To lease or to buy? That is a very, very big question. Rohit Jaggi speaks to the industry’s experts to find the pros and cons to each option and find out which is best suited to whom?Back to Articles
Whether you ultimately choose to lease or buy, both will achieve the same short-term goal of placing you in your next aircraft. But they’re hugely different – including in a couple of ways that might be surprising...
In a world where car ‘ownership’ is routinely by personal contract plans that have transformed access to expensive vehicles, ownership might seem a touch old-fashioned. But taking that route still has some compelling reasons.
Choosing between buying and leasing largely comes down to liquidity and opportunity cost. But it can be even more complicated than it appears. As Gary Crichlow, director of aviation finance at London-based finance brokerage and advisory firm Arc & Co, points out, those two options can be subdivided to make four main ways to own your next business aircraft.
As Crichlow says, “All of these options are complex, but option one is generally the simplest because it's essentially two parties – you and your team of experts, and the seller and their team. The other options introduce a third party - the financier - with its own team of experts, and its own requirements.”
Complex Doesn’t Equal Disadvantage
But while they are more complex, Crichlow adds, all the options apart from self-funded outright ownership have a significant advantage. “Rather than locking the client's own cash into a fundamentally depreciating asset, financing frees up that cash to earn a return instead, such as investing in the client's business or in other assets.
“Certainly, with base rates at their current lows, there are some attractive opportunities to finance at the moment.” And here it depends what else you might do with that cash…
A company that generates returns of 5% or more on investments might be best advised to use any cash doing exactly that, rather than sinking it into an asset that loses value. “In my opinion,” Crichlow offers, “the decision to lease, own with financing or own outright, comes down to your comfort level with three considerations: depreciation, liquidation and title security.”
Consideration 1: Aircraft Depreciation
“When talking about aircraft depreciation,” Crichlow continues, “there's depreciation from an accounting point of view and a ‘real market’ depreciation of value. If, based on expert tax advice, there are significant enough advantages to you from the former, and/or you're not bothered about the latter, then ownership could make sense.”
Tax changes in the US at the start of the present administration allow an immediate tax deduction of 100% of the cost of new and pre-owned aircraft – a change that spurred several purchases.
But gone (at least for the foreseeable future, as the world battles a viral pandemic and a contagion in lack of confidence) are the days when early buyers of new models might be able to count on a higher value for their aircraft than they paid. That era, which now seems a long time ago, essentially ended with the global financial crash in 2008, although it took a while for everyone to cotton on to the new reality.
Despite the tax change in the US, prices of used jets have not recovered significantly.
Consideration 2: Liquidation
Liquidation can also be a big issue. “If you own the aircraft, then getting your cash back out of it by selling it will never be a simple exercise,” says Crichlow. “Nor will it be without costs such as broker fees, rectification of issues found by the buyer's pre-purchase inspection, and legal and technical representation fees.
“Furthermore, the value of your aircraft is volatile, subject to market forces well outside your control.” Even at the best of times, it can take months to sell a business jet or turboprop, so any business that relies on tight cash flow into which the sale of the jet has been inserted is optimistically playing with fire.
“A key advantage of an operating lease is that it transfers the hassle of liquidation and the asset value risk from you onto the lessor,” Crichlow points out. “All you have to do at the end of the lease term is hand back the aircraft and walk away.”
Consideration 3: Title Security
Title security is a thorny one that “has both a legal and an emotional component,” says Crichlow. “If you own title to the aircraft, it confers certain advantages in terms of control, but it also imposes certain responsibilities. In leasing an aircraft, these advantages and responsibilities are the lessor’s.
“If your aircraft is financed and you get into financial difficulty, for example, the financier generally has an easier legal basis on which to intervene if they own title as a lessor, than if you own title and their security is via a mortgage.
“Furthermore, many owners simply enjoy the emotional fulfilment of owning title, and this fulfilment can - and often does - trump all other considerations,” he adds.
On the other side of the fence, for several reasons (some of them regulatory), financiers are being quite picky about who they work with. The number of lenders willing to lend you a few tens of million dollars, secured by a mortgage on the jet, is not huge. But the number of finance institutions willing to take on the risks of actual ownership by granting you an operating lease is even smaller.
One of those is Global Jet Capital, which has built up its specialist expertise to the point where it is might even lease you an airplane that you have chosen but few other financiers would touch. The US-based company, which has $2.6bn in assets under management, prides itself on detailed knowledge of the costs and risks involved – and it charges a bit more to make up for the higher risk.
As Vivek Kaushal, president and COO of Global Jet Capital says, “you have to understand the asset.”
Don’t Decide Without Full Knowledge
It will pay to avoid being seduced into too swift a decision on whether to purchase or lease. Crichlow shares, “In my experience, when comparing an operating lease structure to a mortgage for the same aircraft, the headline monthly payment is often higher for the operating lease. This often leads people to dismiss operating leases.
“However, I always advise my clients to consider as well the non-refundable down-payment and balloon payment that many mortgages require, as well as the value of removing the risk and hassle of liquidating the asset, and to determine the financing structure cash flow and risk profile that works most advantageously for their situation.”
The latest plunge in the cost of borrowing, with base rates that have dipped to zero, might sway a decision on whether to own or lease, especially if you need to own your aircraft outright to be able to talk about it as yours.
But if you don’t have the granular knowledge that Global Jet Capital has, or the cash flow to wait out a dip in the market that comes just when you want to sell, then leasing may be a good option.