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Plane Talk MAXIMIZING YOUR INVESTMENT
Is There A Leaseback In Your Future?
Buying an airplane isn’t cheap, and pilots have developed all sorts of ways to rationalize or off-set the costs of owning and maintaining the craft.
One of the more popular ways to off-set the costs of ownership is a leaseback arrangement in which you buy the airplane, and then lease it to a local flight school that uses it and pays you a percentage of the rental fee.
For flight schools, leasebacks are fantastic. A flight school can secure a fleet of aircraft with very little capital investment, there are no fixed operating costs for the airplane and if the airplanes don’t fly for one reason or another, no negative cash flow.
But for the owner, leasebacks are a potentially risky proposition. There is no simple formula for how to make a leaseback arrangement work, and for every story about a great leaseback arrangement, there are at least 10 stories of relationships that turned disastrous, usually with the owner left holding the bag.
What could go wrong you ask? Consider the loss of value in your airplane if a renter
crashes it into a fence. The damage can be repaired, but the loss in the value of your airplane, particularly a new airplane, can’t be restored. There’s also the issue of increased wear and tear on the airplane, as well as potential liability you face as an owner when someone else is flying your airplane.
“Basically, what it comes down to is, you are loaning the flight school the money for the airplane and giving them control of the airplane and then if it flies, you get some money back,” said Ron Levy. He is an instructor from Salisbury, MD, for Professional Instrument Courses, who used to teach a course in leaseback negotiations at the University of Maryland.
“If you’re doing it to buy an aircraft you could not otherwise afford to own, then you’re sticking yourself out to be chopped off. You will be in a financial commitment at someone else’s mercy,” he adds.
What separates the profitable leaseback deals from the disasters-in-waiting? Experts say three factors will determine the outcome of a leaseback arrangement: the desirability of your particular airplane within the local flying community, the quality of the school you are renting to, and your expectations as a leaseback owner.
“The honest truth is if you make a little monthly profit, you’re doing well,” says Kareem Fahmi, chief flight instructor for California Airways in Hayward, CA. “If somebody wants a guaranteed investment, I tell them put your money in a money market.”
The way a leaseback typically works is that an owner—you—buys an airplane and enters into a leaseback deal with a flight school that allows them to rent your airplane out for flight training and other types of rental use.
According to Jon Boyd, director of sales and marketing for Panorama in White Plains, the best deal for owners is an 80/20 split, with the owner “receiving” 80 percent of the hourly aircraft rental rate, and the flight school receiving 20 percent.
From the owner’s 80 percent, the flight school will deduct fuel, maintenance and tiedown costs. The owner then pays insurance on the aircraft, and sets aside a percentage toward engine overhaul, and pays the monthly payment on the aircraft.
When calculating the numbers, it’s important to consider the fact that an airplane used as part of a rental fleet will always cost more to operate than one kept in the hangar for your private use.
Boyd notes that insurance for a rental aircraft can be six or seven times the insurance for that same aircraft that is owner-flown. Maintenance costs are higher as well, because instead of the 50 or 100 hours per year a single owner might put on the aircraft, a flight school might put 500 or 600 hours a year on the airplane. Inspections are also more frequent with rental aircraft, with most requiring 50 or at least 100 hour inspections, versus the traditional annual inspection required for
non-rental airplanes.
Picking the right airplane for your area is critical because you’ll need to make sure that the airplane gets flown frequently enough to produce income. Boyd notes that most pilots prefer flying new airplanes, and a new airplane comes with a warranty that will off-set some of the maintenance costs.
Fahmi’s flight school has 27 airplanes, 24 of which are leasebacks. He says the simpler airplanes tend get flown more and are cheaper to maintain, making them more profitable for leasebacks. A complex aircraft or a twin has more expensive maintenance and insurance requirements that will limit the number of pilots who can fly the airplane. But a 172 or 182 can be flown by more pilots and generally costs less to maintain.
In most cases, airplanes need to fly 50 or more hours per month in order to break even, in other words, in order for the monthly operating costs to be covered by the owner’s share of the rental rate. If the airplane sits on the ground an entire month with little or no usage, the owner will be stuck paying for the higher insurance even with no income coming in.
On the other hand, Boyd notes that purchasing a new aircraft provides the owner with certain tax deductions that may off-set the operating costs or additional expenses of leasing back the airplane.
A big factor in the leaseback equation is the flight school you choose to lease your airplane to. At Panorama, Boyd said owners are given discounts on fuel, maintenance and tiedown space for the airplane, which makes the airplane cheaper to operate. Another plus is that owners can bump renters from their aircraft at any time (this is unusual; not all flight schools allow this), or they can rent any of Panorama’s other aircraft at the reduced owner rate.
Also Panorama buys its fuel wholesale, has its own mechanic shop and ramp space, and so it is able to give owners sizable discounts on all of its services and still make a small profit on each service. A school that has to buy fuel from another FBO, or that outsources its maintenance operations, doesn’t have that flexibility and therefore the owner’s operating costs will be higher.
Levy cautions owners to carefully read all leaseback contracts and particularly to maintain control of maintenance costs. He says a valuable book to read before getting into a leaseback deal is Practical Aviation Law, by Jay Scott Hamilton. He said thebook provides valuable tips on aircraft ownership and specifically leaseback deals, and is a must-read for any potential aircraft owner.
Some schools have been known to inflate the operating cost of the airplane with unnecessary maintenance, or find other ways to cheat owners out of their share of the rental dollar.
Levy says one way to address the issue is to have an agreed-upon list of items that can be fixed without approval, say all items related to airworthiness or items up to a certain dollar amount, and require other items be approved by the owner before being done.
Also keep in mind that airplanes that are being rented will experience wear and tear faster than one kept in your hangar, so if you’re the kind who will break into tears at scuff marks on the seats or some other cosmetic issue, again, leaseback may not be for you.
Levy notes that a good leaseback arrangement requires the owner to run the aircraft
like a business and carefully consider the operating costs. If the numbers don’t add up, don’t do it. Also, remember that a leaseback deal is a negotiation; make sure you craft a deal that is fair for both sides, or sooner rather than later you will looking to get out.
While a leaseback deal may not be for everyone, it does offer the ability to own an airplane at a greatly reduced cost. And if you want to own an aircraft and have no trouble treating it like a business, then letting a school rent out your airplane on a leaseback might just be the ticket for you.
—Sean Fulton
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