Operating Leases vs Finance Leases in Aviation
Where operating leases work on a rental basis, with ownership remaining with the lessor, finance leases act like a payment plan, where ownership transfers to the lessee, who usually has a bargain purchase option at the end of the facility. It is important to understand the difference between these two forms of leases, as they have vastly different outcomes.
Key Characteristics of Operating Lease Structures
Operating leases are commonly used in the world of aviation finance, and as such, it is important to understand their key characteristics:
- Ownership: The lessor or leasing company will retain ownership of the aircraft before, during, and after the agreed term, with the lessee handing over possession of the aircraft upon completion of the agreed lease term.
- Responsibility: In most cases, the lessee will be wholly responsible for the aircraft’s maintenance, operations, and insurance throughout the duration of the lease. Once the lease has lapsed, the responsibility will revert back to the lessor
- Payments: As part of the lease agreement, the lessee will agree to pay regular rental payments to the lessor and may even be required to pay a portion of their turnover to the lessor, depending on the contract. While the rental payments will differ depending on the details of the lease, they often include maintenance reserve payments, which are intended to protect the asset’s value.
- Flexibility: The operating lease structure offers airline operators the ability to operate a business without having to purchase an aircraft, which is likely to be very expensive.
- Benefits: There are a number of benefits to using aircraft operating leases, but the most obvious are that the lessee is not required to provide a large initial capital outlay. The lessor, on the other hand, is able to generate steady, stable income from their asset for an extended period of time.
