Leasing activity for aircraft, engines, and major components
appears to be on the rise. For example, for engines, the
leasing market is now at $14-15 billion, with new leases of $2.5 billion coming
on line each year, and an estimate that as much as 50% of spare engines
globally are funded by operating leases1. For aircraft, over a third
of the world’s airline fleet is now leased2, and is expected to rise
to 50% by 20153. Distributors
and MRO’s should take notice of these trends because the terms of the leases
often give specific instructions and limitations regarding the parts used
during the course of expected maintenance, and in some cases, the choices of
MRO’s. Given these developments, I thought I’d take time to impart some
introductory information on the practice.
By the way, are there any freshman college courses that
still use the “101” for the course numbers?
firm with the asset that is being leased to an airline/operator.
firm operating the leased asset
The need for increased levels of reliability and fuel
efficiency has pushed technological innovation for aviation products to new
heights. Technological risk, which in the past was reason for lengthy and more
cautious product rollouts, has been greatly mitigated by the overwhelming need
for fuel efficiency and reliability. All this has pushed prices to dizzying
levels. Consider that a new GE90 engine for a 777 will cost close to $35
million, and the same new aircraft in the range of $300 Million. To buy will
usually require substantial cash outlays, and consider that some banks have
taken steps to reduce their exposure to the aviation industry, limiting in some
cases, financing those buys. For any operator that is cash-challenged, wants to
maintain a level of cash reserves, or liquidity, leasing would then seem increasingly
attractive. A short list of additional reasons to lease may include:
The operator only has need of the asset for
short term, seasonal or temporary use. E.g., the airline’s fleet of aircraft or
engines are entering a cycle when heavy checks are due, and therefor will not
be available for revenue operation; lease to make up the difference.
For an operating lease (discussed later), the
asset does not appear on the lessee’s balance sheet.
The airline needs cash: The airline sells its
owned aircraft or engines to a leasing firm, receives the cash, then gets the
aircraft leased back which remain in service.
A “Wet Lease”, sometimes is a way for an operator
to circumvent restrictions it may have on flying into certain countries. The
restrictions may be imposed by political or NAA sources. In other words, if an
airline is restricted from flying in certain countries, a Wet Lease may be a
way to get your products or customers there. Commonly called ACMI, the lessee
is leasing the Aircraft, Crew, Maintenance, and Insurance is provided. Most wet
leases are not for this reason,
When dramatic economic changes occur either to
the airline or in the operating environment, the leased assets can simply be
returned under the terms of the agreement.
For lessors, there is the expectation that an
otherwise idle asset will be generating steady income.
There is literally a myriad of different leasing options,
agreements, terms and conditions, with their own pro’s and con’s. For the
purpose of this blog, I’ll just keep it simple, and please keep in mind there
are variations for all of this.
Commonly called ACMI, the lessee is leasing the
Aircraft, Crew, Maintenance, and Insurance is provided.
The period can go from
one month to usually one to two years.
The Lessee has to
provide all fuel, landing/handling/parking/storage fees, crew expenses
including meals and transportation as well as visa fees, import duties where
applicable, as well as local taxes. Furthermore, the Lessee has to provide
passenger/luggage and cargo insurance and in some cases need to cover the costs
for War Risk.
BTW, the term “Wet” at
one time meant, and still in some agreements means, that fuel is provided.
This is the lease of the basic aircraft
without insurances, crew, maintenance etc. Usually a dry lease is the
instrument of choice by leasing companies and banks. A dry lease requires the Lessee
to put the aircraft on his own AOC (Airline Operating Certificate) and provide
aircraft registration. There are generally two types of dry leases, an
Operating Lease and a Finance Lease.
a lease term that is short compared to the economic life of the aircraft being
leased. An operating lease is commonly used to acquire aircraft for a term of
an operating lease the aircraft doesn't appear on the Lessee’s balance sheet.
Leasing has grown from 3% of the world fleet in 1980 to 35% today, and is
expected to rise to 50% in the next decade3.
Finance Lease: also known as a capital
lease, is defined when one of the following conditions are met:
the end of the lease term the Lessee has the option to purchase the aircraft at
an agreed price.
lease payments are more than 90% of the market value of the aircraft.
term of the lease is over 75% of the aircraft's usable life.
With a finance lease the aircraft
appears on the Lessee's balance sheet, because it is viewed as a purchase.
on Distributors and MRO’s:
Since the Lessor’s own the asset, there is an expected
strong need to enter into agreements which in their eyes maintains and protects
the value of the asset; that’s its future marketability is not compromised
during the lease. Consider the following in many cases:
The lessor will require that the lessee maintain
cash reserves to cover the cost of certain scheduled maintenance checks, and
further that those checks be performed by MRO’s defined by the lessor.
The lessor wants the asset to be maintained in strict
Configuration Control. This may mean that alternative PMA parts or DER repairs
are not allowed or are closely controlled.
Replacement parts used in maintenance may be
required to be in new or overhauled condition rather than Repaired, or
There may be restrictions on exchanges and
control of Life Limited Parts
For Distributors and MRO’s, if leasing is increasing, who
then is the relationship with? Who is the customer? The Lessor, the airline,
both? How about the OEM’s? Nearly every OEM has its own financing and leasing
organizations. In other words, there are both independent and OEM lessors. In
the face of increasing leasing activity, Distributors and MRO’s should consider
diversifying their customer base to include these lessors.
Based on feedback I’ve had from my aviation friends, it is a
rare lease return that will not involve some form of contesting. Teams from the
lessor and lessee will be formed to examine every iota of the agreement for
compliance. Areas that typically require further resolution include:
Were all the AD’s and required Service Bulletins
The status of remaining time or cycles for Life
Were any major scheduled maintenance checks
about to become due?
Were any parts or assemblies modified to non-standard
configurations as defined by the agreement?
Anticipated life remaining of Tires and Brakes
Are there any installed leased or pooled parts
that must be returned to, for example, to a Pooling group?
In settling the particulars of the lease return which often
has to be negotiated, Distributors and MRO’s will often find themselves in the
settled solutions, e.g., in resultant exchanged parts and MRO activity.
I hope you’ve found this blog (course number LeasingEco101)
informative. Please leave a comment on this blog site. We’d particularly like
to hear from Distributors and MRO’s involved in leasing activity.
Over ‘n out
1 “Leasing Options for Sourcing Spare Engines”. Aircraft
Commerce. Issue No. 90, October November 2013.
3 Laurence Vigeant-Langlois, PHD.
”Overview of the Aircraft Leasing Industry”. Presentation to the Air Transportation Systems Engineering class, George
Mason University. CIT Group.