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Purchase, Lease or Charter an Aircraft?

 

Well that's a very complex and personal decision. Choosing the incorrect finance structure for your aircraft purchase can be as difficult and costly as choosing an incorrect aircraft. Many factors influence the decision process but basically these can be broken down into three main areas:

  1. Aircraft Usage
  2. Organizational Structure
  3. Financial Status
Boeing 767

Aircraft Usage...

Outright Purchase: If you have the funds this is the least restrictive type of acquisition, as an aircraft owner only requires a guarantee of payment and is not necessarily interested in your business plan, financial history or organizational structure of your airline.

Charter: As your initial thoughts are towards purchasing an aircraft, charter is probably not a financially viable option. The exception to this would be if you do not hold, or have access to, an Air Operators Certificate (AOC) then you could conduct your flights under a public charter (full), please refer to the Organizational Structure section below for further details.

Leasing: The main alternative to outright purchase is either a lease purchase or a dry lease.

As described in our Aircraft Leasing Definition page, lease agreements of less than two years are usually conducted under an ACMI/Wet Lease agreement, over two years then it is more financially beneficial to either enter a dry lease / purchase agreement or purchase the aircraft outright.

ACMI is mainly used for seasonal fluctuations in aircraft capacity, as well as start-up airlines that feel it more beneficial to operate under this type of lease agreement, initially anyway (less than two years). Again, this should be seen more as short term option.

Financial Lease: There are two types of dry lease... Operational & Financial lease, it is the Financial lease that can have a Purchase option.

  1. at the end of the lease term the Lessee has the option to purchase the aircraft at an agreed price.
  2. the lease payments are more than 90% of the market value of the aircraft.
  3. the term of the lease is over 75% of the aircraft's usable life.

With finance lease the aircraft appears on the Lessee's balance sheet, as it is viewed as a purchase.

Chattel Loan: This is a form of outright purchase where a loan is provided for the purchase so ownership of the aircraft is transferred to the purchasing company and the financier simply takes a mortgage over it. This type of arrangement is commonly used when seeking ownership of the unit at the end of the finance term as a residual or balloon payment is not required. Under a chattel loan the aircraft appears on the company balance sheet as titled to the aircraft has been transferred.

Organizational structure...

In order to operate an aircraft you will require the infrastructure to do so, this may be in the form of experienced personnel, maintenance facilities etc. Without these resources you will need to consider alternative forms of aircraft acquisition, such as ACMI lease or a full charter program.

If your organization does not have, or access to, or does not intend to obtain an AOC then you cannot commercial operate an aircraft. As previously mentioned, in this situation flights can only be operated under a public charter contract. A third party airline or aircraft operator would perform the flights under their AOC and be responsible for all aspects of the flight. Tour operators and small start-up airlines may well use this option rather than going through the certification process prior to start-up. See our Aircraft Charter page for further details.

Financial status...

Boeing 737

Your major decision whether to purchase or lease an aircraft is to evaluate the financial situation of your airline, including any tax benefits available with either option. This process should be undertaken by your external accountant or adviser as an incorrect finance structure may be very costly to your business.

As previously mentioned for an aircraft purchase, an owner is not interested in your business plan, financial history or organisational structure of your airline, only in guaranteeing the receipt of your payment. Obviously, if you have a poor payment/credit history then this will be an issue. Having reputable bank guarantees and or sufficient cash deposits in place should be all that you require.

Financier: One of the most important aspects of purchasing an aircraft is also choosing the right financier. There are literally dozens of international and domestic aircraft financiers that all have varying interest rates, approval policies and terms and conditions. It's best to use a financier that understands the industry and the use of the aircraft to avoid conflicts.

Most main stream lenders have very similar interest rates and fees though they have very different terms and conditions. Some lenders will allow an aircraft to travel internationally others will only allow travel to certain countries or only domestically. Others will consider new ventures or businesses whose aircraft purchase is considered as a non core operating asset and some will not. It's important that you deal with the right financier first time as having the loan or lease declined for any reason can have a detrimental effect on you attempting to secure finance elsewhere.

Conclusion:

Cost of outright aircraft purchase can be restrictive to an airline that plans to start-up or expand it's fleet, a lease purchase agreement allows the cost to be spread across several years. Ensuring the right finance product and provider is quite difficult unless you've been through the process many times, even then it helps to have external assistance. Whether you are purchasing an aircraft for your business or for yourself, consider using an experienced aircraft finance broker. The time and money they will save you is well worth it.

If after reviewing the information here you are undecided whether you should purchase, lease or charter an aircraft then please visit our Leasing Aircraft, Aircraft Charter or Aircraft Financing Aviation Library pages for more details on these options.