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Leasing Structures in Aviation

The aviation and shipping industries are unique in the sense that both industries operate using high value assets which are very costly to purchase and even more challenging to operate and maintain. For this reason, aviation businesses tend to opt for a more practical and cost-effective approach whilst still focussing on maintaining a decent turnover. Leasing has proven to be a flexible and more practical alternative to operating and/or purchasing an aircraft for the purposes of rendering an air service since it is more cost-efficient and therefore a company could easily do away with the burden of having to provide a hefty lump sum for the completion of a purchase transaction.

Even though the general concept of lease under the Maltese Civil Code remains the same, the nature and/or duration of a lease may vary which may give rise to different forms of leases. In light of the above, below are some of the common lease structures used in the aviation industry that may be helpful for aviation companies seeking to purchase aircrafts for the purposes of rendering air services. 

Operating and Finance Leases

The main difference between these two types of leases is the duration of the lease. An operating lease is a short-term lease for the use and possession of the aircraft by the lessee for a specified amount of time typically less than the full life of the aircraft. In an operating lease, the lessee has no expectation of acquiring legal ownership of the aircraft once the scheduled lease payments are made and likewise has no interest in having a residual value interest at the end of the lease agreement. On the other hand, the lessor keeps hold of the risks and rewards of ownership.

In contrast, a finance lease is a long-term lease with an option to purchase the aircraft at the end of the leasing agreement. During the financial lease, the lessee will assume the risks and benefits of ownership, but the lessor retains the legal title. Upon the final lease payment made by the lessee there will be a transfer of ownership from the lessor to the lessee which will leave the lessee with the residual value interest of the aircraft.

Wet, Dry and Damp Leases

The distinction between a wet, dry and damp lease lies in the nature of the lease agreement itself. An aircraft that is leased together with its crew, maintenance and insurance to the lessee is considered to be a ‘wet lease’ and is particularly useful during peak seasons where airlines may need additional aircrafts or in case of time-consuming maintenance checks. Thus, in a wet lease, the lessor will assume operational control of the aircraft. In contrast, a dry lease denotes the lease of an aircraft without the crew or workforce. In this case, it would be the lessee that assumes responsibility for the crew, maintenance and insurance costs. Finally, a damp lease can be considered a hybrid form of the wet lease and the dry lease as both parties contribute a designated part of the crew.

Operating Dry Lease

An operating dry lease is utilized when the owner of the aircraft lacks technical competence to operate an aircraft. The lessor therefore engages a third-party qualified operator that has an air operator certificate for offering air services. It is important to note that the lessor only receives the dry lease payments while the lessee bears all expenses for operating the aircraft, assumes liability risks and assumes maintenance and repair obligations.

This article was written by Dr Sean Xerri de Caro.

For more information on Aviation Leasing Structures kindly contact Dr Robert Tufigno on rtufigno@gtgadvocates.com or Dr Sean Xerri de Caro on sxerridecaro@gtgadvocates.com.

This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.