The Lease Option

Nearly 30 per cent of the world’s commercial aircraft are owned by leasing companies. Despite the high level of demand in the market, lease rates are low especially in respect of larger aircraft. This factor could provide the impetus to the business, estimated to reach a staggering $279 billion in the next three years.

The civil aviation market in India, as indeed the world over, is experiencing an exponential growth. As the aviation industry adapts to the soaring demand of air travel and the expansion looks certain in the next decade, Indian civil aviation authorities have ambitious plans for expansion of airport infrastructure which undoubtedly will boost air travel.

All over the world, including in India, new and more fuel-efficient aircraft are being acquired and operated under lease structures. Boeing’s recent forecast for the next two decades indicates requirement of a large number of commercial aircraft in the Indian subcontinent, South East Asia and China. In India, of all the aircraft leased, 90 per cent are provided by international leasing companies. Indian entrepreneurs need to avail the unique and emerging opportunities in India to develop aircraft leasing business and capture a respectable market share. They must play an active role both in the domestic and international aircraft leasing markets.

Nearly 30 per cent of the world’s commercial aircraft are owned by leasing companies and this percentage is expected to increase sharply. Despite the high level of demand in the market, lease rates are low especially in respect of the larger aircraft. This factor could provide the impetus to this area of business that is estimated to reach a staggering $279 billion (   Rs. 15,34,500 crore) in the next three years.

Sales and lease back arrangements have advantages both for the airlines (lessees) and the leasing company (lessor). The lessors increase cash flows and the lessees avoid sizeable pre-delivery payments and huge investment up front as owning a fleet of fast and big jets is a capital-intensive affair. As there is invariable slippage in delivery schedules both of Airbus and Boeing resulting prolonged waiting time, airlines have been going in for the more expedient option of leasing aircraft to ensure a planned fleet expansion. This is indeed a global trend.

Challenges

There are undoubtedly a number of challenges that the lessors have been facing. Low rate of utilisation of aircraft on account of volatility in the price of aviation turbine fuel (ATF) and periodic global economic downturn, depressed lease rates due to intense competition, easy financing for carriers to procure their own aircraft and the compelling need to hike security deposit and maintenance reserves. However, despite the challenges, profit margins in aircraft leasing business are surprisingly still reasonably good and this trend is expected to continue in the foreseeable future. However, to be successful, the Indian entrepreneur needs to comply with the rules and regulations as stipulated by the Directorate General of Civil Aviation (DGCA), directives of the Reserve Bank of India (RBI) and taxation policies related to leasing transactions.

Types of Lease

There are three types of lease as follows:

• Wet Lease: Along with the aircraft leased, the lessor provides pilots, engineers, flight attendants, maintenance support and insurance. While salaries are paid by the lessor, airport charges and fuel costs are borne by the lessee. A minimum guaranteed block hours stipulated in the lease is to be paid for whether the aircraft flies or not.
• Dry Lease: Under this arrangement, the aircraft is leased without crew, maintenance or insurance. Average period of dry lease exceeds two years. Dry lease is of two types:
  – Operating Lease: The duration of the lease is a fraction of the total life of the aircraft, generally around 40 per cent. At the end of the lease period, the aircraft is returned to the lessor as there is no option to purchase the aircraft.
  – Finance Lease: A long-term lease at the end of which the aircraft can be purchased by the lessee. Lease payments exceed 90 per cent of the market value of the aircraft and the lease period exceeds 75 per cent of its usable life.
• Damp Lease: The lessor provides the aircraft, maintenance and insurance but no cockpit or cabin crew. A trainer for the crew could be provided for a specific period to ensure safe and stabilised operations.