How airlines acquire their aircraft, the mystery?

Acquiring aircraft for airlines isn’t as clear cut as we all think it is. Very few airlines can afford to pay cash for all their fleet. A couple of months back my kin from Zimbabwe were up in arms when the soon to be operational and newly re-branded Zimbabwe Airways was said to be buying second hand and to some people old and dangerous aircraft from Malaysia Airlines. The main fear hinged on the demise of the two MAS aircraft that cost hundreds of lives in those two very unfortunate disasters that are still major topics in the aviation industry to date. The truth is there is so much more that is involved in acquiring aircraft for different airlines and the Boeing B777-200 aircraft from the MAS are one of the most modern and safest aircraft in the market right from Boeing. Every big reputable airline has this variant aircraft in their fleet.qatar.jpg

To give you a rough picture why its not just straightforward transactions for airlines to purchase aircraft, lets take a look at the example of EasyJet – they have a fleet of over 200 A319’s and A320’s. At a price tag of around $90 million per plane, that equates to about $18 billion. Given that their turnover for 2012/13 was around $7 billion, and their net profit was only $660 million, so how exactly do they own so many planes?

Airlines use export credit agencies, leasing companies, commercial banks, and engine manufacturers to buy the aircraft from aircraft manufacturers. Leasing companies provide secured lending, operating leasing and finance leasing facilities.

Secure lending – an airline may simply take out a secured or unsecured loan to buy a commercial aircraft. In such large transactions, a syndicate of 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.

Operating leases – commercial aircraft are often leased through a Commercial Aircraft Sales and Leases (CASL) company, the two largest of which are International Lease Finance Corporation (ILFC) and  GE Commercial Aviation Services (GECAS). Operating leases are generally short-term (less than 10 years in duration), making them attractive when aircraft are needed for a start-up venture, or for the tentative expansion of an established carrier. The short duration of an operating lease also protects against aircraft obsolescence, an important consideration in many countries due to changing noise and environmental laws.

Finance leasing – Finance leasing, also known as “capital leasing”, is a longer-term arrangement in which the operator comes closer to effectively “owning” the aircraft. It involves a more complicated transaction in which a lessor, often a special purpose company (SPC) or partnership, purchases the aircraft through a combination of debt and equity financing, and then leases it to the operator. The operator may have the option to purchase the aircraft at the expiration of the lease, or may automatically receive the aircraft at the expiration of the lease.

Types of Leasingmaxresdefault.jpg

  1. Dry Lease
    The lessor provides an aircraft without insurance, crew, ground staff, supporting equipment, maintenance, etc. It is all the airliners responsibility.
  2. Wet Lease
    The lessor provides an aircraft, complete crew, maintenance, and insurance. It is more like a charter plane, but with your logo on it.
  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 lease back
    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 purchases 100s of planes in bulk and sells 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.
    For example, Air India did this with their new 787s.

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Understanding The Revenue Models Of Aircraft & Airline Industry

Airlines generate sales from travelers for providing air travel services. Aircraft manufacturers get aircraft cost and recurring revenues by offering aircraft and Maintenance, Repair and Overhaul (MRO) services. Leasing companies re-lease the aircraft to airline companies and get lease charges. Engine companies get periodic premium service revenues for offering engine free and charging MRO services at a premium. Commercial and export credit agencies get loan interest for offering the loan guarantee.

Business experts can help us with the other complicated business terms in the comments below. Dont forget to comment, like my Facebook page AviaConnect and on Instagram avia_connect.

Thank you and enjoy your flying experience

AviaConnect (M B Dube)

 

 

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