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Aircraft Funding / Airline Financing

 

Do you require aircraft funding, finance for airline start-up or airline expansion?

The most common methods of financing the purchase of an aircraft are through Direct Purchase, with Bank Finance or through an Operating Lease.

Direct Purchase Arrangement

Under a direct purchase arrangement the airline purchases the plane direct from the manufacturer or vendor, using a secured mortgage loan or structured finance lease. The amount of the advance for the aircraft can vary up to 90% depending on the airline and its available capital. These loans are generally structured with a term up to 12 years with mortgage style amortization and either fixed or floating interest rates. It's quite common for several lenders to work in a syndicate to provide larger loan packages.

There are several advantages and disadvantages with direct purchase of an aircraft, they include:

Main Advantages:

  1. Airline builds up equity in the aircraft as it pays down the mortgage or finance lease
  2. The airline is the owner of the aircraft and so can modify it to its own exact requirements
  3. As the owner of the aircraft the airline is able to gain significant taxation benefits in most countries

Main Disadvantages:

  1. The is subject to residual value risk at the end of the term
  2. Less flexible method of ownership when compared to an operating lease
  3. Heavily weighs down a company's balance sheet which may affect other banking covenants

Operating Lease

When acquiring an aircraft on an operating lease the airline signs a contract which allows it use of the aircraft for a specified period, for a set specified payment. This payment is known the 'rental'. Payment of this rental grants the airline the use of the aircraft, not the ownership. The entity that leases the aircraft to the airline is the owner of the unit retains title to it after purchasing it from the manufacturer. Leases are usually put in place for shorter terms than a finance contract, generally 3-7 years for narrow body aircraft and possibly longer for wide body units. At the end of the lease the airline simply returns the aircraft to the owner or can make an offer to purchase it.

In most cases the airline will be required to provide 3 months rental as a security deposit, which is returned to the airline once the lease is complete, provided the aircraft is returned in proper order. Monthly rental costs vary depending on market demand for aircraft though average approximately 1% of the new purchase cost of the unit.

As with bank finance operating leases come with advantages and disadvantages, namely:

Main Advantages:

  1. Reduction in initial capital requirements
  2. Residual value risk is eliminated as it stays with the owner of the aircraft
  3. The liability stays off balance sheet, having less impact of banking restrictions

Main Disadvantages:

  1. All equity built up in the unit is retained by the Lessee owner
  2. Generally smaller tax advantages are available
  3. Owner of the aircraft may impose onerous restrictions on its use

General Requirements

Boeing 767

The general requirements to finance an aircraft include your company's last 3 years accountant prepared financials, evidence of capital and detailed business profile. If you're attempting to start an airline the most important item you require is a fully detailed business plan and corresponding financial model. Without this you're business won't get off the ground.

As with any major financial decision the choice to lease or finance an aircraft should be made with the help of your professional accounting adviser. Once you've decided on the best option for your business situation contact an experienced, competent aircraft finance broker that can assist you further.