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Aircraft Leasing 101 – A Basic Guide to the Intricacies of Leasing

By Rob Russell

Over the years, many airlines have evolved from predominantly owning their fleets to leasing the majority of the aircraft in their fleet. Of course, there are many plusses and minuses, just as there are when you decide to replace your motor car. Should one buy a new aircraft, or a used one or should one go with the leasing option? Luckily the leasing market is experiencing rapid growth and with so many different options available, leasing is very much an attractive option.

With profit margins being so tight and small, the leasing market is flourishing. Airlines lease aircraft for two main reasons:

  • Reducing the financial burden of having to finance buying aircraft themselves and

  • Providing a temporary increase in capacity over high periods.

Fleet continuity and coherence is also a key consideration. Smaller airlines want to be able to increase their fleets incrementally whilst maintaining a high degree of standardisation. This in turn affects training, licensing, maintenance, spares provisioning, onboard service and customer appeal. However, not all airlines are able to order large numbers of new aircraft, so the leasing option is an attractive option, but one that must be carefully thought through and managed. Many of the bigger airlines depreciation policies require them to replace aircraft in cycles (usually between 7 – 10 years), and in turn, they create opportunities for start-ups and other smaller carriers who might only need a handful or two of the same model and specification aircraft to lease these aircraft that are being replaced.

Likewise, airlines have the option of leasing aircraft out during quieter, often winter, seasons and earning extra income.

Finance leases (or lease-purchases). These are aircraft acquisition instruments driven by accounting and tax decisions and involving the relevant depreciation calculations and interest rates. Typical finance leases are loan structures where an export credit agency/bank gives money to a Special Purpose Company (SPC), ie a leasing company or investment bank, which holds the title of the aircraft and pays the manufacturer. The airline pays the SPC and gains the aircraft title when it has paid off the entire loan. In such cases, payments are similar to a mortgage on a home, with regular monthly payments. Dependant on interest rates, these payments can also vary over the repayment term. Their attraction is that they have less impact on cash flow in the early years compared with a straightforward loan.

Finance leases are often attractive when it comes to the acquisition of a new aircraft that has been equipped and configured to a particular airline’s specifications. Most large airlines try to balance their fleet acquisitions between purchased/lease financed and operating leases in order to achieve the desired flexibility they need to meet their changing operational needs and those of their target markets.

As an example of this, within the Air France/KLM group:

  • On December 31, 2022, the average age of the Air France fleet was 13.7 years, with 13.2 years for the long-haul fleet, 14.2 years for the medium-haul fleet and 13.9 years for the cargo fleet. Within the fleet, 88 aircraft are fully owned (41.3%), 22 are under finance lease (10.3%) and 103 are under operating lease (48.4%).

  • On December 31, 2022, the KLM fleet comprised 107 aircraft, of which 62 long-haul aircraft and 45 medium-haul aircraft. 42 aircraft are fully owned (39.3%), 22 aircraft are under finance lease (20.6%) 43 are under operating lease (40.2%).

  • An Operating lease is primarily a fleet planning decision to give an airline optimal adaptability, flexibility and continuity, as its needs on the routes it flies, change.

The industry has two main operating leasing types: wet leasing, which is normally used for short-term leasing, and dry leasing which is more normal for longer-term leases. The industry also uses combinations of wet and dry. For example, when the aircraft is wet-leased to establish new services, then as the airline's flight or cabin crews become trained, they can be switched to a dry lease. In some markets, there may also be hybrid models, such as with cockpit crew provided with the aircraft, whilst the cabin crew are provided by lessees. This model is now known as the damp lease.

Many airlines are unable to secure favourable financing, to buy their own aircraft, either from the manufacturers or financial institutions, and elect to go the leasing route, as a simpler way of building their airline, increasing their fleets and being able to operate more routes, thereby expanding their route network. Smaller aircraft can be leased, whilst undertaking expansion and keeping costs under control.

Leasing of jet airliners accounted for less than 2% of the fleet in 1976, then 15% in the early 1990s, 25% in 2000 and 40% in 2017, with lessors involved in 62% of second-hand mid-life aircraft transactions since 2000: 42% in Europe and 29% in North America. In 2015, for example, over $120 billion of commercial aircraft were delivered worldwide and half of the global lessors were based in Ireland.

Operating leases are all about managing and matching supply and demand while trying to manage the short-term problems that any airline has to manage. It all boils down to profitability and best management of resources. These could be financial, eg. limits on available capital (and ability to raise loan finance), personnel, resources and management expertise.

There are many advantages of an operating lease, which airlines seek to use:

  • Short-term fleet expansion

  • The relative ease of getting common aircraft into the fleet

  • Ability to lease for short periods

  • Ability to return aircraft, if needed at the airline change

  • No capital commitment

It is on the side of operating leases that we have all heard of the expressions “wet” and “dry” when it comes to leasing, but what were the origins of these two terms? It seems they come from the type of lease available. Ie an aircraft either comes with the fuel in it - wet, or without the fuel - hence the expression dry.

But what does it mean when an airline leases an aircraft and how are the leases concluded? Traditionally, there are two main types of lease:

Wet lease

This is a leasing arrangement whereby one company, be it a manufacturer, financial institution, or even another airline, (the lessor) provides an aircraft, complete crew, maintenance, and insurance (ACMI) to another airline or other type of business acting as a broker of air travel (the lessee), which pays by hours operated. The lessee provides fuel and covers airport fees, and any other duties, taxes, etc. The flight uses the flight number of the lessee. A wet lease is more commonly used for short periods, which can range from even one flight or day to several months, even as much as 24 months. A wet lease is typically utilized during peak traffic seasons, ie over the summer season or Christmas, It is often used to initiate new routes, whilst the airline builds up demand and frequency, without having to use its own aircraft. They are also used during periods of heavy maintenance checks. On rare occasions and very seldom, a wet-leased aircraft may be used to fly services into countries where the lessee is banned from operating.

During a wet lease, airlines that lease to other airlines, often retain the colour scheme of themselves and maintain the aircraft registration, as the lease is for a short period and it is not worth the financial and other hassles of re-registering an aircraft and changing the paint scheme. That's why so many airlines now have aircraft that are all white. Easy to lease out and easy to put a temporary decal on. It's all about cost efficiency in the lease!

Variations of a wet lease include a code share arrangement, where an airline operates a flight on behalf of another airline, a block seat agreement,

An example of a wet lease in South Africa is the B737-300 that SAA leases from African Charter Airlines, to serve some of its routes. The aircraft is flown by ACA pilots, ironically many of them used to fly with SAA version 1!

Dry lease

This other popular is a leasing arrangement whereby primarily aircraft financing entities, or other airlines, (lessor), such as AerCap or Air Lease Corporation, provide an aircraft without crew and ground staff, ie the lessee provides its own personnel to fly, maintain and service the aircraft. Dry lease is typically used by leasing companies and banks, which require the lessee to put the aircraft on its own air operator's certificate (AOC) and provide aircraft registration. A typical dry lease lasts upwards of one or two years and bears certain conditions with respect to depreciation, maintenance, insurance, - basically, the operator takes control and management and is responsible for all aspects of operating the aircraft.

Dry leases tend to be for longer periods than a year and provide stability to the lessee, as they are not constantly changing their fleets. They are also often used when an airline undergoes a period of expansion and due to order backlogs on certain aircraft, it is easier and faster to lease and obtain aircraft (albeit slightly older) on the leasing market, whilst waiting for new aircraft to arrive. (Airbus, Boeing and Embraer are currently sitting with full order books with their first available new aircraft delivery slots between four and six years from now, depending on certain models). Similarly, the problems with the Pratt & Whitney GTF engines have resulted in the temporary withdrawal of numerous A320neos from service. As a result, many airlines that still have A320ceos have pushed out their retirement and those that were available for lease are being snapped up but at premium lease rates. COVID helped to mitigate a similar surge in demand for older 737-800s when the MAX was grounded.

An example of this type of lease is found in S Africa, where many of the aircraft SAA and Safair operate, are leased from major leasing companies and they provide their own crews.

A dry-lease arrangement can also be made between a major airline and a regional airline, in which the major airline provides the aircraft and the regional operator provides flight crews, maintenance and other operational aspects of the aircraft, which then may be operated under the major airline's name and using the various codes of the major airline.

A dry lease can also save a major airline the expense of training personnel to fly and maintain aircraft, that carry its name, along with other considerations (such as staggered union contracts, regional airport staffing, etc.). FedEx Express being a large jet operator, has a need to service smaller routes and hubs, but its fleet is not suitable, so it uses an arrangement of this type of dry lease, for its feeder operations, contracting to companies such as Empire Airlines, Mountain Air Cargo, Swiftair, and others to operate its single and twin-engined turbo-prop aircraft in the US, serving its hubs and in turn FedEx is able to expand its route network and services. Another large freight operator,  DHL has a joint venture in the United States with Polar Air Cargo, a subsidiary of Atlas Air, to operate their domestic deliveries.

These traditional lease types have proven successful and worked well for most leasing companies and those leasing jets, but trends indicate a new type of lease in the market:

Damp leases

These lease types originated In the United Kingdom. In essence, it's a wet lease, but with some modifications, whereby the lessor provides the aircraft, flight crew and maintenance but the lessee provides the cabin crew. It's a hybrid of the two main lease types. It has benefits for both the lessor and lessee. The lessor does not have to provide cabin crew, which reduces its labour costs, whilst the lessee makes use of excess staff and ensures better productivity of its personnel.

There is a growing move towards damp leases, as it has benefits for all parties and can also significantly reduce leasing costs. These lease types are also over short periods, much the same as wet leases. An example of this is now found in SA, where SAA has leased 2 Boeing 737-800s from Turkish airline SunExpress, which in turn is a jointly owned airline of Lufthansa and Turkish Airlines. The aircraft retain their Turkish registration, whilst flying with a SAA tail. SunExpress is now entering the European winter, where demand for flights reduces, whilst SAA has a need for more flights over the African summer season. The lease serves the interest of both airlines, although, with the poor financial record of SAA, it is believed that SAA is paying premium lease rates for these jets. SunExpress provide the cockpit crews, but SAA provides the cabin personnel. The lack of A320s available for lease is probably one of the reasons why SAA hasn’t been able to acquire back some of its old A320 and instead was left with the option of using SunExpress Boeings, to be able to operate their summer timetable.

Leasing aircraft is a flourishing business and requires the services of well-trained personnel to ensure both the lessor and lessee are able to obtain the maximum benefits of the lease.



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