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Lease Pros and Cons

by David Wyndham 1. September 2007 00:00
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A lease may be an attractive way to acquire an aircraft. Before you go down that path, there are a few things to know.

In a basic definition of an aircraft lease, the owner (lessor) allows another the use of an aircraft for a fixed period of time or at will. The lease most of us are familiar with is called an operating lease.

An operating lease is a lease whose term is short compared to the useful life of the asset. For example, an aircraft which has an economic life of 30 years or more may be leased to you for 5 years on an operating lease. This can be a simple leasing transaction where at the end of the lease, the aircraft is returned to the lessor. There may also be the option at lease end to buy the aircraft at Fair Market Value (FMV). If the buy-out is significantly less than FMV, then it isn't a true operating lease, but more of an installment sale.

What are the advantages of a lease?

Leasing is less capital intensive than cash purchase. You don't tie up all your cash (if you have it available) and many leases require smaller up front payments than even traditional loans.

Leasing shifts the residual value risk to the lessor. Aircraft values depreciate over time. If you tried selling your used aircraft in 2001 - 2003, you lost a lot of value. If you are selling a popular turbine airplane today, you'll likely come out even or maybe ahead! With a lease, you shift this risk (and reward) to the lessor.

The lessor gets the tax write-off. Aircraft can be written off to zero value for tax purposes in eight or fewer years. If the aircraft is predominantly for business and your company is profitable, you may want the tax advantages of ownership. However, personal use aircraft don't have any tax advantages, so by having the lessor use them, you may get a lower rate than with a traditional loan.

A lease allows you to walk away at lease end without having to be concerned with selling an owned aircraft. If you completed an aircraft lease in 2001-2003, you did not face the loss of residual value that the owner did.

Operating leases also have disadvantages.

A lease can place restrictions on the operations of the aircraft. A lease may restrict where you can base or how you can operate the aircraft or prohibit commercial operations. These items can be negotiable.

Leases have return conditions. When returning an aircraft from a lease, you must return it in some pre-agreed state of condition. Failure to do so will have financial consequences.

Early returns from a lease can be costly. If you break a lease, you may be responsible for the remaining lease payments.

Leases can work for some companies and individuals. You must examine your ownership, tax and risk requirements and review the lease documents with your tax advisor to see whether a lease work for you.

Anyone had either a good or poor experience with a lease? Please email me (leaving out the individual party's name) and let me know.


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