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How does the airplane leasing business work?

Why do airlines buy en sell them to a leasing company and then lease it back? - Quora

16/06/16, 11:01 AM

How does the airplane leasing business work? Why do airlines


buy the planes, then sell them to a leasing company and then
lease it back?
It's like house renting business, except that your tenants are airliners and they will
always pay on time. Various safety and legal agencies will make sure that they maintain
your planes well and they lease for long time like 5-15 years. You don't have to
advertise as there will always be demand. There is low competition and high entry
barriers for new players. You don't have to maintain the planes or care about fuel costs.
And if your plane crashes then insurance companies will compensate you with more
money.
There is almost no legal liabilities and low business risk. Common people don't even
need to know that you or your company exists. Although, if you are a plane lover like
me, then you can brag that you own thousand jumbo jets. In-fact, Plane manufacturing
companies like Boeing and Airbus will consult you first before designing a new
airplane. Does that sound like a good business idea? (Except that you would need
loads of initial investment just like any other rental business)

Why do airlines need to lease planes?


Nearly half of the passenger airplanes flying today are leased by the airlines from big
plane leasing companies. The main reason is because it's cheap.
Economic Uncertainty and flexibility
Let's take an example, of lets say "Quora Airways". They purchased 5 aircraft from
Boeing for 500 million dollars, but due to their superior services(compared to yahoo
air) and due to the vacation season (especially in India), they now have enough
demand to have 9 aircraft in service, but they can't buy new planes as they had put all
their money in buying 5 planes.

https://www.quora.com/How-does-the-airplane-leasing-business-worklanes-then-sell-them-to-a-leasing-company-and-then-lease-it-back

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How does the airplane leasing business work? Why do airlines buy en sell them to a leasing company and then lease it back? - Quora

16/06/16, 11:01 AM

Image: It was made in 2 minutes for fun, so no judgments -_This is where a leasing company can be the airlines best friend. They can step in and
cheaply (relative to buying an aircraft) provide them with aircraft to cater for the spike
in demand.
Conversely, lets say it is off season and the demand fell. Now Quora Airways only
needs 3 aircraft for the next two seasons. If they own the 5 aircraft they would find
themselves in a major problem, trying to fill the aircraft or lease them out.
However if their fleet was composed of a few leased aircraft, they could arrange for the
early return of the aircraft, and with some penalty payments, solve their capacity crisis.
The total Investment capital that went into AirAsia India was around $100 million, they
have a fleet of 5 A320s which would have costed them $100m per plane if they had
purchased it instead of leasing.
Price

Airplanes are very expensive. New airlines cannot afford to invest such large amount
of money in buying planes. Existing airlines may not want to put all their money into
buying one aircraft. Instead they can operate 10 aircraft on lease and focus on growth.
Take a look at the price chart of Boeing's planes. Big lessors purchase planes in large
quantities (about 50 to 250) even before the first plane of that model is manufactured.
Such lessors can get as much as 70% off on each plane. These deals happen privately,
so I don't have much of a proof.

https://www.quora.com/How-does-the-airplane-leasing-business-worklanes-then-sell-them-to-a-leasing-company-and-then-lease-it-back

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How does the airplane leasing business work? Why do airlines buy en sell them to a leasing company and then lease it back? - Quora

16/06/16, 11:01 AM

Here is a table indicating the alleged discounts offered on various models.

https://www.quora.com/How-does-the-airplane-leasing-business-worklanes-then-sell-them-to-a-leasing-company-and-then-lease-it-back

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How does the airplane leasing business work? Why do airlines buy en sell them to a leasing company and then lease it back? - Quora

16/06/16, 11:01 AM

Types of Leasing

1. Dry Lease

The lessor provides an aircraft without insurance, crew, ground staff, supporting
equipment, maintenance, etc. It is all the airliners responsibility.

2. Wet Lease

The lessor provides an aircraft, complete crew, maintenance, and insurance. It is

more like a charter plane, but with your logo on it.


3. Damp Lease

A damp lease is similar to a wet lease but leasing company won't provide the

cabin crew services.


4. Sale and lease back

An airline which has bought an aircraft, sells the aircraft to a leasing company at
current market price and immediately leases the same aircraft back. Airliners

https://www.quora.com/How-does-the-airplane-leasing-business-worklanes-then-sell-them-to-a-leasing-company-and-then-lease-it-back

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How does the airplane leasing business work? Why do airlines buy en sell them to a leasing company and then lease it back? - Quora

16/06/16, 11:01 AM

typically purchases 100s of planes in bulk and sells them to banks and then
leases them back. As aircraft are owned by a lessor, an airline can save on the
depreciation provision, which increases profit and saves tax.
For example, Air India did this with their new 787s.
Air India's flawed sales and lease-back strategy for its 787 Dreamliners Bangalore Aviation

In 2013, when every Indian airliner was making 100s of crores of loss, Indigo airlines
made 6 fold profit by cleverly using sale and leaseback model. Although their CEO
denies it and says that "focusing on the product and services" is the reason, I believe
the reason for such profits is the sale and lease back model.
What I think is the reason for Indego's success?
1. They always buy in bulk. In 2005 when they started operation, they had
purchased 100 A320s. In 2011, IndiGo had placed another large order for 180
A320neo aircraft, valued at $15 billion. Recently they had placed an order for
250 A320neos, valued at $25.70 billion (Rs.1.50 lakh crore) at catalogue price. It
is the largest plane purchase order ever. They must have got 60-70% off for such
https://www.quora.com/How-does-the-airplane-leasing-business-worklanes-then-sell-them-to-a-leasing-company-and-then-lease-it-back

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How does the airplane leasing business work? Why do airlines buy en sell them to a leasing company and then lease it back? - Quora

16/06/16, 11:01 AM

bulk orders.

2. They always go with 'sale and lease back model' when the planes are delivered
and sells them for a profit.
3. They only buy one type of airplane.( brand new A320neos)
4. They save on fuel as they only use most efficient new planes.
5. They only have economy class and provide descent services at low cost.
6. They always retire their planes at the end of 6years to probably avoid
maintenance costs.

Which are the top plane leasing companies?


You may be surprised to find out that Ireland is the hub of aircraft leasing business.
Nine out of the top 10 leasing firms in the world operate from here. This is mainly due
to tax benefits.
GE Capital Aviation Services:- They own 1700+ big planes and is the biggest leasing
company. (Just for a reference, Boeing have made 1508 Boeing 747s since 1967)

International Lease Finance Corporation :- A company founded by Steven UdvarHazy. They own nearly 1000 big passenger planes. If you are interested then you can
read his story here - "The Real Owner of All Those Planes"
SMBC Aviation Capital :- 350+ planes
AWAS :- They own 250+ planes
FLY Leasing :- They own 125+ planes
There are 100s of other companies in plane leasing business. It is more profitable and
easier to run a leasing company than to run an airliner (provided that you have loads of
money for investment :p )

What are the risks involved?


Asset recovery risk
https://www.quora.com/How-does-the-airplane-leasing-business-worklanes-then-sell-them-to-a-leasing-company-and-then-lease-it-back

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How does the airplane leasing business work? Why do airlines buy en sell them to a leasing company and then lease it back? - Quora

16/06/16, 11:01 AM

If the airline goes bankrupt, the lessor faces a huge risk in retriving their aircraft in
good condition.
For example, ILFC was the main lessor of Kingfisher Airlines, a regional airlines based
in India. When Kingfisher went bankrupt, ILFC had to seize most of their planes in bad
operating condition due to poor maintenance. Some planes could not even be flown as
many of their parts were scavenged to repair other planes.
Some aircraft were so badly cannibalized that they can only be sent to scrapyard.
Although rare, but this is the biggest risk in this business.
Kingfisher Airliness 15 leased planes may land in scrapyards - The Times of India
Short Leases

Long leases are better for the lessor than shorter ones. The fewer changeovers an
aircraft does during its life the better! The lessor may have to reconfigure the seating
arrangements and such customization according to the preference of the new
operator. This can cause unnecessary costs.
Transition Time

The lessor earns no revenue during the transition time between the previous and new
operators.
Currency fluctuations

Since leasing rate is fixed for a long time, any fluctuations in the value of currencies
involved may cause loss to either lessee or the lessor.
Bad lessees

Even though there are many laws to safeguard lessors, some airliners (like Kingfisher
airlines) might not maintain your aircraft as agreed, or simply not pay. If this happens
then the lessor may have to negotiate with the airline for an early return, or if the
relationship becomes hostile, then an international seizing operation might have to be
done.
Long term investment

Just like any other rental business, it takes 8 to 15 years for the plane to break even
and make profit for the lessor. An average jet have a lifespan of about 25 to 35 years
after which it may be sold to low budget airlines operating from poor countries or it is
sent to scrapyard.

https://www.quora.com/How-does-the-airplane-leasing-business-worklanes-then-sell-them-to-a-leasing-company-and-then-lease-it-back

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How does the airplane leasing business work? Why do airlines buy en sell them to a leasing company and then lease it back? - Quora

16/06/16, 11:01 AM

Sources
Lessor trouble mounts for Kingfisher Airlines
Aircraft lease
About Boeing Commercial Airplanes
The secret of Indigos consistent profits
Competition between Airbus and Boeing

https://www.quora.com/How-does-the-airplane-leasing-business-worklanes-then-sell-them-to-a-leasing-company-and-then-lease-it-back

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