It’s a recurring question among the general public when the media talk about the financial performance of airlines: how can an airline be valued at less than its fleet (which is the case for most of them!)?

And the question arose in the same way during COVID: why don’t the airlines sell their planes to survive? In this particular case, it would have been pointless because none of them could afford to buy, especially as they all had excess capacity compared to demand. But under normal circumstances the question would have been relevant. When you owe a billion euros and have a fleet of A320s (€100 million each at list price) and B777s (€320 million at list price), even used ones, there may be a way to make a little money flow into the coffers.

Well, in both cases the answer is the same: because most of the time, airlines don’t own their planes. So it’s not an asset that can influence their valuation (even if it is a production tool) and even less an asset that can be sold!

In this article:

How do airlines finance their aircraft?

How does leasing work for airlines?

Why do airlines use leasing?

Wet Lease, Dry Lease: the different forms of leasing

The limits of leasing in the airline industry

How important are leasing and lessors in the airline industry?

Bonus: financing method has an impact on aircraft registration

How do airlines finance their aircraft?

The airlines aren’t that different from us, they just play with larger amounts of money.

When you want to buy a car, you have 3 options:

1°) You pay cash

2°) You loan from your banker

3°) You rent, otherwise known as a rent with buying option You rent the car for a certain period, after which you either buy it or return it.

Airlines face the same alternatives. Except for a few details.

Cash payment is not an option: when you have to renew a fleet of 50 long-haul aircraft at 250 million a piece, that’s 13 12.5 billion to be paid out. Forget about it, even if aircraft manufacturers do in fact offer generous discounts on the list price.

The bank? Why not, but you’re in a cyclical business, subject to recurring crises, with high capital requirements and low margins. Assuming that only the rich get loans… And if you don’t pay, your bank has no desire to end up with a fleet of A320s in its hands. Getting your apartment with a view of the Eiffel Tower back if you default on your mortgage is one thing, but a fleet of planes is another.

Then there’s leasing.

How does leasing work for airlines?

It’s a bit like leasing your car. Except we’re talking about dozens or hundreds of very expensive cars.

The airline will lease its aircraft for a period of say 20 years. At the end of 20 years, it can either buy them for a residual price, or return them to the lessor to buy more modern, more efficient, more cost-effective ones. If it returns the aircraft, it will either be leased back or sold to a second-tier airline happy to get its hands on a twenty-year-old aircraft for a good price. In the meantime, if our airline suffers a reversal of fortune – as happened during the COVID crisis, but also to many other struggling airlines before it – returning the aircraft to the lessor will not bring in new money, but it will reduce costs.

It’s a good deal for the airline, which smoothes out its operation over a long period and often pays less than if it had bought the aircraft itself. Why is that?

Because if it goes to Airbus to buy 20 planes, it will get a discount. But if the lessor buys 300 units, he’ll get an even bigger discount, which will be reflected in the rent. It also suits Airbus because the lessor is more solvent and less risky than an airline. An airline may have one problem, but the lessor averages its risk over several. In short, the aircraft manufacturer gains a little more security too.

The airline saves cash by leasing for less over a longer period, and the lessor earns money from the lease payments and, of course, by selling the aircraft at the end of the cycle, since a well-maintained aircraft ultimately depreciates very little. What if it doesn’t find a buyer (try selling a used A380 today…)? Well, the aircraft will be scrapped and its parts resold as spare parts.

Why do airlines use leasing?

We’ve already answered part of the question, but it’s important to understand the needs of each airline depending on its context. Leasing is an attractive option for airlines.

1°) If it doesn’t have the money to buy its aircraft in cash.

2°) It wants to take advantage of the market growth. Imagine, for example, that tourism suddenly takes off in a region, or that a series of bankruptcies creates opportunities for airlines that can quickly replace the failing ones. At this stage, it is possible to place an order with Boeing or Airbus and wait years for delivery, or go through a lessor who has the aircraft in stock or on order and will deliver within a few weeks or months.

3°) An unusable fleet. For example, if you have a fleet of 737 Maxes, they may be grounded indefinitely, but in the meantime you have your slots and crews that you pay. In this case, a short-term leasing arrangement will enable you to continue operating.

4°) Its activity is seasonal. For example, if you operate flights in a tourist region, with high demand in summer and low demand in winter… it’s in your interest to own the minimum number of aircraft needed, and lease the others for the season.

Wet Lease, Dry Lease: the different forms of leasing

Unlike leasing your car, air leasing comes in a variety of forms, because, as we’ve seen, it can be used for both long- and short-term needs. So there are different types of leasing.

First of all, the “Wet Lease“. In this case, the lessor provides you with everything: the aircraft, the pilots, the crew, and sometimes even takes care of maintenance. This is the solution for airlines with localized, seasonal operations. Few aircraft and crews in the low season, and aircraft and crews leased in the high season, giving them great flexibility and enabling them to make most of their costs variable.

Then the “Dry Lease“. This is the solution adopted by all the major airlines. They only rent the aircraft, as they have their own crews, whom they train, and are keen to ensure a constant level of service quality. They cannot afford to operate with crews that are not their own. Dry Lease can therefore be useful for these airlines in the long term, or in the short term when they are short of aircraft but still have the crews (the 737 Max crisis, for example).

The “Damp Lease“. As the name suggests, it’s a mixture of the two, a sort of à la carte leasing, with sometimes only the pilots, sometimes only the maintenance, sometimes the crew and maintenance but not the pilots…

The limits of leasing in the airline industry

But leasing is not all good news, especially when it comes to coping with financial difficulties. Yes, an airline can’t sell aircraft it doesn’t own, but that also prevents it from getting loans.

When you loan money, you pledge assets as collateral. If you don’t own anything, you can’t get a loan. This is one of the reasons why, during the COVID crisis, American airlines used their loyalty programs and not their aircraft to raise money.

How important are leasing and lessors in the airline industry?

According to Statista, while in 2000 only 24% of aircraft were leased, today 46% of the world fleet is owned not by airlines but by lessors.

A trend that’s constantly growing. In 2021, according to Reuters, lessors will finance more than 50% of aircraft purchases worldwide, meaning that for the first time in history lessors will buy more aircraft than airlines.

The biggest of these you’ve probably never heard of are the owners of the aircraft you’ve flown on:

Note: AerCap and GECAS are in the process of merging.

By way of comparison, before the crisis, Air France and KLM combined “weighed” 554 aircraft.

While Ryanair owns all its aircraft, before the crisis Air France owned just 40% and Alitalia 10%. half of Emirates’ A380s are also leased.

And if you want to know who owns the French-registered aircraft you’re boarding, you can use this civil aviation website. Enter the plane’s registration and find out who owns it. For example, the Air France F-GKXN that took me from Bordeaux to Paris this autumn belongs to XLease.

For foreign aircraft, you’ll need to go to the website of the authority in the country of registration, such as the FAA in the USA.

Bonus: financing method has an impact on aircraft registration

You’ll see that all French airlines have aircraft with F-xxxx as the first letter of their registration. This is because France requires a French airline to operate only French-registered aircraft. But that’s not the case in all countries.

So you’ll see a lot of foreign airline aircraft with EI-xxxx registrations, i.e. in Ireland. For tax reasons? Not just that.

In the event of bankruptcy, some countries protect lessors less than others. The Cape Town Convention (2001) protects aircraft owners in the event of airline bankruptcy: they can easily recover their aircraft. But not all countries have signed the agreement (France, Italy, Germany, etc. are all signatories), so when an airline in one of these countries leases an aircraft, and unless, as in France, the law requires it to be registered in the country concerned, the lessor will ask them to register their aircraft in a signatory country such as Ireland, so as to recover them more easily in the event of a problem. But we’ve already explained all this to you in an article on aircraft registrations.

Bottom line

Today, more than half of all aircraft purchased are no longer by airlines, but by lessors, who then lease them to airlines.

Image : planes in single file by heychli via Shutterstock

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