Airline leasing companies are some of the largest shadow players of the industry, owning fleets that rival some national airlines (Over 1000 planes), placing the largest orders with Boeing and Airbus (sometimes at the same time) and yet most of their operations are a mystery.
What is an airline leasing firm?
Simply, a business that airlines rent a physical plane off, rather than them buying a plane themselves. There are instantly some great advantages of this route and why most airlines choose to lease instead of buy:
- The craft is available. An airline could have the latest and greatest aircraft on the market with barely month’s notice.
- An airline would not have to pay the total cost of an aircraft (A brand new A380 costs $444 million, a lease significantly less so). Leasing airlines buy so many aircraft that they get them up to 70% off from manufactures.
- If an airline has a large travel/holiday demand, they can upgrade their fleet quickly and continue to make sales. Once that capacity is no longer needed they can reduce the capacity.
- If an airline has a mechanical problem, like we have seen with the Boeing 787 Dreamliners, they can swap in another aircraft quickly and easily.
- As an option, airlines can have maintenance included in on their leases (Also known as a damp lease).
Not sure what a damp lease is? There are three distinct lease types.
A dry lease is just the aircraft itself, but with a wet-lease, the aircraft comes with fuel, crew, insurance and operations as well (Essentially much like a charter). Technically with a wet-lease, an airline could operate without an airline certificate, as it would be operated by the leasing company. A damp lease is in-between with either crew or maintenance provided.
There is also the hidden fourth option of Buy Back Leasing or Leaseback. Which is a complicated dance of an airline buying the aircraft, then selling them instantly to a leasing company before renting them back again. As aircraft are owned by a lessor, an airline can save on the depreciation provision, which increases profit and saves on tax.
At Finnair we are also experiencing very, very high load factors. High load factors mean demand for more aircraft. Demand for more aircraft is good for lessors.” – Colm Barrington, CEO of FLY Leasing
Do these leasing companies make a profit?
Profit is the extra currency left on top after you have deduced costs from revenue. For a leasing company to make a profit, they must manage their risk and exposure. Let’s begin with the income stream for the leaser:
- Airline leases – They will rent out a plane for a lease starting from five to fifteen years.
- Airline sales – Once the planes have finished their life with the airline leasing company, they can sell on the plane. In this regard, planes are more like houses than luxury cars, they do not depreciate quickly and if correctly maintained,
- Part sales – If they can’t sell the plane, they can break them down for spare parts. In the case of the A380, they are worth about $80 million in spare components that are rare and can be difficult to find.
Now let us look at the typical risks with running a leasing company:
- Cost of airlines – The first cost is the cost of the fleet itself, they must have the capital to initially buy the aircraft.
- Asset recovery – If a leaser lends a craft to an and they go bankrupt, the leaser must pay to recover the assets. Sometimes, like in the case with the Indian Kingfisher Airlines in 2012, some of the leased planes were poorly maintained (due to the lack of funds from the renter) and even missing expensive parts and thus could not even be flown to another customer.
- Currency conversion – Because these leases are over 5-15 years at a time, leasing agencies need to account for different currencies. If they lent to a country’s airline that suffered an economic crisis, they might be left short. Alternatively, if the country had an economic boom, it might actually cost the leaser money as they are now too cheap.
Airline leasing is an incredibly profitable business to be in. You don’t need to worry about the aircraft losing value, as they can always be sold, nor do you need to worry about the airlines not needing the planes, as demand always exists.
Since the airline industry is growing faster and bigger than it ever has before, Airline leasing will become more and more profitable and this author for one can’t wait to see what happens next.