Some of us may not even have heard of leasing corporations before. Some, who have explored the intricacies of aviation, understand that airlines sometimes lease aircraft, rather than buying them. in addition, terms like wet lease, dry lease or damp lease agreement fluctuates around aviation news sites.
For example, one of the largest airlines and most prestigious airlines in the world, Emirates has leased a Boeing 777-300ER from AviaAM financial Leasing China.
You’ve for sure heard of Emirates. but AviaAM Leasing? Owning a Boeing 777? Leasing it to Emirates?
It undoubtedly raises some questions about leasing, leasing companies and why such huge airlines, like Emirates, would need to lease an aircraft.
So, in order to clear things up regarding aircraft leasing, let’s dig deeper into the subject.
What is aircraft Leasing?
To make it less complicated, imagine it’s like an apartment or house loan. A bank or a construction company owns a big apartment building in an attractive location. You, as a potential home-owner, are looking to buy an apartment in the exact same location.
So, you contact the company that owns the apartment complex, strike a deal on the price. Then, you proceed to go to the bank and acquire a loan agreement of 15, 20 or 25 years. every month you pay your loan and you can use the apartment however you want (in accordance with your contract, of course). once the 25 years, the apartment is yours – you’ll be able to sell it, rent it or live in it. the choice is yours.
Similarly to this, aircraft leasing works pretty much the same. an airline is looking to expand its own fleet but doesn’t have the money to buy an aircraft out-right. maybe it’s a new company; maybe the airline just got out of bankruptcy protection and is looking to save some cash while still increasing their operations.
Subsequently, they contact an aircraft leasing company saying they need to lease an aircraft.
But this is where things get interesting and aviation spices things up.
Wet, Dry or Damp lease
The airline must understand what type of lease they require – a wet lease, a dry lease or a damp lease. each of those can be a short-term or a long-term lease.
What’s the difference?
Firstly, let’s begin with the wet lease. once an airline wet leases an aircraft, the leasing company provides literally everything – the aircraft itself, pilots and cabin crew. furthermore, the leasing company also takes care of maintenance and insurance.
Essentially, you can have zero aircraft that you own as a company and still run an airline. Usually, when a leasing company provides an ACMI (Aircraft, Crew, Maintenance, and Insurance) service, they operate under their own Air operator’s certificate.
For example, an airline is based in a popular summer destination, like Cancun or Ibiza. during the winter, the passenger numbers are low and the airline can handle operations and the traffic by themselves with a small amount of aircraft.
However, as summer months return, the passenger numbers double or triple. The airline doesn’t have enough money to suddenly ramp up operations and purchase new aircraft, hire new crew and maintenance people. So, what they do is contact a leasing company and order wet leases. they’re short-term, as during the winter months they wouldn’t need so many aircraft.
Long-term agreements would be signed by bigger airlines with more stable passenger numbers on their routes. throughout the last few months, Jet Airways has collapsed. The airline had various profitable routes to and from India. the foremost sought after routes are to the Middle East.
So, Jet Airways‘ bankruptcy opened a gap where suddenly airlines could take up their profitable routes. So, they buy their slots and make contact with a leasing company for a long-term wet lease. As they don’t currently own any free aircraft or have a free crew available. The aircraft leasing company provides an aircraft within months, while a brand new aircraft order would take a couple of years to materialize.
But what if the airline has a lot of free crew available?
This is where dry leasing shines through.
A few months ago, Southwest Airlines had a number of circumstances go very wrong. Firstly, a lot of their Boeing 737s have been grounded thanks to maintenance issues (they weren’t related to the Boeing 737 max groundings). Secondly, their mechanics, the people who are responsible for fixing the aircraft, went out on strike.
And then, the Boeing 737 max groundings occurred after the Ethiopian Airlines Flight ET302 crash.
Southwest basically had plenty of free pilots, cabin crew members and, after resolving the issue with their mechanics‘ union, maintenance personnel. but they were lacking aircraft and the airline was forced to cancel hundreds of flights.
While Southwest eventually resolved their problems, but dry leasing Boeing 737‘s would‘ve been also a choice. they’d the crew, but no aircraft. So, they contact a leasing company for short-term leasing to briefly solve their fleet shortages.
And this is just one example of how a dry lease can help out an airline during a shortage. Dry leasing also works great for the biggest airlines, as they have huge crew facilities and can prepare new recruits to join the corporate on an enormous scale. So, they assure the very best quality of service with their own crew training.
But as I mentioned above, the waiting line for a new aircraft can be up to a few years. If an airline is expanding, time is of the essence. So, the company can opt-in for a long-term dry lease, as they have the crew available.
A damp lease is a mixture of both dry and wet lease. (Hence the name)
When an airline asks for a damp lease, the leasing company loans them out the aircraft, pilots and helps out with the insurance. but agreements differ for a damp lease.
For example, an airline might have plenty of free cabin crew available, as they just hired plenty of new recruits. but they lack the engineering personnel to cover the maintenance operations. So, a damp lease here is perfect – they loan the aircraft, the pilots that come with it, insurance and maintenance personnel, but they don’t need the extra cabin crew, so their lease is cheaper.
So, now that we know the 3 lease types that fluctuate in aviation, we can answer the question: Why would an airline opt to lease an aircraft?
Why do airlines lease aircraft
In short, we can see four definitive reasons why would an airline lease aircraft:
1. The airline doesn‘t have the cash instantaneously. So, they split up the payments for an aircraft and still can operate it fully;
2. a gap in the market has opened up, for instance, once a rival airline has gone bankrupt. The airline needs an aircraft quickly – they could order a brand new one from Airbus or Boeing, but the waiting line is a couple of years. Instead, they lease an aircraft and receive it within a couple of months or perhaps weeks, in the most extreme cases;
3. Unforeseen circumstances like an uncommon amount of aircraft being maintained, fleet groundings or strikes can help the airline stay in control of their own operations with short-term leases.
4. seasonal changes – for the summer they need additional aircraft, while for the winter the same aircraft would sit idle. So, the airline uses a short-term lease to cover its seasonal operations.
So, to sum up, why do airlines lease aircraft – not enough financial resources to buy aircraft, needing an aircraft quickly thanks to numerous circumstances and seasonal changes make airlines consider that they should lease an aircraft.
But what about leasing companies? Are they profitable? how do they make money themselves?
In short, yes, they’re profitable. With aviation booming as it is and passenger numbers rising yearly, airlines do lease more and more aircraft.
According to a KPMG report about the aviation industry leaders, around 15 August 1945 of the global aviation fleet was leased by airlines in 1999.
20 years later, the number has risen to nearly five hundredths. In total, leasing companies around the world own more than 12 000 various aircraft – from the Superjumbo Airbus A380 to small jets like the Bombardier CRJ200.
However, most leasing companies own an enormous amount of narrow-body aircraft like the Boeing 737 or the Airbus A320. they have the largest profit margins for lessors, as when switching operating airlines, preparing a narrow body aircraft is much cheaper than say, a Boeing 787.
But how do these companies make money?
They buy in bulk. for example, according to Airbus, the Airbus A320 price is $101 million. If an airline orders one or 2, they might pay the total price.
If a leasing company comes to an aircraft manufacturer, they’ll make a bulk order. based on the same KPMG report, the current biggest leasing company, GECAS, has 369 aircraft on order. when making a bulk order, the company can negotiate a discount from the manufacturer. As a result, their profit margins are going to be much higher.
A leasing company can decide for how long they will hold on of an aircraft. It varies, but after the life-cycle within the lessor, the aircraft is sold on.
As the aircraft is taken care of properly, they do not depreciate a lot. Thus, the leasing company doesn’t lose a lot of cash after a re-sale.
If a lessor cannot find a buyer, they can simply scrap the aircraft for parts. there’s always an aftermarket for spare parts. while it might not recover the same amount of cash, the corporate still retain some of the value of an aircraft.
Even though the airline industry is growing as fast as ever, there are risks associated with the leasing business.
While demand won’t drop off drastically and will probably keep rising, the number of leasing corporations has also risen massively.
According to Boeing’s market outlook for 2019, in 2002 there were less than one hundred leasing corporations providing their services to airlines. Currently, the number has grown considerably – more than a hundred and fifty lessors provide leases to airlines around the world.
With the overcapacity of the leasing market, a leasing company might operate on ridiculously low-profit margins, simply to compete better. As a result, the large players can lose customers and in turn, money, which might cause bankruptcy.
And bankruptcy is a word that’s often used in aviation, regardless of how unfortunate that’s. for instance, the recently bankrupt Icelandic WOW Air owned a leased Airbus A330. Avolon, the leasing company, could’ve potentially lost money, as WOW Air wasn’t able to totally pay their loan agreements. Also, the aircraft was sitting on the ground – thus not making cash.
So, leasing aircraft to airlines can also be risky – with shifting winds and bankruptcies happening after every winter, a lessor’s aircraft may be spending a lot of time on the ground, rather in the air and making cash.
Hopefully, after this article, you can understand why airlines lease aircraft and how do leasing companies make money, thus explaining the service’s popularity!