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The most common methods of financing the purchase of an aircraft are through Direct Purchase, with Bank Finance or through an Operating Lease.
Under a direct purchase arrangement the airline purchases the plane direct from the manufacturer or vendor, using a secured mortgage loan or structured finance lease. The amount of the advance for the aircraft can vary up to 90% depending on the airline and its available capital. These loans are generally structured with a term up to 12 years with mortgage style amortization and either fixed or floating interest rates. It’s quite common for several lenders to work in a syndicate to provide larger loan packages.
There are several advantages and disadvantages with direct purchase of an aircraft, they include;
When acquiring an aircraft on an operating lease the airline signs a contract which allows it use of the aircraft for a specified period, for a set specified payment. This payment is known the 'rental'. Payment of this rental grants the airline the use of the aircraft, not the ownership. The entity that leases the aircraft to the airline is the owner of the unit retains title to it after purchasing it from the manufacturer. Leases are usually put in place for shorter terms than a finance contract, generally 3-7 years for narrow body aircraft and possibly longer for wide body units. At the end of the lease the airline simply returns the aircraft to the owner or can make an offer to purchase it.
In most cases the airline will be required to provide 3 months rental as a security deposit, which is returned to the airline once the lease is complete, provided the aircraft is returned in proper order. Monthly rental costs vary depending on market demand for aircraft though average approximately 1% of the new purchase cost of the unit.
As with bank finance operating leases come with advantages and disadvantages, namely:
The general requirements to finance an aircraft include your companies last 3 years accountant prepared financials, evidence of capital and detailed business profile. If you’re attempting to start an airline the most important item you require is a fully detailed business plan and corresponding financial model. Without this you’re business won’t get off the ground.
As with any major financial decision the choice to lease or finance an aircraft should be made with the help of your professional accounting adviser. Once you've decided on the best option for your business situation contact an experienced, competent aircraft finance broker that can assist you further.
If you require finance to fund your next aircraft purchase or airline start-up we highly recommend DC Heavy Equipment Finance to help you achieve your goal. You can email them or go to DC Heavy Equipment Finance's website for further information on their services.
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