Aviation finance is a type of asset finance for the purchase and operation of aircraft. Usually the financing is structured as secured lending, operating leasing or finance leasing. Financings can also involve manufacturer finance, export credit agency assistance or other tax and accounting based structures. The structures are often chosen depending on how the aircraft will be used including how long the aircraft is required and the financial position of the aircraft owner.
Types of Parties
Manufacturers: The biggest manufacturers are Boeing and Airbus followed by Bombardier, Embraer and ATR. The engines and other parts are manufactured by other companies (General Electric, Pratt & Whitney, Rolls-Royce). For the financing of new aircraft, the manufacturers are heavily involved to ensure that upon the completion of construction, finance is available for the purchase. In second hand sales, they are mainly involved in relation to warranties which are transferred when the aircraft is transferred.
Airlines: Usually airlines will not want to use their own cash to purchase the aircraft they need for their business so they look for external finance.
Leasing companies: When airlines do not wish to own the aircraft themselves, they can lease an aircraft from a leasing company (such as AerCap (who acquired ILFC another well known lessor) and GECAS).
Financiers: Banks provide financing either by themselves or in a syndicate and sometimes equity investors are used in highly sophisticated tax structures.
Secured lending could be via a loan made by one bank to the airline or by a syndicate of several banks which share the risk. The banks will take security over the aircraft (a mortgage) and over any other assets of the aircraft owner. Banks will normally only lend around 85% of the purchase price to ensure the airline also has cash at risk. Once the loan has been repaid, the mortgage and other security is released by the bank.
Leasing companies lease their aircraft to airlines by an operating lease for short term periods (usually less than 10 years). The airline insures and maintains the aircraft during the lease term and at the end of the lease, the airline must return the aircraft in a certain condition.
A finance lease is where the aircraft is owned by the bank (or its special purpose company) and regular lease payments are made by the airline to the bank until the full amount is paid and the airline owns, or has the option of purchasing, the aircraft. A special purpose company, vehicle or entity is a company or entity set up for specific and narrow purpose not for the general business. It is usually a subsidiary of a holding company and is used to isolate financial risk of a project or asset.
Important Issues in Aircraft Financing
Leasing companies and banks will take a deep interest in how the aircraft is maintained by the airline and returned at the end of a lease, as their principal security is the asset itself. They will wish to be involved in how the aircraft is used (for example limiting sub-leasing to approved sub-lessees). Leasing companies and banks will rigorously check the insurances which are put in place by the airline. Insurance will not only cover damage to or loss of the aircraft itself but more importantly (and where there is more financial risk) in relation to third party liability claims (for example in the case of a crash with significant loss of life).
On the other hand, airlines will need flexibility to operate their aircraft and to maximise profit, it’s important to ensure that the financing documentation does not impede the airline’s business unnecessarily. A banking and finance lawyer can assist in legal structuring and review of documentation for aviation finance matters. If you have any questions about secured lending, operating leasing or finance leasing, get in touch with LegalVision.