What Is Fractional Aircraft Ownership?

Aircraft leasing (also known as aircraft leasing internationally) means that the lessor provides the aircraft to the lessee for use within a certain period of time, and the lessee regularly pays the rent to the lessor according to the lease contract. The ownership of the aircraft belongs to the lessor, and the lessee obtains the right of use. Aircraft leasing periods are generally longer, and it is a form of trade that realizes medium- and long-term financing through financial means. ^[1]

Aircraft leasing

Aircraft leasing (also known as aircraft leasing internationally) means that the lessor provides the aircraft to the lessee for a certain period of time, and the lessee regularly pays the rent to the lessor according to the lease contract. The ownership of the aircraft belongs to the lessor, and the lessee obtains the right of use. Aircraft leasing periods are generally longer, and it is a form of trade that realizes medium- and long-term financing through financial means. ^[1]

1. Effectively meet the needs of airline run and expansion, alleviate capital pressure and improve airline financial status and operating pressure

2. Avoid risks caused by inflation, exchange rate risks, economic crisis, etc.

3. Rent can be amortized into costs, reducing corporate taxes

4. Enjoy a series of preferential policies, including VAT reduction and withholding income tax

There are various types of aircraft leasing, divided by nature: mainly financial leases and operating leases; from the lease scope: dry lease and wet lease; from the financing source and payment object of the lessor: sublease and sale and leaseback, etc. . There are many other types of aircraft leasing, but they are basically born out of these types.

Financial lease: It means that the lessor purchases the aircraft selected by the lessee (airline), enjoys the ownership of the aircraft, and leases the aircraft to the lessee for use within a certain period of time. This is the basic charter method used by airlines.

Operating lease: It is a lease form characterized by providing short-term use rights of aircraft. The lessor (leasing company) selects a highly versatile aircraft according to market demand, and the leaser (airline) chooses to rent it within a certain period of time in order to recover investment costs and risk rewards. This lease method can be divided into wet lease and dry lease.

Dry lease: The air transport company leases the aircraft to others for use within the agreed time. The lessor only provides the aircraft and does not bear various costs in the transportation process. It charges a fixed rental fee. The lessee resolves it by himself.

Wet rent: It is relative to dry rent. Wet leases require airlines to provide not only the aircraft, but also the corresponding crew, maintenance personnel, insurance and spare parts to provide flight services.

Sublease: The lessor leases the aircraft from another financial leasing company or airline and then subleases it to the lessee.

Sale and leaseback: The airline first sells its aircraft to a financial leasing company (lessor), and then the leasing company leases the aircraft to the original aircraft user (lessee) for use. ^[3]

The working procedure of aircraft leasing has the following links:

Make an application

Aviation requires aircraft leasing according to transportation needs. First, it is necessary to submit a request for adding aircraft in the form of a feasibility study report to the General Administration of Civil Aviation of China, including the corresponding financing methods. It is formally approved by the Commission and airlines can formally negotiate with foreign investors.

2. Order aircraft and purchase transfer

According to the documents approved by the state, China Aviation Equipment Corporation and airlines will conduct unified external negotiations. And signed an aircraft purchase contract with the aircraft manufacturer. The airline should contact a foreign bank or leasing company at least three months before the aircraft is delivered. After the airline entrusts a bank consortium or a leasing company to arrange the lease, China Aviation Equipment Corporation and the airline will transfer the purchase contract to the lessor, and the lessor will pay the purchase price to the aircraft manufacturer, and then lease the aircraft to the airline .

3. External Tendering

Airlines invite tenders externally, but do not issue bid invitation notices, nor sign any form of written certification documents, such as letters of intent and power of attorney. During normal contact with airlines and foreign businessmen through airlines, they consciously disclose information about ordering aircraft to foreign businessmen, such as the type and number of aircraft and engines leased; aircraft specifications, delivery dates, and lease terms.

4. Scheme evaluation

Airlines based on the financing proposals provided by banks and leasing companies, listed the main terms and compared them one by one, and carried out a comprehensive evaluation of each proposal. Leases with more bids need to be reviewed 1-2 times to gradually reduce the scope of consideration. Then, several better proposals were negotiated with foreign investors until an economic, safe, and reliable solution was selected. The evaluation of the scheme involves the following aspects: lease term, currency and exchange rate risk, investment and loan ratio, period-end purchase value, net present value, lease rate, and loan interest rate of the bidder's credit.

5. Issue a power of attorney

After rigorous review and scientific evaluation, the airline will submit the final selected plan to the General Administration of Civil Aviation for approval. After approval, the airline will send the plan negotiated with the foreign business to the foreign business in the form of a power of attorney. Affected and experienced law firms review the lease documents drafted by the lessor, and at the same time inform the lawyer of the contents and requirements of the power of attorney so that the lawyer can discuss all the documents with the lessor and the parties involved in the lease as the airline intends. If new problems are discovered, the lawyer must consult with us before negotiating with the other party.

6. Make work schedule

After issuing the power of attorney, the airline should determine the following work schedules with participants such as arrangers, banks, and investors: the date of commitment for investment and loans, the date of completion of the first draft of the aircraft lease document, the date of the first consultation document, and the amendment Manuscript distribution date, second consultation document date, and contract signing date.

7. Working procedures of the lessee

The charterer's work procedures mainly include: reviewing the insurance, guarantee and legal opinion form, economic calculation part and liability guarantee part; preparing relevant prerequisite documents for aircraft leasing and going through relevant formalities, such as authorization letter, aircraft nationality registration commitment letter, concession Flight certificate, bank guarantee letter, insurance policy, lawyer's opinion, etc.

8. Signing and delivery of aircraft

After the transaction parties have negotiated and reviewed the documents, they can formally sign the agreement if there are no differences. Within 30 days after signing the contract, foreign debt registration shall be performed with the State Administration of Foreign Exchange, a foreign debt registration certificate shall be obtained, and the guarantee bank shall be required to sign a letter of confirmation for the transfer of a guarantee letter and an insurance company to sign a notice of insurance transfer.

Although the history of civil aviation aircraft leasing in China is 20 years later than that of European and American countries, the current development situation is in full swing. Looking inside, we can see the characteristics of the Chinese aircraft leasing market:

Feature one: dominated by international aircraft leasing transactions, domestic aircraft leasing is underdeveloped

At present, leased aircraft accounts for more than half of the total civil aviation fleet, but China's aircraft leasing market is mainly occupied by foreign leasing companies, and only a few leasing companies in China can try to complete aircraft leasing business independently. This is mainly because China's civil aviation aircraft leasing has embarked on the international road from the beginning. Most of the mainline airlines in China have been introduced through foreign financial institutions, especially through foreign aircraft leasing companies. Therefore, if we want to understand the aircraft leasing market in China, we have to mention foreign companies engaged in aircraft leasing at home, because they occupy nearly 90% of the market for Chinese aircraft leasing, especially American General Electric Financial Aviation Services and International Leasing. Financial companies are two companies.

Feature two: mainly finance leases

The aircraft leasing of China Civil Aviation started with financial leasing transactions. In the 30 years of leasing history so far, financial leasing transactions have accounted for most of aircraft leasing transactions. For example, from 1980 to the end of 2000, China Civil Aviation introduced 365 jetliners such as Boeing 747-400, Boeing 777, Boeing 767, Boeing 757, Boeing 737, Airbus A300, A320, A321, A340, etc. During the same period, 117 aircraft were introduced under operating leases. Financing leases accounted for 75.7% of the total number of leased aircraft and operating leases were 24.3%. In recent years, financial leasing has been welcomed by domestic airlines. For example, from 2006 to 2008, China Eastern Airlines Corporation Limited ("Eastern Airlines") financed a total of 62 aircraft, accounting for its total aircraft fleet in 2008. Nearly 25% of the number of shelves.

Feature 3: There are many types of lease methods

Since the 1980s, China National Airlines has used the United States, Japan, the United Kingdom, France, Germany, the Netherlands, Sweden and other countries to use the United States investment tax-reduced leveraged lease, Japanese leveraged lease, German leveraged lease, Dutch tax lease, and Swedish leveraged lease. , German and French leveraged leasing, foreign sales company leasing, loan financing leasing, sale and leaseback, and operating leasing. In addition, China has also adopted other innovative lease structures. For example, the structure of export credit + leveraged leasing that has been widely used since the mid-1990s, the structure of bond financing (lease) under the guarantee of the Export-Import Bank, and the balance of lease in recent years are all examples of international aircraft leasing. Innovative varieties in the market.

Feature four: The domestic aircraft leasing industry is developing rapidly

Although China has been engaged in aircraft leasing for nearly 30 years, domestic leasing companies have only recently begun to engage in aircraft leasing transactions. In May 2000, two leasing companies owned by Xinjiang Delong, New Century Financial Leasing Company and Xinjiang Financial Leasing Co., Ltd. took the lead in launching the aircraft lease business in China. After nearly 10 years of development, domestic leasing companies have grown rapidly either through equity restructuring or through acquisitions, and have gone abroad to acquire foreign high-quality leasing companies.

Dongjiang, Tianjin

In December 2009, ICBC Leasing successfully introduced two Boeing aircraft from the United States through the "Aircraft Bonded Import Leasing Model", setting a precedent for Chinese leasing companies to enter the aircraft leasing industry.

After the first business ice break, Tianjin Dongjiang ushered in a round of bonus for policies and reforms.

In May 2011, the State Council approved to encourage Dongjiang to advance its leasing business on a trial basis, improve the project subsidiary (SPV) management and control model, carry out aircraft leasing innovation, and prioritize the use of foreign debt indicators to lay a foundation for the development of Dongjiang aircraft leasing Policy support. In August 2015, Tianjin Dongjiang was approved to pilot a foreign currency rent policy for operating leases. On August 1, 2017, the State Administration of Foreign Exchange officially approved the Tianjin Dongjiang Bonded Port Area to launch a foreign lease rental business for operating leases, effectively helping Dongjiang. Leasing companies have avoided exchange risks. In particular, in May 2018, the State Administration of Taxation and the General Administration of Customs issued Announcement No. 24. The customs of imported leased aircraft ceased to collect VAT on behalf of the import link, and the problem of repeated taxation that has plagued the industry for many years was resolved.

While benefiting from the national policy dividend, Tianjin Dongjiang is also actively promoting the development of the aircraft leasing industry through its own reforms and innovations. In recent years, Tianjin Dongjiang has launched more than 30 lease business models, including bonded leases, export leases, joint leases, and offshore leases, to promote innovation in regulatory methods and transaction structures.

"In 2009, Dongjiang Customs first introduced the model of off-site commissioned supervision." Zhang Jie, customs director of Tianjin Dongjiang Free Trade Port District, introduced that in 2015, Dongjiang Customs, Free Trade Zone Customs, and Airport Customs coordinated supervision to achieve no-load quality. Aircraft above 25 tons can actually enter the special customs supervision area for supervision, and the supervision system is further improved. At the beginning of 2018, Tianjin Dongjiang completed the joint supervision and innovation of imported leased aircraft across customs borders, with Dongjiang as the center to achieve multi-customs supervision and interconnection, making leased aircraft customs clearance delivery easier.

Policy innovation and deepening reform have promoted the rapid development of the aircraft leasing industry in Dongjiang. Yang Liu, deputy director of the Tianjin Dongjiang Bonded Port District Management Committee, introduced that there are currently 1,500 companies operating aviation leasing business in Dongjiang, serving more than 100 domestic and foreign airlines. Domestic and overseas leasing companies such as ICBC Leasing, CCB Leasing, Air China Leasing, China Eastern Leasing, and Standard Chartered Leasing have completed aircraft leasing business and delivered aircraft to airlines through Dongjiang's leasing platform.

According to reports, before Tianjin Dongjiang "embarked on" aircraft leasing, a number of countries around the world, such as Ireland and Singapore, started this business. As of September 22, 2017, Tianjin Dongjiang Bonded Port Area has delivered over 1,000 aircraft delivered through financial leasing, second only to Ireland, ranking first, and becoming the second largest aircraft leasing platform in the world. In 2017, more than half of the world's top 25 aircraft leasing companies started operations in Tianjin Dongjiang, with a total of more than 600 aircraft delivered.

As the region with the most concentrated leasing assets in the country, the aircraft leasing industry in Tianjin Dongjiang is more actively promoting the development of domestic aircraft. According to reports, through the Dongjiang platform, following the leasing business of the Xinzhou 60 aircraft, the delivery of domestic ARJ21 aircraft was realized in 2018. The eastern Xinjiang lease structure of domestic regional aircraft also explored a feasible model for the lease of domestic large aircraft C919. The data shows that among the orders of C919, more than 10 domestic leasing companies represented by ICBC Leasing have ordered more than 600 aircraft.

As of the end of July 2018, 1,207 aircraft had been delivered, with total aircraft assets of $ 60 billion. The aircraft introduced through Tianjin Dongjiang Leasing include 17 brands and 48 aircraft types including Boeing, Airbus, Bombardier and Embraer. The total number of Airbus and Boeing large aircraft has reached 850; Bell, Airbus Little Squirrel, Cessna, Gulfstream and other general aviation aircraft have more than 270. ^[2]