Private aircraft provide tremendous benefits to companies who use it for flying their executives for business purpose. Business aviation has demonstrated its purpose in increasing employee productivity. Internationally, cost conscious companies such as Walmart have successfully used a fleet of private jets to fly executives to Walmart stores located in remote parts of US.
However, large companies can afford acquiring private aircraft and have the right expertise to acquire the right aircraft and manage operations. But not all companies can afford to put the 20% down payment required to purchase an asset. In addition, not many companies like to have an expensive asset sit on their books.
Hence an alternative to purchasing aircraft is in leasing it. Leasing of private jets is an increasing trend and is favoured form of finance for many companies who are planning to operate jets for the first time.
What is leasing: There are two types of lease – 1) Wet lease and 2) Dry lease
Wet lease refers to leasing of an aircraft along with its pilots. Hence the company leasing aircraft does not have to bother about hiring, training and licensing issues.
Dry leasing refers to leasing only an aircraft. The company hires and trains its own pilots and associated staff to operate the aircraft.
The company that provides the leased aircraft is called a lessor and the one who operates it is called a lessee.
There are advantages and disadvantages of leasing, depending on the requirement of the company.
1. Reduced Capital – The lessee in the agreement needs to pay the security deposit only, which could be just 3 to 6 months of rental fee instead of making a downpayment which can be equal to 20% of the cost of asset. This significantly reduces the upfront capital requirement which the lessee can use it for working capital payments.
Better planning of operations and maintenance cost. – As the value of the ownership is known to the lessee, he can easily do his monthly cash management and can work efficiently and effectively in running the operations. It helps the lessee to estimate his fixed expenses carefully as the number of hours to fly is clearly defined in the contract by the lessor. This also enables him to plan for his future expansion and increase his revenue over a period.
2. Flexibility to operate – The lessee has enormous flexibility as an operator to decide to continue or close the lease. He has a defined lease period which is generally of five years and has the option of choosing whether he wants to renew it or wish to end the lease. If the business has increased during the lease tenure of his operating the jet, he has the first option to keep enjoying the revenue and extend the lease. However, if if the lessee wants to terminate the lease due to unfavourable business forecast or due to aircraft performance issues, then the company can do so easily within the contractual framework.
3. Ease of managing the asset risk – The asset risk can be effectively managed by the lessee in the case of the lease. The residual risk of the aircraft lies with the lessor rather than the lessee and therefore is a big relief for the lessee. In case the aircraft becomes outdated in the lease period because of some new technology or in case there’s a drop in the price the risk of the onus lies with the lessor and not with the lessee. The lessee has a perfect upper hand in deciding depending upon the prevailing market conditions.
4. Lighter balance sheet – It’s not worth to carry a considerably larger amount of asset of somewhere close to multi-million-dollar in your balance sheet because of just owning a high-value item such as aircraft. As this can potentially impact the debt-to-equity ratio and other relative parameters in the balance sheet. Therefore, it is advisable to go for leasing the high-value items and keep your balance sheet light and luring.
1. The ownership lies with the lessor – Though the operation and the maintenance are managed by the lessee, the ownership of the aircraft lies with the lessor for the contracted duration. Therefore the tax benefits of asset depreciation go to the lessor.
2. Limitations in freedom to use – The lessor is the owner who keeps a close watch on how the lessee is operating the aircraft as per the contract they have made. He has the right to make the lessee abide by the terms and conditions he has accepted while finalizing the lease. From several hours of flying the aircraft to the degree of modifications he can do to the geographical terrains he can fly; the contract restricts all. He cannot alter any of the terms even if a small alteration can lead him to a considerable benefit without resulting in any loss to the lessor.
The cost of capital in leasing is higher as compared to a debt asset loan. Hence the lessee ends up paying a higher rate for the asset as compared to its own asset.
Conclusion – In the airline industry, more than 50% of the airlines use leased aircraft as it helps them avoid making upfront payments, while managing the age of the aircraft and risks associated with the business. Similar benefits accrue to companies which plan to lease business aircraft.
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