Aircraft leasing: how the rate is calculated
A lease rate is assembled from four components, and only one of them is the cost of money. The other three are priced off the individual aircraft: off the liquidity of the type, off the assumption about residual value, and off the status of its maintenance programmes. Here is what makes up the payment and why two aircraft of the same price get different terms.
The four components
| Component | What sets it | What the borrower controls |
|---|---|---|
| Funding cost | the market, the currency of the deal, the term | choice of currency and term |
| Credit risk margin | the lessee's financial position, the structure of the security | accounts, guarantees, additional collateral |
| Residual value risk | type, age, liquidity on the pre-owned market, state of the records | choice of type and keeping programmes live |
| Repossession risk | registry jurisdiction, ability to recover the asset on default | choice of registry and ownership structure |
Percentages move with the money market, so the rate band is quoted on the date of the deal — separately by currency, term and type of lessee. The part the borrower controls sits in the bottom three rows of that table, and it is larger than people assume.
Advance and term: the two numbers the conversation starts with
A normal advance on an aircraft runs from 20–30%; the range depends on type, age, term and borrower. Rare and older types are harder to finance at all.
On pre-owned helicopters, commercial leasing runs with an advance of 5–20% and a term of up to ten years. A separate story is the subsidised GTLK programme funded from Russia's National Wealth Fund: an advance from 0%, a term of up to 25 years, and only an airline holding an operator certificate can be the lessee.
The arithmetic of the first step is simple. A Global 5000 at the pre-owned median is about $11.3M, to my knowledge. A 20% advance is $2.26M of your own money, with $9.04M financed. After that the payment is set by the rate, the term, and what the lessor assumes the aircraft will be worth at the end of the deal.
Type liquidity: why the lessor prices it
On default the lessor takes the aircraft back and sells it, so the time to sell is built into the rate.
The figure is measurable. Average days on market: Challenger 350 — 72, G650 — 112, Challenger 300 — 165, Global 7500 — 189. Almost four months separate the extremes, and throughout that time the aircraft consumes parking, insurance and calendar checks.
Depth of offer reads separately: two or three Challenger 650s are publicly listed in the whole world, against eighteen Challenger 604s.
Residual value: the main multiplier on the payment
The payment is calculated from the difference between the purchase price and what the aircraft will be worth at the end of the term. The lower the assumption, the higher the payment.
The market prices that risk directly, in money. An aircraft without a live engine programme gives up $1.5–2M on a Challenger 604 or Global 6000, $1–1.5M on a Legacy 450, $500–800k on a Phenom 300. An overdue 120-month inspection takes another $0.8–1.5M off a Global 6000. All figures are benchmarks, to my knowledge.
A live maintenance programme works as a tool for lowering the rate: the lessor sees a protected residual value.
The second lever is age at entry. A new business jet loses a substantial part of its price in the first three years, after which the fall flattens out. An aircraft of 8–12 years has passed the main depreciation to its previous owner, and the residual value assumption on it is calmer.
Return conditions: the cost that is not in the rate
Under an operating lease the aircraft is returned in an agreed condition. Getting it to that condition sometimes costs as much as several months of payments, and that sum does not appear in the deal presentation.
What to read in the contract beyond the rate: end-of-term condition requirements, limits on hours flown and on geography, insurance conditions, the procedure on damage, early buyout terms, and the right to put the aircraft on a charter certificate.
What to total before signing
Total the whole cost over the term of the deal. The payment is only part of it.
- scheduled payments across the full term;
- insurance to the lessor's requirements;
- maintenance to the agreed scope, and programme contributions;
- the cost of bringing the aircraft to return condition;
- the tax consequences of the particular structure.
Compare the result against buying outright — adjusted for what your money earns in your main business. On ten million dollars at 15% a year, the return foregone over five years is comparable to the cost of the aircraft itself. That question usually decides it.
Figures here are benchmarks, to my knowledge. Deal terms are priced off the aircraft, the borrower and the market on the date of signing. Forms of financing and what to look for in the contract are set out in leasing and financing.
Alexander Filimonov — business aviation: sourcing, acquisition and entry into service of aircraft.
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