Buying aircraft is not a cheap business. The list price of aircraft runs to tens,
if not hundreds of millions of dollars. Although airlines can often negotiate
hefty discounts on these published prices, particularly if they’re ordering a lot at once,
how on earth do they actually pay for these planes? Let’s find out.
If we look at the Boeing lineup as an example, its cheapest aircraft for
sale right now is the 737 NG, specifically the -700. This is published to cost $89m,
slightly less than the $99.7m of the 737 MAX 7. The most expensive aircraft for sale at the
moment is the eagerly anticipated Boeing 777-9, which has a list price of $442.2m.
When Airbus used to publish its price list, its most expensive model was the A380,
coming in at $445.6m. The cheapest was the A318, at just over $77m. However,
Airbus recognized that these list prices were something of a farce,
given the amount of negotiations that go on. As such, Christian Scherer,
the commercial chief at the company, decided to stop publishing price lists in July of 2020.
Nevertheless, airlines are still parting with hundreds of millions of dollars in aircraft
orders, sometimes several billion for a big order, so how do they finance these purchases?
For many airlines, the headline purchase announcements aren’t really purchases
at all. Leasing is incredibly common in the aviation industry, with around half of operational
aircraft currently on lease, according to CAPA. Many of the world’s biggest leasing firms are
based in Ireland, including Aercap, Avolon, and GECAS.
This is primarily down to favorable tax conditions there, and a historically strong industry. But how
do the lessors buy the planes for the airlines? Leasing firms tend to have better credit ratings
than airlines themselves. This is down to them being perceived as lower risk by creditors,
which allows them to finance aircraft purchases at much-reduced rates.
These savings can then be passed on to airlines under competitive leasing deals.
For the airline, in addition to securing an aircraft at a competitive rate,
they also benefit from being able to queue jump. Aircraft purchases usually have lead times of
anything from two to ten years! However, by leasing the plane, they can expand faster.
Although there are many benefits to leasing a plane, airlines also like to own them too.
Owning planes outright gives the company more assets, adding value to the business and giving
it some options for raising liquidity in the case of financial difficulties.
In this situation, airlines will usually raise capital for the purchase through direct lending.
Just as we can borrow money from banks, airlines are able to take out secured or unsecured loans
to buy aircraft. However, given the huge amounts on the table, this may be provided by a consortium
of banks rather than one individual lender. The other option for airlines is finance leasing,
also called ‘capital leasing.’ This is a longer-term arrangement than typical leasing,
which allows the operator to come close to ‘owning’ the aircraft through a complicated
transaction process. To greatly simplify the concept, it’s a bit like a hire purchase
agreement where the airline has the opportunity to purchase the plane outright at the end of the
lease, either through a final balloon payment or through paying more during the leasing contract.
Ultimately, it’s much more complicated than an airline delivering a truck full of cash to Airbus
or Boeing,... which isn’t all that surprising given how much money these big birds are worth!
Did you know how airlines pay for planes? Is it a topic you find
interesting? Let us know in the comments.