LEASING AS A MODERN DAY INSTRUMENT OF FINANCING – WITH REFERENCE TO AIRCRAFT

Alaf K.MAmol SoniG Surya Druva TejJagan R.Mohd. Anees N.AMohnish AssudaneyVishesh Agrawal

INTRODUCTIONDefinition: A lease is a contract between

two parties called the lessor and the lessee whereby the lessor conveys to the lessee in return for rent the right to use an asset for an agreed period of time.

OTHER FACTSThe provisions of the Indian

Contract Act, 1872 apply to lease Contracts.

Council of ICAI issued Accounting Standard (AS) 19 for leases.

TYPES OF LEASING

LEASE

Operating Lease

Financial Lease

Sale & Lease buy-back

Leverage Lease

Short Term Lease

Long Term Lease

BENEFITS OF LEASING

1. Reduce total cost of ownership2. Refresh your technology3. Conserve capital 4. Finance 100% of your solution5. Advantage of tax regulation6. Balance sheet advantage7. Eliminate end of useful life hassles

DISADVANTAGES

1. Early Termination2. Insurance Cost3. Higher Credit Requirement4. Mileage limitation5. No ownership

AIRCRAFT LEASINGAircraft lease is a contract

between airlines (lessor) and aircraft operators (lesse).

Two main reasons for leasing a aircraft are;

To operate aircraft without the financial burden of buying them and

to provide temporary increase in capacity.

AIRCRAFT MANUFACTURER

LESSOR

LESSEE

Aircraft Sale

Leasing Company

Lease Payment

Right to Use

Airline Company

** Governments are often involved in the process of approving lease transactions.

TYPES OF AIRCRAFT LEASE

Aircraft lease

Wet Lease (ACMI, Damp

Lease)Dry Lease

Operating Lease

Finance Lease

WET LEASEA wet lease is a leasing arrangement

whereby one airline (lessor) provides an aircraft, complete crew, maintenance, and insurance (ACMI) to another airline (lessee) by hours operated.

DRY LEASEA dry lease is a leasing

arrangement whereby an aircraft financing entity, provides an aircraft without insurance, crew, ground staff, supporting equipment, maintenance, etc.1.Operating Lease.2.Finance Lease.

CROSS-BORDER LEASEA cross-border lease is a transaction

where the lessor, the lesse and other related parties are located in two or more different countries and potentially accounting regimes.

The reasons are:-1. More attractive lease condition in a foreign country as opposed to domestic capital markets.2. Tax savings is another benefit.

AIRCRAFT LEASING TIPS Choosing the right type of leaseAircraft considerationLeasing companies

ADVANTAGES

1. Control Versus Flexibility2. Tax Advantages3. Balance Sheet Advantages4. A common technique to

acquire an aircraft5. As part of full service lease,

most render maintenance management

DISADVANTAGES

1. A lease can place restrictions on the operations of the aircraft.

2. Early returns from a lease can be costly.

3. With a lease, you may loose tax advantages.

SAMPLE OF AIRCRAFT LEASING

PLANNING TO START A NEW AIRLINE?

Here are the steps An idea / dream / vision / niche

market Solid aviation business plan Experienced management team More than adequate funding Certification Aircraft selection Suppliers

KOREAN AIRCRAFT & ITS IRISH SUBSIDIARY

Korean Air Lines Co., Ltd. – Established in 1969.

Serving National flag carrier of Korea for 39 years – Passengers & Cargo.

Had service to 109 international and domestic cities around the world with more than 19000 Employees

As of January 2007 it was operating 122 aircraft on its fleet , of which 22 are cargo aircraft.

CONTD.. 1997 Asian Currency crisis – Relied on

international finance market particularly with export credit supported structure such as US EXIM bank due to lack of domestic financing

In 1997 Korean Aircraft limited established Financing subsidiary named Korean Air Lease & Finance company Limited at international financing services in center in Dublin.

LEASE – KAL & KALF

Lease between KIA &

KALF are categorized

in three types.

F-O type

O-O type

F-F type

Aircraft Manufacturer

Owner/Lessor

KALFSublessor

Korean AirLessee

LenderAircraft Sales Loans

Head Lease(Finance Lease or operating lease

Sublease (Finance Lease or operating Lease)

Guarantee in favor of lesser

CONCLUSION

Airline companies are relying on aircraft leasing due to large capital requirement. Especially when they are in financial distress, Leasing is an attractive way to secure the aircraft without having more debts on the balance sheet.

We are open to your questions..