(Illustration: John T. Lewis)

Exit Strategies

Operating leases are a popular business jet financing tool. In a lease, instead of lending you the money to buy the aircraft, the financial institution purchases it and leases it back to you, typically for five to 10 years.

Traditionally, leases have appealed to public companies that desire to avoid disclosing ownership of business jets, buyers who are leery of the residual risk of owning a jet, and taxpayers who don’t use a jet enough for a trade or business to allow them to write off related expenses. When a bank or finance company owns the jet, it can usually write off depreciation expense on the aircraft for tax purposes in its leasing business, and to the extent that it passes that benefit on to you, it will lower your financing cost. In these days of “bonus” tax depreciation (which is beginning to seem less like a bonus and more like standard policy), the value of writing off the aircraft (and thus leasing it if you can’t write it off yourself) can be considerable.

Another supposed benefit of leasing instead of buying or borrowing is avoidance of residual risk. This can be especially helpful when you’re dealing with a bank that has little business jet experience and makes suicidal residual assumptions, but the opposite is probably the case: like you, the novice bank is scared to death of winding up with an aircraft worth less than expected, and it prices the lease accordingly. On the other hand, many big players in business jet leasing suffered third-degree burns when aircraft values fell precipitously in 2008­–09 and again in 2015–16 and, assuming they are still writing the leases, are being extra careful to protect themselves from value meltdown.

A big drawback of a jet lease is that you can’t just terminate it when you want to. Nothing is more painful for business jet brokers and acquisition consultants than encountering a jet lessee who desperately wants to get out of his lease and acquire a different aircraft but is basically trapped.

A graceful exit from a jet lease can be provided by a so-called early-buyout option (EBO), an opportunity for the lessee to acquire the aircraft at a set price. Many leases have two EBOs, say in years five and seven of a 10-year term. But adding EBOs to a jet lease can hike up the lease rate, since the bank must plan for the possibility of forfeiting lease revenue if you exercise the EBO. Then, too, pricing in EBOs often seems designed more to ensure you stay in the lease than to offer an enticing opportunity to get out early. Besides, the chance that your desired exit occurs within one of two short windows provided by an EBO is remote. And of course, exercising the EBO means you wind up owning the aircraft, the very thing the lease was designed to prevent.

Many big players in business jet leasing suffered third-degree burns when aircraft values fell precipitously and are being extra careful to protect themselves.

 

Suppose you just want out? If you’re lucky, your lease contains a schedule of “termination values,” offering a chance to buy your way out at a set price. If you think the EBO price is unappealing, however, wait until you look up your current termination value. The last one I checked offered the lessee an opportunity to wave goodbye by paying over $8 million in the case of an aircraft that was then basically worth nothing.

But the pain doesn’t necessarily end there. You may have to comply with wallet-emptying return conditions and maintenance requirements, and the lease may even say that the termination isn’t effective unless the lessor can quickly sell the aircraft “to the highest bidder.” In short, aircraft lease termination provisions can be so onerous that you aren’t missing much by not having the opportunity.

Another option is to sublet the aircraft to someone. Unfortunately, you’ll almost certainly need the lessor’s approval, but depending on the sublessee you have in mind, this may not be an insurmountable obstacle. Of course, if the reason you want out of the lease now is that it represents a bad deal, finding an appropriate sublessee who thinks it’s a good deal may be difficult, but there’s no reason you can’t reduce the lease payments to the sublessee so long as you make up the difference under the head lease. In any case, you should be able to lay off all fixed and variable operating costs on the sublessee.

Note, however, that the sublessee may expect you to pay your fair share of any significant scheduled maintenance cost coming due. In fact, you might have the same expectation about a sublessee. Let’s say you sublet the aircraft for the final 24 months of the lease, during which a 96-month inspection is due. The sublessee won’t want to pay for that but should arguably cover 25 percent of it (24 of 96 months). On the other hand, if the 96-month inspection comes due after the two-year sublease expires, you might require the sublessee to chip in 25 percent of the estimated cost of that as well.

Lessees having trouble getting out of a lease often consider parking the aircraft for the remainder of the term, which may conjure up an image of a jet packed in mothballs and not costing anything. In fact, while parking an aircraft does avoid operating expenses, it won’t relieve you of lease payments or obligations like hangar, insurance, and calendar maintenance, so parking is a desperation measure only.

As problematic as it can be, trying to cut a deal with your bank is better than subleasing or parking. The lessor may be willing to let you go if you make all the remaining lease payments up front (maybe you could even negotiate paying their net present value), plus allowances for scheduled maintenance. You’ll also probably have to comply with the return conditions in the lease, but that might be negotiable.

This strategy works particularly well if you plan to replace the leased aircraft. Suppose, for example, you’re leasing a Challenger 605 and want to terminate the arrangement so you can acquire a Global 6000. Your bank might be delighted to let you out of the lease for the Challenger  if it is awarded the one for the Global. (Better yet, maybe consider debt financing this time around!) But there’s an obvious downside to this strategy: asking the bank for a major concession on the Challenger lease is hardly the best way to get an unbeatable financing deal on the Global. Still, all in all, it may be worth it.

The best way to escape a jet lease? Never get into one in the first place.

Show comments (2)

This was clearly written by a broker who needs more business and if someone is in a lease, that limits his ability to soak the aircraft owner for more broker fees. Let's talk about this more shall we? The lease return inspections and associated costs are no different than an aircraft owner selling the aircraft and going through a pre-buy inspection that will most likely be required by the buyer. A lease return process is not as Weiand put it "Wallet Empting" at least not any more than a pre-buy inspection for a sale would be. The biggest difference is the owner had to pay an aircraft broker a six figure check to list and sell that aircraft. Under a lease you do not have to pay for any re-marketing fees. When looking at the cost to exit a lease at maturity vs selling an owned aircraft you need to add in an exorbitant broker fee on top of it. When you look at all the benefits that leasing offers and look at the true costs of the return process, leasing starts to make a lot of sense. That is why most fortune 100 companies choose leasing.

Leasing has its advantageous and pitfalls. The best deals are buying with cash only. If you cannot afford to do this, then stick with a fractional or NetJets pay as you go model.

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