Question

You are a senior airline captain finally making good money and decide to buy a new airplane for your personal flying. An FBO that is an aircraft dealer seeking to sell you an airplane offers to lease it back from you for use in their charter, rental, and flight training operations. A different flight school operation that is not in the business of selling aircraft advises you that they'd be interested in leasing the aircraft from you. Having some income from the airplane would be financially helpful, and both companies are financially sound and have good reputations for paying their bills on time and taking good care of aircraft entrusted to them.

You have two options:

1. Buy the airplane from the dealer and lease it back to them, or
2. Buy the airplane from the dealer and lease it forward to the flight school.

Carefully analyze which of these options is the most likely to result in the lowest purchase price and the most reliable lease income. Explaining your reasoning clearly.

Answer 1

I would be taking alternative number 2 based on my decision. Purchasing the aircraft from the manufacturer and selling it to the flight school. That is since typically a lease forward contributes to a stronger partnership between the lessor and the lessee. The lessor's primary motive in the ordinary aircraft lease (a lease forward) is to earn income from the aircraft and the primary motive for the lessee is to obtain the use of an aircraft without having to make the capital investment necessary to purchase one. When the interests of the participants in a lease deal have been harmonized, neither the lessor nor the lessee typically has the motive to turn around and disrupt the lease's happy running. On the other side, leasebacks continue to result in further lawsuits and conflicts. In a fly (fly-forward), the principal incentive of the lessor is to gain revenue from the plane, while the primary purpose of the lessee (Flight School) is to acquire the usage of a plane without incurring the considerable capital cost and debt service needed to buy it. The seller-lessee's primary motivation in a leaseback sale is the sale of an airplane. The flight school is for educating pilots and not about selling aeroplanes. That is what they are really worried with, as long as the aircraft is secure and airworthy.

In comparison, a forward lease is best because of the aircraft leasebacks established mainly as an aircraft selling device, the leaseback being given as an option to persuade a individual to purchase an aircraft that they would not believe like they might manage. While the seller / lessee might still have the same incentive in a lease-back as a lessee in a lease-forward (to have the benefit of an aircraft without needing to make the capital cost to purchase one), this is usually the secondary motive of the lessee. In a selling and leaseback the lessee's primary purpose is to sell the aircraft.  This can offer the lessee an opportunity to behave later in ways that could compromise the good running of the deal because of the desire to sell the aircraft and gain revenue from it. However, where a leaseback is included in the contract, the buyer / lessor could pay a considerably higher price for the aircraft than if it were not. Because aircraft are usually priced on sale, the broker may earn up to 25% of the sales price to market a new aircraft. If I were to buy an aircraft without a leaseback I would probably find some price negotiability.

It is not in the best interests of the owner-lessor (me) to see identical new aircraft introduced to the flight line of the seller-lessee (FBO) vying for small competition from the company. The seller-lessee is often encouraged to sell another aircraft and if providing a specific leaseback agreement to another prospective purchaser of a related aircraft leads to a deal, the seller-lessee is driven to provide that leaseback to that prospective buyer. As that will put an even older rival aircraft to the flight route, my leaseback profits might be projected to fall more. Furthermore, if I could no longer afford this new investment, once the FBO got my aircraft listed, I might figure out that the aircraft got risen or depreciated at a cheaper pace than my accountant had expected and forced me to pay more taxes.

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