Module No-3 Aircraft Leasing & Finance

Aircraft Leasing
Leasing a plane is allowing a company (the lessee) to use the plane owned by another
company (lesser) for money under certain terms and conditions. As it is understood from the
definition, there are two parties in a plane leasing agreement and the plane(s)are in the
middle. We can say that the lesser company is the owner of the plane and the lessee company
is the operator of the plane under certain conditions.

Some reasons for Aircraft Leasing

Insufficient financial sources: Sometimes, companies do not have the necessary financial
resources for aircraft purchase. As you can imagine, commercial airplanes are very expensive
and have a large share in the investment items of companies. Companies that do not have this
financial power may want to continue their operations by leasing aircraft.
Tax advantage: Leasing a plane can sometimes provide tax advantages to the lessee
companies.
Meeting urgent needs quickly: The airline industry is a rapidly changing and dynamic
industry. Periodically, the demand for some routes may increase. Or the airline company may
implement a policy to fill some of the gaps in the sector quickly. In such cases, leasing a
plane can be a quick solution.
Order Time: Aircraft manufacturing companies produce aircraft according to orders from
companies. (Even Boeing produces aircraft by giving a specific code of the company that
ordered the aircraft). And often it may be necessary to wait a long time for an ordered
aircraft. In such cases, renting a plane may be a suitable option.

Finance leases

A finance lease is a type of equipment lease where the customer (or 'lessee') rents an
asset for most of the item's useful life. Finance leases are sometimes also known as capital
leases.
Finance leases consist of a primary rental period, where the monthly payments will add up to
the full cost of the asset plus interest (hence their other name, capital leases).

Once the primary period is up, the asset will normally be near the end of its useful life. At the
end of the primary lease period, you will usually have three options:

 Continue to use the asset in a secondary lease period (often with cheaper payments).

 Sell the asset and keep a share of income from the sale.

 Return the asset to the lessor.

Types of Leases
The types of leases depend on the requirements and various considerations of tax and
revenue by the lessee (airlines company). Primarily, there are three types of leases for aircraft
lease: (1) wet lease; (2) damp lease; and (3) dry lease.
1. Wet Lease
In wet leasing arrangement, the lessor company or owner, who is leasing out the
aircraft to the lessee, provides ACMI (Aircraft, Crew, Maintenance, and Insurance) to the
lessee. The team includes pilots, engineers and flight attendants and the lessor also pays the
salaries of the crew. A wet lease is a short-term lease, and the aircraft usually operates under
the lessor's Aircraft Operator's Certificate (AOC). The lessee pays fuel charges, airport fees,
and other duties or fees payable. The payment in a wet lease is based on block hours operated
fixed by lessor while entering into the lease agreement. Therefore, the usage of the aircraft is
immaterial regarding payment.
This lease is also called ad-hoc charter often used for reasons such as trying or
initiating new routes for airlines, peak seasons, etc. The lessee has financial control over the
operations of the aircraft and uses its airline designator code and traffic rights while operating
the plane.
2. Damp lease
A damp lease is primarily a wet lease without the provision of the crew which
becomes the responsibility of the lessee. Another name for this term is AMI (Aircraft,
Maintenance, and Insurance). The crew/ team provided by the lessee is sought to undergo
Safety and Emergency Procedures (SEP) training for the leased aircraft to provide them with
an initial training or guidance.
3. Dry lease
In dry leasing arrangements, the lessee provides for the crew, maintenance, and
insurance. So, the lessor just leases the aircraft, and the lessee provides all other things. A dry
lease is a long-term lease usually lasting for more than a year and extends to half of the
aircraft's life, which ranges from ten to twenty years. The lessee operates the aircraft under its
own AOC.
There are two (2) types of contracts on a dry lease, i.e., operating lease and finance lease.
Operating lease: Lease wherein the right to use the aircraft is made available for lease period
which is shorter than aircraft life and the return the plane upon expiry of such period the
aircraft without capitalizing the asset on lessee's financial records. Therefore, in operating
lease, the lessee incurs rental expenses which are "off-balance sheet financing." The
operating leases have tax incentives for lessee as they do not create an asset or liabilities on
balance sheet thereby enhancing financial ratios of the lessee.
Finance Lease: Another term for finance lease is a capital lease. In finance leases, there if a
transfer of risks and rewards incidental to ownership as there is a bargain purchase option by
the end of the lease period. Thus, there is capitalization of an asset.
The finance lease is for a more extended period than dry operating lease as it covers
more than 50% up to 75% of the aircraft life. The value of lease payments is higher than 90%
of the plane's market value.

Aircraft Leasing versus Aircraft Ownership

Airlines have the option to either lease or to purchase an aircraft for their flight
operations – both of which have their own pros and cons. Purchasing of an aircraft cost
significantly more and could also negatively affect an organisation’s liquidity by increasing
the financial agility and cash retention ability. However, in times like this, with a pandemic
ongoing, ownership of an aircraft would reduce the costs as compared to a lease as the airline
does not need to pay for the lease monthly. These aircraft can also be used to help liquidate
where necessary as well. However, in opposition to the ownership of an aircraft, leasing
might prove to be more cost-savvy.
Leasing also offers a certain degree of flexibility and allows airlines who are in
financial trouble preserve cash for their survival.
When an aircraft is leased to an airline to when they are returned to the lessor, certain
tasks have to be done before handing it over. These tasks include both physical inspections on
the aircraft, detailed screening of the records, and reviews on life-limited parts. These leasing
works usually requires a highly experienced person to ensure smooth transitions between the
lessor and lessee. Here at ALG, we provide experts in this field that is guaranteed to fit your
requirements through our service.

securitization of aircraft
Aircraft Securitizations and the Proposed Rules for Credit Risk Retention.
Securitization is an attractive method for financing portfolios of leases and loans relating to
transportation equipment, including aircraft and aircraft engines.
Securitization is an attractive method for financing portfolios of leases and loans
relating to transportation equipment, including aircraft and aircraft engines. In a typical
securitization transaction, a lender or lessor (the originator) sells loans or leases (and the
related equipment) to a special-purpose entity that finances the purchase through the issuance
of securities backed by the cash flow from the loans or leases. During the recent financial
crisis, investors in securitization transactions involving certain types of assets (primarily
residential mortgage loans) incurred substantial losses. These losses have been largely
attributed to poor underwriting of the underlying assets.
Commentators have argued that the poor underwriting was the result of a
securitization process that created incentives for originators (primarily mortgage loan
originators) to acquire and sell loans without regard to whether the loans were properly
underwritten, since the originators did not expect to bear the risk of borrower default. The
originators received cash up front for selling loans but had little ongoing economic interest
(also known as skin in the game) relating to the future performance of the loans.

Securitization Transaction

The Dodd-Frank Act's risk retention provisions apply to the issuance of asset-backed
securities (ABS). The definition of ABS includes "a fixed-income or other security
collateralized by any type of self-liquidating asset (including a loan, a lease, or other secured
or unsecured receivable) that allows the holder of the security to receive payments that
depend primarily on cash flow from the asset…."3 The risk retention requirements apply to all
ABS offerings, even if the ABS offerings are not registered with the Securities and Exchange
Commission. This means that the risk retention rules will apply to ABS issued in private
placement transactions, including private placements structured as Rule 144A/Regulation S
bond offerings.

Advantages of securitisation
Usually, securitisation is used for raising large amounts of funding and can be advantageous
to your business if you are looking for investment. For example:

 the SPV is entirely separate from the originating business

 generally, the interest rates payable on securitised bonds sold by an SPV are lower
than those on corporate bonds
 private companies get access to wider capital markets - both domestic and
international
 shareholders can maintain undiluted ownership of the company
 intangible assets such as patents and copyrights can be used for security to raise cash
 the assets in the SPV are protected, even if your business gets into financial problems
- which reduces the credit risk for investors
 an SPV usually has an excellent credit rating - so regulated investors (such as
insurance companies and pension funds) will find it easier to buy bonds than from a
private company
Disadvantages of securitisation
There are also some disadvantages to consider. For example:

 it can be a complicated and expensive way of raising long-term capital - though less
expensive than full share flotation
 it may restrict the ability of your business to raise money in the future
 you could lose direct control of some of your business assets - this may reduce your
business' value in the event of flotation
 it may cost you substantially if you want to take back your assets and close the SPV

Traffic Forecasting

Our highly experienced air traffic forecasting team produce robust, defensible and insightful
passenger and cargo forecasts.
Our traffic forecasts are used to support a variety of business decisions. These include long-
term new route assessments for airlines, long-term masterplans for airports and financial
transactions (airport or airline acquisition, disposal and refinancing).

We tailor our forecast output to your needs, with segmentation aligned with key value
drivers. As part of our analysis, we undertake market analysis to assess potential upside or
downside risks, as well as macroeconomic and market positioning factors.
Passenger, Cargo, ATM and Secondary Forecasts

Our skilled modellers use a variety of analytical techniques to approach each forecast,
reflecting the particular circumstances of the market in question, as well as the nature of the
required forecast output. These include:

 Econometric modelling, incorporating macroeconomic factors (e.g. GDP),

microeconomic factors (e.g. fares and taxes, fuel cost, emissions trading, etc.) and
traffic elasticities.
 Bottom-up forecasts (by route, airline, aircraft, frequency).
 Traffic allocation modelling (passenger choice between competing airports).
 Connection’s modelling (QSI).
 Scenario testing and sensitivity analysis. Peak period and design day modelling, used
to inform terminal and airfield master planning, surface access development and
environmental assessment.
 Non-aeronautical forecasts (e.g., car park occupation).
Airline capital expenditure projections

Capital investment is one of three critical factors when financing airport investment,
particularly during the first seven years of a project when both traffic volumes and revenues
are at their lowest. The ability to sustain capital expenditure during this period is a crucial
consideration.
An expert eye can add significant value to an investment simply by knowing what is
absolutely required as part of the early phases of development and what can be deferred to a
later date when the airport is more able to fund capital expansion. As capital expenditure has
such a disproportionate impact during this time airports, sponsors and lenders need to have
confidence in financial projections in order to ensure investment plans are optimised,
deliverable and financeable.

New Airports Council International (ACI) World forecasts for the global airport
sector show that approximately $2.4 trillion (figures in US Dollars) in airport total capital
investments will be needed to address the long-term trend in passenger demand to 2040.
The Global Outlook of Airport Capital Expenditure – Meeting Sustainable
Development Goals and Future Air Travel Demand,published today, shows that significant
investment in new greenfield airports, as well as significant investment to expand and
maintain existing airport infrastructure, is required. The study was supported by Hamad
International Airport and developed in collaboration with Oxford Economics.
The estimated decline in capital expenditure between the pre-COVID-19 baseline year
of 2019 and the depth of the global COVID-19 lockdown (2020) is 33% or about $28 billion.
While capital investment partial recovery to about 14% (approximately $12 billion) below
2019 baseline is expected in 2021, ACI World believes that as air transport demand recovers
to pre-pandemic levels, passenger demand will put increased pressure on airports’
infrastructure and failure to invest to address capacity needs will have real socio-economic
consequences.
If longer term capacity constraints are not addressed through capital investment, ACI
World estimates that a reduction of up to 5.1 billion passengers globally by 2040. For every
million passengers airports cannot accommodate due to airport capacity constraints in 2040,
10,500 fewer jobs and $346 million less in Gross Domestic Product would be the result.
“Airport infrastructure is key to the continued development of air transport which
supports millions of jobs and provides social and economic development for the global
communities we serve,” ACI World Director General Luis Felipe de Oliveira said.
“Beyond the recovery from the COVID-19 pandemic, our focus is to provide sustainable long
term growth for the industry which will need increased airport capital investment in new and
optimized existing infrastructure, reasonable policies for the use of slots, and developments
improving the economic, social, and environmental footprint of airports.

“ACI World’s CAPEX study shows the airport industry’s current financial shortfall
poses significant challenges to the modernizing of infrastructure to improve sustainability and
resilience which will be required if passenger demand into the future is to be met.

“In normal times, addressing the growth of passenger demand in the face of global
airport capacity constraints already poses a significant challenge, but the pandemic has
dramatically reduced airport revenues, adding even greater challenges to meeting long-term
capacity needs.”

ACI World recently published its long-term carbon goal whereby the world’s airports
are committed to net zero carbon emissions by 2050. To realize this, additional green capital
financing will be needed and ACI World believes that, to fully realize positive economic,
social, and environmental outcomes, innovative approaches, appropriate incentives, and
flexibility in organizing and securing financing, such as green bonds or public-private
partnerships, are required.

“Governments will play an important role in supporting and incentivizing recovery

and to mitigate the risks of falling short on Sustainable Development Goals linked to
airports,” Luis Felipe de Oliveira said.
 “This support could take the form of the development and access to renewal energy
sources, reducing electricity purchase through energy efficiency measures, improving access
to green financing instruments, adapting airport infrastructure to serve alternative fuel
aircraft, or fostering the development of negative emission technologies.”

Regional breakdown

Asia-Pacific comprises about $1.3 trillion of reflecting the region’s rapid passenger
growth and subsequent demand to develop new greenfield airports as well as to modernize
and expand existing airport infrastructure. The Middle East is projected to need about $151
billion.

Europe’s $427 billion needs represent 18% of the 2021–2040 global total. More than
half of this investment is expected in terminals to maintain and retrofit the region’s
infrastructure.

North America’s $400 billion needed investment represents about 17% of the global
total. Projections suggest that new greenfield airports are very minimal or unlikely, as
airports have strong geographic coverage in the region.

Latin America-Caribbean’s need represents an investment of about $94 billion of

which an estimated $41 billion will be needed in new greenfield development.
Africa’s needs exceed $32 billion with the pace of needed new greenfield airport
investment representing nearly 40% of this.

Capital investment is one of three critical factors when financing airport investment,
particularly during the first seven years of a project when both traffic volumes and revenues
are at their lowest. The ability to sustain capital expenditure during this period is a crucial
consideration.
Enhanced governance and control
It helps set up airport projects in a way that ensures management and control is
inherent from its inception. Strategic cost planning informs corporate objective setting,
providing realistic programme and cost expectations and assuring predictability, certainty,
operational efficiency to optimise capital investment and value for money.

As part of airport planning and design, we prepare cost plans, cashflow forecasts,
value engineering commentary, risk analyses and life cycle costs. The client is therefore in
command of the broadest perspective possible concerning both capital and whole life costs.
We adopt a combination of top down and bottom-up approaches to cost planning utilising
relevant benchmarking techniques such as:
  Knowledge of recent infrastructure programmes at airports worldwide

 Understanding of upcoming policy and political factors

 Understanding how airports and airlines can optimise their ground and
terminal operations to avoid or delay capital expenditure.
Airline financial requirements forecasts

Global commercial air traffic plummeted in the first quarter of 2020 as the Covid-19
pandemic took hold. In May 2020, we began making regular forecasts of how soon aviation
demand would recover based on four potential scenarios and the latest information. We’re
now publishing those forecasts in this dashboard, which we’ll update regularly.

Here are the latest developments as of November 2021.

 This year’s global airline revenue is expected to land near the 2020 total, a
disappointing outcome for a year that began with optimism for a faster travel rebound
based on the arrival of Covid-19 vaccines. Since our previous forecast, the projected
global revenue for 2021 in the baseline recovery scenario continues to drop, falling an
additional $5 billion, to $230 billion. That would represent just 34% of the industry’s
total revenue in 2019 (see panel 1 above). Last year’s global airline revenue totalled
33% of 2019’s revenue.
 We expect air travel demand in Asia to pick up as China rebounds after Covid-19
lockdowns curbed air traffic (see panel 3). In Europe, the travel recovery has flattened
since the summer, although we’re projecting slight improvement as countries’ travel
restrictions continue to loosen, such as in the UK. The US’s reopening to vaccinated
international travellers this month should also contribute to increased global air travel.

Projected market and financial information, analyses, and conclusions are based (unless
sourced otherwise) on external information and Bain & Company’s judgment. They are
intended as a guide only and should not be construed as definitive forecasts or guarantees of
future performance or results. No responsibility or liability whatsoever is accepted by any
person, including Bain & Company, Inc. or its affiliates and their respective officers,
employees, or agents, for any errors or omissions.