The Big Buy: Aircraft Buying and Leasing for Low Cost Airlines

Low cost airlines pride themselves on cutting costs and finding new ways of generating revenue, but they are always going to face one big cost: airplanes. Airlines are looking for innovative approaches to financial management in aircraft operations (which happens to be a topic of a panel discussion at Low Cost Airlines World Americas with Embraer, Trans States Airlines, and Avianca-TACA) in order to have the safest and most cost effective fleet.

When looking to expand their fleets, airlines have the option to buy directly from the manufacturer or lease (or buy) from an aircraft leasing companies. Both options have various pros and cons, some of which will be discussed below.

Buying directly from the manufacturer allows airlines to have a new, more reliable fleet, and manufacturers often times offer incentives to airlines that buy direct. Airbus, a speaker at the upcoming Low Cost Airlines World Asia Pacific, has been making headlines recently in the low cost carrier market with two large orders, one from IndiGo for up to 180 new A320’s, and one from Virgin America for 60 A320’s. Both airlines in this case put in orders for the A320neo (new engine option) that utilizes variations of the Pratt & Whitney‘s PW1000G and CFM Leap-X engines to gain a 15% fuel burn improvement. With the rising cost of fuel this improvement means considerable savings for the airlines. Boeing is sure to release plans for an updated 737 (or new plane) that also offers greater fuel efficiency.

Buying direct from a manufacturer also allows airlines to configure the cabin to suite their needs. Having a configurable cabin allows airlines to generate more revenue (higher ticket cost for better seats or implementing something like the SkyRider seat to have more seats) and reduce weight (using a fiber optic IFE from Lumexis or using PSP’s provided by IFE Services instead of traditional seatback displays.)

The major con of buying direct is the buying part. Buying an airplane is a great expense to an airline, the cost for IndiGo to buy the new A320’s is around $15 billion dollars. The next option is to lease or finance a plane. Aviation financing has seen a large growth from both banks and manufactures. The Macquarie Group started Macquarie Airfinance in 2006 (representatives of which will be at LCAWA), the Royal Bank of Scotland has RBS Aviation Capital, and Citibank has its Transportation Investment Banking division (who will be speaking at LCAWAP). Manufacturers have started finance and lease options through subsidiaries such as ATR Asset Management, Airbus Asset Management, Boeing Aircraft Holding Company, Boeing Capital Corporation, Bombardier Capital, and many others. These offer airlines a chance to lease or finance planes from manufacturers.

The last option is through traditional aviation leasing companies. The two classic players have been General Electric Capital Aviation Services (GECAS) and International Lease Finance Corporation (ILFC). Though GECAS and ILFC have a large market share, a number of aviation leasing companies are expanding. These leasing companies buy planes, either used or directly from manufactures, and lease them to airlines. This allows airlines the option to try new planes, or get better rates on older ones, without having to buy. This is a cost effective solution for airlines looking to expand their fleet but not spend as much capital, and is used by most airlines in the industry. A recent example of this is the recent announcement by Viva Aerobus to expand its fleet by leasing new planes.

Ultimately a number of factors play into how an airline is going to expand their fleet. With the growth in the travel market, airlines are constantly expanding, giving opportunities to manufacturers, banks, finance and lease companies.

If you are an aircraft manufacturer, bank, aviation finance or aviation leasing company looking to meet new and existing airline clients check out Low Cost Airlines World Americas 2011. Opportunities are still available to expand business and meet new clients.

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