How Aircraft Sale and Leaseback Transactions Work

In the world of commercial aviation, an airline may not always own all the aircraft that it flies. In some cases an airline will purchase aircraft through various financing mechanisms and other times it may lease aircraft from lessors for a fixed regular payment. In simpler terms, the carriers are effectively renting the aircraft.

There are various types of transactions that an airline can undertake when leasing aircraft such as wet and dry leasing, but for this article, we’ll be looking at the sale-leaseback transaction.

The term is relatively self-explanatory, an airline owns an aircraft which it then sells to an aircraft lessor and the aircraft lessor promptly leases it back to the airline. An airline may do this for a couple of reasons, the main one being it needs liquidity relatively quickly.

Unlocking Equity

A sale and leaseback would allow an airline to access the equity it may have had in aircraft. If the airline had initially bought an aircraft for $200 million and has made $100 million in financing payments, the equity in the aircraft is $100 million.

The airline can then attempt to sell the aircraft and use the proceeds from the sale to pay off the remaining debt and pocket the leftover cash. It would then immediately enter a leasing agreement with the lessor and continue using the same aircraft. The only difference now is that the airline no longer owns the aircraft and is now making lease payments instead of financing payments.

The catch there though is that the aircraft still needs to retain some value. If the airline is trying to sell the aircraft they acquired for $200 million with half the value still financed and can only find a buyer at $110 million, the end result isn’t entirely helpful to the airline.

Views above a crowded Pinal Airport with stored jets due to COVID-19. (Photo: AirlineGeeks | Ryan Ewing)

The opposite holds true as well when it comes to relatively new aircraft. If an airline acquires an aircraft and tries to sell it in a sale and leaseback transaction, it likely won’t have enough equity built up in the aircraft yet to make the transaction worthwhile.

Market values of aircraft and built-up equity need to be appropriate to make these transactions have any sort of meaningful cash release for the airline.

Another benefit of this type of transaction is that it makes managing the airline’s cash flows somewhat easier. The airline would be able to reduce some of its aircraft financing expenses and instead make lease payments. Lease payments would most likely be significantly lower than financing costs.

This is an important benefit for cash-strapped airlines and serves as a tool to raise cash quickly and reduce financing expenses at the same time.

Spirit Airlines

Some notable sale and lease buyback transactions occurred during the start of the COVID-19 pandemic when airlines were struggling for cash. More recently Spirit Airlines entered into sale and leaseback transactions for 25 aircraft which netted the airline around $419 million in cash after paying off debt obligations for the aircraft.

The airline will need to get creative as losses continue and Spirit faces mounting losses and a challenging future with many doubting the airline’s ability to survive given the JetBlue merger was shot down by the courts in January. JetBlue and Spirit have filed for an expedited appeal of the ruling in an attempt to reverse the previous court’s decision blocking the merger.

• Author
• Recent Posts

Hemal Gosai

Hemal took his first flight at four years old and has been an avgeek since then. When he isn't working as an analyst he's frequently found outside watching planes fly overhead or flying in them. His favorite plane is the 747-8i which Lufthansa thankfully flies to EWR allowing for some great spotting. He firmly believes that the best way to fly between JFK and BOS is via DFW and is always willing to go for that extra elite qualifying mile. Hemal's opinions are his own and do not reflect those of his employer.

Latest posts by Hemal Gosai (see all)

• EVA Air Recertified For Pharmaceutical Air Cargo Operations - April 19, 2024
• Air New Zealand Debuts New Inflight Menu Items - April 11, 2024
• Spirit To Close Atlantic City Crew Base - April 11, 2024