Global Jet Capital, a provider of financing solutions for corporate aircraft, expects demand for operating leases for the purchase of mid to heavy private jets to become increasingly popular in Asia over the next three years.
Compared to other markets, a much smaller percentage of business aircraft purchases in Asia involve leases. However, in the past few months Global Jet Capital has seen a significant increase in enquiries from the region, and it believes this is primarily down to the growing interest in operating leases.
Violet Kwek, Sales Director, Greater China and North Asia at Global Jet Capital, said: “The purchase prices of mid to large private jets are in the mid to high eight figures, and this can have a significant impact on a prospective owner’s balance sheet, their available working capital and lines of credit with existing lenders.
“In addition to this, the timeframes for both planning and ownership of larger aircraft are often significantly longer than for smaller ones and owners therefore need to understand where the majority of the financial risk falls. Operating leases allow the owner to assume less of the risk of the asset and buyers in Asia are waking up to the benefits of these schemes fast.”
The operating lease is an increasingly popular aircraft financing tool to help private aircraft users gain access to these progressively more expensive assets. In an operating lease financing structure, clients can enter into a sale and lease back arrangement for their pre-owned aircraft; identify an aircraft for Global Jet Capital to purchase; or assign their purchase contracts to Global Jet Capital for their new, on-order aircraft. In each of these scenarios, the client does not take ownership of the aircraft, but has full use of it as if they did. Instead of a large down payment, the client supplies a more modest security deposit and returns the aircraft at the end of the lease term to Global Jet Capital.
The client enters into a lease arrangement with Global Jet Capital for an agreed multi-year lease term. The operating lease will typically be five years or longer and the client will be responsible for making all lease, insurance, operational and maintenance related payments for the duration of the lease. Global Jet Capital will lease the aircraft to the customer for a pre-agreed term and monthly lease rate.
Advantages of Operating Leases:
Allocation of Capital
Acquiring a long range private aircraft for cash, or using traditional loan financing for 70% of the aircraft cost, represents a significant allocation of capital into a depreciating asset. With an operating lease, up to 100% of the cost of the aircraft can be funded by Global Jet Capital. Clients typically only have to fund the security deposit and certain other transaction costs at closing.
No Residual Value Risk
Operating leases shift the risk of aircraft ownership to Global Jet Capital and away from the customer. At the end of the operating lease, the customer simply returns the aircraft to Global Jet Capital. The value of the aircraft at the end of the lease is Global Jet Capital's risk - not the customer's.
Certainty of Cost
Operating leases help customers more accurately predict the cost of private aircraft use. In both the loan and the operating lease scenario, the user will have the same direct operating costs. But at the end of the loan term, when it comes time to sell the aircraft, cost of ownership can jump if the customer cannot sell in a timely manner or if the net proceeds fall short of expectations.
An operating lease allows a client to transition between aircraft more easily. At the end of the operating lease, the user can upgrade to the latest technology aircraft, adjust the size or capabilities of the aircraft to reflect a changing mission profile, or seek to extend the lease on the existing aircraft. Transitioning an owned aircraft can involve a lengthy sale process and the prospect of owning two aircraft at the same time to facilitate the transition.
Accounting and Tax Benefits Operating leases support off balance sheet accounting treatment. Users can access a private aircraft without burdening the balance sheet with a non-core asset. For jurisdictions that tax the purchase of an aircraft, the operating lease may allow users to minimize their tax liabilities to just tax on monthly lease payments. Consult your tax and accounting professional for guidance.
Global Jet Capital launched in 2014 and it is capitalized by three global investment firms – GSO Capital Partners, a Blackstone company in partnership with Franklin Square Capital Partners*; The Carlyle Group; and AE Industrial Partners. In January 2016 Global Jet Capital completed the purchase of GE’s corporate aircraft lease and loan book in the Americas.
The company’s current management team and executive committee is composed of leaders from business jet manufacturers, maintenance and service providers and leading financial institutions who have served the private aircraft industry for a combined 200-plus years and have completed over 3,500 aircraft transactions.