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Buying vs leasing: How airlines pay for Air India-like mega deals for fleets worth billions

Around 80% of India's commercial fleet is leased compared to 53% globally, says PwC report. Leasing gives airline services providers operational flexibility and improved cash flow.

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New Delhi: Earlier this month, Air India placed the largest order in aviation history for acquiring 470 new aircraft as it looks to modernise its fleet and expand its network under its five-year roadmap — ‘Vihaan.AI’ — in order to transform into a world class airline.

Before this mega deal by the Tata Group-owned airline, IndiGo held the previous Indian record for bulk order of 300 aircraft made in 2019.

In a virtual press conference Monday, Air India CEO Campbell Wilson said the list price of the order — 250 aircraft from European manufacturer Airbus and 220 jets from US-based Boeing — is $70 billion.

The company, he added, plans to fund the purchase using a combination of sources, including internal cash, shareholder equity and sale-and-leasebacks.

ThePrint takes a look at how airlines in India and the world over foot the bill for aircraft deals that run into millions and billions of dollars.

Airplanes do not come cheap. As per the prices listed on Boeing’s website, a new aircraft from the 737 family costs $89.1 million (for 737-700 version) and go up to $134.9 million (for 737 Max 10).

However, according to industry experts, these prices are highly negotiable and buyers can end up paying up to 50 per cent less than the list price depending on aircraft type, modifications and order size. Airbus stopped publishing list prices of aircraft in 2019, as it felt that the data did not represent the true value of the orders.

In most cases, while the airlines place an order for new planes, they don’t end up owning the aircraft. Leasing of aircraft is the preferred choice of airlines globally, and this holds more true for Indian air carriers.

According to its February 2021 report on ‘Aircraft leasing in India: Ready to take off’, auditing major PwC said the size of the global aircraft leasing industry was estimated to be $290.07 billion in 2019.

Aircraft lessors have seen their share in the total commercial fleet grow globally from 25 per cent in 2000 to 48.9 per cent in 2020, it added.

Leasing is an attractive proposition for airline services providers, as it frees up capital and offers operational flexibility and improved cash flow. It comes in two arrangements: dry lease (i.e. getting aircraft without crew and support staff) and wet lease (lessor providing plane along with crew).

Around 80 per cent of India’s total commercial fleet is leased, compared to 53 per cent globally in 2018, the PwC report noted, adding that Avolon was the largest lessor, while GE Capital Aviation Services (GECAS) and BBAM came second and third, respectively.

In 2018, IndiGo, Air India and SpiceJet occupied top three positions in fleet strength with 262, 127, 113 aircraft, respectively. The lease percentage was over 80 per cent for IndiGo and SpiceJet while it was more than 40 per cent for Air India, according to the PwC report.

As recently as 23 February, IndiGo, the country’s largest passenger airline, saw Avolon complete the delivery of 15 aircraft. In a press release, the Dublin-based company said IndiGo now has its 21 aircraft on lease.

Even as the contours of the mega deal were being worked out, Air India announced in September that it would lease 30 aircraft for boosting domestic and international operations over the next 15 months. Three months on, the airline said it was taking another 6 planes on lease to further augment its existing fleet.

Also read: Why Air India’s jumbo order for 470 jets could mark a turning point for Indian aviation

How it works

Globally, in 2020, the largest aircraft operating lessor was Irish-American company GECAS, which maintained a fleet of 1,074 aircraft, followed by Irish aircraft leasing company AerCap, with 1,024 aircraft.

More than 60 per cent of the leased aircraft globally are owned or managed out of Ireland. The European country is a leader in global aircraft leasing largely due to factors such as favourable tax regime, double tax avoidance treaties and a stable business environment.

Ireland has signed over 74 double tax avoidance agreements (tax treaties) which provides a competitive advantage to lessors, the PwC report said.

An airline services provider, such as Air India or Indigo, can opt to either buy the aircraft by raising funds directly, or they can opt to lease the aircraft. When it comes to the second option, air carriers can either go for a finance lease or capital lease, which is a long-term lease with an option to purchase the aircraft at the end of the agreement, or they can also lease aircraft for a shorter specified duration.

Usually, airlines enter into a sale and lease-back agreement with the lessors allowing them to acquire aircraft and sell it to a lessor — ideally at a profit — and then lease it back for its own use.

Mark D. Martin MRAeS, Chief Executive Officer, Martin Consulting, told ThePrint, “Leasing is a popular option with airlines because they can focus on running the services efficiently rather than spending time managing the fleet. Within leasing, there is operational lease and financial lease”.

While operational lease is typically for 5-7 years, financial lease lasts longer and is for a 10-15 year time period, he said, adding that in India, airlines prefer operational lease. Further, lease can be paid in advance, or monthly, or six-monthly or be on credit, depending on the reputation of the lessor airline.

“Usually, manufacturers like Airbus and Boeing say that as long as aircrafts are maintained, spare parts changed… the plane can continue being operational. There is however ‘economic life’ of an aircraft which is a point when almost all parts have been replaced. This stage comes at 15-20 years into the life of an aircraft. At 20-25 years of age, the aircraft is called ‘ageing aircraft’ and is usually taken out of the fleet,” he added.

(Edited by Tony Rai)

Also Read: Air India making global waves with Airbus, Boeing deals, unleashes nation’s aviation promise


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