By: Wilmington Trust
Aircraft leasing is an alternative to purchase that may provide advantages to some companies. Whether it's right for your company depends upon the specific needs and capabilities of the company.
Control Versus Flexibility If you own the aircraft, you may have virtually complete control over its use. Depending upon the resale market for the aircraft and how long you are willing to hold it, you may be building equity. However, there is less flexibility with ownership. The aircraft you purchase may become obsolete or the company's aircraft needs may change over time. A substantial down payment may be required to purchase an aircraft, depleting the company's working capital and adversely affecting your debt-equity ratio. In addition, payments towards purchase may be higher than available lease arrangements. Some companies may be subject to requirements prohibiting aircraft ownership due to shareholder or insurance liability concerns.
A lease arrangement may be more flexible than purchase of an aircraft. A lease can enable a company to get in and out of aircraft use more easily through shorter-term commitments and without the prepayment penalties that might be triggered upon sale of a mortgaged aircraft and the risks and responsibilities of aircraft ownership.
Tax Advantages Ownership of an aircraft will generally give you the right to depreciate it for tax purposes. However, only interest, not principal, will be deductible. For some companies facing potential Alternative Minimum Tax issues, a lease with fully-deductible payments could present advantages. Or, if the company has insufficient tax liabilities to take advantage of depreciation deductions, leasing might provide a cheaper method of acquiring use of an aircraft. Also, a company with international operations may have options, in terms of structuring the acquisition of aircraft, that make the option of leasing more desirable than purchase.
Balance Sheet Advantages
One reason to choose a lease over purchase is that it can minimize the cash flow required to provide what is, in effect, a service (transportation), rather than an asset, necessary to company operations. In most cases, the company has no inherent interest in owning aircraft, only in using aircraft. Even companies in business directly involving aircraft, such as the airline industry, often lease. Currently, about half of the commercial aircraft operating worldwide are leased.
Since lessors assume a residual value to the aircraft being leased, they can typically offer a lower rental payment. However, to optimize the cash flow benefit, leases usually must be for a longer term. In addition to freeing up cash, leasing also may help keep your lines of credit open.
Leasing also can remove long-term debt from the balance sheet. Under many lease agreements, lease rental payments will qualify as an expense, not debt, under applicable accounting rules. Companies looking to clean-up their balance sheets may prefer leasing to purchase of aircraft. You may, however, have to reflect your lease obligations in the footnotes to your financial statements.
How To Lease An Aircraft
Theoretically, there are three ways to acquire equipment through leasing:
- You can identify the aircraft you want and then contact a lender who will finance the transaction as a lessor.
- You can contact an aircraft vendor or manufacturer who provides such lease financing through a subsidiary.
- You can acquire the aircraft directly from a lessor in the business of leasing aircraft.
Types of Leases
Operating leases are for terms shorter than the expected life of the aircraft, and the asset typically need not appear on the balance sheet. A capital finance lease more nearly covers the term of the useful life of the aircraft. A sale-leaseback arrangement involves purchase of the aircraft and use for a short period of time, followed by sale to the lessor who then leases the aircraft back. An experienced professional can customize provisions and options in your aircraft lease to meet the specific business, tax, and accounting requirements of your company.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
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