Types of Leases

There is a large variety with regard to types of leases and deals that airlines can make with the lessors. Firstly, the leasing of commercial aircraft is generally categorized according to general classification criteria: operating, finance, sales and lease back and wet leases.2

Dry lease is like renting an asset, i.e. a car, but for a longer period: normally 6 to 12 years.3 The airline leases the asset and uses it according to its needs during the established period. A dry lease is a transaction for a physical aircraft without insurance, crew or maintenance. Moreover, dry leases may occur in two different forms: Financial leases or Operational leases.

  • Finance lease: This is an arrangement whereby the acquisition of the aircraft is financially structured in such a way that ultimately the airline (lessee) becomes the owner of the aircraft. Finance leases require a higher security deposit and while the amount of monthly rent to be paid dictates the duration of the lease, are more expensive in cash flow cost than the operating lease. The rent over the course of the lease pays off the aircraft and at the end, either the lessee takes ownership of the aircraft without making any additional payment or has to make a final balloon payment to take ownership. Furthermore, at the end of the finance lease, the funds collected as maintenance reserves (see below) accrued in the lessor´s account, are credited back to the lessee. In a finance lease, the aircraft is regarded as an asset of the airline from an accounting perspective and in contrast, the operating lease only affects the airline cash flow.
  • Operating lease: This is an arrangement whereby the aircraft is owned by a leasing company (the lessor) throughout the lease period and then leased to an airline (the lessee) to register and operate it in the host country under its own Air Operator´s Certificate (AOC). Such periods vary in duration from a few years to 10 or 12 years (lease extensions are common) with monthly rent for the aircraft, as well as maintenance reserves as additional payment. Operating leases are attractive for startup airlines. In certain countries where airlines are deemed less creditworthy, operating leases may be the only way to acquire aircraft. At the end of the lease, the aircraft is returned to the lessor under strict return conditions. This type of leasing does not require the lessee to invest in the aircraft but has limited flexibility. 

A wet lease of an aircraft often provides an airline with the physical aircraft and cockpit crew, and sometimes also cabin crew. Under a wet lease, an aircraft is transacted between airlines. There might however, be several subtypes of wet- leasing. Among these are damp leases and Aircraft, Crew, Maintenance and Insurance (ACMI), with the latter being the most popular.

ACMI: This is a wet-lease agreement whereby the lessor provides the aircraft, crew, maintenance and insurance to the lessee. An ACMI is arranged between airlines whereby the host airline (the lessee) leases the aircraft to operate it under its call sign and covers the passenger, baggage, and cargo liability insurance during the wet-lease period. Monthly hours flown are established as a minimum guaranteed Minimum Guaranteed Hours (MGM) during the wet-lease period. These leases are ideal for startup airlines, new routes, and seasonal or sudden demand peaks.

Damp lease: This is an arrangement whereby the lessor provides the aircraft, cockpit crew, maintenance, and insurance, whereas the airline leasing the aircraft (the lessee) provides the cabin crew. This type of arrangement works well when both airlines operate similar types of aircraft and, by using its own cabin crew pool, reduces the lessee’s costs substantially.