Different Aircraft Finance Options

Aircraft finance refers to financing for the use of aircraft. Typically, because commercial aircraft are expensive, they are normally financed through 1) direct lending, 2) operating leases, or 3) financial leases.

1. Direct lendings – The airline takes out a bank loan to buy an aircraft



1. Due to the high price of commercial aircraft, a syndicate of banks may be used



2. The purchased aircraft or a pool or aircraft may be used as collateral



3. Airlines assume a high level of financial leverage which may make them vulnerable to market fluctuations





2. Operating leases – A lessor buys an aircraft and leases it to an airline. Lessor takes back the aircraft at the end of the lease.



1. Generally shorter-term (less than 10 years)



2. Could include extension options or customized terms to fit specific needs



3. An operating lease results in lower leverage for an airline, which could reserve its borrowing capacity for other purposes



4. Lessee loses tax benefit associated with depreciation of the aircraft



5. Reduces the risk of obsolescence of an aircraft to airlines



6. Lessor generally assumes the residual value risk





3. Financial leases – A lessor buys an aircraft and leases it to an airline. Lessee assume substantial risks and rewards incidental to ownership of an aircraft.



1. Lessee often takes ownership at the end of the lease



2. Duration of the lease exceeds 75% of the useful life or the lease payment exceeds 90% of aircraft value



3. Aircraft treated as an asset and future lease payments treated as a liability of the lessee



4. Lessee can claim depreciation on the aircraft