Aircraft Leasing
By James Wynbrandt - September 1, 2009
There are times when leasing an aircraft makes more sense than buying one outright–including times like these. Leasing can offer several advantages over purchasing, and the turmoil currently rocking the global aircraft marketplace has only amplified these benefits. So how can you determine whether a lease is right for you? Consider these seven factors:
1. Cost. Compared with purchasing, leasing typically improves cash flow over the short term. With leasing, “you pay only for what you use of the asset, versus its full cost, and that could be a substantial differential,” said Tony Kioussis, a vice president at GE Capital Solutions in Danbury, Conn.
Consider the example of buying versus leasing a new $7.5 million Cessna CJ3. Both options would typically require about $1.5 million up front for a purchase down payment or a lease security deposit (returned at the end), according to the aviation consulting firm of Conklin & de Decker. But the lease would then cost $50,000 monthly while the purchase with a 10-year note would cost $113,000 to $122,000 monthly (based on 5- to 8-percent interest).
Over the long run, nevertheless, leasing generally costs more than ownership. That’s because an owner receives much of his money back when he sells the aircraft.
Still, lease terms may be more attractive now than they were a year ago. “[Finance] companies that write lots of leases are sitting on more and more airplanes, and if they sell them sooner rather than later, they will take a residual-value hit,” noted David Wyndham, vice president of Conklin & de Decker. “A lot of these companies may be willing to do short-term leases and be more flexible and make you a more attractive proposition.”
2. Tax issues. One of the best reasons for choosing ownership over leasing is the tax benefit that buying outright provides. You can depreciate the value of the aircraft in as little as five years, helping to offset other income and lowering your taxes. But if profits have declined, you might not have much income for a depreciation allowance to offset, and leasing might make more sense.
“If your company isn’t as profitable as it was 18 months ago and your airplane won’t produce revenue, purchasing it may not provide optimized tax savings,” said David A. Davis, senior vice president and general manager at CIT Aerospace, the Dallas-based financing firm. Leases are treated as an operating expense, and insofar as you use the aircraft for business, you can fully deduct the cost. And by the way, blanket arguments about the tax benefits of ownership over leasing ignore an important fact: Though lessors get all the depreciation tax write-offs, these benefits are passed along to lessees in the form of lower leasing costs in this competitive financing landscape.
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