Are You Sure This is a Good Idea?
At first glance, the idea of investing in a commercial airplane seems CRAZY. Running an airline seems like an ultra-complicated undertaking with thousands of employees, massive government regulation, buying the rights to gates at airports, extensive servicing and maintenance of airplanes, and a million other factors.
However, aircraft leasing is a much simpler, more straightforward transaction. For the ultra-wealthy looking for an alternative source of income, it actually might make some sense.
This type of investor is probably already investing in commercial real estate. Leasing aircraft actually has a lot of similarities to the commercial real estate business, specifically the net lease sector….
Similarities between Aircraft Leasing and Commercial Real Estate Investment
• Fragmented market: There are some big players such as Air Lease Corp. and AerCap and corporations such as RBS and GE that are deep in the mix. However, a lot of much smaller players like private equity funds, hedge funds and other investment funds that you have never heard of are also in this space.
At the end of the day, a Boeing 747 is a Boeing 747, regardless of what company leases the airplane. While a large player might have relationships with say, Hawaiian Airlines and Etihad Airways, that is not to say that they would never consider leasing elsewhere.
It would be the same way in the commercial real estate world with Chick-Fil-A or Dollar General; they would generally nor pay more or lease an inferior location just so they could have a particular landlord.
• Risk of Buying Speculatively: In the case of commercial real estate, you absolutely would want to have a tenant lined up (or at least very likely to lease your property, with backup options) before you bought a parcel of land or an empty building.
In aircraft leasing, it would still be important to have an airline ready to lease; not as important as in commercial real estate due to the interchangeability of airplanes between airlines, but still important.
• Long Leases: The leases airlines sign are typically between 5 and 15 years. This is not a asset where you are constantly searching for new tenants like apartments or rental houses.
Net leased properties are also often leased in a similar range of years.
• Maintenance: In a net leased commercial property, the tenant is typically responsible for all maintenance and any repairs required to keep the property in good condition.
A retailer like Walmart or CVS wants to keep their building updated and maintained to keep their customers. You can structure the aircraft lease the same way with the tenant responsible for all maintenance and repairs.
On top of that, the airline industry is highly regulated and planes must meet exhaustive maintenance and safety standards.
• Insurance: Just like you can get insurance against a fire burning down your building, you can insure your plane against fires, plane crashes, etc.
There are a few key differences…
• Valuation: With net leased properties, you are buying an income stream.
A net leased Walgreens in suburban Kansas City with 15 years remaining on the lease is almost always going to be worth far more than the exact same building on the same corner if it were empty.
This is not the case with airplanes as you should be able to rent the asset to someone else, perhaps at a lower rate, if a tenant defaults or does not renew.
• Fungibility: If your tenant goes dark, in the case of a bankruptcy for instance, the asset might decline in value 50% or more and in some cases, re-tenanting the asset with anyone might require costly modifications of the property or it might be impossible.
This is not the case with airplanes.
The market might for your particular airplane might go down or up, but unlike real estate, a plane leased to a bankrupt U.S. carrier could potentially be moved to Canada, the Middle East, etc.
• Income: net leased income properties to corporate tenants have seen cap rates decline to historically low levels. Ground-leased properties which are leased to McDonald’s or Chase Bank sometimes trade at cap rates below 4% (someone might buy an asset for $5,000,000 that only $15,000 per month in net income).
In the case of aircraft, the purchase prices are generally going to be higher, but the monthly income stream will be MUCH, MUCH higher. Ascend Aircraft Data in early 2015 tracked the price of used Boeing 747’s at between $7.5 million and $27 million and the average lease rates at between $170,000 and $350,000 per month.
Without having details about any specific lease, let’s says someone paid at the very high end of the range ($27 million) and leased at the very low end ($170,000 per month).
That would still yield 7.5%. If both numbers were in the middle of the range ($17.25M purchase price and $260,000 per month lease rate), you are looking at 18%.
On the other hand, there is one key difference that favors net leased properties…
• Depreciation: There seems to be one major difference between net leased properties and aircraft. When you buy an airplane, it has a finite life and each year it depreciates until it eventually becomes virtually worthless.
When you buy a net leased property, the building depreciates every year but it is possible that the land appreciates (if it is, for instance, at a trophy intersection in a major city.)
This is not always the case; the land under a Dollar Store in a small town in Mississippi may never appreciate. Even in a major city, the land value could decline if the area became run down and all new development avoided the area.
However, in many cases, if you due a reasonable amount of due diligence, the land is still going to have a significant value even after the lease is up and the building is ready for tear-down.
Final Considerations Before Investing
In terms of approaching this as a practical investment, I don’t think someone with below around $100 million should even think seriously about getting into aircraft leasing.
There are funds that invest in aircraft and that is how most people, including the ultra-wealthy, would probably invest in this space.
I don’t think it would be out of the question to buy a plane directly and lease it to an airline, but you would first need to develop a high level of competence with things like valuation of the aircraft and lease terms.
There are probably enough experts out there with direct experience that could help develop this.
The number of potential customers out there is very low; there are only so many airlines in the world, so contacting many of the potential customers would not be impossible.
Aircraft leasing seems like an unusual but interesting investment for the jet-setting billionaire.