Aircraft Ownership and Leasing Costs

Financing and Costs of Aircraft

This knowledge clip discusses the costs associated with owning or using an aircraft. It covers different financing options and aircraft leasing agreements. After reviewing this material, you should be able to calculate the costs of owning or leasing an aircraft and know which resources to consult.

The main resources for are the book Fundamentals of Aviation Operations, specifically Chapter 12 on financing and Chapter 15 on the costs of aircraft ownership.

Aircraft Purchase Costs

Acquiring an aircraft is a significant investment. Prices for aircraft from major manufacturers like Airbus and Boeing can be substantial. For narrow-body aircraft, prices typically range from $30,000,000$ to $60,000,000$ USD. Wide-body aircraft costs range from $60,000,000$ to $153,000,000$ USD.

These figures reflect 2023 market conditions, which are subject to change. Comprehensive overviews of aircraft models, including both new and pre-owned options, are available.

Aircraft Acquisition Methods

An airline can acquire aircraft through purchase or lease.

Purchase

An airline can purchase aircraft using its own capital or by securing a loan from a bank. The loan is repaid with interest. The airline becomes the owner of the aircraft, which is then listed on the airline's balance sheet and added to its Aircraft Operator Certificate (AOC). The aircraft is built according to the airline's specific requirements.

Financial Lease (Hire Purchase)

A leasing company (lessor) purchases the aircraft and leases it to the airline for a monthly fee. The lessor owns the aircraft, and the aircraft appears on the lessor's balance sheet. The airline adds the aircraft to its AOC. At the end of the lease term, the airline has the option to purchase the aircraft. As with a direct purchase, the aircraft is built to the airline's specifications.

Operational Lease

Similar to a financial lease, the lessor purchases the aircraft and leases it to the airline for a monthly fee. However, the lease term is shorter, typically between 2 and 10 years. The lessor remains the owner of the aircraft and retains it on their balance sheet. The airline adds the aircraft to its AOC. Unlike a financial lease, the aircraft returns to the leasing company at the end of the lease period, and the lessor seeks a new lessee. The aircraft is built according to the leasing company's specifications rather than a specific airline's.

ACMI Lease

In an ACMI (Aircraft, Crew, Maintenance, Insurance) lease, an airline leases its aircraft to another airline for a monthly fee covering the cost of the aircraft, crew, maintenance, and insurance. The lessor airline remains the owner, and the aircraft stays on its AOC. ACMI leases typically last from 2 to 12 months, after which the aircraft returns to the original airline.

The choice of financing method is a strategic decision for the airline.

Fleet Composition Example: TAP Air Portugal

TAP Air Portugal's fleet is composed entirely of leased aircraft. The airline owns no aircraft outright and has no aircraft assets on its balance sheet. A small portion of the fleet is under finance lease agreements with purchase options. The majority of the fleet is under operating lease agreements. A portion of the fleet is managed through ACMI leases. Information on fleet composition is generally available in an airline's annual report.

Aircraft Leasing Costs

If an airline chooses to lease instead of purchase, it can lease aircraft from leasing companies such as GECAS, Aircap, or ILFC. Monthly lease rates for narrow-body aircraft range from $200,000$ to $350,000$ EUR. Modern wide-body aircraft can cost between $690,000$ and $1,000,000$ USD per month.

These rates apply to both financial and operating leases. The KPI Fee database provides detailed information on the market value and lease rates for individual aircraft.

Additional Costs

In addition to ownership or leasing costs, airlines must also pay for aircraft hull insurance. The insurance premium is approximately 0.5% of the aircraft's new value.

Cost Calculation

For owned aircraft, fixed ownership costs are calculated as the sum of interest, amortization, and insurance:

$Fixed\,Ownership\, Costs = Interest + Amortization + Insurance$

For aircraft under an operating lease, fixed usage costs are calculated as the sum of the monthly lease payment and insurance costs:

$Fixed\,Usage\,Costs = Monthly\,Lease\,Payment + Insurance$

To allocate usage costs to production, divide the total annual costs (monthly payment and insurance) by the number of block hours flown per year:

$Usage\,Cost\,per\,Block\,Hour = \frac{Total\,Annual\,Costs}{Annual\,Block\,Hours}$

The number of block hours is influenced by flight duration, turnaround time, and the aircraft's technical reliability. Better aircraft utilization leads to more block hours per year, which reduces the usage costs per hour.