Kingfisher Airlines, deep in debt, is set to return two of its Airbus jets to Irish leasing company AerCap. A rival company executive said more of Kingfisher's jets would be returned in coming days. In fact, Kingfisher owns just two aircraft out of its fleet of 65, shows data available with aviation regulator Directorate General of Civil Aviation. The data further reveals that, with the sole exception of state-owned Air India, which owns all its planes, almost all the aircraft used by Indian airlines belong to leasing companies.
Welcome to the curious world of aircraft buying. Aircraft do not come cheap. The average list price of a brand new Airbus A320 in 2011 was $85 million. Boeing has the 737-800 listed for $84.4 million. GoAir, IndiGo, Kingfisher and the domestic flights of Air India all use the A320 extensively. Jet Airways and SpiceJet use the 737-800.
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However, almost no aircraft ever sells at its listed price. Airbus and Boeing negotiate hard for large orders and offer massive discounts to get them. Discounts range from 10 to 40 per cent depending on the type of aircraft ordered, delivery dates requested, the engines selected and the interior options specified.
STILL TURBULENT WEATHER
- The problems of the airline industry, exemplified by Kingfisher's plight, continue. Key recent developments:
- Heads of all six airlines meet the prime minister on November 26 to seek increased foreign direct investment in the sector and permission to import aviation fuel directly.
- Aviation fuel grows more expensive with oil companies hiking prices by four per cent in end-November. Fuel accounts for 40 per cent of airlines' total costs.
- Air India considers a sale and lease back arrangement for 27 Boeing Dreamliner aircraft. Such a decision will be a major departure for the airline, which till now owns all the planes it uses.
- IndiGo pips Kingfisher to become the second-largest airline in terms of market share.]
- Market leader Jet Airways considers setting up an entirely separate low-cost arm, ending JetLite and JetKonnect More and more carriers cut down on flights to save costs.
- Kingfisher tops the list flying only 243 of its scheduled 418 flights daily
Airlines pay, on average, only one per cent of the cost of the aircraft at the time of signing the deal to buy them. At pre-determined times before the delivery date, they have to fork out small percentages of the cost to the manufacturer. Much of this financing is provided by banks, from which airlines usually take long-term loans at pre-negotiated rates.
Next come leasing companies. The world's two largest aircraft leasing companies are GECAS, part of the General Electric group, and International Lease Finance Corporation, or ILFC, part of insurance company AIG. Often, leasing companies buy aircraft directly from Airbus and Boeing - at times for particular customers to whom they lease them once the aircraft are delivered. Indian airline companies, however, follow a different path. They buy most of their aircraft directly from the manufacturer, but before these are delivered, they also often conclude deals with leasing companies to sell them the aircraft.
"The deal with the leasing company is concluded before delivery," says the former boss of an Indian airline. "It hands us a cheque before the delivery. When we get the plane, we pay the manufacturer with that money. The manufacturer gives us the ownership papers and we in turn hand those over to the leasing companies."
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Depending on the price an airline buys an aircraft it can sell it to the leasing company at a higher price, making a profit. The airline then promptly leases the aircraft back from the leasing company, thus concluding a 'sale-leaseback' deal on the aircraft for a pre-determined period of time.
Again, airlines often do not buy aircraft engines from the aircraft manufacturer. They negotiate separate deals with engine manufacturers. They can conclude 'perhour' deals with engine companies, paying them for every hour an engine is used, rather than buy the engine outright. Engines are easily swapped around between aircraft, so the plane you fly next could well be using engines other than the ones it had when it was delivered.
But why would leasing companies let airlines book profits at their expense? In fact, when an airline strikes a sale-leaseback deal, the profit the airline made is factored into the lease. If the profit was relatively small, the monthly lease rental is lower. The average lease rental on a brand new A320 or 737-800 ranges between $ 500,000-750,000 per month.
But the airline still benefits because it does not have to factor in a depreciating asset on its books. The lease payments become an operating expense. But with such an arrangement, managing costs becomes vital.