Aircraft purchase is costly for financially-constrained companies. Also, not all airlines can afford the cash needed for a whole fleet. Aircraft leasing enables such airlines to get into a legal agreement with a leasing company (lessor) for a specific period in exchange for lease payments or rentals.
These payments may be made full-time, meaning all payments are done upfront or on an operating basis, which means the airline (lessee) pays for flight hours utilized only. Aircraft leasing comes in handy for airlines looking to own airplanes without the hefty ownership costs. Discussed below is everything you need to know about aircraft leasing.
1. Aircraft lease types
Different aircraft leasing options have unique regulatory obligations and requirements. They include:
- Wet lease: In this lease type, the lessor doesn’t just offer the aircraft alone and also provide the crew, insurance, and maintenance. This implies that the leasing company (lessor) is liable for flight safety and operation while the airline (lessee) pays for airport fees, hours flown, and fuel. Wet leases are normally short-term and can range from a few weeks to some months. They’re often sought to attain seasonal or temporary demand, begin new markets or routes, or cover maintenance concerns
- Damp lease: Here, the lessor offers the aircraft and part of the crew while the lessee gets the remaining staff, insurance, and maintenance. This implies that the lessee and lessor share some operation expenses and responsibilities based on the contract terms. Damp leases are normally medium-term and range from several months to a few years. They come in handy for airlines looking to train or supplement their crew or to adhere to regulatory requirements
- Dry lease: This is when the leasing company provides the aircraft only, and the airline is responsible for the insurance, maintenance, and crew, meaning the lessee is liable for flight safety and operation, and the lessor gets an hourly or fixed monthly fee. Dry leases are long-term and can be used to renew/ expand the fleet, leverage tax benefits, and lower capital expenditure
2. Benefits of aircraft leasing
Airlines need aircraft leasing for multiple reasons. This practice’s flexibility enables airlines to regulate their fleet composition and sizes depending on market demand, business expansion, and seasonal variations. Aircraft leasing is a cost-efficient alternative to buying because airlines only need to pay for aircraft use, not ownership by lowering depreciation costs and initial capital expenditure.
Aircraft leasing inspires innovation by enabling airlines to access newer, more efficient models. This enhances their performance and customer satisfaction. Leasing is the best option for airlines looking to experiment with expanded frequencies or new routes as it’s low risk. If the trial fails, the aircraft can return to the lessor. With leasing, airlines can minimize their indebtedness, allowing for exceptional financial agility and improved cash retention.
3. Aircraft leasing liability risks
Dry and wet leases include liability risks for the involved parties. However, the risks’ extent and nature vary based on the lease type. For wet leases, lessors are exposed to misconduct or negligent risks by:
- Mechanical failure
- The crew
- Aircraft defect
- Contract breach by the lessee
The lessor might also face third-party claims from airports and passengers for any injuries/ damages the crew or aircraft causes.
In dry leases, lessees are exposed to misconduct or negligence risks by:
- The crew
- Aircraft defect
- Mechanical failure
- Contract breach by the lessor
Additionally, the lessee could face third-party claims for injuries/ damages the crew or aircraft caused.
4. Aircraft leasing liability management
To manage liability risks for operating dry or wet leases, the lessors and lessees must have sufficient insurance coverage, effective communication, and clear contractual terms. The insurance coverage must involve aircraft liability and hull insurance, passenger liability insurance, and crew liability insurance. The contractual terms must specify each party’s obligations, responsibilities, and obligations, plus the process for resolving claims/ disputes. There should be transparent, frequent communication to address lease defaults or disputes arising during the lease time frame.
Wet or dry lease liability risks can also be managed by transferring all or part of it to a third party, like:
- A broker: It’s the company or person that organizes the lease between an airline and a leasing company. They can assume part of the liability for the lease’s performance
- A sub-lessee: This is a company/ individual that leases an aircraft from the leasing company and can assume a portion of the liability for the aircraft use
- An operator: It’s the company or operator that runs the aircraft on the lessor’s or lessee’s behalf. They can take part of the liability for the aircraft’s operation
5. How to choose the best aircraft lease
Selecting the best lease for your airline or company can be challenging. However, considering the following can help.
- Budget
- Operational needs
- Regulatory environments
- Strategic plans
- Availability of resources
You should also consider the potential lessor’s reputation and reliability. Reading the contract’s terms and conditions can help you select a good lease.
Endnote
Aircraft leasing comes in handy for cash-strapped airlines that are unable to finance a whole fleet. Learning everything about aircraft leasing can help airlines make informed decisions.
