Sale and leaseback transactions involve airlines purchasing aircraft, selling them to a lessor and then leasing them back from them. This sounds like an unnecessarily complicated way of adding an aircraft to a fleet, but it is proving increasingly popular with both airlines and lessors.
“Sale and leasebacks are used for both new aircraft and older aircraft,” says A&L Goodbody partner Maria McElhinney. “It is a common method of financing for airlines, and it is a means of acquiring aircraft assets for lessors. These types of transactions became more common during the Covid pandemic where airlines had cash constraints. Sale and leaseback, however, continues to be popular among growing lessors as it is difficult to source aircraft directly from manufacturers.”
The main attraction for airlines is the unlocking of equity that it has in the aircraft, she explains. “The airline sells the aircraft and uses the sale proceeds to repay any existing debt on the aircraft with the remainder of the funds to be used at their disposal. Sale and leaseback structures allow airlines a workaround to develop their fleets when there are capital constraints or may allow airlines to monetise their assets to fund other capital investments or operational costs.”
Sale and leasebacks also allow the airlines to manage cash flow as leasing costs in the short term are lower than financing costs, McElhinney adds. “Other advantages for airlines include access to newer aircraft on agreed lease terms, lowering of risk profile, and [that] airlines no longer have the worry of remarketing the aircraft at the end of the term.”
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SMBC Aviation Capital head of airline marketing Conor Stafford describes sale and leaseback transactions as a foundational pillar of the aviation finance industry. According to Stafford, it allows airlines to tap into diverse sources of capital and to optimise the mix of owned and leased aircraft in their fleets. It also allows them to transfer the risk associated with the residual value of aircraft to a leasing company.
“Different airlines use it for different reasons,” he says. “For some, it’s the most efficient form of finance. Some have aircraft orders of such scale that they need different forms of finance to fund them. Many tier-one airlines will look to do sale and leaseback deals to take capital expenditure off their balance sheets and replace it with rental liability. This maximises free cash flow and can positively impact credit rating and share price performance.”
Sale and leasebacks also play a role in funding advance orders for aircraft. Stafford explains that airlines can order an aircraft from Boeing or Airbus for as little as 1 or 2 per cent of the purchase price. However, pre-delivery payments (PDPs) kick in a few years out from delivery and these can be substantial.
It may suit an airline to do a sale and leaseback deal at that point, with the lessor funding the PDPs along with the price to be paid on delivery.
“It helps us to expand our own fleet and secure long-term partnerships with our customers,” says Stafford. “The customer is at the centre of what we do.”
Interestingly, sale and leasebacks can also generate profits for airlines. Stafford explains that airlines can agree orders with manufacturers years in advance of delivery and the bigger the order the better the price they get. With aircraft in short supply, the value of the aircraft will increase as the delivery date approaches.
“If they do a sale and leaseback deal, they can sell the aircraft to a lessor for more than they are paying for it. The lessor is not just acquiring the asset but cash flow as well. It makes sense for the lessor to pay more because of that.”
“Aircraft are scarce and the manufacturers order books are full, resulting in years-long lead times,” McElhinney adds. “Sale and leaseback transactions are being used by lessors as a means of growing their aircraft portfolio. For the lessor they acquire an aircraft that is subject to a long-term lease, and the associated steady stream of income under the terms of the leaseback. Airlines in these types of transactions are typically well established, and investment risk is mitigated.”
With competition for aircraft acquisition at an all-time high, there is huge demand for sale and leaseback transactions among lessors who do not have direct access to a manufacturer’s order book, she continues. “Aircraft lessors are a key component for the continued growth of the aviation industry and sale and lease back transactions are a key component of the growth strategy for many lessors.”
