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A typical aircraft order by an airline can run into billions of dollars. It makes us wonder how rich airlines must be, but do airlines own their own planes?
There are many ways in which airlines fly passengers. Sometimes, they do it on their own planes, run by their crew. At other times, they use planes that are leased from other companies. In some cases, codeshare flights serve as a good option.
No matter how rich an airline is, it usually does not have a billion dollars lying around in cash. So how does an airline acquire a new plane when it needs one? The most common option is leasing. But there are various other methods that airlines can use to fly passengers to their destinations.
According to airlinegeeks.com, purchasing a large number of aircraft can have a considerable effect on the running capital of the airline. Leasing serves as a cost-effective option for airlines to operate new jets. It is no surprise that aircraft leasing companies make up a multi-billion dollar industry. These leasing companies purchase jets from manufacturers and then lease them out to airlines.
Most airlines do not own the planes they operate as many people do for cars, airlines lease planes from specialized aircraft leasing companies. Nearly forty percent of the planes flying today are not owned by their operators.
The mechanism works similarly to car leasing, but planes can cost several hundred thousand dollars a month instead of being a few thousand dollars a month.
Possessing extremely large fleets distributed among different airlines, aircraft leasing firms have much better credit ratings than many airlines. Placing bulk orders with manufacturers allows leasing companies to bag hefty discounts. They can also negotiate much better interest rates when borrowing for new aircraft and often pass on the benefits to the customers.
When an aircraft is leased to an airline, heavy documentation is involved. The leasing contract typically lasts between seven and ten years; however, there are exceptions. An initial down payment is expected from the airline, which is normally three to six months equivalent to the monthly lease.
The contract clearly states who will be responsible for the maintenance and overhauling of the plane. If any significant modifications are required on the plane, the leasing firm and the airline mutually agree on that.
Bigger airlines like to modify their plane’s interior to their signature style. This often poses problems for the leasing company because a modified plane cannot be given to another company immediately after the plane is returned.
Every airline has a unique approach regarding buying or leasing a plane, and there is no fixed pattern. Some airlines operate a completely self-owned fleet, while others fly leased aircraft only. Most airlines, however, keep a mix of self-owned and leased aircraft in their fleet.
Reasons for Leasing
Even for big airlines, ordering a new plane can be a very daunting task. A considerable amount of research goes into the process. Demand, cost-benefit analyses, and financial aspects are all looked up in detail. After all is said and done, many airlines consider leasing their aircraft rather than purchasing them.
Planes are Not Cheap
Even small planes like the Airbus A320neo cost over $100 million. No airline wants to spend huge amounts of money on one order. So they approach leasing companies, which invest huge amounts in planes and then profit by allowing airlines to operate their aircraft and substantially charging them for it.
The modern Boeing 787 jet has a list price of $250 million. But an airline can lease an almost new one for around a million dollars per month. Given that the wide-body jet has a seating capacity of 250, the airline and the leasing company can both make good earnings for the month.
Maintain a Younger Fleet
For new airlines planning to grow rapidly, leasing is the best option as it allows them to flaunt a newer fleet at low costs. Since the airline does not own the plane, they can return the aircraft to the leasing company at the end of the leasing tenure and choose a newer plane.
On Spot Delivery
Purchasing an aircraft is not like buying a car, where you pay the money, grab the keys and drive off. Aircraft manufacturers have a huge backlog of orders pending. Most demanded jets like the Boeing 737 cannot be collected for up to several years after placing the order. The aircraft can be ready for the airline much earlier with leasing companies.
Reasons for Owning over Leasing
Until now, we have not seen any downsides of leasing aircraft. Why then do many airlines opt for purchasing aircraft over leasing them?
Depending on the business model that the airline follows, it might choose to cut down on the monthly fixed cost. If the airline plans to use the aircraft for a long time, it would be better to buy the airplane rather than lease it. This would reduce the overall running costs for the airline.
Many leasing companies charge for modifying the plane according to the airline’s requirement. At the end of the lease period, the airline might have to pay hefty amounts to remove those modifications from the plane. Owning a plane cuts down on these costs, and the airline can make any modification it deems fit on the aircraft.
The year 2020 saw one of the worst crises in aviation history. With travel bans and all planes grounded, airlines incurred huge losses. Those airlines that owned their aircraft could take huge loans by keeping the planes as collateral.
This allowed the companies to provide cash for running expenses.
Additionally, since the aircraft is an asset, the airline can choose to sell it off at any time to inject capital into the business.
Wet Lease vs. Dry Lease
At times, aircraft owners lease out their planes to help cover expenses for the company. There are two ways in which this can be done, and in both cases, the ownership of the aircraft remains with the leasing company.
The airline takes an aircraft from the leasing company for a predetermined period in a dry lease situation. The leasing company continues to hold ownership of the plane. On the other hand, the airline only operates the aircraft with its own crew.
A dry lease usually lasts for more than two years and comes with certain maintenance, insurance, and depreciation conditions.
Some of the most renowned and largest leasing companies are:
- General Electric Capital Aviation Services or GECAS
- Air Lease Corporation
- SMBC Aviation Capital
Some of these companies have fleets much larger than any airline in the world. GECAS, for example, has a fleet of around 1970 aircraft ranging from helicopters to the large Boeing 747.
Dry leasing was an option availed by many airlines when the Boeing 737 Max was grounded for safety reasons. To fill the void in their fleet, many airlines approached different leasing companies to obtain aircraft until the 737 Max issue was resolved.
Another advantage of dry leasing is that the airline has complete control over its brand image and customer experience. Chances are, with the airline livery and onboard modifications, you may never even know if an aircraft is leased or owned by the airline.
Wet leasing is when the leasing company provides the aircraft and the crew that operates it, much like renting a chauffeur-driven car. In this case, the leasing company completely takes care of the flight experience.
This approach has landed many airlines in trouble as the wet-leased aircraft are sometimes poorer than the airline’s other aircraft. With passengers making bookings to fly on a specific aircraft, an older aircraft showing up at the gate can be quite a disappointment.
But there can be a sweet surprise for some lucky passengers as well. Imagine booking a flight with an airline that operates older A330s and arriving at the gate; you find a brand new A350-1000 waiting for you. You will be more than just a happy customer.
For airlines, the most important advantage of wet leasing is that they have much less to worry about regarding operations. Since the crew, legal formalities, maintenance, etc., are all managed by the leasing company, the planes are ready to fly for the airline almost immediately.
Codeshare flights can be confusing. If you are on a codeshare flight, you might arrive at a gate to find a different airline parked at the gate than the one you initially booked for. You will find yourself asking around, only to find out that this is the plane you are going on.
A codeshare is when two or more airlines use one flight and market it as their own flight. For example, flying on KLM from Amsterdam to the US, you might be surprised to find a Delta plane parked at the gate. Since KLM and Delta are in a codeshare agreement for many flights between Amsterdam and the US, A Delta airline flight is often marketed by KLM as their own.
To understand how this works, let us look at an example:
KLM is already operating from Amsterdam to New York and sees that most of its flights are overbooked in the holiday season. It is not feasible for KLM to acquire a new plane to meet the high demand for a few months.
- KLM approaches Delta Airlines, and after significant negotiations, they enter into a codeshare agreement.
- KLM buys a fixed number of tickets from Delta Airlines at a low price. Delta benefits from this because it now has guaranteed revenue.
- On the other hand, KLM sells Delta tickets to its customers under its own name at a slight profit. KLM benefits by retaining its customers and making substantial profits in the process.
- The customers are also happy that they can find flights during peak seasons.
Codeshare agreements provide a win-win situation for the customers, the operating airline, and the marketing airline.
In an alliance, several airlines enter an agreement to pool resources. Many airlines have entered partnerships with other airlines to support one another.
As a passenger, you do not need to make separate bookings for multiple legs of your journey; if an airline does not operate to a specific destination, its alliance partner will. Similarly, if you are a frequent flier and use your points to purchase flights and upgrades, you can use your points across all airlines in the alliance.
Where alliances provide advantages for passengers, there are massive benefits for airlines. With codeshare flights, the airlines can market more destinations without operating the flight themselves.
For example, American Airlines and Japan Airlines are in the OneWorld Alliance. Japan Airlines operates direct flights only to major airports like New York, Chicago, Houston, etc. But due to the alliance, Japan Airlines can market US domestic airports as their destination.