This action might not be possible to undo. Are you sure you want to continue?
Complex aircraft finance (such as those schemes employed by airlines) shares many characteristics with maritime finance, and to a lesser extent with project finance.
Financing for the purchase of private aircraft is similar to a mortgage or automobile loan. A basic transaction for a small personal or corporate aircraft may proceed as follows: 1. The borrower provides basic information about themselves and their prospective aircraft to the lender.
2. The lender performs an appraisal of the aircraft's value. 3. The lender performs a title search based on the aircraft's registration number, in order to
confirm that no liens or title defects are present. In many cases, a title insurance policy is procured to protect against any undetected defects in title. 4. The lender then prepares documentation for the transaction:
○ ○ ○
A security agreement, which establishes a security interest in the aircraft, so that the lender may repossess it in the event of default on the loan A promissory note, which makes the borrower responsible for any outstanding loan balance not covered by repossession of the aircraft If the borrower is deemed less credit-worthy, a surety from a third party (or from multiple third parties)
5. At closing, the loan documentation is executed and funds and title are transferred.
 Commercial aircraft
Aircraft are expensive. A Boeing 737-700, the type Southwest or Ryanair uses, is priced in 2008 USD in the range of $58.5 - $69.5 million  (although very few airlines actually pay this much). Airlines also typically have low margins so very few airlines can afford to pay cash for all their fleet. Commercial aircraft, such as those operated by airlines, use more sophisticated leases and debt financing schemes. The three most common schemes for financing commercial aircraft are secured lending, operating leasing and finance leasing. However, there are other ways to pay for the aircraft: 1. Cash 2. Operating leasing and sale/leasebacks 3. Bank loans/finance leases 4. Export credit guaranteed loans 5. Tax leases 6. Manufacturer support 7. EETCs These schemes are primarily distinguished by tax and accounting considerations, particularly tax-deductible depreciation, interest and operating costs which can reduce tax liability for the operator, lessor and financier.
operating leases may be the only way for an airline to acquire aircraft.g. most direct lending for aircraft purchases is accompanied by a security interest in the aircraft. the resulting drop in depreciation "expenses" caused the company's reported profits to rise by DM392 million. Because the cost of a commercial aircraft may be hundreds of millions of dollars. The owner may require that the aircraft be returned in the same maintenance condition (e. which can obtain aircraft less expensively through other financing methods. Direct lending As described above for private aircraft. or spread out depreciation costs to improve their bottom line. Lufthansa adjusted its accounting to depreciate aircraft over 12 years instead of 10 years. Conversely. JAL made a similar adjustment in 1993. In such large transactions. it provides the flexilibility to the airlines so that they can manage fleet size and composition as closely as possible. a wet-leased aircraft operates as part of the leasing . making them attractive when aircraft are needed for a start-up venture. certain governments finance the export of domestically-produced aircraft through the Large Aircraft Sector Understanding (LASU). in which the aircraft is leased together with its crew. post-C check) as it was delivered. Such leases are generally on a short-term basis to cover bursts in demand. an airline may simply take out a secured or unsecured loan to buy a commercial aircraft. prior to the advent of commercial aircraft leasing in the 1980s. Like leases in other fields. These terms are often less attractive for larger operators. the former Soviet Union). However. By directly owning their aircraft. although some sensitivity still exists.g. in 1992.  Operating leasing Commercial aircraft are often leased through a Commercial Aircraft Sales and Leasing (CASL) company. a security deposit is often required.6 million. an established carrier with high equity and a steady cash flow). so that the aircraft may be repossessed in event of nonpayment. the two largest of which are International Lease Finance Corporation (ILFC) and GE Commercial Aviation Services (GECAS). On the other hand.g. a syndicate of banks may collectively provide a loan to the borrower. For instance. so as to expedite turnaround to the next operator. airlines may deduct depreciation costs for tax purposes. or for the tentative expansion of an established carrier. leases offer additional flexibility in this area. The short duration of an operating lease also protects against aircraft obsolescence. and the option to "lock in" an interest rate up to three months prior to taking out the loan. This interstate agreement provides for financing of aircraft purchases at 120 to 175 points over prime rate for terms of 10 to 12 years. unless the borrower is deemed particularly creditworthy (e. One particular type of operating lease is the wet lease. It is generally very difficult for borrowers to obtain affordable private unsecured financing of an aircraft purchase. an important consideration in many countries due to changing noise and environmental laws. causing the company's profits to rise by ¥29. and have made airlines increasingly less sensitive to cost and revenue fluctuations. privatelyowned airlines were highly vulnerable to market fluctuations due to their need to assume high levels of debt in order to purchase new equipment. In some countries where airlines may be deemed less creditworthy (e. expanding and contracting to match demand. the aircraft's residual value at the end of the lease is an important consideration for the owner. Moreover. Operating leases are generally short-term (less than 10 years in duration). Unlike a charter flight. such as the Hajj pilgrimage.
and is tax-exempt so long as at least 50% of the aircraft is made in the US. although it often retains the livery of its owner. on condition that the airline will receive title upon full performance of the lease. in the US.  Finance leasing Finance leasing. This has made aircraft a popular form of tax shelter for investors. In the UK. ETCs blur the line between finance leasing and secured lending. The various forms of finance leasing include: • Equipment trust certificate (ETC): Most commonly used in North America. some operating lease expenses can be capitalized on the company's balance sheet. US leveraged lease: Used by foreign airlines importing aircraft from the United States. every three years). a Foreign Sales Corporation (FSC) purchases and leases the aircraft. The operator may have the option to purchase the aircraft at the expiration of the lease. and created a burden to the leasing companies. often a special purpose company (SPC) or partnership. they have only been used for very expensive aircraft being operated entirely outside the US. Because of the extensive documentation required for these leases. the lease can also be conceptualized as an operating lease. it must be counted as an asset of the company. a finance lease is generally defined as one in which the lessor receives substantially all rights of ownership.carrier's fleet and with that carrier's airline code. and in their most recent forms have begun to resemble securitization arrangements. If a lease is defined as a finance lease. in contrast to an operating lease which only impacts the company's cash flow. purchases the aircraft through a combination of debt and equity financing. A trust of investors purchases the aircraft and then "leases" it to the operator.The operating lease can affords the airlines flexible to change the fleet size. Extendible operating lease: Although an EOL resembles a finance lease. also known as "capital leasing.g. such as Boeing 747s purchased for domestic routes within Japan. Under American and British accounting rules. and at least 50% of its flight miles are flown outside the US. similarly to fuel or wages. Finance leasing is attractive to the lessee because the lessee may claim depreciation deductions over the aircraft's useful life. In a US lease. the lessee generally has the option to terminate the lease at specified points (e." is a longer-term arrangement in which the operator comes closer to effectively "owning" the aircraft. and then leases it to the operator.  US and UK accounting rules differ regarding operating leases. in which the operator sells its own aircraft for cash. Whether EOLs qualify as operating leases depends on the timing of the termination right and the accounting rules applicable to the companies. A related concept to the operating lease is the leaseback. or in which the present value of the minimum lease payments for the duration of the lease exceeds 90% of the fair market value of the aircraft. It involves a more complicated transaction in which a lessor. and then leases the same aircraft back from the purchaser for a periodic payment. operating lease expenses are generally reported as operating expenses. thus. which offset the profits from the lease for tax purposes. • • . or may automatically receive the aircraft at the expiration of the lease. and deduct interest paid to those creditors who financed the purchase. and has also made finance leasing a cheaper alternative to operating leases or secured purchasing for many operators.
and the Japanese investors are exempt from taxation on their investment. a locally-incorporated lessor acquires an aircraft through a combination of non-recourse debt. Widebody aircraft are leased for 12 years. where income taxes are low in comparison to other countries. Its high tax losses can then be set off against profits from leasing the aircraft to a local carrier. in which the investors' liability is mainly limited by insurance and by contract with the operator. leveraged leasing to local operators is common. JLLs were encouraged in the early 1990s as a form of re-exporting currency generated by Japan's trade surplus. • . recourse debt and equity (generally in a 49-16-35 proportion). Under a JLL. and thus be able to claim depreciation allowances despite only being liable for half of the purchase price.• Japanese leveraged lease: A JLL requires the establishment of a special purpose company to acquire the aircraft. Hong Kong leveraged lease: In Hong Kong. and at least 20% of the equity in the company must be held by Japanese nationals. In such transactions. while narrowbody aircraft are leased for 10 years. Due to local tax laws. these investments are set up as general partnerships. the airline receives tax deductions in its home country.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.