How does hubzone aircraft lease work? If you are in the aviation industry you probably already know by now that airlines often lease aircrafts instead of actually purchasing them. For instance, are you aware that Emirates, of the biggest airline companies in the world, had just leased Boeing 777-300ER? You’re probably wondering why they would do that? Why would huge companies think about leasing an aircraft when they can afford it? Let’s learn more about aircraft leasing and how it works.
Aircraft Leasing Defined
You can think of aircraft leasing as something similar to loaning a house or an apartment. Hypothetically, let’s assume that a large construction company owns a massive condominium in a prime location. Meanwhile, you’re planning to buy a unit in that same location. What you do is you get in touch with the owner of the condominium, discuss a deal until you both agree on a reasonable price. You’ll go to the bank to apply for a loan and decide whether you’ll get a fifteen, twenty or thirty-year loan. Every month you are required to pay the bank based on what you’ve agreed on the contract. Once you have completed and paid off the amount, let’s say after thirty years, you can live in the condo unit, rent it off or you can sell it. You get to decide what you want to do with it.
Aircraft leasing is quite similar to this. When an airline company is planning to add more planes to its fleet, but they don’t have enough budget to buy one they resort to leasing. This is usually the case if the airline company has just started out or if they want to expand their operations when their bankruptcy protection has expired. If an airline company wishes to lease an airline, they should get in touch with an aircraft leasing company.
Do you know that there are different kinds of leases? There’s the wet, the dry and the damp. Let’s understand the difference between the three.
Understanding Wet Lease
When a particular airline applies for a wet lease the leasing company will be the one to provide for the aircraft, the cabin crew and the pilots. In addition, the leasing company will also shoulder the insurance and the maintenance needs of the aircraft. This means that when you apply for a wet lease you don’t have to buy an aircraft to be able to run a company. In such case, the leasing company normally provides the Aircraft, Crew, Maintenance and Insurance service under their own certificate.
When should you get a wet lease? Here’s an example. Your airline is located in one of the most visited areas in the US. However, when it starts to get cold during the winter season the number of passenger’s plummet and the airline is able to handle the operations by themselves without problem even if they have a limited number of aircrafts. However, during the summer when travelers flock the area, the demand skyrockets but if the company doesn’t have enough money to buy an aircraft, pay for maintenance and new crew to meet the demands they can always go for a wet lease. In a nutshell, a wet lease is a short-term solution like when you need the extra hand for a limited time.
What happens when the airline company has a lot of crew available? That’s the time you’ll need a dry lease.
Understanding Dry Lease
There was a time when Southwest Airlines went through a crisis. Most of their Boeing 737s were all grounded as a result of maintenance problems. To make matters worse, those who are trained to fix aircraft problems went on a strike. Subsequently, their Boeing 737 Max groundings happened right after the terrifying crash of Ethiopian Airlines.
Basically, Southwest Airlines had a lot of free cabin crewmembers and free pilots. When the problem with the mechanics was resolved the only problem, they were facing were the aircrafts. Due to lack of aircrafts, the company had no choice but announce the cancellation of numerous flights. This problem was solved through dry leasing. Dry leasing can be a short-term solution for a company that is experiencing a shortage of aircrafts.
Assuming airline companies have the means to afford a new aircraft, time is what they’ll be up against because waiting for a new aircraft could take years. Why wait for years when you can get one ASAP through airline leasing?
Understanding Damp Lease
A damp lease is a bit of both wet and dry, which explains the name. In this type of lease the leasing company will loan an aircraft including the pilots as well as the insurance but the only difference is the agreement. For instance, the airline company may have numerous free cabin crew but they don’t have enough engineering personnel in charge of maintenance operations. This is where the airline can benefit from a damp lease because they can loan an aircraft and the pilots and the insurance but they can refuse the cabin crew and this means the amount of lease will be relatively less expensive because they can save on cabin crew.
Why do you think airline companies choose to lease aircraft? Let’s find out.
One possible reason why the airline company prefer to lease is when they don’t have sufficient funds to buy an aircraft. Another possible reason is when a competing airline has filed for bankruptcy and they need an aircraft fast. Although they could opt to order an aircraft from Boeing or Airbus waiting for the aircraft could take years. However, when they choose to lease an aircraft, they can be able to get it in just a matter of weeks or months.
There are also unforeseen issues wherein several aircrafts are being maintained simultaneously so in order to continue operations airline companies choose to lease. Like the example mentioned earlier, seasonal changes also prompt airline companies to lease especially when the supply cannot meet the demands like during the summer when passengers multiply in numbers. Similarly, during the winter the number of passengers dwindle which makes leasing the most feasible option there is.
When airline companies do not have sufficient funds to purchase a new aircraft they resort to leasing or when they need it urgently to continue their operations and to cater to seasonal changes. Choosing to lease an aircraft is a more practical option instead of actually buying an aircraft although there are some airlines that prefer the latter. However, you have to keep in mind that when you order a new aircraft you have to be patient because it usually takes years before you can receive it. The long waiting time is actually one of the many reasons why airline companies prefer leasing to buying especially if they need it right away.
The question is, can leasing companies profit from this? And how do they earn money? Is this a profitable business?
Yes, this business is profitable otherwise they wouldn’t be in this business in the first place. In fact, it’s quite a booming business since more and more people are flying all year round and as a result, airline companies are always leasing aircrafts. According to a report by KPMG on the aviation industry, approximately 15% of global aircraft fleet was leased in the year 1999. After two decades the number of aircraft being leased has increased by 50%. If you add up all aircrafts of leasing companies ranging from small jets to Super Jumbo Airbus it can add up to more than 12,000 airplanes.
How Do They Make Money?
Aircraft leasing companies earn money by purchasing aircrafts in bulk. One example is the Airbus A320, which costs a total of $101 million. If the airline leasing company orders two, the amount will not be the same as its full price. Whenever leasing companies purchase aircrafts, they will always order in bulk to avail of huge discounts therefore giving them a high profit margin.
When an aircraft is properly maintained it will not incur significant depreciations. Besides, when leasing companies do decide to let go of an aircraft, they will still earn a profit when they resell it. If airline leasing companies cannot find a buyer for their aircraft, they can simply sell aircraft parts. The demand for aircraft parts is always on the rise. Although it will not have the same value, at least you can still earn money from your aircraft.
The Risks in Aircraft Leasing
As in every business, there are always risks involved. Although the industry is rising, you can’t escape the risks associated with leasing. According to surveys, the number of leasing companies is growing in numbers and because of the industry is so crowded leasing companies are forced to offer low rates to compete and that means they operate on exaggeratingly low profit margins. It’s also possible that they can go bankrupt if airline companies fail to pay their loan agreements. So, you see, this kind of business, although profitable, still has its own fair share of risks.