Everything You Need To Know About Leasing An Aircraft

Introduction to Leasing An Aircraft

The world is constantly witnessing an increase in economic uncertainty. The aviation industry is no different in this respect. 

According to Mondaq, there has also been a growing competition between the American and Chinese lessors which has added pressure to the leasing rates. Further to that, there is a growing demand for air travel across the globe. 

As a result, the airline operators and other aircraft stakeholders are forced to take into account several financial structures and different choices to enable a steady business revenue. Tax payments when owning an aircraft is a major factor that pushes businesses to take into consideration the option of leasing an aircraft rather than purchasing it. Several other aspects that lead to the choice of financing an aircraft rather than purchasing one are sudden change in fleet capacity due to fluctuating demand for an airline route in shifting seasons, fluctuation in the cost of short-term operation of an aircraft, change in forecasted revenue generation, burdens of carrying out maintenance, among others. 

Complexity in Aircraft Lease Agreements

The procedure of leasing an aircraft might look quite suitable for an airline in financial terms but looking at this process in greater detail reveals that going for an aircraft lease involves many intricacies and is a time taking process. 

As stated by Ryan Demoor, an Amway aviation financial analyst, “I think people are sometimes put off by it because leasing is complex and setting a lease-up requires legal consultation”.

This is due to the fact that complications arise when ensuring regulations and all technical characteristics are met to guarantee the safety of the passengers that will end up availing the airline facilities. An aircraft is a huge asset for both the lessors and the airlines or the lessees. A process of asset management needs to be carried out in order to maintain the value of the aircraft, the equipment, and the engines it comes along. The complexity of the whole process elevates when the lease agreement is topped up with complicated clauses to mitigate the effects of an unfavorable event taking place in the future. These unfortunate scenarios might include a default in payments. Other situations requiring pre-mitigation clauses are tough legal authorities and the use of the aircraft in the jurisdictions of multiple geographical locations, cumbersome maintenance of records of the complete aircraft’s lifetime, tough airworthiness requirements during aircraft operations, and aircraft’s conditions demanded by the lessor during redelivery, among others. 

Types of Aircraft Leases

Now that it has been explained why airline operators choose to lease an aircraft, it is equally important to know the types of lease agreements that exist. 

According to Aerotime, there are primarily three types of aircraft leases.

There are several types of lease agreement to cater to various factors of taxation and income requirements of the airlines or the lessees. 

Wet Lease

In the agreement of a Wet Lease, the lessor of the aircraft provides almost everything necessary to operate those aircraft. The acronym famous for this is ACMI which stands for Aircraft, Crew, Maintenance, and Insurance. These are the services that a lessor provides with the aircraft in a Wet Lease. The Lessor provides the crew for the aircraft, takes care of the maintenance checks that need to be performed, and caters to the insurance requirements. The operator on the other hand only has to pay fees for the airports and fuel charges. This type of lease agreement is best suited for airlines that have a relatively low number of regular passengers and a small fleet of aircraft. Though, as peak seasons such as summers approach, these small airlines start receiving a greater demand for air travel due to which they have to increase upgrade the amount of aircraft by almost double or even more. But this sudden increase in the fleet comes at a huge cost which these small airlines cannot bear. As a result, the operators contact leasing companies for acquiring the needed amount of aircraft along with the crew. These lease agreements are usually of a short-term nature, as when seasons like winters approach, the demand for air travel returns back to normal and so does the demand for newly acquired aircraft. Although long-term wet-lease agreements are also signed, this is done only by bigger airlines that have a more stable customer base. 

According to Herdem, short-term wet-lease agreements are best suited for start-up airlines as it enables them to handle seasonal fluctuations and cope with sudden peaks in air travel demand. 

Dry Lease

In this kind of lease agreement, the lessor only provides the aircraft and it is the lessee’s responsibility to come up with its own crew, carry out maintenance and pay for the insurance. Dry Lease agreements are suitable for bigger, well-established airlines which have a pool of large fleet and possess large aircraft crew. These airlines are capable of recruiting new crew and are able to train them. As opposed to a wet lease, dry lease is a long-term lease. This type of long-term lease extends to almost half of the aircraft’s life. 

According to Lexology, dry Lease is further divided into two categories, one being Finance Lease and the other being Operation Lease. 

In a Finance Lease, the rewards and risks are transferred to the lessee and a bargain purchase option exists at the end of the lease period while in the operating lease, the risks and rewards are not transferred and the aircraft is returned to the lessor upon expiry of lease period. 

Damp Lease

A damp lease is almost of a similar nature to a wet lease but there is no facility of the crew being provided by the lessor. The acronym used in this lease agreement category is AMI which stands for aircraft, Maintenance, and Insurance, the services provided in conjunction with the aircraft by the lessor to the lessee. 

Associated Risks

There is a constant rise in the number of Aircraft Leasing Companies surfacing in the market. This has led to extremely low-profit margins which is a necessity for every lessor to survive in this competitive market. Now more than ever, the risk related to the leasing business is that airlines have started going bankrupt, similar to the scenario that came up in the aftermath of the recent COVID-19 pandemic.