The Real Reason Airlines Don’t Own Their Planes

Summary

Airline fleets are increasingly relying on leased planes instead of owning them, with major players like Delta, United, and even Malaysia Airlines opting for leasing to manage costs and mitigate risk. The airline deregulation of 1978 shifted the market, prompting leasing companies like ILFC and GPA to flourish. These lessors help airlines avoid the financial burden of owning expensive aircraft by offering flexible, tax-friendly lease agreements. While this reduces risk for airlines, it has created a hidden billion-dollar industry. The majority of leased planes are managed out of Ireland, which offers tax advantages that further drive this financial strategy.

Takeaways

• 😀 Airlines in the U.S. have significantly reduced their ownership of planes, with major airlines like American Airlines, Delta, and United leasing a large portion of their fleets.
• 😀 The percentage of aircraft leased by airlines has skyrocketed since the 1978 Airline Deregulation Act, which gave airlines more freedom but also increased financial risks.
• 😀 The International Lease Finance Corporation (ILFC) was one of the first companies to capitalize on this trend of plane leasing, and it remains a major player in the industry.
• 😀 Aircraft leasing allows airlines to avoid large upfront costs, with some planes costing over $100 million each, and instead pay a more manageable monthly lease.
• 😀 Leasing companies like ILFC and GPA can provide flexibility for airlines by offering planes without the long-term risks associated with ownership.
• 😀 A lease agreement is much simpler for airlines to manage than buying a plane, which requires dealing with depreciation, interest payments, and a large down payment.
• 😀 Leasing costs between $400,000 to $1 million per month, depending on the type of plane, but it can be more financially viable than purchasing a plane outright.
• 😀 While leasing a plane is more cost-effective, it’s risky for leasing companies who must manage large fleets, which is why diversification across many airline customers is crucial.
• 😀 Leasing companies primarily operate out of Ireland, which has favorable tax laws and depreciation policies, making it a hub for the global aviation leasing market.
• 😀 Despite the hidden role of leasing companies in aviation, passengers are unlikely to notice any risk from leased planes, as airlines maintain full responsibility for safety and maintenance.

Q & A

Why do many airlines prefer leasing planes rather than purchasing them outright?

Leasing planes allows airlines to avoid the massive upfront costs associated with purchasing aircraft. With leasing, airlines can also avoid depreciation and risk management, focusing instead on their operational costs. Additionally, leasing provides flexibility, as airlines can adjust their fleets more easily based on market conditions.

How has the proportion of owned planes in airline fleets changed over time?

In the 1970s, most U.S. airlines owned the majority of their planes, but by late 2022, airlines only owned about 60% of their fleets, with European airlines owning just 30%. The trend of leasing has grown due to financial considerations and the deregulation of the airline industry.

What impact did the Airline Deregulation Act of 1978 have on airline fleet management?

The Airline Deregulation Act of 1978 removed government control over fares and routes, leading airlines to focus more on profitability. This change spurred an increase in the number of planes leased rather than owned, as new airlines, which lacked capital, turned to leasing as a way to build fleets without large upfront investments.

What is the role of aircraft leasing companies in the airline industry?

Aircraft leasing companies, or lessors, own large fleets of aircraft and lease them to airlines. These companies, such as ILFC, GPA, and GE Capital, play a crucial role by providing airlines with the flexibility to operate modern fleets without having to make large capital investments, while also spreading the financial risk across various customers.

Why do aircraft leasing companies primarily operate out of Ireland?

Ireland has become a hub for aircraft leasing due to favorable corporate tax rates (12.5%), tax treaties with over 70 countries, and supportive laws regarding asset depreciation. These benefits make it financially advantageous for leasing companies to base their operations in Ireland, especially for managing the complex financial aspects of aircraft leasing.

What is the financial advantage of leasing planes instead of buying them?

Leasing allows airlines to avoid the upfront cost of purchasing planes, which can range from $100 million to over $350 million. Instead, airlines pay a monthly lease, which is a deductible operating expense. This approach helps airlines maintain cash flow and focus on profitability without bearing the risks of depreciation or the long-term financial obligations of purchasing aircraft.

What was the first deal of ILFC, and how did it shape the leasing industry?

ILFC's first deal was leasing a DC-8 to Aero Mexico in 1973. This deal marked the beginning of a new financial vehicle that would help airlines relieve the burden of owning widebody aircraft, and it set the stage for the expansion of the aircraft leasing industry, particularly after the deregulation of U.S. airlines in 1978.

How did the Gulf War affect the aircraft leasing industry?

The Gulf War of 1991 posed a major threat to the stability of leasing companies like GPA, which faced massive financial difficulties. This situation nearly led to the company's collapse, but it was rescued by GE Capital, highlighting the risks involved in the leasing industry, especially when airlines face crises or market disruptions.

What are 'dry leases' and how do they differ from other types of leases?

'Dry leases' are agreements where an airline rents a plane from a leasing company and assumes full responsibility for its operation, including maintenance and staffing. The airline is essentially in control of the plane, while the lessor retains ownership. This differs from 'wet leases,' where the leasing company provides the aircraft along with crew and maintenance services.

How does the taxation system in Ireland benefit aircraft leasing companies?

Ireland's tax policies, including its low corporate tax rate of 12.5% and favorable depreciation laws for aircraft, make it an attractive location for leasing companies. Additionally, Ireland's network of tax treaties with numerous countries reduces withholding taxes on international lease payments, which can significantly lower the overall cost for airlines.