How does aircraft leasing work – Aircraft leasing explained
Some of us might not even have heard of leasing companies before. Some, who have explored the intricacies of aviation, know that airlines sometimes lease aircraft, instead of buying them. In addition, terms like wet lease, dry lease or damp lease agreement fluctuates around aviation news sites.
For example, one of the biggest airlines and most prestigious airlines in the world, Emirates has leased a Boeing 777-300ER from AviaAM Financial Leasing China.
You’ve surely heard of Emirates. But AviaAM Leasing? Owning a Boeing 777? Leasing it to Emirates?
It definitely raises some questions about leasing, leasing companies and why such huge airlines, like Emirates, would need to lease an aircraft.
So, in order to clear things up about Aircraft leasing, let’s dig deeper into the subject.
What is Aircraft Leasing?
To make it simpler, imagine it is like an apartment or house loan. A bank or a construction company owns a big apartment building in an attractive location. You, as a potential homeowner, are looking to buy an apartment in the very same location.
So, you contact the company that owns the apartment complex, strike a deal on the price. Then, you proceed to go to the bank and get a loan agreement of 15, 20 or 25 years. Each month you pay your loan and you can use the apartment however you want (in accordance with your contract, of course). After the 25 years, the apartment is yours – you can sell it, rent it or live in it. The choice is yours.
Similarly to this, aircraft leasing works pretty much the same. An airline is looking to expand its own fleet but doesn’t have the cash to purchase an aircraft out-right. Maybe it is a new company; maybe the airline just got out of bankruptcy protection and is looking to save some money while still expanding their operations.
Subsequently, they contact an aircraft leasing company saying they want to lease an aircraft.
But this is where things get interesting and aviation spices things up.
Wet, Dry or Damp lease
The airline needs to know what type of lease they want – a wet lease, a dry lease or a damp lease. Each of those could be a short-term or a long-term lease.
What’s the difference?
Firstly, let’s begin with the wet lease. When an airline wet leases an aircraft, the leasing company provides literally everything – the aircraft itself, pilots and cabin crew. Furthermore, the leasing company also takes care of maintenance and insurance.
Essentially, you can have 0 aircraft that you own as a company and still run an airline. Usually, when a leasing company provides an ACMI (Aircraft, Crew, Maintenance and Insurance) service, they operate under their own Air operator’s certificate.
For example, an airline is based in a popular summer destination, like Cancun or Ibiza. During the winter, the passenger numbers are low and the airline can handle operations and the traffic by themselves with a small amount of aircraft.
However, as summer months come, the passenger numbers double or triple. The airline doesn’t have enough money to suddenly ramp up operations and buy new aircraft, hire new crew and maintenance people. So, what they do is contact a leasing company and order wet leases. They are short-term, as during the winter months they wouldn’t need so many aircraft.
Long-term agreements would be signed by bigger airlines with more stable passenger numbers on their routes. During the last few months, Jet Airways has collapsed. The airline had numerous lucrative routes to and from India. The most sought after routes are to the Middle East.
Jet Airways’ bankruptcy has cost a lot of money for aircraft lessors
So, Jet Airways‘ bankruptcy opened a gap where suddenly airlines could take up their profitable routes. So, they buy out their slots and contact a leasing company for a long-term wet lease, as they do not currently own any free aircraft or have free crew available. The aircraft leasing company provides an aircraft within months, while a new aircraft order would take a few years to materialize.
But what if the airline has a lot of free crew available?
This is where dry leasing shines through.
A few months ago, Southwest Airlines (LUV) had a few circumstances go very wrong. Firstly, a lot of their Boeing 737s were grounded due to maintenance issues (they were not related to the Boeing 737 MAX groundings). Secondly, their mechanics, the people who are responsible for fixing the aircraft, went out on strike.
And then, the Boeing 737 MAX groundings occurred after the Ethiopian Airlines Flight ET302 crash.
Southwest essentially had a lot of free pilots, cabin crew members and, after resolving the issue with their mechanics‘ union, maintenance personnel. But they were lacking aircraft and the airline was forced to cancel hundreds of flights.
While Southwest eventually resolved their issues, but dry leasing Boeing 737‘s would‘ve been also an option. They had the crew, but no aircraft. So, they contact a leasing company for short-term leasing to temporarily solve their fleet shortages.
And this is just one example of how a dry lease can help out an airline during a shortage. Dry leasing also works great for the biggest airlines, as they have huge crew facilities and can prepare new recruits to join the company on a huge scale. So, they assure the highest quality of service with their own crew training.
But as I mentioned above, the waiting line for a new aircraft can be up to a few years. If an airline is expanding, time is of the essence. So, the company can opt-in for a long-term dry lease, as they have the crew available.
A damp lease is a mixture of both dry and wet lease. (Hence the name)
When an airline asks for a damp lease, the leasing company loans them out the aircraft, pilots and helps out with the insurance. But agreements differ for a damp lease.
For example, an airline might have a lot of free cabin crew available, as they just hired a lot of new recruits. But they lack the engineering personnel to cover the maintenance operations. So, a damp lease here is perfect – they loan the aircraft, the pilots that come with it, insurance and maintenance personnel, but they do not need the additional cabin crew, so their lease is cheaper.
Emirates Training Facility
So, now that we know the three lease types that fluctuate in aviation, we can answer the question: Why would an airline choose to lease an aircraft?
Why do airlines lease aircraft
In short, we can see four definitive reasons why would an airline lease aircraft:
1. The airline doesn‘t have the money instantaneously. So, they split up the payments for an aircraft and still can operate it fully;
2. A gap in the market has opened up, for example after a rival airline has gone bankrupt. The airline needs an aircraft quickly – they could order a new one from Airbus or Boeing, but the waiting line is a couple of years. Instead, they lease an aircraft and receive it within a few months or even weeks, in the most extreme cases;
3. Unforeseen circumstances like an unusual amount of aircraft being maintained, fleet groundings or strikes can help the airline stay in control of their own operations with short-term leases.
4. Seasonal changes – for the summer they need more aircraft, while for the winter the same aircraft would sit idle. So, the airline uses a short-term lease to cover its seasonal operations.
So, to sum up, why do airlines lease aircraft – not enough financial resources to buy aircraft, needing an aircraft quickly due to various circumstances and seasonal changes make airlines consider that they should lease an aircraft.
But what about leasing companies? Are they profitable? How do they make money themselves?
In short, yes, they are profitable. With aviation booming as it is and passenger numbers rising yearly, airlines do lease more and more aircraft.
According to a KPMG report about the aviation industry leaders, around 15% of the global aviation fleet was leased by airlines in 1999.
20 years later, the number has risen to almost 50%. In total, leasing companies around the world own more than 12 000 various aircraft – from the Super Jumbo Airbus A380 to small jets like the Bombardier CRJ200.
HiFly Airbus A380 – The only leaseable Airbus A380 in the world
However, most leasing companies own a huge amount of narrow-body aircraft like the Boeing 737 or the Airbus A320. They have the biggest profit margins for lessors, as when switching operating airlines, preparing a narrow body aircraft is much cheaper than say, a Boeing 787.
But how do these companies make money?
They buy in bulk. For example, according to Airbus, the Airbus A320 costs $101 million. If an airline orders one or two, they might pay the full price.
If a leasing company comes to an aircraft manufacturer, they will make a bulk order. Based on the same KPMG report, the current biggest leasing company, GECAS, has 369 aircraft on order. When making a bulk order, the company can negotiate a discount from the manufacturer. As a result, their profit margins will be much higher.
A leasing company can decide for how long they will hold on of an aircraft. It varies, but after the life-cycle within the lessor, the aircraft is sold on.
As the aircraft are looked after properly, they do not depreciate a lot. Thus, the leasing company does not lose a lot of money after a re-sale.
If a lessor cannot find a buyer, they can just scrap the aircraft for parts. There is always an aftermarket for spare parts. While it might not recover the same amount of money, the company still retains some of the value of an aircraft.
Even though the airline industry is growing as fast as ever, there are risks related to the leasing business.
While demand might not drop off drastically and will probably keep rising, the amount of leasing companies has also risen massively.
According to Boeing’s market outlook for 2019, in 2002 there were less than 100 leasing companies offering their services to airlines. Currently, the number has grown significantly – more than 150 lessors provide leases to airlines around the world.
With the overcapacity of the leasing market, a leasing company might operate on ridiculously low-profit margins, just to compete better. As a result, the big players can lose customers and in turn, money, which can cause bankruptcy.
And bankruptcy is a word that is often used in aviation, no matter how unfortunate that is. For example, the recently bankrupt Icelandic WOW Air owned a leased Airbus A330. Avolon, the leasing company, could’ve potentially lost money, as WOW Air was not able to fully pay their loan agreements. Also, the aircraft was sitting on the ground – thus not making money.
So, leasing aircraft to airlines can also be risky – with shifting winds and bankruptcies happening after every winter, a lessor’s aircraft might be spending a lot of time on the ground, rather in the air and making money.
WOW Air Airbus A330
Hopefully, after this article you will understand why do airlines lease aircraft and how do leasing companies make money, thus explaining the service’s popularity!