We at wetleasing.eu try our best to educate the customers at every point. It is one of our prime responsibilities as we believe that well-informed customers are more likely to make the right decision. In this article we will explain the need to lease an aircraft, three main types of aircraft leasing and how they differ from each other.

Leasing defined

In its simplest form, the term leasing means transferring of a property (in our case this would be an aircraft) from the owner to the party buying it. However, the title of the property remains with the owner (the lesser) until, at least the maturity of the lease. The person or party buying the property is known as the lessee.

Why lease an aircraft?

Now the inevitable question – why an airline would want to lease an aircraft. There are two main reasons for that.

Financial Resources

:Airline operators usually go for the leasing option to better manage their financial resources.

There is a famous saying in transportation business,

“If it floats or flies, you should rent (lease) it”

According to Philips Baggaley, Managing Director of one of the top credit rating firm (Standard and Poor), airlines are usually short on cash when it comes to expanding their fleet, hence, buying an aircraft is usually not a feasible option. Borrowing to purchase aircraft is also not a cheap option. This is the reason why rent and lease is becoming increasingly popular in the airline industry.

Leasing is therefore an attractive option for airline operators that can free them of financial burden and stress. Of course, it has its downsides as well, which we might cover in our future posts.

Expand operations

Another reason why airlines lease equipment is to help them expand their operations. For example, PIA (Pakistan International Airlines) recently bought a couple of passenger aircraft on lease to strengthen their UAE operations and start new flights between Pakistan and Europe. The company knew that these routes are profitable but couldn’t materialize it because of the unavailability of aircraft.

Not only commercial airlines, but charter operators also at times need more equipment to strengthen their operations.

Lessor, Lessee and the three main types of aircraft lease

The lessor provides the aircraft and sometimes with it the services of cabin crew as well. This crew may include flight attendants, engineers, etc. The lessor might even bear their monthly salaries but the daily allowance will not be covered. The lessor is also bound to pay for insurance and maintenance. As per the agreement, the lessor will charge for block hours, this means that whether the airplane flies or not the lessee will be responsible for paying the minimum guaranteed block hours.

Lessee has to bear all expenses for fuel, crew, transportation, meals, landing/parking/storage fees, local taxes and import duties. Other than that, the lessee has to cover the cargo insurance and in some cases the cost of war risk as well.

The three main types of aircraft lease are:

Wet Lease

A wet lease is an agreement under which the lessor agrees to provide one or more cabin crew to the lessee. Other than that, under this agreement, the lessor will also be responsible to cover for major maintenance of the aircraft and insurance that might be necessary for the equipment to operate.

Damp Lease

Under damp lease, the lessor provides the equipment to the lessee but without the cabin crew. The rest of the agreement remains the same at large. Under this agreement, the lessee will have to provide the cabin crew, which must be properly trained as well. However, the lessor in this case will provide a supervising cabin purser. Damp lease in some countries is also known as Wet Lease, Without Fuel.

Dry Lease

The term dry lease means the transfer of equipment from lessor to lessee but without maintenance, crew, insurance, etc. Banks and leasing companies are usually involved in dry lease. The aircraft registration and the AOC (air operator’s certificate) must be provided by the lessee under a dry lease.

A dry lease can be of two types:

Operating lease: is usually a short term lease when compared with the economic life of the aircraft. Under operating lease, the equipment is usually acquired for a period of 2 – 7 years. The aircraft, under operating lease doesn’t form a part of lessee’s balance sheet.

Finance lease: can also be known as a capital lease and is based on one of the following conditions being met.

1- At the maturity of the lease, the lessee has the option of purchasing the equipment.
2- The total lease payments are more than 90% of the total market value of the equipment.
3- The lease period covers at least 75% of the usable life of the equipment.

Under finance lease, the aircraft is treated as an asset and hence appears in the balance sheet of the lessee.