Leasing - Page 2 Aviation Articles

Answers To Aircraft Dry-Lease Questions

In an August 11, 2011 Legal Interpretation, the FAA discussed regulation of aircraft wet and dry leases. Under a dry lease of an aircraft the lessor provides the aircraft and the lessee supplies his or her own flight crew, retains operational control of the flight and may operate under FAR Part 91. Under a wet lease, the lessor provides both the aircraft and the crew and retains operational control of the flight, but the lessor is usually required to hold an operating certificate because the FAA considers it to be providing air transportation.

According to the Interpretation, "[a] key consideration in differentiating a dry lease from a wet lease is whether the aircraft and flight crew are obtained separately, or provided together as a package." For example, if the evidence shows that the parties are "acting in concert" to furnish an aircraft and crew, then the FAA would likely consider the arrangement a wet lease. However, whether an aircraft lease is a dry or wet lease is determined on a case-by-case basis.

The Interpretation goes on to state that the regulations do not limit the number of lessees that may lease an aircraft, nor do they establish hourly requirements for aircraft leases. Those issues are "contractual terms negotiated by the owner and the lessee." Additionally, a lessee may hire the same management company that is used by the owner, provided that the other facts and circumstances do not show that the arrangement is "merely a wet lease in disguise."

The interpretation also notes that a lessee may contract with the same flight crew that is contracted for by the aircraft owner. But again, only so long as the other evidence does not suggest that the arrangement is really a wet lease. The Interpretation states "[g]enerally the FAA would consider an arrangement where a person leases an aircraft from its owner, and secures the flight crew from another source to be a dry lease. If the aircraft and flight crew are provided as a package, the lease would be a wet-lease."

Finally, the Interpretation indicates that the FAA "does not have specific requirements regarding collection of payment for the flight crew. However, the method of payment may serve as indicia of whether the parties have entered into a wet- or dry-lease agreement."

If you enter into aircraft lease arrangements, you should become familiar with this Interpretation. However, the Interpretation only provides a general outline of how the FAA will review such arrangements. Since the "devil is in the detail," having an aviation attorney review the particular circumstances for each situation and then draft or review an appropriate written lease agreement can protect aircraft lessors, aircraft lessees, and the pilots who operate the aircraft, from FAA enforcement.

There's Money For Aircraft Deals, You Just Have To Know How To Ask For It.

This article was written with the aid of Joseph Dini of Air Credit Alliance.

ABBA was a Swedish pop music group who had quite a number of hits in the 1970s. At one point, they had album sales outside of the US exceeding that of the Beatles. One of their songs had a chorus of

“Money, Money, Money, it’s a rich man’s world”

If you are looking to finance an aircraft, it may seem to you that the only ones getting financing don’t need it; that there is no money for aircraft deals. That statement is only partially true. There is money out there, but not for crazy aircraft deals. Crazy aircraft deals are as follows:

  • No 100% financing. No interest only with a big balloon payment, either. Too risky for the banks to even consider.
  • No "trust me, I'm good for it" loans. You may know someone famous, or rich, or rich and famous. It will take more than your word for the bank to lend money.  Banks need verification.
  • No old airplanes. There is still a glut of used aircraft on the market. The last ones moving generally are the oldest aircraft. Rule of thumb: the aircraft age at the end of the deal must not exceed 20 years. So if you want a 5 year loan, the aircraft must be no older than age 15 at the start.

This “no old planes” is very true in the turbine world, and even in the piston market banks are loathe to take a risk on a stable, popular piston.

What you need for a loan or a lease of an aircraft are the good old fashioned banking requirements of Credit, Character, Collateral, and Capacity.

When I use the term "bank" I mean that to cover all financial institutions that are (still) in the market of leasing and loaning money for business aircraft.  You need to prove that the deal works for the bank.

Credit. You need to demonstrate that you have the finances to acquire and operate the aircraft. Complete fiscal disclosure is needed. You need to show that your Assets exceed your Liabilities and that your Assets are able to survive an economic downturn.

Character. Who are you? Reliable, dependable, salt-of-the-earth type character counts.  If you (or your own business) has a bankruptcy history, don’t plan on financing. Consistent creditworthiness needs to be demonstrated. If your record matches that of Lindsey Lohan, then you'd better pay cash.

Collateral. No 100% financing means both a down payment and sufficient cash or cash-equivalents to secure the aircraft. Today, as a rule of thumb, you will need 20% down payment on a new business jet. As the aircraft gets older, you will be asked to come up with a larger down payment. For a 10-15 year old business jet, 50% down is not unexpected. Same for pistons, expect a sizeable down payment. You may also need to post a security deposit for a lease as well as be required to pay down the loan should your aircraft value deteriorate to an unacceptable level during the loan period.  In the event you want to sell the aircraft, this is in your benefit as you will be maintaining equity in your aircraft.

Capacity. Can you afford to not only make the payments, but also pay the bills to operate the aircraft and still pay your other debts, too? 

In all of the above, relationships matter.  If you have a significant long-term history with a bank, they should be your first stop for all financing issues. They know you, your character, and your credit history and should be able to make the best deal to secure your business.

Leasing follows similar requirements. One plus in today's market is that short term leases (two to three years) may have more attractive rates as the banks are still looking to unload aircraft. Three to ten years is a typical lease duration.  If you do not have significant business use of the aircraft, a lease may be a better deal as the bank can make use of the tax depreciation of the aircraft. Remember, plan carefully with a lease. Exiting a lease early is easy, just pay off the remaining lease payments! You may wish to negotiate for an early buy-out option if you think you may not make the full lease term.

You will need a stack of paperwork at least a high as the tail of the aircraft!

  1. Historical financial and tax information (may include your spouse too for an individual)
  2. Credit and bank references
  3. Aircraft purchase agreement
  4. Information on the seller (or dealer-broker)
  5. Used aircraft deals may be helped if there is a pre-purchase inspection already done

This is all very much like applying for your mortgage.

The rate you will get on a loan or lease will be in proportion to both what the bank’s cost of money is, the risk they see in the deal, plus their need to cover expected or historical losses, and taxes.  Today, money is cheap for the banks, but their risk tolerance is low.  If you want to check out some of the financial institutions in the aviation business, head over to the Globalair.com - Finance Directory

So the money is there, you just have to qualify. In 2008, aircraft lending was like a community college, almost everybody got in! Today, they are more like an Ivy League School. When looking for a loan or lease, be ready to discuss your finances, and remember that the banker you know may be your new best friend!  So if you have your best friend in hand and ready to buy or lease an aircraft Globlair.com offers a great place to start looking for "Aircraft for Sale" or "Aircraft for Lease".  Who knows some of them may even have Owner Financing!

Do you have any thoughts and/or suggestions regarding the Financing of capital assets (Aircraft).  What are your experiences?  The only way we learn from mistakes

End of content

No more pages to load