Wet Aviation Leasing

What is wet leasing in aviation? What is it for? We will answer these and other questions in the article. Aviation leasing is the version of leasing that is used to purchase and operate steel birds, as well as related equipment and infrastructure. This discipline combines project allocation systems and marine rentals.

Operating lease

It is known that “wet” leasing is an integral part of the operating. Leasing companies, airlines and manufacturers use several different systems for supplying aircraft for rent. The basic ones are two: financial leasing and operational.

Commercial aircraft are often leased through Commercial aircraft sales and leasing (CASL), the two most powerful of which are GE Capital Aviation Services (GECAS) and International Lease Finance Corporation (ILFC).

Operating leases are usually short-term. It lasts less than ten years, which makes it attractive when the liner is needed to launch a project (company) or a trial extension of the official carrier.

Due to the short operating lease, the airliners are protected from wear and tear. This point is most important in most countries due to frequently changing laws regarding ecology and noise. And what about the states where airlines are less creditworthy (for example, the countries of the former USSR)? Here, operating leasing is the only way to buy an airplane for an airline.

In addition, the company with its help gets flexibility: it becomes able to manage the composition and size of the fleet, reduce and expand it in accordance with demand.

Depreciation

In operating leases, aircraft equipment is not fully depreciated during the lease. After its expiration, it can be rented out again or returned to the owner. On the other hand, the residual price of the airliner at the end of the lease is important to the owner. The owner may ask that the returned equipment undergo maintenance (for example, C-check) in order to rush the transfer to the next operator. As well as in other leasing areas, a security (guarantee) deposit is often required in an air lease.

How does wet leasing work in Russia? In operating leases, the delivery time for aircraft is no more than seven, sometimes ten years. The customer must pay leasing payments monthly, their size depends on the term of the contract.

Special shape

So what is wet leasing? This is a special type of operating room when an airplane is leased with the crew. That is, when an aircraft, its crew, insurance (ACMI) and maintenance, one airline (lessor) entrusts to another or another type of business, acting as an air travel intermediary (lessee), which pays for the administration on an hourly basis.

The tenant supplies fuel, the payments also include taxes, airport fees, any other duties and so on. Its flight number applies. Wet leasing, as is customary, lasts from 1 to 24 months. A shorter lease is considered as a charter short-term flight on behalf of the client.

Practice

“Wet” leasing (wet leasing) is usually used during the peak seasons of transportation or when opening new flights, or when the mass annual inspections of the technical situation. Airliners obtained using this type of lease can operate in countries where lessees are prohibited from working.

This discipline can also be a form of charter, according to which the lessor provides the simplest working services, including ACMI, and the lessee balances the assistance received with flight numbers. In all other forms of charter, the lessor also issues flight numbers. Different wet leasing options can also have code-sharing with reservation of seats.

Political reasons

Wet leasing is a great tool. It may be used for political reasons. For example, EgyptAir, an Egyptian state-owned company, cannot transport passengers to Israel under its own name due to the policies of its state. As a result, Air Sinai operates the flights of this country from Cairo to Tel Aviv. To avoid this political issue, it is it that provides EgyptAir wet leasing.

In the UK, this discipline is called the operation of an aircraft under the Lessor’s Certificate of Operator (AOC).

Qualities

What else is good for “wet” leasing an airplane? It consists of obligatory technical maintenance of equipment, its repair, insurance and other operations for which the lessor is responsible. At the request of the tenant, in addition to these services, the owner can train qualified personnel, engage in marketing, supply raw materials and so on.

The subject of this type of leasing is most often complex specific devices. Wet leasing in most cases is used either by their manufacturers or wholesalers. Banks and financial institutions rarely resort to this type of transaction, since they do not have the necessary technical base.

In practice, there are many forms of leasing agreements, but they cannot be considered as separate types of lease transactions.

Rental forms

Wet leasing involves many different nuances. In international practice, the following forms of rental transactions have become the most common:

• In accordance with leasing to the “Supplier”, the seller of the equipment also turns into a lessee, as in the case of a return transaction. But the rented property is not used by him, but by another tenant, whom he must track down and hand over to him the object of the contract. Sublease is a prerequisite for such contracts.
• Leasing “Standard” provides for the sale of a transaction object to a financing organization, which, through its leasing enterprises, hands it over to consumers.
• In renewable form, the agreement provides for periodic replacement of equipment at the request of the tenant with newer models.
• General leasing is the tenant’s right to increase the list of equipment received without concluding new agreements.
• Joint-stock (group) leasing - leasing of large objects (towers, ships, drilling platforms, aircraft). In such transactions, several enterprises are the owner of the equipment.
• A contract lease is a special form of leasing, in which the tenant is provided with complete parks of cars, tractors, road-building and agricultural machinery.
• When a lessor receives a long-term loan from one or several lenders in the amount of up to 80% of the assets being leased, leasing occurs with the attraction of funds. Here, creditors are large investment and commercial banks, owning impressive resources attracted for a long time. Leasing transactions are financed by banks through a loan or acquisition of obligations.

These are only the most popular forms of leasing contracts. In practice, a combination of different forms of agreements is possible, which increases their number.

Commercial aircraft

And yet, what is aviation leasing for? It is used due to the high cost of airliners. For example, the Boeing 737 Next Generation in 2008 cost about $ 58.5-69.5 million. It is used by Ryanair and Southwest Airlines. In general, few airlines can afford to pay for their air fleet in cash, as they have low profits.

Commercial steel birds are bought by airlines using more complex methods of financing and leasing (by attracting borrowed capital and obtaining loans). The most popular schemes for allocating commercial aircraft are financial and operational leasing, and secured loans. An example of a wet lease agreement can be obtained from any relevant company. There are other options for paying for aircraft:

• bank loan or finance lease;
• real money;
• operator leasing and sale or financial leasing;
• manufacturer support;
• tax leasing;
• EETCs (Trust Certificate for Equipment).

These schemes primarily relate to tax and accounting. They include interest, amortization of tax deductions and operating expenses, which can reduce tax liabilities for the financier, operator and lessor.

Private airliners

Private jet leasing is identical to a car loan or mortgage. A basic transaction for a corporate or small private jet can be done this way:

• the borrower provides basic information about the expected aircraft and about himself to the creditor;
• the lender determines the price of the aircraft;
• the lender searches the property by the registration number of the board to find problems in the property right;
• the lender prepares materials for the transaction: collateral agreement, bill of exchange, guarantee from a third party (if the borrower is less creditworthy).

At the conclusion of such a transaction, credit documents are drawn up, ownership and cash are transferred.