Global fuel prices of over $120/bbl are forcing airlines to further seek for more efficient aircraft thus contributing to yet another wave of fleet renewals around the world. Many airlines like never before are struggling to maintain maximum flexibility while forming and reshaping their fleets, as the demand is constantly changing. Aircraft leasing comes as a rescue for the operators with restricted cash flows, but which leasing option is the most cost efficient for modern airlines?

The air transportation market is very volatile and sensitive to any internal and external fluctuations, such as economic crisis, military conflicts, acts of terrorism and epidemics or any other issues which cannot be foreseen. This means that whether an airline operates a smaller Embraer E190 or a larger Airbus A320, in 5 or 10 years’ time the demand may either go up or down thus making an aircraft no longer effective. The issue particularly concerns medium and smaller airlines which maintain more moderate route networks and thus have fewer opportunities to re-adjust the distribution of airplanes among destinations.

‘Operating lease provides a carrier with considerably more flexibility in comparison to the finance lease. Should there be a shift in demand, the carrier has an option to stop the operation of an ineffective aircraft, phase it out from the fleet and replace it with another aircraft type which would better fit to the new market conditions. On the other hand, under the operating leasing agreement the carrier is usually obliged to return the aircraft in the same condition as it was initially delivered to him,’ comments the CEO of AviaAM Leasing.

The aircraft redelivery comes with a certain risk for airlines, as they are required to return the aircraft in the same technical condition as it was delivered, so as to expedite the turnaround to the next operator. Furthermore, under the operating lease ownership remains with the lessor, meaning that the leasing company has legal means to restrict certain aspects of aircraft operation (e.g. geography of flights). However, according to a Forbes/CIT survey, despite the risks associated with the redelivery, almost 70% of airlines indicate that operating leasing will remain as an ‘extremely important’ or ‘very important’ source of aircraft financing in the following several years. Furthermore, experts estimate that operating leasing will represent approx. 40% of the entire global fleet by 2020.

At the same time, leasing comes with certain risks to lessors as well. Under the finance lease the main issue for the lessor is the creditworthiness of an airline. The continuing poor performance of some of the European airlines has proven that even large carriers may face major financial issues. Should an airline loose the ability to pay under its finance lease obligations, the bank (the most common source of finance lease) is being left with an aircraft which it has neither means nor experience to properly manage and remarket prior to the recurrent market placement.

‘With regard to operating lease, the main risk for a lessor is related to the technical condition of the asset. During its lifetime an aircraft may be released 4-5 times, or even more in case of short-time leases. Every redelivery is fraught with asset depreciation risks. Poor aircraft maintenance during the leasing period and repair works prior to the redelivery result in direct losses to the lessor as he may face unforeseen expenses on resource restoration, as well as several weeks or a month of additional downtime of an aircraft. That is why operational leasing companies are obliged to maintain their own extensive technical capabilities to ensure expert supervision of aircraft technical management throughout the entire leasing period in order to minimize residual value risks,’ concludes Tadas Goberis.