How can you value aircraft for leasing based on lessee type?

1 Lessee types

There are two main types of lessees in the aviation industry: airlines and lessors. Airlines are the end-users of aircraft, and they lease aircraft to meet their operational and strategic needs. Lessors are intermediaries that own and lease aircraft to airlines or other lessors, and they aim to maximize their return on investment and minimize their exposure to market fluctuations. The type of lessee affects the value of aircraft for leasing, because it determines the demand and supply of aircraft, the lease terms and conditions, and the risk profile of the lease.

2 Lease types

There are two main types of leases in the aviation industry: operating leases and finance leases. Operating leases are short-term or medium-term leases that do not transfer the ownership or the risk of ownership of the aircraft to the lessee. The lessee pays a periodic rent to the lessor, and the lessor retains the residual value and the maintenance responsibility of the aircraft. Finance leases are long-term leases that transfer the ownership or the risk of ownership of the aircraft to the lessee. The lessee pays a periodic rent to the lessor, and the lessee bears the residual value and the maintenance responsibility of the aircraft. The type of lease affects the value of aircraft for leasing, because it determines the cash flow and the depreciation of the aircraft, as well as the tax and accounting implications for both parties.

3 Market conditions

The market conditions affect the value of aircraft for leasing, because they influence the demand and supply of aircraft, the interest rates and the inflation rates, and the fuel prices and the exchange rates. The demand and supply of aircraft depend on the economic and industry factors that affect the profitability and growth of airlines and lessors, such as passenger traffic, load factor, yield, cost, competition, regulation, and innovation. The interest rates and the inflation rates affect the cost of capital and the discount rate for both parties, as well as the present value and the future value of the lease payments and the residual value. The fuel prices and the exchange rates affect the operating cost and the revenue of airlines and lessors, as well as the competitiveness and the attractiveness of different types of aircraft.

4 Lease rates

The lease rate is the amount of money that the lessee pays to the lessor for the use of the aircraft over a specified period of time. The lease rate is usually expressed as a percentage of the initial value or the market value of the aircraft, and it varies depending on the type of lessee, the type of lease, and the market conditions. The lease rate reflects the opportunity cost and the risk premium of the lessor, as well as the bargaining power and the preferences of the lessee. The lease rate can be calculated using different methods, such as the net present value method, the internal rate of return method, the lease factor method, and the market comparison method.

5 Residual values

The residual value is the amount of money that the aircraft is worth at the end of the lease term. The residual value is usually expressed as a percentage of the initial value or the market value of the aircraft, and it depends on the type of lessee, the type of lease, and the market conditions. The residual value reflects the depreciation and the obsolescence of the aircraft, as well as the demand and supply of the aircraft in the secondary market. The residual value can be estimated using different methods, such as the straight-line method, the declining balance method, the sum-of-the-years digits method, and the market forecast method.

6 Valuation models

To value aircraft for leasing based on lessee type, you can use various valuation models that combine the lease rate and the residual value, as well as other factors such as maintenance costs, insurance costs, taxes, and fees. Some examples of valuation models are the lease vs. buy model, the lease vs. lease model, the lease vs. sell model, and the lease vs. scrap model. These models help you compare different leasing options and scenarios, and determine the optimal leasing decision for your specific situation and objectives.

7 Here’s what else to consider

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