This business model is straightforward: aircraft leasing companies either directly purchase planes from aircraft manufacturers such as Airbus or Boeing, or indulge in sale-leaseback transactions with global airlines on existing fleets, in exchange for a monthly rent.
Purchasing an aircraft is an expensive undertaking for airlines that are already strapped for cash. Few airlines can afford to pay cash for their entire fleet. These airlines instead purchase aircraft from aircraft manufacturers through export credit agencies, leasing companies, commercial banks, and engine manufacturers.
The global airline sector has developed in the last few years, catapulted by the worldwide economic recovery and the prevalence of budget carriers in the developing world. As a result, numerous airlines around the world are seeking fresh planes to add to their fleets.
When airlines lack the resources to acquire aircraft on their own, they turn to the aircraft leasing industry for assistance. Leasing companies have benefited greatly from the aviation industry’s rapid growth, chiefly from airlines that operate in developing countries.
Airlines can buy aircraft directly from manufacturers using commercial bank loans, or they can hire leasing companies to help arrange and close the deal with manufacturers on their behalf.
Companies are also more likely to use a hybrid solution. In the hybrid version, airlines collaborate with banks to obtain an initial deal signing amount to purchase the aircraft directly from the manufacturer while also concluding deals with leasing companies to sell the aircraft.
Airlines enter into a lease agreement with a leasing company after purchasing aircraft directly from the manufacturer. This enables airlines to pay the required amount to the manufacturers and obtain ownership papers. Airlines then enter into a ‘sale-leaseback’ agreement with the leasing company for a set period of time.
As of now, the cost of the aircraft engine has been excluded from the buying and leasing process. Airlines and engine manufacturers negotiate separate contracts. They reach ‘pay-per-hour’ agreements with engine manufacturers, paying them for each hour an engine is used rather than purchasing the engine all at once.
How Does the Aircraft Leasing Business Model Work?
Airline companies that use this business model frequently offer a variety of services. For starters, airlines with severely restricted credit can use this model to enlarge and modernize their fleets. Furthermore, airlines that would like to avoid the 25-year commitment that comes with owning an airplane can lease planes instead.
Most aircraft leasing companies acquire aircraft in one of three ways. First, they may place direct orders with manufacturers for new planes.
Second, they may engage in sale-leaseback transactions with airlines that have already placed orders for aircraft. Remember that in this role, aircraft leases serve as a substitute for debt financing. Finally, they could also buy used aircraft.
In sale-leaseback transactions, the aircraft leasing company already appears to know which airline could very well lease the plane. Or else, these lessors must rely on relationships with dozens of airlines to ensure leases for the planes they have purchased.
When the initial lease contract ends the aircraft leasing company will offer the airline the option of renewing the lease or purchasing the plane. If the airline does not want to keep the plane, the leasing company could then sell it or place it with another customer. Various aircraft leasing companies use various strategies for purchasing and selling aircraft.
Some people only buy new planes and then sell them when they become obsolete. Others would rather buy used planes at a discount and keep them for the majority of their useful lives. Some businesses are more proactive and will purchase both new and used planes.
How Do Businesses With This Business Model Make Money?
They buy in bulk, which provides them with numerous benefits. The Airbus A320, for example, costs $101 million, according to Airbus. If an airline orders one or two, they may be required to pay the full price. A leasing company, on the other hand, will place a large order with an aircraft manufacturer.
When placing a large order, the company has the negotiating power to obtain a discount from the manufacturer. As a result, their profit margins will be significantly higher. A leasing company can determine for how long it will keep an aircraft.
This varies, but the aircraft is usually sold after its life cycle with the lessor. As long as the aircraft are properly maintained, they do not depreciate significantly. As a matter of fact, the leasing company does not incur a significant financial loss following a resale.
If a lessor is unable to find a buyer, the aircraft may be scrapped for parts. Remember that there will always be an aftermarket for spare parts. While it may not recoup that very same amount of money, the company can maintain some of the aircraft’s value.
Top 20 Companies Operating This Business Model
- Industrial And Commercial Bank Of China (ICBC)
- Aercap Holdings N.V.
- Nordic Aviation Capital
- Chapman Freeborn
- McDonnell Douglas
- Textron Financial
- SMBC Aviation Capital
- Lockheed Martin
- Dubai Aerospace Enterprise
- General Electric Capital Aviation Services (GECAS)
- Air Lease Corporation
- Atlas Air Worldwide
- BOC Aviation
- FLY Leasing
Aircraft lease payments are possible on an operating basis, in which the lessee only pays for the flight hours used, or on a full-time basis, in which all hours are paid in advance. A lease for an aircraft can also be constructed as a single payment with no recurring payments.
It is critical to understand that leasing agreements are not loans because no interest is charged over time and no title is transferred. To those that want to own an airplane without the high cost of ownership, aircraft leasing is an excellent option. A typical aircraft lease will last 5 to 10 years, after which you will either return it to the lessor or purchase it outright.