David Goodnight based in Austin, Texas explains the types of aircraft financing

May 04 18:46 2022

Secured Commercial: In a basic secured loan structure, a lender makes a loan to an airline or leasing company to purchase an aircraft from a manufacturer or previously owned aircraft. The loan is secured like a mortgage over the aircraft. The airline or leasing company may operate the aircraft or lease it to another party. The main disadvantage is that the loan is on the balance sheet of the airline or leasing company. The various leasing structures explained below are the more favorable routes. Please note that no single solution is right for every situation. Balance, sheet, management team, credit rating, collateral, contracts, routes, insurance, etc. all play a role in which to select. Many airlines and leasing companies use and/or offer all of the below and some bespoke systems that we specialize in. 

Operating leases: An owner or lessor acquires or owns aircraft that it leases to an airline or other lessee, retains substantially all the risks and rewards incident to the ownership of the aircraft, and regains possession of the aircraft at the end of the lease term. Re-leases or sells the aircraft once it is returned by the previous lessee. There are two types of operating leases. A “dry lease” in which the owner or lessor only provides the aircraft and the lessee is responsible for operating, maintaining, insuring, and providing a crew for the aircraft. A “wet lease” in which the owner or lessor retains operational control of the aircraft, operates flights for the airline, maintains, provides the crew, and secures insurance for the aircraft.

Finance leases: An owner or lessor buys an aircraft from a manufacturer that it leases to an airline or other lessee and structures the lease so that monthly/quarterly payments return all or substantially all of the purchase price, and the lessee is commonly required to purchase aircraft at the end of the term. The risks and rewards incident to the ownership of the aircraft is transferred to the airline or lessee.

Leveraged leases: A leveraged lease is similar to a finance lease except that in these transactions, lenders provide the owner or lessor with loans to cover a portion of the acquisition cost. The balance of the aircraft’s cost is provided by the new owner. The lender will typically carry a first priority lien on the aircraft and rights to receive payment from the lessee.  The owner can claim all of the tax benefits associated with the asset. These loans are commonly non-recourse. The airline or lessee can claim the full amount of lease payment as expenses. In the case of a default, the lender can step in and foreclose on the aircraft.

Leaseback: An airline sells either a used aircraft or its right to purchase a new aircraft from a manufacturer to either a leasing company or an SPV lessor. The airline then leases the aircraft back from that entity. Sale leasebacks are often used when an airline needs the flexibility to manage its fleet financing.

Export Credit Agency: EC Agency financing promotes the export of aircraft by directly financing or guaranteeing the purchase of aircraft by foreign buyers. In an ECA transaction, the ECA can make a direct loan or provide a guarantee made by other lenders to an owner or lessor to finance the purchase from a manufacturer. David Goodnight of Austin, Texas would like to note that this type of financing is only available for new aircraft and state-owned airlines would likely be required to provide a sovereign or Ministry of Finance guarantee.  

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