Aircraft Operating Leasing

Overview

In a typical aircraft operating lease investment, the investor (lessor) purchases an aircraft, enters into a lease agreement with an airline or other entity (lessee), and ultimately sells the aircraft. Investment is recovered and returns achieved from the lease payments received and the proceeds from the sale of the aircraft.

Diagram showing the flow of assets (aircraft) and funds from the start of the lease to the end of the lease Diagram showing the flow of assets (aircraft) and funds from the start of the lease to the end of the lease
  • Accounting treatment may differ from the "Operating Lease" above

Characteristics and Merits

  • Relatively high cash return from rents
    Rental rate usually between 6 ~ 12% of purchase cost per annum
  • Relatively long economic life
    Long useful life with gradually declining value
  • Aircraft as a depreciable asset
    Statutory for newly built aircraft between 8 to 10 years with amortization as high as 25% per year.
  • Lessee (airline) responsible for operation of the aircraft
    Airline generally responsible for the operation, insurance, and maintenance of the aircraft during the lease period and are performed at the lessee’s expense
  • Sale and purchase of aircraft in the used equipment market
    Limited number of popular aircraft types making aircraft a relatively liquid investment. Aircraft actively traded in the used equipment market.

Key points

Management of the aircraft during the lease term and remarketing at the end of the lease are crucial to a succesful investment

(1) Management during the lease term

It is important to confirm the operational and maintenance status of the aircraft during the lease term because the status of the aircraft affects the terms of its sale.
NBB provides information such as checking lease payment status, loan repayments, and relationships with banks as well as the latest information on market trends.

(2) Remarketing at the end of the lease

Remarketing activity involves finding a buyer or new lease for the aircraft, usually commencing six months to one year before the scheduled lease termination date. NBB supports the lessor in the remarketing of the aircraft.

Opportunities for remarketing an aircraft at the end of the lease term

  • Purchase by or lease extension with the current airline.
  • Lease to a new airline or sale of the aircraft to a fund or other investor
  • Scrap the aircraft and sell for parts or convert the aircraft to cargo configuration

Investment Structures

NBB offers a product lineup designed to meet a wide range of customer needs.
Investment can be made utilizing the framework of a partnership, either a silent partnership under the Japanese Commercial Code ("Tokumei-kumiai") or a partnership as set out in the Civil Code ("Nin-i Kumiai"). Investment can also be that through direct ownership, where the investor owns and leases the aircraft directly.

Major risks and their mitigation

Investors should take into account both the benefits and risks involved in considering an investment in an aircraft operating lease.

Examples of Risk

  • Risks relating to the disposition price of the aircraft and the timing of the sale
  • Foreign exchange risk
  • Credit risk
  • Risk of partial or total loss of the aircraft
  • Risks related to tax system changes
  • Incurrence of increased/additional costs

Examples of Risk Mitigation

  • Lease to a new lessee upon return of aircraft on lessee default
  • Regard investment as one in foreign currency
  • Prepare for lessee bankruptcy when necessary
  • Lessee provided insurance
  • Creation of a cash reserve
  • Investors should refer to the offering materials for any transaction they consider for details on investment risk