Methods of Airline Financing And Its Impact on Airline Tickets Pricing

Aircraft prices range from tens to hundreds of millions of dollars. Most of the airlines often do not have the cash to make purchases of aircraft. For this, there is a need to get the financing facility. The way this financing is done has a bearing on apportioning of costs ultimately on airline tickets. Let us have a look at some of the methods of aircraft financing and know how these affect flight tickets prices.

1.Direct lending: Direct lending is a method in which a number of banks form a consortium to lend directly to the airline company. This direct lending could be secured or unsecured, but most often, there is a requirement of having secure interest which allows lenders to repossess the aircraft in the event of failure of airlines to pay the loan instalment. However, if the airline has solid equity base and steady cash flows, then even unsecured loan could be provided.

The main advantage of direct lending of the loan to the carrier airlines is that the costs of depreciation can be reduced by spreading these over increased number of years. Writing off of the depreciation costs over increased period of time reduces the expenses and increase the profitability of the airline. This might even make airlines to offer cheap international air tickets.

2.Operating Lease: In this method of financing, the manufacturer of aircraft, the owner and the operator are three different entities. The owner is usually a large finance company which leases or buys aircraft from manufacturer in its own name but provides it to the airline companies (operators) on lease. This method of leasing is best suited in situations where creditworthiness of airline is susceptible or there is tentative need for expansion or there are chances that airlines might have to change fleet due to environmental concerns after a few years of operation.

This method is relatively expensive than direct lending since margins of owner are involved and also because the costs of leasing have to be apportioned over a lesser time duration (less than 10 years in most cases). This increases airline tickets prices.

At the end of lease duration, the owner requires the aircraft to be returned after completing the extensive and exhaustive Class-C checks.

A variation of operating lease is wet lease in which aircraft is leased along with crew in order to meet temporary high demands. Another variation is in the form of leaseback arrangement in which the operator sells the aircraft and gets it leased back for paying periodic sums.

3.Finance leasing: This is a long term leasing arrangement in which special purpose company is created for buying the aircraft by using a mix of debt and equity finance and then this aircraft is leased to the operator with a provision of the operator opting to buy it at the end of lease period. So, in this arrangement the operator comes very close to being the owner of the aircraft.

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The way financing has been done determines the cost burden on the operator and the price of flight tickets.