Why are airlines leasing more aircraft?

May 17, 2018

In a recent article for Airline Economics, Mylène Scholnick breaks down leasing trends around the world.

Globally, airlines operate a fleet of more than 27,000 commercial jet aircraft valued at over $696 billion (active and parked aircraft). Airlines rely heavily on third-party debt and equity to finance these capital-intensive assets. Third­-party equity financing the aircraft has increasingly been provided to the airline industry by aircraft operating lessors which acquire and lease aircraft to airlines as their lessees.

Today, over 13,300 commercial jet aircraft, valued at approximately $331 billion, are owned by operating lessors and leased on this basis to the global airlines, representing more than 49% of the fleet by value.

An aircraft operating lease is a contract that permits airlines to use, operate and maintain the aircraft, but does not provide the lessee with ownership rights in the asset. For the lessor, the aircraft subject to lease are accounted for as assets and depreciated as such. For lessees, accounting has historically been off-balance sheet, without the recording assets or liabilities, which can improve financial ratios. An operating lease must not (i) transfer ownership to the lessee, or (ii) provide the lessee with bargain purchase options.

Under an operating lease, the lessor retains the risks and rewards of ownership, with the aircraft returned to the lessor at the end of the lease term such that there is no residual value interest, or exposure, for the lessee. Operating lessors rely on their ability to arrange several consecutive leases, and to sell the aircraft eventually, in order to cover their cost of capital and generate returns.

The long-term competitiveness of the largest aircraft lessors is driven to a significant extent by aircraft purchase prices and financing costs as well as their agility in placing and trading aircraft. Boeing Capital's latest forecast projects operating leasing will account for 50% of the in-service fleet by the end of this decade.

With over 19,000 commercial jet aircraft needed by 2025, several sources of financing will be required to meet that volume, and lessors are expected to provide a significant portion of the financing required. Operating leases, although more dominant for narrow-body jets at 51 % leased (by volume), have also penetrated the regional jet (41%) and wide-body segments (38%).

According to Sylvain Bourdain, Professor of Corporate Finance, and Catherine Muller-Vibes, Professor of Industrial Organization at the Toulouse Business School, in their paper, "Leasing and Profitability: Empirical evidence from the airline industry" and based on 73 airlines examined between 1996 and 2011, the ideal mix between leasing and owning aircraft for airlines is at 53.5% of the fleet on lease. This percentage is higher for low cost carriers and younger airlines as their access to aircraft purchase is more limited.

While there are more than 70 aircraft lessors with more than 25 aircraft in their portfolio, the 10 largest lessors, as measured by value of their current fleet, have aircraft portfolios valued at nearly $150 billion, equal to nearly 50% of the total leased aircraft fleet, while the top 20 leasing companies own nearly 85% of the leased fleet.

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