There are a few strong reasons to do this. The first one is that it could work out to be cheaper for airlines. If an airline plans to use its planes for decades to come as many airlines do , buying the plane gives them a lot more flexibility and allows them to sell the aircraft in the future for increased capital. During a crisis, like the one in , airlines can use their planes as collateral for a loan.
Clearly, there are many compelling reasons for airlines to lease their planes rather than buy them. As aviation slowly rises from its current crisis, it will be interesting to see if airlines opt to purchase planes in the future or lower costs and lease them instead.
Lead Journalist - India - Pranjal is an experienced journalist with a strong focus on Indian aviation. His background in political science and economics gives him unique insight into issues surrounding international travel and governmental regulations. Pranjal is enthusiastic about new aircraft types and has his stories regularly picked up by renowned publications including Forbes. The number of people travelling by air has continued to increase, despite the recent slowdown in the global economy and other seemingly negative outside influences.
According to the International Air Transport Association, the air travel industry has a long-term annual growth rate of 5. Boeing, the plane manufacturer, expects air traffic growth of more than 4. It also predicts that the global fleet size will double. Rising incomes and a growing middle class in emerging markets will likely continue to be the biggest drivers of growth. While these figures bode well for airlines, buying planes is an expensive business.
One of the biggest sources of airline financing used to be bank debt, often from European commercial banks. But funding from this source began to dry up in the aftermath of the financial crisis. Global economic uncertainty and the European sovereign debt crises caused some banks to leave the market completely.
This type of financing became even less common after banks began to reduce the amount of debt on their balance sheets, partly as a result of new regulations. Other kinds of aircraft financing, such as the operating lease structure, therefore became more popular.
Under this kind of agreement an airline rents a plane for an agreed period of time from a leasing company. The leasing company that owns the aircraft the lessor has sole claim to it. Meanwhile, the airline lessee pays for the right to use it. If market conditions are favourable when the lease expires, the airline can try to negotiate a new lease. If they are not, it can return the aircraft.
Leasing companies take on two risks. The first is that the airline will remain creditworthy. The second is that the second-hand value of the plane will meet expectations. The reward for taking on this risk is that the total amount paid to borrow the aircraft is more than the cost of buying it outright. The most common reason for such transactions is to free up capital and obtain cash.
Agreements as such, happen quite regularly historically. Financially troubled carriers are more likely to do such deals, as cash becomes more valuable for their short term survival.
Over the coming months, we could see a significant amount of such deals taking place. Their size and will only be constrained by the financial stability of the leasing companies. With airlines desperately grasping for cash, leasing firms with strong books can score some very beneficial contracts. Under normal circumstances, leasing allows airlines to reduce their indebtedness, cash retention, and greater financial agility.
It is the only fleet financing solution that allows a dynamic expansion without huge capital expenditures, which many airlines have recently benefitted from.
If leasing provides airlines with so many benefits, why would any airline even consider purchasing aircraft on their own? Well, actually, owning aircraft makes sense too. Firstly, once the airplane gets grounded, either due to a network planning issue, or a global pandemic, the airline does not have to continuously pay for its lease, as it owns it outright.
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