Leasing can be something of a mystery for the uninitiated. ITC-AeroLeasing’s President, Mirika Nakayama, explains what you should consider when you think about leasing aircraft and offers five points to guide you through the process.
Contrary to commercial airliner leasing, the helicopter leasing industry is still relatively young, or at least underutilised.
According to one of the industry’s major aircraft data and appraisal firms, IBA, the helicopter leasing market is far less mature than the fixed-wing market.
In 2022, less than 10 percent of the global commercial helicopter fleet was leased, as opposed to around 50 percent for commercial fixed-wing aircraft. Depending on personal experience, it’s normal to be somewhat confused or unsure about what leasing is and, more importantly, how it can benefit you. Let’s shed some light on this side of the industry by discussing the main points to be aware of before getting involved in leasing.
For the avoidance of doubt, we will limit our discussion here to dry leasing.
What benefits to leasing?
Just like any purchase decision, you need to weigh the pros and cons of purchasing versus leasing an aircraft based on your operational requirements, business strategy and financial needs. Factors that may lead you to lease an aircraft can include the cost of capital/interest rates of loans or mortgages, utilising working capital in your business for growth/expansion, the unknown future market value of aircraft, unknow direct operating and maintenance costs, anticipated operating revenue generation, access to latest aircraft technology, fleet expansion and flexibility.
Whatever our reason may be, there are many ways in which leasing can help you and your business.
There are numerous advantages to leasing an aircraft, depending on perspective and business goals.
The most obvious reason for leasing is that it is cheaper in the short-term sense – having a much lower initial capital outlay is convenient if you are looking to conserve capital or avoid large initial expenditures, allowing you to optimise your working capital in other areas.
Leasing can allow for easier financial planning, with rent payment schedules based on a pre-determined formula and, sometimes, maintenance event reserve funds of programmes based on the planned aircraft utilisation. This allows you to become somewhat free from a large unforeseen expense. Leasing may be available with a degree of flexibility and financing options to suit your financial situation and operational needs.
Leasing is also an oft-sought solution to short-, medium- and long-term cashflow needs. A sale and leaseback transaction, for example, would allow the operators to extract the equity they hold in their existing fleet by selling aircraft to lessors who then lease the aircraft back to the operator. The operator can then take the sale proceeds and invest this money in their business or cover upfront costs for a new contract. The financial aspect is not the only benefit of leasing an aircraft – it also brings flexibility to your fleet by giving you the ability to rapidly increase your fleet, acquire the latest aircraft, or even try a novel aircraft for a specific contract. For this reason, combined with the ability to return assets to lessors, some operators prefer a composite fleet structure of both leased and owned aircraft.
Overall, leasing an aircraft with the right lessor partner will often bring more freedom to your fleet, optimise financial planning, and improve your ability to meet the demands of contracts and tenders, etc. Leasing may reduce or mitigate some of the risks associated with aircraft ownership, such as asset depreciation and residual value risk, in a cyclical industry with constantly evolving technology.
What are the different types of leases?
When we refer to a type of lease, we mean the lease structure and defining features. Lease structures each have their specificities in terms of risks and rewards for both the lessee and the lessor.
Finance lease (also called a capital lease): One of the most common lease structures would be the finance lease, whereby the lessee intends to own the aircraft at the end of the lease period and would therefore hold the risks and rewards of ownership including the residual value risk. The payments made as rent under the finance lease are generally the sum of the purchase price of the aircraft and interest during the lease term. At the end of the lease term, as the lessee, you claim ownership of the aircraft after a final installment payment.
Operating lease (also called a true lease): An operating lease is fundamentally different from a finance lease. The lessee intends to return the aircraft to the lessor at the end of the lease period and therefore the lessor is responsible for the risks and rewards of ownership including the residual value risk. As a lessee, you are the temporary operator of the aircraft, much like renting an apartment. The payments made as rent under the operating lease would no longer be a combination of the interest and purchase price, but rather a reflection of the credit risk and residual risk lessors are taking during and after the lease.
Hybrid lease (also called an operating lease with a purchase option): It is also common to see hybrids of the first two structures, whereby a lessee can be granted ownership of the aircraft at the end of the lease term in a form of a purchase option. Such a purchase option is not given under the traditional operating lease. This is also what contrast the hybrid lease with a finance lease, wherein under a finance lease the lessee becoming the aircraft owner is the intended outcome for all parties, unless the lessee defaults under such a finance lease. The final purchase of the aircraft by the lessee is by no means certain under the hybrid lease. The payment made as rent under such a hybrid lease naturally reflects the uncertainty of the ownership transfer at the lease end.
There may be additional features, variations or adjustments made to each of the above lease structures, but these are the main lease products available that you will see in the market. What is important is that each structure has pros and cons for the lessor and the lessee which means the economic terms on offer under the varying structure can vary drastically. While the economics of an operating lease may not make sense to all operators, some may find that the hybrid lease gives them the best of both worlds. It’s important for operators to understand these distinctions so that they do not write off all forms of leasing after a bad experience with one type.
Who are lessees and lessors?
The lessees are often approved commercial aircraft operators. It is important to note that the companies flying and maintaining aircraft have all the appropriate qualifications issued by the aviation regulatory authorities – this is a prerequisite for any aircraft lease. as a lessee, when you start looking for a lessor partner, you will find that they can take several forms and offer different leasing products.
Some will have a specialisation: brand new aircraft, pre-owned, or a sector specialisation such as energy sector or medical services, while others will specialise in certain jurisdiction. Most importantly, any of these established leasing companies have resources that leverage significant benefits to the lessees in terms of streamlined processes, industry knowledge, transaction specialists, etc, enabling them to offer more appealing and competitive terms than those given in the traditional bank loan.They are experts in leasing aircraft to all businesses, for government-related contracts or private individuals, in a wide range of jurisdictions.
In recent years, helicopter leasing has become a truly global industry. Leasing companies tend to have expertise in asset valuation, market analyses, lease, purchase and related transaction agreements, international registration, tax advisory/benefits, etc. Leasing company staff are often comprised of financial, technical and legal experts, capable of supplying and leasing aircraft in cross-border transactions. The lessee and the lessor, therefore, can discuss and find a mutually agreeable solution, which can be tailored to the lessee’s needs.
The lease agreement
At the heart of a lease contract is the lease agreement -the contract that outlines the terms and rules of the lease. This should be strictly adhered to by all parties. It covers every single aspect of the lease, from the technical status of the aircraft at the time of delivery to maintenance obligations, insurance requirements, payments and end-of-lease conditions.
There are many important elements to a lease agreement, but the redelivery conditions will have a significant impact in the residual value and marketability of the asset at the end of the lease term, especially for an operating lease. The lessor will always have the right to perform some kind of monitoring inspection at various intervals during the lease term, without infringing on a lessee’s operation, to validate that the aircraft is being correctly maintained following the lease agreement and aviation regulations.
What will you pay when you lease an aircraft?
First, a lessee might be required to pay a security deposit to secure the aircraft – the amount can be negotiated and would likely be determined based on the lessor’s financial due diligence unless the lessee and the lessor agreed to apply a haircut on the financing values. (This means the financing value is less than the aircraft’s then market value.)
Second, rent would be paid by a lessee to the lessor usually every month on the same date, in advance. The amount of rent payable is often expressed as a lease-rate-factor (LRF), which is the percentage of the rent compared to the purchase price or value of the aircraft at the start of the lease.
In addition to the above, a lessee would usually need to pay all operational, insurance and maintenance costs during the lease term, as well as any taxes arising from the transaction or usage of the aircraft. The lessee must be prepared to pay for all maintenance performed on the aircraft as required by the manufacturers’ recommendations and aviation regulations during the term if the lease, either through an overhaul reserve or by enrolling in a maintenance service programme.
Leasing can be seen as a daunting, complex process. It requires constant vigilance, careful consideration and long negotiations with a lessor to ensure it will fit your needs. Though not a breeze, leasing brings a lot of benefits to operators who wish to have more flexibility, better financial control and planning, and focus on their missions.
Originally published by RotorHub International in the June/July 2024 issue.
Disclaimer: this article is produced as general information only and is not intended to constitute financial, tax, legal, or any other form of advice. No representation, guarantee or warranty is given as to the accuracy, completeness or likelihood of achievement or reasonableness of any statements made.
