June, 2013

Value-Add Airplane Lease Strategy

Commercial airplane travel has been growing over 5% a year globally since 2010. With industry-wide route expansion, airlines have looked to reduce equipment costs by leasing older aircrafts instead of purchasing new ones. Older planes can be acquired when needed and their reduced price lowers the break-even costs on new routes. Commercial aircraft and engines have a use life of over 30 years when properly cared for, and today most major carriers in the US have fleets that are well over 10 years old.

Coming out of the 2008-2009 recession, the lending environment for aircraft was very tight and as such the airlines were increasingly leasing airplanes. We partnered with a Florida-based organization whose niche is finding and leasing used 737 and 757 planes to major airlines, allowing the airlines to meet demand for new routes. These older and significantly cheaper planes are leased with little or no residual value assumed. As a result, 3-5 year leases are essentially full pay with 1.8%-2.1 % monthly lease factors. At the end of the lease term the plane has been paid for, we have made a nice return on our capital, and we still own the plane, which can be re-leased or sold. The current portfolio (unleveraged) is generating a 13%-15% annual pre-tax cash yield with the expectation of a total return of 20%-25% when all leases have completed their terms and the planes have been sold or re-leased.