Austin, Texas-based David Goodnight explains the types of aircraft financing
Safe trade: 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 an aircraft it previously owned. The loan is secured as a mortgage on the aircraft. The airline or leasing company can 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 different rental structures explained below are the most favorable routes. Please note that no single solution is suitable for all situations. The balance sheet, balance sheet, management team, credit rating, guarantees, contracts, routes, insurance, etc. all play a part in the selection. Many airlines and leasing companies use and/or offer all of the systems below and some bespoke systems that we specialize in.
Operating leases: An owner or lessor acquires or owns an aircraft that it leases to an airline or other lessee, retains substantially all the risks and rewards of ownership of the aircraft, and repossesses the aircraft upon 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 “dump lease” in which the owner or lessor provides only the aircraft and the lessee is responsible for the operation, maintenance, insurance and provision of a crew for the aircraft . A “wet lease” in which the owner or lessor retains operational control of the aircraft, operates the flights for the airline, maintains, provides crew and purchases insurance for the aircraft.
Finance lease: An owner or lessor purchases an aircraft from a manufacturer and leases it to an airline or other lessee and structures the lease so that monthly/quarterly payments bring in all or nearly all of the cost of purchase, and the lessee is generally obligated to purchase the aircraft at the end of the term. The risks and rewards of aircraft ownership pass to the airline or lessee.
Leveraged leases: A leveraged lease is similar to a finance lease, except that in these transactions, lenders give the owner or lessor loans to cover part of the cost of acquisition. The balance of the cost of the aircraft is provided by the new owner. The lender will generally bear a first lien on the aircraft and the right to receive payment from the lessee. The owner can claim all tax benefits associated with the asset. These loans are generally non-recourse. The airline or renter may claim the full amount of the rental payment as expenses. In the event of default, the lender can step in and seize the aircraft.
sale-leaseback: An airline sells either a used aircraft or its right to purchase a new aircraft from a manufacturer, a leasing company or an SPV lessor. The airline then leases the aircraft to that entity. Sale-leasebacks are often used when an airline needs flexibility to manage its fleet financing.
Export Credit Agency: EC Agency funding promotes the export of aircraft by directly financing or guaranteeing the purchase of aircraft by foreign buyers. In an ECA transaction, the ECA may 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, is keen to point out that this type of financing is only available for new aircraft and that state-owned airlines would likely be required to provide a sovereign or Treasury Department guarantee.