At a time when large orders for aircraft by airlines are making big news, the inside story is how airlines are operating largely leased aircraft, with some airlines owning not even a single plane.
The financial leasing model is helping airlines to not only provide flexibility to adjust capacity and align it with demand, but also bring the much-needed cash to its books.
Take the country?s largest low-cost airline, IndiGo, which recently placed an order for 180 airplanes at a list price of $16 billion with European aircraft manufacturer Airbus Industrie. IndiGo owns just 20-25% of its current fleet of 34, which are part of its 2005 order with Airbus for 100 aircraft, helping it keep debt low.
While the airline, co-promoted by former US Airways CEO Rakesh Gangwal and InterGlobe Enterprise managing director Rahul Bhatia, may not be the pioneer of financial leasing, the two entrepreneurs have shown how the model could contribute significantly to make India’s most profitable airline. The budget carrier has followed the financial leasing model to acquire its fleet, ensuring that the fleet is young at any point of time. Nearly 30% of the aircraft, the delivery of which IndiGo is expected to take, would go for replacement. Under financial leasing, an operator sells its aircraft to a leasing company and leases it back, thus generating cash for the company and spreading out the asset acquisition cost over a longer period of time.
For instance, an airline agrees to buy an airplane at $40 million (including inflationary impact) in 2014 and at the time of delivery, sells the plane to a leasing company for $50 million. In the process, the operator gets $10 million cash from the leasing company and brings it back to its profit and loss account as other revenues. And, despite its order of 180 aircraft, as per the forecasted balance sheet of IndiGo, the airline would have a secured loan of Rs 4,932 crore by March 2017 (a copy of which is with FE). ?This means the airline would have assets worth that much on its balance sheet. A loan of Rs 5,000 crore indicates the airline owning just about 30 aircraft,? says an industry-watcher, who did not wish to be identified. Boeing India president Dinesh Keskar says many start-up airlines in the world go for the financial leasing option as it helps them maintain fleet without shelling out substantial cash in one go. ?Start-up airlines have low equity base; so they worldwide go for sale and lease-back of aircraft. The leasing option protects carriers from risks like sudden fall in demand, as they adjust demand accordingly and thus don’t have idle assets,? says KPMG director (aerospace and defence) Amber Dubey. Indian carriers own a total of 403 aircraft among themselves. The balance sheets of most of the carriers have started turning black after two-three years of huge losses. The industry is estimated to have lost Rs 10,000 crore and Rs 8,000 crore in FY09 and FY10 respectively. The total debt burden on the industry is around Rs 61,000 crore. No wonder most carriers in India are shunning fresh debt and instead have gone in for the financial leasing model to induct capacity in the the past few years. The country’s largest private airline Jet Airways, and budget airline SpiceJet have chosen the model to ensure cash flow. While Jet has a mix of owned and leased aircraft, SpiceJet has its entire fleet on lease. Even Kingfisher has most of its planes on lease. In case of Air India, it owns about 100 of its 136 aircraft. And while there is an argument against the model, ?having assets on the balance sheet gives strength to the company. It helps raise funds by mortgaging part of the asset. This option is largely closed for an airline which have got all its aircraft leased,? as a Jet executive says, an airline operating a fleet of leased aircraft argue that it helps them adjust capacity in line with demand.
?The aviation market is very uncertain. It’s affected by a range of factors. Higher fuel price, spread of epidemic and low sentiment, among others, could affect demand and it becomes difficult to adjust capacity in case the fleet is owned,? a low-cost airline executive said.