Introduction to Aircraft Financing and Leasing
Expert-defined terms from the Executive Certificate in Aircraft Financing and Leasing course at London School of International Business. Free to read, free to share, paired with a globally recognised certification pathway.
Aircraft Financing and Leasing Glossary #
Aircraft Financing and Leasing Glossary
Aircraft Financing and Leasing #
The process of obtaining funding to acquire aircraft or leasing aircraft to airlines or other operators. This involves various financial structures and agreements to facilitate the acquisition or use of aircraft.
Aircraft #
A machine capable of flight that is used for transportation of passengers, cargo, or military purposes. Different types of aircraft include commercial airliners, cargo planes, helicopters, and military jets.
Airline #
A company that provides air transport services for passengers and cargo. Airlines operate scheduled flights on specific routes and may offer additional services such as charter flights and cargo transport.
Asset #
Based Financing: A type of financing where the aircraft itself serves as collateral for the loan. If the borrower defaults on the loan, the lender can repossess the aircraft to recover their investment.
Aviation Finance #
The financial aspect of the aviation industry, including aircraft financing, leasing, insurance, and other financial services related to the acquisition and operation of aircraft.
Bankruptcy #
A legal process in which a person or organization is unable to repay their debts and seeks protection from creditors. In the context of aircraft financing, bankruptcy can impact lenders and lessors if the borrower or lessee declares bankruptcy.
Capital Expenditure #
Funds used by a company to acquire or upgrade physical assets such as aircraft. Capital expenditures are typically large investments that have a long-term impact on the company's operations.
Commercial Aircraft #
Aircraft used for transporting passengers or cargo for commercial purposes. Commercial aircraft are operated by airlines and other air transport companies.
Default #
Failure to meet the terms of a loan or lease agreement, such as missing payments or breaching covenants. Defaults can lead to repossession of the aircraft by the lender or lessor.
Depreciation #
A decrease in the value of an asset over time due to wear and tear, obsolescence, or other factors. Aircraft typically depreciate in value as they age and accrue flight hours.
Equity #
Ownership interest in an asset, such as an aircraft. Equity represents the value of the asset that belongs to the owner after deducting any liabilities or debts associated with the asset.
Export Credit #
Financing provided by governments or export credit agencies to support the export of goods and services, including aircraft. Export credit can help buyers secure funding for aircraft purchases.
Finance Lease #
A lease agreement in which the lessee (the airline or operator) is responsible for maintenance, insurance, and other operating costs of the aircraft. At the end of the lease term, the lessee may have the option to purchase the aircraft at a predetermined price.
Financial Institutions #
Organizations that provide financial services such as loans, leases, and insurance. Financial institutions play a key role in aircraft financing and leasing by providing capital to airlines and operators.
Fixed Costs #
Costs that do not vary with the level of aircraft utilization, such as lease payments, insurance, and depreciation. Fixed costs are incurred regardless of whether the aircraft is flying.
Freighters #
Aircraft specifically designed for transporting cargo. Freighters are used by cargo airlines and integrated carriers to transport goods and packages around the world.
Insurance #
A financial product that protects against the risk of loss or damage to the aircraft. Insurance is an important aspect of aircraft financing and leasing to mitigate risks associated with aircraft operations.
Interest Rate #
The cost of borrowing money, expressed as a percentage of the loan amount. Interest rates can vary based on market conditions, creditworthiness of the borrower, and other factors.
Lease Agreement #
A legal contract between the lessor (owner of the aircraft) and the lessee (airline or operator) that outlines the terms and conditions of the lease, including lease term, rent payments, and maintenance responsibilities.
Leaseback #
A transaction in which an airline sells an aircraft to a lessor and immediately leases it back for operational use. Leaseback transactions can help airlines free up capital tied up in aircraft ownership.
Lessor #
The owner of the aircraft who leases the aircraft to an airline or operator. The lessor retains ownership of the aircraft but allows the lessee to use it in exchange for lease payments.
Leveraged Lease #
A type of lease financing in which a lender provides a loan to the lessee to finance a portion of the aircraft's cost. The lessor provides the remaining financing and takes on the risks associated with ownership.
Lien #
A legal claim on an asset, such as an aircraft, to secure repayment of a debt. Lenders may place a lien on the aircraft as collateral for a loan to protect their interests.
Liquidation Value #
The estimated value of an asset, such as an aircraft, if it were to be sold in a forced sale or liquidation. Liquidation value is typically lower than the fair market value of the asset.
Maintenance Reserve #
Funds set aside by the lessee to cover the cost of maintenance and repairs on the aircraft during the lease term. Maintenance reserves help ensure that the aircraft remains in airworthy condition.
Operating Lease #
A lease agreement in which the lessor retains ownership of the aircraft and is responsible for maintenance, insurance, and other operating costs. Operating leases are typically shorter-term leases with lower monthly payments.
Repossession #
The act of taking back possession of an asset, such as an aircraft, due to default or breach of the lease agreement. Lenders or lessors may repossess the aircraft if the borrower or lessee fails to meet their obligations.
Secured Loan #
A loan that is backed by collateral, such as the aircraft itself. If the borrower defaults on the loan, the lender can seize the collateral to recover their investment.
Structured Finance #
A type of financing that involves complex financial arrangements to meet the specific needs of the borrower. Structured finance is commonly used in aircraft financing to create customized solutions for airlines and operators.
Sublease #
A lease agreement in which the lessee (original lessee) leases the aircraft to a third party (sublessee) for a portion of the lease term. Subleasing allows the lessee to generate additional revenue from the aircraft.
Terminal Value #
The estimated residual value of an aircraft at the end of its useful life. Terminal value is used in financial modeling to calculate the total value of the aircraft over its entire lifecycle.
Unsecured Loan #
A loan that is not backed by collateral, such as the aircraft. Unsecured loans carry higher risks for lenders, as they have limited recourse if the borrower defaults on the loan.
Utilization Rate #
The percentage of time that an aircraft is in operation or flying. Utilization rate is an important metric for airlines to maximize revenue and profitability by optimizing aircraft usage.
Value Added Tax (VAT) #
A consumption tax levied on the purchase of goods and services, including aircraft. VAT can impact the cost of aircraft acquisitions and leasing transactions in countries where it is imposed.
Working Capital #
The funds available to a company for day-to-day operations, including aircraft maintenance, fuel, and other operating expenses. Working capital is essential for airlines to sustain their operations and meet financial obligations.
Aircraft Financing and Leasing Glossary #
Aircraft Financing and Leasing Glossary
Aircraft Financing and Leasing #
Aircraft Financing and Leasing
Aircraft financing and leasing refer to the methods used by airlines and other a… #
Financing involves borrowing money to purchase an aircraft, while leasing involves renting an aircraft for a specific period.
Airline #
Airline
An airline is a company that provides air transport services for passengers and… #
Airlines operate scheduled flights on fixed routes and also provide charter services.
Airport #
Airport
An airport is a facility where aircraft take off and land #
Airports have runways, terminals, and other facilities to support the arrival and departure of aircraft.
Asset #
Backed Securities
Asset #
backed securities are financial instruments backed by a pool of assets, such as aircraft leases or loans. Investors receive payments from the cash flows generated by the underlying assets.
Capital Markets #
Capital Markets
Capital markets are financial markets where companies and governments raise long #
term funds by issuing stocks and bonds. Aircraft financing transactions can involve capital markets to raise funds.
Debt Financing #
Debt Financing
Debt financing is a method of raising capital by borrowing money from lenders #
Aircraft operators can use debt financing to purchase new aircraft or refinance existing debt.
Depreciation #
Depreciation
Depreciation is the gradual decrease in the value of an aircraft over time #
Aircraft operators must account for depreciation when valuing their assets and calculating taxes.
Equity Financing #
Equity Financing
Export Credit Agencies (ECAs) #
Export Credit Agencies (ECAs)
Export Credit Agencies are government #
backed institutions that provide financing and insurance to support exports. ECAs can help aircraft manufacturers and operators secure financing for aircraft purchases.
Finance Lease #
Finance Lease
A finance lease is a type of lease where the lessee (the aircraft operator) is r… #
At the end of the lease term, the lessee usually has the option to purchase the aircraft.
Financial Analysis #
Financial Analysis
Financial analysis involves evaluating the financial health and performance of a… #
Financial analysis helps investors and lenders assess the risks of financing aircraft transactions.
Financial Institution #
Financial Institution
A financial institution is a company that provides financial services, such as l… #
Financial institutions play a key role in aircraft financing and leasing transactions.
Fixed Costs #
Fixed Costs
Fixed costs are expenses that do not vary with the level of aircraft utilization… #
Aircraft operators must cover fixed costs to maintain operations.
Insurance #
Insurance
Insurance is a risk management tool that provides financial protection against u… #
Aircraft operators must have insurance coverage to protect their assets.
Interest Rate #
Interest Rate
Interest rate is the cost of borrowing money, expressed as a percentage of the l… #
Aircraft financing transactions involve interest rates that determine the cost of capital for aircraft operators.
Lease Agreement #
Lease Agreement
A lease agreement is a contract between the lessor (the aircraft owner) and the… #
Lease agreements outline lease payments, maintenance responsibilities, and other terms.
Lease Term #
Lease Term
The lease term is the period during which an aircraft operator leases an aircraf… #
Lease terms can vary from a few months to several years, depending on the leasing arrangement.
Lessor #
Lessor
A lessor is the owner of an aircraft who leases the aircraft to an operator #
Lessors can be aircraft manufacturers, financial institutions, or leasing companies.
Leverage #
Leverage
Leverage is the use of borrowed funds to finance investments #
Aircraft operators can use leverage to increase their purchasing power and acquire more aircraft than they could with equity alone.
Lien #
Lien
A lien is a legal claim on an aircraft or other asset to secure a debt #
Lenders may place a lien on an aircraft as collateral for a loan, giving them the right to repossess the aircraft in case of default.
Operating Lease #
Operating Lease
An operating lease is a type of lease where the lessor retains ownership of the… #
Operating leases are typically short-term and do not appear on the lessee's balance sheet.
Portfolio Management #
Portfolio Management
Portfolio management involves managing a collection of assets, such as aircraft… #
Aircraft lessors and financiers use portfolio management techniques to optimize their investment returns.
Residual Value #
Residual Value
Residual value is the estimated value of an aircraft at the end of its useful li… #
Aircraft operators and lessors must consider residual value when leasing or financing aircraft to determine the overall cost of ownership.
Securitization #
Securitization
Securitization is the process of bundling assets, such as aircraft leases or loa… #
Aircraft financiers can securitize their portfolios to raise capital and manage risk.
Taxation #
Taxation
Taxation refers to the system of levying taxes on individuals and businesses to… #
Aircraft operators must comply with tax laws and regulations related to aircraft ownership, leasing, and financing.
Term Loan #
Term Loan
A term loan is a type of loan that is repaid in regular installments over a spec… #
Aircraft operators can use term loans to finance aircraft purchases or refinance existing debt.
Transaction Structure #
Transaction Structure
The transaction structure refers to the legal and financial arrangements governi… #
Transaction structures can vary based on the parties involved, the type of financing, and other factors.
Value Chain #
Value Chain
The value chain is the sequence of activities involved in producing and deliveri… #
The aircraft financing and leasing value chain includes aircraft manufacturers, lessors, financiers, operators, and other stakeholders.
Working Capital #
Working Capital
Working capital is the difference between an aircraft operator's current assets… #
Working capital is essential for covering day-to-day operations and ensuring the financial health of the business.