.

There is almost no legal liabilities and low business risks as various safety and legal agencies will make sure that they maintain your planes well and they lease for a long time like 5-15 years. There is no need to maintain the planes or care about fuel cost, and the insurance companies will compensate you with more money in the case of a crash.

TYPES OF LEASES:

1.    WET LEASE:

A wet lease is a leasing arrangement whereby one airline (the lessor) provides an aircraft, complete crew, maintenance, and insurance (ACMI) to another airline or other type of business acting as a broker of air travel (the lessee), which pays by hours operated. The lessee provides fuel and covers airport fees, and any other duties, taxes, etc. The flight uses the flight number of the lessee. A wet lease generally lasts 1–24 months; a shorter duration would be considered an ad hoc charter. A wet lease is typically utilized during peak traffic seasons or annual heavy maintenance checks, or to initiate new routes. A wet-leased aircraft may be used to fly services into countries where the lessee is banned from operating.

Wet leases are occasionally used for political reasons. For instance, EgyptAir, an Egyptian government enterprise, cannot fly to Israel under its own name, as a matter of Egyptian government policy. Therefore, Egyptian flights from Cairo to Tel Aviv are operated by Air Sinai, which wet-leases from EgyptAir to get around the political issue.

In summary, the lessor provides an aircraft, complete crew, maintenance, and insurance. It is more like a charter plane, but with your logo on it.

2.    DRY LEASE:

Dry lease is typically used by leasing companies and banks, requiring the lessee to put the aircraft on its own air operator's certificate (AOC) and provide aircraft registration. A typical dry lease lasts upwards of two years and bears certain conditions with respect to depreciation, maintenance, insurances, etc., depending also on the geographical location, political circumstances, etc. 

A dry-lease arrangement can also be made between a major airline and a regional airline, in which the major airline provides the aircraft and the regional operator provides flight crews, maintenance and other operational aspects of the aircraft, which then may be operated under the major airline's name or some similar name. A dry lease saves the major airline the expense of training personnel to fly and maintain the aircraft, along with other considerations.

Basically, The lessor provides an aircraft without insurance, crew, ground staff, supporting equipment, maintenance, etc. It is all the airliners responsibility.

3.    DAMP LEASE:
A damp lease is similar to a wet lease but leasing company won't provide the cabin crew services.

4.    SALE AND LEASEBACK:

      An airline which has bought an aircraft sells the aircraft to a leasing company at current market price and immediately leases the same aircraft back. Airliners typically purchase 100s of planes in bulk and sell them to banks and then leases them back. As aircraft are owned by a lessor, an airline can save on the depreciation provision, which increases profit and saves tax.

However, there are no businesses that are completely free from risks, in line with the subject matter, these are some of the risks that a lessor might encounter in the course of his business activities:

1.      Asset recovery risk:
If the airline goes bankrupt, the lessor faces a huge risk in retrieving their aircraft in good condition.

2.      Short Leases:
Long leases are better for the lessor than shorter ones. The fewer changeovers an aircraft does during its life the better! The lessor may have to reconfigure the seating arrangements and such customization according to the preference of the new operator. This can cause unnecessary costs.

3.      Currency fluctuations:
Since the leasing rate is fixed for a long time, any fluctuations in the value of currencies involved may cause loss to either lessee or the lessor.

4.      Bad lessees:
Even though there are many laws to safeguard lessors, some airliners (like Kingfisher airlines) might not maintain your aircraft as agreed, or simply not pay. If this happens then the lessor may have to negotiate with the airline for an early return, or if the relationship becomes hostile, then an international seizing operation might have to be done.

5.      Long term investment:
Just like any other rental business, it takes 8 to 15 years for the plane to break even and make profit for the lessor. An average jet have a lifespan of about 25 to 35 years after which it may be sold to low budget airlines operating from poor countries or it is sent to the scrapyard. 

6.      Transition Time:
The lessor earns no revenue during the transition time between the previous and new operators.

Overall, it is expedient that a lawyer knows the distinction of these terms so as to avoid a legal battle!

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