Buying aircraft is not a cheap business. The list price of aircraft runs to tens, if not hundreds of millions of dollars. Although airlines can often negotiate hefty discounts on these published prices, particularly if they’re ordering a lot at once, how on earth do they actually pay for these planes? Let’s find out.
The cost of a plane
If we look at the Boeing lineup as an example, its cheapest aircraft for sale right now is the 737 NG, specifically the -700. This is published to cost $89m, slightly less than the $99.7m of the 737 MAX 7. The most expensive aircraft for sale at the moment is the eagerly anticipated Boeing 777-9, which has a list price of $442.2m.
When Airbus used to publish its price list, its most expensive model was the A380, coming in at $445.6m. The cheapest was the A318, at just over $77m. However, Airbus recognized that these list prices were something of a farce, given the amount of negotiations that go on. As such, Christian Scherer, the commercial chief at the company, decided to stop publishing price lists in July last year.
Nevertheless, airlines are still parting with hundreds of millions of dollars in aircraft orders, sometimes several billion for a big order, so how do they finance these purchases?
To lease or to buy
For many airlines, the headline purchase announcements aren’t really purchases at all. Leasing is incredibly common in the aviation industry, with around half of operational aircraft currently on lease, according to CAPA.
Many of the world’s biggest leasing firms are based in Ireland, including Aercap, Avolon, and GECAS. This is primarily down to favorable tax conditions there, and a historically strong industry. But how do the lessors buy the planes for the airlines?
Leasing firms tend to have better credit ratings than airlines themselves. This is down to them being perceived as lower risk by creditors, which allows them to finance aircraft purchases at much-reduced rates. These savings are then able to be passed on to airlines under competitive leasing deals.
For the airline, as well as securing an aircraft at a competitive rate, they also benefit from being able to queue jump. Aircraft purchases usually have lead times of anything from two to ten years, but by leasing the plane, they can expand faster.
What if they want to buy?
Although there are many benefits to leasing a plane, airlines also like to own them too. Owning planes outright gives the company more assets, adding value to the business and giving it some options for raising liquidity in the case of financial difficulties.
In this situation, airlines will usually raise capital for the purchase through direct lending. Just as we can borrow money (albeit on a much smaller scale), airlines are able to take out secured or unsecured loans to buy aircraft. However, given the huge amounts on the table, this may be provided by a consortium of banks rather than one individual lender.
The other option for airlines is finance leasing, also called ‘capital leasing.’ This is a longer-term arrangement than typical leasing, which allows the operator to come close to ‘owning’ the aircraft through a complicated transaction process. In a very generalist term, it’s a bit like a hire purchase agreement where the airline has the opportunity to purchase the plane outright at the end of the lease, either through a final balloon payment or through paying more during the leasing contract.
Did you know how airlines pay for planes? Are you surprised by the amount of leased aircraft in the world? Let us know in the comments.