The Indian aviation industry is on a roll with a surge in demand for air travel. The dramatic post-pandemic recovery of Indian passenger traffic sent most airlines into a tizzy. With the number of passenger traffic in the country slated to rise by a minimum of 15-20% year on year, airlines have rushed to order aircraft or plan to lease aircraft from other airlines to keep up with the market demand. Grappling with this sudden rise in demand for air travel, airline companies are leasing aircraft.
So have you wondered what leasing is? Let's have a look at it!
A lease is a contractual agreement calling for the lessee (the user) to pay the lessor (the provider) for the use of assets and other operational support. In Aviation, there are two leasing models that airline companies use namely; Wet Lease and Dry Lease. Leasing can occur in unexpected circumstances 1)fleet grounding, 2) when airlines want to increase capacity during a particular period, and 3)when a particular airline cannot fly in a sector.
A wet lease (ACMI) is an arrangement in which one airline (the lessor) provides another airline (the lessee) with not just the aircraft but also the crew, maintenance, insurance, and other operational services. This type of leasing mainly takes place in an emergency for 3 months to combat seasonal and operational fluctuations. Wet leasing is slightly costlier and can increase operational costs for the airline, but it provides a turnkey solution to boost revenue and control their business. An example of wet leasing is Israel not allowing EgyptAir to fly to their territory. Here, wet leasing is a solution, so Air Sinai wet-leased EgyptAir flights to cover that route. Another example is IndiGo, wherein they faced problems in their P&W engines, and that caused fleet grounding, thus, they wet-leased a few A320s.
Whereas, a Dry Lease is an arrangement in which the lessor provides the lessee with only the aircraft and no accompanying services. The lessee has to be responsible for the operations and maintenance of the aircraft. A dry lease can be up to 12 months and can be further extended by 12 months under the rules of the Directorate General of Civil Aviation(DGCA). Dry leases are well-suited for long-term commitments and strategic fleet expansion as it's cheaper compared to wet leases. For example, Sri Lankan Airlines is looking for five Airbus A330-300 or A330-200 airplanes on a six-year dry lease contract to replace some of its older existing A330s to ensure smooth operations and safety.
Now have you ever wondered why aircrafts prefer leasing of aircrafts?
Commercial airlines often lease aircraft to secure the ability to temporarily increase capacity on certain routes or sectors to meet current demand. Leasing also helps airlines negate the financial stress of actual purchase, diversify their range of business while catering to a new market and customers, build cost efficiency, and reduce capital expenditure and depreciation costs upfront. Leasing allows airlines to reduce their indebtedness, cash retention, and greater financial stability. Paying a small fraction of the aircraft's value each month is a vital part of many airline strategies. It is the only fleet financing solution that allows a dynamic expansion without huge capital expenditures, which many airlines have recently benefited from. Hence, leasing is preferred by the majority of airline companies.
Comments