Aviation Finance Options – Part 2: Aviation Financing Options
Part 2 of our Aviation Finance briefing discusses the various options available to parties for financing.
Under English law, a lease of goods is simply a hire contract whose essential characteristic is that goods are bailed by one party (A) to another party (B) for party B’s use or enjoyment in exchange for payment of rent. A simple hire contract is distinguished from a hire purchase contract and a conditional sale agreement in that party B has neither the option, nor the obligation, to purchase the goods, but is required to return them to party A, or deal with them as party A directs, when the bailment comes to an end.
In aircraft finance transactions, this type of lease is usually referred to as an operating lease (and sometimes a dry lease).
From an economic and accounting perspective, under an operating lease it is the owner of the aircraft (generally, a leasing company) who retains substantially all of the risks and rewards relating to the ownership of the asset and, therefore, wants to preserve the future value of the asset and its earning potential. As a result, covenants relating to matters such as maintenance are usually more stringent in an operating lease than in alternative aircraft finance structures where the airline ultimately acquires the aircraft.
The benefits to an airline of using an operating lease to finance the acquisition of an aircraft include:
• The airline has the use of the aircraft without having to record the aircraft on its balance sheet (although note that the International Accounting Standards Board has published proposals that will reverse this.
• Greater business flexibility because operating leases can be short term and so provide the airline with greater capacity as and when required (for example, charter airlines need more aircraft in the busy summer season but fewer aircraft at other times of the year).
For a diagram of a typical asset finance lease structure please email our aviation team on firstname.lastname@example.org for a copy.
The key feature of a finance lease (and what distinguishes it from an operating lease) is that, at the end of the lease term, the airline becomes the owner of the aircraft. In many respects, a finance lease is much more similar to a bank loan than an operating lease.
Where the finance lease is for a new aircraft, it is usually the airline that selects the aircraft, enters into the contract with the manufacturer and supervises the construction process. For operating leases, this process is usually led by the leasing company.
For more information on finance leases please email our aviation team on email@example.com for a copy.
If an airline uses a loan to acquire an aircraft then, once the airline has paid the purchase price of the aircraft to the manufacturer (using funds drawn down under the loan, usually combined with its own funds), the airline owns the aircraft. This is a similar situation to a finance lease but the airline owns the aircraft from the outset rather than only becoming owner at the end of the lease term.
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