Buying, as is the case with other assets, proves cheaper than renting in the long term. Furthermore, if the airline is buying in bulk, with associated discounts, it could make sense to debt finance the aircraft and therefore acquire an asset that is less expensive than the average market price.
However, an airline has multiple factors to consider when choosing between buying or leasing an aircraft. Leasing is attractive from an airline´s perspective; it has several advantages among which are the following:
- Financial flexibility: Leasing allows airlines to optimize the use of their capital and focus on the core business, flight operations, rather than on fleet management.
- Speed of delivery: As the aviation industry has become highly dynamic, airlines need to adapt to changes. Leasing facilitates the rapid growth of their fleet.
- Improved cash flows: Commercial airline services require a substantial amount of funds. Leasing provides airlines with liquidity.
- Avoidance of ¨Pre-Delivery Payment¨: A number of years before the delivery of an aircraft by the manufacturer, the airline has to make a large upfront payment. Through leasing, the lessee avoids this capital outlay.
- Reduction of delivery lead time for new aircraft types and models: For aircraft with the latest technology, delivery slots are usually limited and delivery lead time might be several years.
- Prevention of residual value risk: With leasing, residual value risk is borne by the leasing company.
- Decrease in the required capital: Leasing lowers the financial barriers for entering the market and significantly reduces the need for substantial capital commitments.
The choice to lease nevertheless also has some disadvantages:
- Conditions of return: If an airline owns an aircraft, it can be used as much as required. However, when leased, according to an agreed utilization clause, if the aircraft is not returned in a suitable condition, the airline will likely face a penalty.
- Operating restrictions: Lease agreements commonly include restrictions regarding where the aircraft can be based or under which conditions it can be operated. Furthermore, it may detail if the wet lease (see below) is permitted and under which conditions.
- Tax disadvantages: While lease payments are accounted for as expenses, operating leases do not allow the benefit of writing off an aircraft on a zero-tax basis.
Generally, newly created airlines with a small fleet and reduced capital reserves, or even larger airlines trying out a new line of business (i.e. new routes) for which they need different planes, tend to lease a high percentage of their planes. Conversely, airlines with abundant capital rely primarily on owned aircraft. In practice, airlines utilize both ownership and leasing to manage the financing of their fleet. This provides the benefit of active comparison which assists Finance and Fleet Directors in weighing up the cost and benefits of ownership versus leasing. It also injects competitive tension in any bidding process for aircraft debt or lease Request for Proposals (RFP) which can help the airline to extract maximum value from a deal.
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