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Aircraft leasing in unstable times

The total losses of Russian airlines for the first half 2015 amounted to 28 billion rubles. Debts to the lessor airline is increasing, and this can lead to further problems for both sides.
Aircrafts for airlines is the main means of production. Because it is costly asset price in dozens or even hundreds of millions of dollars, many airlines prefer either have to acquire the ownership of the aircraft, and take them in leasing, financial or operational. Financial leasing, with some reservations, a sale by installments, while during the term of the lease the aircraft remains on the balance sheet of the leasing company and at its end becomes the property of the carrier or redeemed at the residual value. Operational leasing, with a number of reservations, a rental aircraft; at the end of its term of aircraft continues to be, as was the property of the leasing company. Financial leasing contract is usually for 15 years, and operational - for five years. When operating lease airline can reduce their costs by 15-20%, as does not buy the aircraft. In general, it is a flexible tool that allows airlines to speedily maneuver their carrying capacities in the event of changes in the market. A turbulent times is now. Obvious problems for carriers began a year ago. First, in 2012-2013, the airline had hoped for an increase in demand of 12%, but at the end of 2014 faced the problem of excess capacity, while almost two-fold reduction of the ruble painful blow to the economy of the airline. The total losses of Russian airlines for the first half of 2015 tripled compared to the same period in the previous year and amounted to 28 billion rubles. According to the Russian Association of Air Transport Operators (AEVT), the direct costs of the airlines during this period increased by 25%, while fuel costs increased by 17%, and lease payments - 45%. "Lease payments are huge. Operational leasing is still possible to draw and spent to purchase the aircraft does not make sense", - says CEO of a small airline engaged in regional transportation, who requested anonymity. In general, the relationship between air carriers and leasing companies have become more strained. In the spring, seeing the problems carriers, many lessors agreed to restructure payments, that is, allowed airlines to fly into debt to pay off the debt at the end of the summer high season. However, there are serious suspicions that even the usually most profitable for the third quarter many carriers are not able to get a plus, and the fourth quarter will definitely unprofitable. As a result, debt to the lessor airline is increasing, and this can lead to further problems. Operational advantages"Operational leasing is more common for typical asset because, for example, a unique object harder to rent, and then return and transfer to another. And for cars, rolling stock and aircraft is quite a common situation, because each such asset is consistent with its type "- says Pavel Piskun, director of international business development company" Sberbank Leasing ". In the case of aircraft plays a role, and the fact that they operate on a strictly defined and strictly enforced rules, the technical condition of the aircraft and all work with him are documented, so that the lessor always have a clear understanding of how the exploited its assets, in what state It is supported and what is the residual value. How to recognize the lessor, the transaction in these times become more risky, and here it is necessary to stress the fundamental difference between financial and operational leasing. In the first case, the main risks are focused on the lessee. As mentioned a while ago, many large Russian leasing companies, "we are working only with reliable customers," but the experience of airline "Transaero" showed that they were wrong. Most of the transactions entered into with the so-called scheme leaseback (SLB, Sale-Leaseback). In a typical transaction itself SLB airline aircraft orders from the manufacturer according to their needs, making all the advances, but when approaching delivery date, sells the purchased aircraft leasing company and takes them in her lease. The company is generally selected on the basis of a tender - who will offer lower lease rates. In fact, the role of the leasing company in the transaction is reduced to a SLB attract as possible cheap long-term loans, the leverage in such transactions reaches 90-95%. Not surprisingly, the subsidiaries of major Russian banks had a good credit rating and access to international financial markets, could be nice to advance in the competition with foreign leasing companies. Transactions SLB attractive at steady state of the market, also at higher funding levels they have little margin for leasing companies. This is fundamentally important criterion is financial reliability airline lessee, because if the carrier would be insolvent, unable to pay and return the aircraft leasing company, it will have a serious problem to find a new customer, and the plane at this time will stand and bear huge losses. While leasing companies are subsidiaries of Russian banks accumulate experience in aircraft remarketing in the secondary market, it is not enough at them. However, now, solving problems with the aircraft, "Transaero", they gain this experience accelerated pace. Work on the scheme operating lease transfers the risks to the solvency of the customer on the quality and liquidity of the asset, ie the aircraft. It certainly has high requirements to the level of competence of the leasing company - a market and technology whenever possible to promptly solve the problem of re-marketing of aircraft.
In Russia, this business model has traditionally operated leasing company "Ilyushin Finance Co." (IFC), which itself buys aircraft for subsequent placement on the market. At IFC lower volume of transactions compared with the biggest leasing companies, as it works exclusively with aircraft and is the largest in this segment of leasing in Russia. The company has its own marketing specialists and maintenance. Through this approach, IFC may rely more on aircraft as financial assets, not just the reliability of both airlines payers.
"Wet" leasingUsually, the operating lease meant the so-called dry (dry) Lease - airline rents a plane, but it provides its own crew, maintenance and insurance. Another option - a "wet" lease - in Russia is still prohibited (a legacy of the early 1990's, when it was easier to prohibit than to regulate), but in the world it has spread. In this case, the airline leased aircraft with crew, for the technical condition of the aircraft and also meets the landlord insurance. It is the most flexible type of leasing, which allows airlines to very quickly, within a season, increase of capacity or, conversely, to temporarily get rid of the excess.
Driving "wet" leasing can be used for promotion on the world markets of the new Russian regional jet, the Sukhoi Superjet 100 (SSJ 100). Since this is a new product on the market, interested foreign airline can take a few airplanes from the Russian airline Red Wings and try them in their operation conditions on its route network. For the Red Wings aircraft lessor will make the company IFC, which promotes SSJ 100 in the world market.
"Now there are commercial negotiations on this subject with the airlines from Cambodia and Laos, it is necessary to finalize agreement on the numbers, - says CEO of IFC Alexander Rubtsov. - We also met with three or four companies of Iran, who want to get SSJ 100" wet "leasing . And if this country is open for supplies, I think in Iran we do give a few cars. "
Another promising direction of the IFC in the world market - leasing of new Canadian regional aircraft Bombardier CSeries CS300. "The winner is the one who takes a new generation aircraft, because they provide a quantum leap in efficiency," - says Alexander Rubtsov.
During the air show in Dubai in early November, the IFC signed a letter of intent to lease two CS300, which will be delivered to the customer under the terms of financial leasing in the second half of 2016. The Parties agreed to conclude a firm contract until December 1, 2015, but the name of the customer at the time of delivery rooms in print were not disclosed.
So what changed realities forced the IFC to develop new types of leasing, in particular, the "wet" because this option is the most attractive marketing tool for carriers that can check whether they liked the plane before ordering more such machines. Pretty bold move given the fact that none of the Russian leasing companies, this has not done. But hard times have to invent innovative approaches.

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