“[New billionaires in fast-growing countries] have to buy longer-range airplanes. If you’re flying from Mongolia to Nigeria, it’s either a three-day journey flying commercial or a nine-hour flight on your jet.”
There are times when leasing an aircraft makes more sense than buying one outright-including times like these. Leasing can offer several advantages over purchasing, and the turmoil currently rocking the global aircraft marketplace has only amplified these benefits. So how can you determine whether a lease is right for you? Consider these seven factors:
1. Cost. Compared with purchasing, leasing typically improves cash flow over the short term. With leasing, "you pay only for what you use of the asset, versus its full cost, and that could be a substantial differential," said Tony Kioussis, a vice president at GE Capital Solutions in Danbury, Conn.
Consider the example of buying versus leasing a new $7.5 million Cessna CJ3. Both options would typically require about $1.5 million up front for a purchase down payment or a lease security deposit (returned at the end), according to the aviation consulting firm of Conklin & de Decker. But the lease would then cost $50,000 monthly while the purchase with a 10-year note would cost $113,000 to $122,000 monthly (based on 5- to 8-percent interest).
Over the long run, nevertheless, leasing generally costs more than ownership. That's because an owner receives much of his money back when he sells the aircraft.
Still, lease terms may be more attractive now than they were a year ago. "[Finance] companies that write lots of leases are sitting on more and more airplanes, and if they sell them sooner rather than later, they will take a residual-value hit," noted David Wyndham, vice president of Conklin & de Decker. "A lot of these companies may be willing to do short-term leases and be more flexible and make you a more attractive proposition."
2. Tax issues. One of the best reasons for choosing ownership over leasing is the tax benefit that buying outright provides. You can depreciate the value of the aircraft in as little as five years, helping to offset other income and lowering your taxes. But if profits have declined, you might not have much income for a depreciation allowance to offset, and leasing might make more sense.
"If your company isn't as profitable as it was 18 months ago and your airplane won't produce revenue, purchasing it may not provide optimized tax savings," said David A. Davis, senior vice president and general manager at CIT Aerospace, the Dallas-based financing firm. Leases are treated as an operating expense, and insofar as you use the aircraft for business, you can fully deduct the cost. And by the way, blanket arguments about the tax benefits of ownership over leasing ignore an important fact: Though lessors get all the depreciation tax write-offs, these benefits are passed along to lessees in the form of lower leasing costs in this competitive financing landscape.
3. Capital considerations. When you buy an aircraft, you typically borrow the bulk of the purchase price. With leasing, you don't have to do that. In the current environment, moreover, borrowing can be more difficult than usual and companies may be particularly concerned with minimizing capital outlays.
4. Accounting concerns. Business aircraft have become lightning rods for anger aimed at perceived corporate excess. For that reason, some business aircraft users now prefer leased airplanes, since they don't appear on a company's balance sheet. But don't expect a lease to keep your jet totally invisible. "It used to be you could stay off the radar if you leased an aircraft through another name and it didn't necessarily show up [in company records]," said Wayne Starling, Sr., vice president at PNC Aviation Finance in Boise, Idaho. "Today, there are means where anyone with a little effort can quickly find out who's leasing a plane."
Still, for users who have to answer to corporate boards, shareholders or company accountants, "there's substantial pressure, from a political perspective, not to own the corporate jet-you lease it," said CIT's Davis.
5. Residual valuation. Leasing reduces concerns about residual value. It's true that lessors take residual-value estimates into account when writing your lease, but they spread the risk over multiple aircraft and a large time span to average out their right and wrong calls on any one lease. And you don't have to worry about selling the aircraft when the lease ends. You do, however, need to know current values and ensure that the cost of your lease represents fair market value.
6. Walking away. As lease periods are somewhat negotiable, you can lease an aircraft for the amount of time you know you will need it, and at the end of the term walk away (or activate a renewal option) without the hassle of disposing of the aircraft. True, you may face hefty financial penalties if you break the lease, but you can negotiate early exit or purchase options, like-kind exchange provisions, skipped-payment plans and fixed- to floating- to adjustable- interest rates.
Note, however, that a lease mandates that the aircraft be returned in a certain condition, and lessees face maintenance and repair costs if it isn't. Also, leases typically impose restrictions on where and how you can operate an aircraft. They may also limit the hours you can fly, after which additional charges are assessed.
7. The leaseback. If you already own an aircraft, you can sell it to a financing company that will lease it back to you. This can be a good way to free up capital and remove an asset from scrutiny while preserving access to the airplane.
But don't consider the leaseback an upscale pawnshop arrangement; if you're contemplating a leaseback to raise capital to keep a business going, you're unlikely to find a financing company willing to work with you. Also, if your airplane has lost considerable value since you bought it, you're probably better off continuing to operate it as the owner.
"Do you want to take that kind of a book loss on a leaseback?" asked CIT's Davis, noting that the cash you generate could be millions less than what you paid for the aircraft. "I don't know many companies that find that acceptable."
If you're in this upside-down situation, wait until values rebound before arranging a leaseback. But one can also be arranged when you buy an aircraft. If you're planning to use an aircraft for a reasonable amount of time, a leaseback at purchase can make sense.