How to Evaluate a Business Aircraft Lease Solution

What are the aircraft lease options available today? René Armas Maes shines a spotlight on the leasing market, highlighting which option make sense, for whom, and when…

René Armas Maes  |  05th June 2020
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    René Armas Maes
    René Armas Maes

    René Armas Maes, Vice President, Commercial, Jet Link International LLC, is an international...

    Private jet inside a closed hangar

    In uncertain economic times, leasing a business aircraft could be a short- to medium-term solution for enjoying the many benefits Business Aviation offers at a fraction of the cost. This option comes without substantial debt or longer-term commitments.

    With coronavirus fears prominent regarding the use of airports, travel restrictions, and social distancing recommendations by health authorities, could this be an opportunity for a larger base of users to benefit from Business Aviation?

    Certainly the option of leasing a business aircraft could be very attractive for some. But first, it’s important to understand more about leasing business aircraft.

    What are the Types of Leases?

    The two most common business aircraft lease types are dry and wet leases, though other types exist. We’ll explore these here…

    Dry Lease: Under a dry lease, no flight crew is supplied, and neither are maintenance or insurance providers. These are left to the lessee to arrange. Typically, dry lease contracts range between two to five years.

    Wet Lease: These are intended for shorter periods of between a month and two years. Wet lease contracts include at least one crew, along with maintenance and insurance.

    Capital Lease: A capital lease has the economic characteristics of asset ownership for accounting purposes, and therefore the lessee can take advantage of tax benefits. These type of agreements come with an option to own the asset at the end of the term.

    Operating Lease: Allowing a lessor to take advantage of tax benefits associated with ownership, the operating lease also allows a lessee to eliminate the potential risks associated with aircraft residual values, since at the end of the lease term, the operator hands the aircraft back to the lessor.

    Synthetic Lease: Ultimately, a synthetic lease is an operating lease for accounting purposes and a capital lease for tax purposes. This allows the lessee to take advantage of tax benefits while the lessor remains the owner for accounting purposes.

    While the above list gives a very brief outline of the main types of business aircraft lease, other leasing arrangements could include master leases and sub-leases among others.

    For oversight purposes, aviation regulatory bodies need to understand and clearly identify which party (lessor or lessee) has operational control of the aircraft, and the intended type of operation as d. Different rules apply depending on whether the operation is commercially-oriented (Part 135), privately (Part 91) or both.

    Sale & Lease Back: While it’s a common instrument used by airlines to increase liquidity, corporations or private individuals may also choose to sell their business jets to a lessor or financial institution and lease it back without any interruption to their operations.

    This solution can allow current business aircraft users to continue having access to the aircraft under weaker economic conditions.

    Nevertheless, owners considering this option need to be careful about the timing of the transaction, and the condition of the pre-owned aircraft inventory as a larger than expected loss could be anticipated if market conditions are less than ideal. In such circumstances, it might be better to continue operating the jet than selling and leasing it back.

    Which Aircraft Lease Option Makes Financial Sense?

    Under several circumstances, leasing a business jet can be the right solution. Here are some considerations when deciding whether an aircraft lease makes sense for you…

    Capital Outlay and Cash Flow Requirements: An entity or a private individual might not have the financial strength and desire to purchase a whole jet, but still have the need of flying a number of hours annually.

    A short-term lease is less expensive than outright aircraft ownership, therefore it can be the right solution to preserve cash for working capital requirements while one reinvests financial resource and expands a business where stronger returns can be achieved.

    Flexibility and Peace of Mind: Under a leasing agreement, a lessee has the flexibility to cancel a contract before the term finishes (although penalties will apply), thus enhancing convenience. Moreover, a lease contract can be renewed and an option to purchase the assets at the end of the term can be negotiated.

    Leasing an aircraft is a great opportunity to experience the benefits of Business Aviation before moving up a level into joint or full aircraft ownership. And leasing might be advantageous to those whose requirements could change (in terms of average stage length and mission).

    Taxes, Depreciation and Off-balance Sheet Treatment: As mentioned, capital and synthetic leases allow lessees to take advantage of tax benefits without aircraft ownership. In addition and by using bonus depreciation, the owner of the asset (the lessor) is able to write-off tax depreciation, while the lessees can negotiate and benefit from lower lease rates.

    This lessor write-off can be done not only for new aircraft, but also for pre-owned aircraft acquired and placed into service after Sept. 27, 2017, and before Jan. 1, 2023.

    In addition, based on the latest amendments made to the Financial Accounting Standards Board (FASB), leases with contract terms up to one year can still be treated as off-balance sheet expenses allowing a lessee to treat a lease as an off-balance-sheet item.

    Residual Value Risk: A business jet typically depreciates between 25% and 30% during its first year of operation, and depreciates at a rate of 3-5% per year thereafter. With a leasing contract, there is no risk associated with aircraft residual values as, at the end of the term, the aircraft is returned to the lessor.

    Aircraft residual values can be highly impacted by a number of conditions including the pre-owned aircraft market, fair market values and the timing a jet is put in the market for sale. Because of those uncertainties even in the short-term, leasing an aircraft could be the preferred option for some.

    Technology: At the end of a lease contract, the aircraft can be swapped for a more modern, technologically advanced aircraft.

    When Does an Aircraft Lease Make the Most Sense?

    Typically, leasing a business jet can be an advantageous proposition for corporations and private individuals that fly between 100 and 150 hours (or more) annually, and who seek flexibility and convenience at a reasonable hourly cost, compared to other types of private jet solutions.

    To structure a lease contract, lessors require:

    • A refundable lease security deposit,
    • A monthly lease fee covering indirect operating costs, and
    • An operating hourly fee.

    Other additional fees could include fuel tax surcharge, international fees, etc. In addition, asset return and usage provisions will be included in the contract, as well as reporting requirements (such as flight and block times).

    It’s also important to note that leasing a business jet can also be a solution for current business aircraft owners. A short-term wet lease solution can assist aircraft owners during prolonged Aircraft On Ground (AOG) events, periods of extended maintenance and refurbishment, and even while waiting for an aircraft to be delivered by the manufacturer.

    Figure A highlights when a business jet leasing solution might make sense, based on different users’ needs and wants.

    FIGURE A: Potential Lease Solution vs. User Profile Needs & Wants

    Why Lease Instead of Charter?

    So why lease a jet instead of charter one? Although chartering an airplane could be least expensive option, with a lease solution the jet can be conveniently located at your home airport, thus reducing any repositioning costs.

    Other business jet solutions include fractional ownership, joint or sole aircraft ownership (managed or not), right up to dedicated in-house flight department as shown in the next (see Figure B).

    FIGURE B: Leasing vs. Other BizAv Solutions (Based on Number of Annual Flight Hours)

    Ultimately, leasing agreements are less expensive than outright ownership, dependent on a number of circumstances including aircraft utilization and others). They provide greater liquidity in the short- and medium-term. But over the long run, leasing will generally costs more than whole aircraft ownership.

    It’s important to remember that each solution has its pros and cons, and should be evaluated in terms of upfront cost, long-term commitments, size of debt payment, total hourly cost per option, guaranteed departure at short notice, residual value risk, opportunity cost, and privacy (to name a few).

    You’d be well advised to seek the guidance of an expert in the field to work through your own Business Aviation needs when deciding whether aircraft lease makes sense for you…

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    René Armas Maes

    René Armas Maes

    Editor, Buyer Strategy & Finance

    René Armas Maes, Vice President, Commercial, Jet Link International LLC, is an international aviation consultant and experienced C-Level professional. He has built a successful track record for developing and delivering Business Aviation strategies for Fortune 500 companies, Venture Capital firms, and HNWIs.

    René is a regular columnist for Bloomberg (financial), America Economia (business) and a speaker at aviation conferences worldwide.



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