Aircraft leasing started in the 1970s, as increased competition made flying more convenient for passengers and less profitable for airlines that could no longer count on monopolies. As margins shrunk, the appeal of being able to offload the main capex expenditure from an airline’s balance sheet increased.
On a company’s balance sheet, rather than a depreciating fixed asset, a leased aircraft appears as a lease payment – a recurrent cash outflow.
A simple way to illustrate the relationship between the lessor and the lessee is shown in the flowchart below:
An aircraft lease is a fairly straightforward contract involving two parties – a lessor, which owns the airplane, and a lessee, who leases it. The lessee pays a monthly lease fee which is proportional to the value of the aircraft and can thus depend on the initial price, the age, the number of past flying hours. There are two major types of aircraft leases – wet and dry – with the former including a crew in addition to the aircraft.
According to Statista, as of 2021, the average monthly (dry) lease payment by aircraft type can vary between $1.7 million and $100 thousand, depending on the model.
To help compare a lease with an outright purchase, an Airbus A380, which costs approximately $1.2 million a month on average to lease, can be bought new for close to $450 million.
Depending on the lease terms, at the end of the contract the lease can be renewed or the lessee can be given a purchase option. Terms can vary, but generally speaking, the airline is in charge of reparations and maintenance, and is responsible to return the aircraft in the same conditions it was received – minus wear and tear.
In addition to lease payments, a lessor can benefit from the final sale of the asset – whether it ends up being acquired by the lessee or by a third party.
The airline industry suffered from a major setback as consumers drastically cut back on both domestic and international travel at the peak of the global pandemic. As restrictions started to be removed in mid-2021, airline traffic began to pick up, reaching approximately 90% of the 2019 levels for the first few months of 2022.
That said, it is important to note that from the lessor’s standpoint, the largest risk is idiosyncratic, and it is mostly related to the company’s ability to pay. In the context of its due diligence, the lessor is likely to also spend time evaluating the asset – the aircraft(s) – condition, valuation, maintenance schedule, and estimates of future value.
Cyclical industry swings that are less dramatic than a global pandemic tend to impact companies’ balance sheets, but if they do not cause bankruptcies they are unlikely to affect lease payments – especially for major airlines. Major unpredictable geopolitical events – such as the Russia’s invasion of Ukraine, with the resulting western sanctions on Russia’s airlines – can also impact the industry, as leased aircrafts that were stuck in Russia were seized by the Russian government, and vice versa.
Yieldstreet and aircraft leasing
Yieldstreet provided investors with an opportunity to invest in an aviator capital fund. It is currently looking at additional opportunities within the industry, as air travel picks up and airlines plan to expand their fleets post-pandemic.
1 https://www.cnn.com/2022/03/16/business/russia-aircraft-seizure/index.html and https://www.reuters.com/business/aerospace-defense/russia-says-78-its-aircraft-have-been-seized-abroad-ifax-2022-03-22/
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