Bjorn’s Corner: Sale/Leasebacks

By Bjorn Fehrm

By Bjorn Fehrm

21 August 2015, ©. Leeham Co: IndiGo Airlines firmed up Airbus’ largest aircraft sale by unit numbers in the week. The order is for 250 A320neos. This means the airline goes from 180 A320neos on order to 430. The airline is just finishing off its first order with Airbus for 100 A320ceos, the final eight being delivered over the next months.

How can an airline that did not exist 10 years ago order 430 A320neos?

There are a couple of things that makes this possible, one of them being the Sale/Leaseback. Before we go to Sale/Leaseback and how this enables this magnitude of business, let’s take a quick look at IndiGo. It has certain similarities to other airlines that also close large aircraft deals.

IndiGo started as an LCC in India in the autumn 2006. It was started by the ex-CEO and chairman of US Airways, Rakesh Gangwal, with a local partner. The airline has been professionally managed from day one and holds 36% market share in India today. It will probably pass 40% next year. Right now it serves 38 destinations with 630 daily flights and is perhaps the only profitable airline in India.

So why ordering 430 A320neos and how does one finance such an expansion? The additional 250 unit purchase on top of the 180 A320neos that IndiGo ordered at the A320neo launch 2011 are part of a 10 year fleet plan. Indigo sees an expanding market and has a policy of only keeping their aircraft for six years. The 430 A320neos are for replacement of the present 100 aircraft and expansion.

But how can a young airline that need its capital for operations and its expansion spend billions on new aircraft purchases? It doesn’t. The secret to these large aircraft deals is Sale/Leaseback. Here is how it works.

When an airline buys 180 or 250 aircraft, it of course gets a great net price. Most likely it also gets favorable deposit and progress payment conditions. The deposit is what the airline has to pay right away to secure its place in the delivery schedule of the OEM. As the delivery draws closer, there will also be progress payments, to compensate the OEM for its purchase of material and sub-supplies as part of the production of the aircraft (which lasts more than a year).

When the time comes to take title to the aircraft, the rest of the purchase price is due. This is where the Sale/Leasebacks steps in and makes sure the airline never has to find the lump-sum cash to pay for the aircraft. Instead the aircraft is immediately sold on to a leasing company, this time to a fair market price. This market price is higher than what the airline pays the OEM but better than what the leasing company could buy the aircraft for from the OEM. The leasing company also gets a contracted rental (lease) customer for the aircraft for the first six years.

The scheme is a win for the airline. It gets extra capital to run its operation and pay progress payments for each aircraft it take delivery off. The leasing company gets a new lease customer (or an expanded relationship if a leasing arrangement already exists) and an aircraft for that first lease at an attractive price.

The whole scheme works at its highest pace with airlines like IndiGo, Emirates, Norwegian, AirAsia or Lion Air that all expand very fast (Ryanair orders rather special aircraft, which are less “liquid”). Legacy carriers like Lufthansa or Delta buy in more normal quantities. They therefore have other ownership strategies and tend to finance their aircraft differently and keep them longer.


So who is taking the risks in such large deals? The deals are made (except for Emirates) around very “liquid” aircraft types, i.e., types which are popular in the market and easy to place with leasing companies and other carriers should the airline that ordered them have a slower growth and not need this quarter’s deliveries.

In a down market where even an A320neo or the Boeing 737 MAX 8 would be hard to place, the risk is shared by the airline and OEM. The leasing company comes in rather late and should be able to stay clear of any excess deliveries from such mega orders. In a global backlog of 7,000 single aisle “next-gens” (neo, MAX), the market can swallow that one or other has problems. If several of these mega purchasers run into trouble, the total market has to implode for there to be whitetails.

49 Comments on “Bjorn’s Corner: Sale/Leasebacks

  1. IndiGo, apparently, thinks big and is planning to eventually have a fleet of 1000 aircraft.

    In January 2011, IndiGo ordered 180 planes worth $15 billion from Airbus, at the time the biggest order in commercial aviation history, as it builds toward its goal of a 1,000-jet fleet. The carrier has taken delivery of more than 100 planes from that order so far.

    • OV-99:

      Big difference in PR and reality.

      Also if they shuck off aircraft that they can’t use then its not part of their fleet count.

        • @TransWorld – @TexRLon

          IndiGo It is the fastest growing and also the largest airline in India, and it is closing in on 40 percent market share in India. Perhaps you should take a closer look on why IndiGo is the only airline in India that has produced consistent profitability since it was set up in 2006. That Airbus for example, “supported” Kingfisher is just totally irrelevant to the topic in question. Also, not looking at IndiGo’s growth plans in an economy that now, apparently, is the world’s fastest-growing large economy, may seem somewhat ignorant – if not, a tad Americentric?

          NEW DELHI—India’s output growth accelerated to 7.5% last quarter, putting it ahead of China as the world’s fastest-growing large economy.

          According to government data released Friday, gross domestic product in the South Asian nation grew by 7.3% for the full fiscal year ended in March. That trumps the previous fiscal year’s 6.9% expansion and is the country’s fastest annual growth since 2011. China’s growth last quarter was 7%.

          Their sheer size and growth potential — particularly India’s — mean that China and India will be at the core of the Asian powerhouse over the coming decades. Over the past 20 years, the two countries have already more than tripled their share of the global economy. Adjusted for purchasing power parity (PPP), the Indian economy is now roughly the size of Japan’s. In PPP terms, China’s economy is likely to top that of the United States in the next year or two. One Goldman Sachs estimate suggests that India’s economy will surpass the US economy by 2043. For long the world’s second largest in population, the dynamics of India’s population growth will push it ahead of China’s in less than two decades.

          • Indigo is doing well.

            What is not doing well are third world economies.

            China is melting down, India is rife with corruption.

            As the an old title “Crash Go the Chariots”

            I simply do not believe Indigo is a 1000 aircraft company.

            Nothing to do with being an American.

            Japan was like China and India at one time, now?

          • @TransWorld

            You are right of course.

            Just to put things in perspective. Ryanair’s fleet is roughly 300 airplanes and Southwest’s is 700. So why should anyone question the ability of Indigo to grow 10 fold to 1000. After all, as OV-099 points out, it “thinks big”.

            Seriously, OV-099’s thesis might pass mustard on Wall Street and at Goldman Sachs but no one who has worked a day at an airline would subscribe to it. Hopefully OV-099 is just a stock tout and doesn’t believe his own posts.

          • @TransWorld – @HossTruz

            China may very well be heading towards a downturn. However, downturns are perfectly normal as the U.S. has often demonstrated. Over the past century the U.S. economy experienced a dozen recessions and a Great Depression even as it remained the world’s leading economy. For example, by the early 1960s, the US economy was three times bigger than it was in October 1929.


            BTW, India currently has a population 10 times that of Japan. In 1950 India only had 4.5 times as many people as Japan.

            So, yes – believing that it would be impossible for India’s best run airline to be able to grow, at least, to the same size of that of Southwest Airlines, does seem somewhat ignorant – if not, a tad Americentric.

            Interestingly, Southwest Airlines grew tenfold from the early 1980s to 2010.


          • Quite the contrary. I am a huge fan of Airbus.

            I just don’t believe every order press release put out by the manufacturers.

            I am skeptical of the need for 1,000 airplane fleet even if they do “think big” just like I was skeptical when Skybus announced a large order many years ago.

          • Again, you’re comparing the A320 order from a defunct US airline – that barely existed for one year – with A320ceo/A320neo orders from the most (-/only) profitable airline in India, and which commenced operations nine years ago.

            Any reasonable objective individual would have tried to look at, for example, the similarities in the business philosophy of the most succesful LCC in India (IndiGo) and the most succesful LCC in the US (Southwest Airlines), in order to find out if IndiGo, perhaps, will be able to grow their fleet tenfold over a period of, say, 20 years.

            In contrast, you, seem to be more “concerned” with Airbus supposedly “having a history of flaky orders, especially in India”, than looking at the most succesful LCC in India and concluding that Airbus certainly bet on the right horse there.

          • What Rakesh Gangwal has accomplished at Indigo is quite impressive and admirable. I am just skeptical about the ultimate need for 1000 airplanes. That doesn’t mean I don’t think they will grow at a healthy clip.

            The Southwest business model isn’t exactly a trade secret so i am not sure why comparing that to Indigo’s philosophy would be instructive. It is easy to espouse a similar strategy. The proof in the pudding is to be able to execute similarly. Airlines are great at getting distracted.

            Having watched the industry for many years, I can tell you the fate of airlines can change on a dime. Here’s a good recent non-American example.



            Making poor and unrealistic airplane orders contributed to its demise.

  2. “Indigo sees an expanding market and has a policy of only keeping their aircraft for six years.”

    That is a brilliant strategy, especially for a company operating in that part of he world where maintenance expertise, infrastructures and government controls are not in tune with the needs of a fast developing airline. To operate only brand new aircraft makes everything that much more simple. It is a bit like Southwest who until recently were operating a single type of aircraft. And they are based in the US; imagine what the situation is for a more chaotic country like India.

    “In a down market where even an A320neo or the Boeing 737 MAX 8 would be hard to place, the risk is shared by the airline and OEM.”

    From time to time we discuss on this blog if we are in a market bubble or not. It is a very difficult question to answer because in certain parts of the world there is a genuine requirement for fast development and quick expansion, while in other parts the situation might be somewhat different. And there was a time when aviation’s development was limited to the Americas and Europe. Today it is all over the globe and we have new business models, like Emirates for example, that we do not fully understand yet. So it complicates the situation and makes it more difficult to make predictions. But to see backlogs in excess of 7000 narrowbody units with only two OEMs frightens me. Particularly now that we see much slower growth in China, the new locomotive of the world economy; along with negative growth in other BRIC countries; an uncertain and uneven European economy; and although the US economy is in much better health than it was seven years ago we still don’t know where it is heading in terms of inflation, interest rates and employment. Last, but not least, is Japan. That country’s economy has been stalled for more than two decades now and its population is declining, and will likely continue to decline at an increasing rate. We never know, a similar phenomenon could eventually happen to China. And India, the second largest population, has a very sticky economy as well. All this adds up to the uncertainty.

    Oil prices are sinking fast and could remain low for a relatively long period of time. What I find positively scary is the fact that we see negative growth simultaneously with very low oil prices and interest rates. Normally the global economy would have a tendency to slow down only when oil prices and interest rates are both very high, not very low as they are now. Scary an strange. I am not sure I understand what’s going on.

    • There is no such thing as “negative growth”. Growth can’t be negative because then its not growth anymore.

      • You are absolutely right Andrew. It’s a contradiction in terms. But I hear all the time and it has crept on me.

      • Losses can certainly grow (see the stock market today).
        Contractions can certainly grow.
        So negative growth, doesn’t appear to be an oxymoron to me.

    • I agree with Normand but I will say I am sure I do not know what is going on.

      Low fuel prices growth should be going up, inertia or a undertow?

  3. 17 of the first 100 A320 Indigo bought have already left the fleet and fly with operators like Turkish and SAS. The 6 year thing is the limit, the search for new lessors begins at the 3-4 year mark. Brilliant idea, hatched by professionals that previously worked in the US market. Makes sense as long as the leasing companies play along. Many leasing firms got badly burned with Kingfisher (KFA) though, so it’s not without risk.

  4. I had read (no attribution to list) that Ryanair only keeps (or if its dated kept) their 737s for 5 years (lengthy of the warranty)

    I don’t know if they were the first but that was the first time I had heard about the practice (possibly from Av Week)

    Bjorn: what makes Ryaniar aircraft less liquid?

    • “Bjorn: what makes Ryaniar aircraft less liquid?”

      I wanted to ask the very same question. But instead I will add another one to it:

      Bjorn: if they change their aircraft every five years or so how to they get rid of them if they are so “viscous” (illiquid)?

      • They do get rid of them in the same way as IndiGo, it is just that these aircraft require a little more work before second placement.

    • Ryanair has special interiors, both in terms of seats and galleys. This means any taker of a second lease will have to redo the cabin almost 100%, ie new seats, different galleys etc. Such changes are time consuming and expensive. Carriers which run a more std interior will cause less changes, if any, to place the aircraft with another operator.

      • Ryanair uses Irelands depreciation rate which allows complete writeoff aircraft and engines in only 8 years .
        It seems there is a maintenance or resale price point at 5 years which means waiting the 3 extra years insnt worth it.

      • Two (and a bit) questions.

        First, is it the interior only or are systems (eg lack of ACARS on Ryanair aircraft) also an issue? If it is also a systems issue, is the interior still the main cost?

        Second, what happens to all the Ryanair specific seats and galleys? Do they get refurbished and then fitted to the new Ryanair aircraft coming off the line, or do they get junked?

  5. It’s a bit bubbly isn’t it ?When the downturn inevitably arrives Airbus will be trying to sell new A320’s and find itself completing against its own nearly new product.

    • I have been thinking the same thing. Both A&B may be shooting themselves in the foot with that.

      • Terrifying, if you’re an OEM.

        Having a market that is flooded with aircraft that still have 10-15 years of flying in them really dampens the viability of a NSA.

        • It’s exactly the same problem that auto manufacturers have in selling to daily rental fleets: it’s easy volume but at low margin, and then nearly-new vehicles come on the secondary market, depressing prices…

          • We have talked about downturns and upturns but I think we are clouded by the fact that the upturn masked massive changes in which the large operators are using their aircraft and the unwillingness to go after volume. This coupled with high fuel prices making ticket pries relatively high has meant a muted growth in most countries total air travel in that period.

            I see the downturn to be similarly muted as the drop in fuel prices means that the average punter is far more likely to be able to afford travel and there are many parts of the economy doing well. This will mean that there will still be a lot of traffic both commercial and otherwise.

            Okay we may lose some of the ‘froth’ from the market but that is probably no bad thing and in some areas such as SE Asia and India there could be real pain. Overall however the world will keep turning.

            Regarding the OEM order books, that is another thing entirely. Some of the more marginal products could see a dramatic slowdown of frames being taken up and lots of deferrals. We have to remember the historical context of the very substantial peaks and troughs of this industry. ‘Will the last person leaving Seattle please turn out the lights’ springs to mind.

          • Pretty good analogy.I wonder if indigo are allowed to just sell them on without using them.Most of the risk is with Airbus,as they have given a reduced price.If it goes well indigo takes the profit.If it goes badly the lessors won’t take up the leases and indigo will defer,cancel or just go bust.Do Airbus (and the leasors)really need a middleman?

  6. There’s something about India’s restrictive business practices making maintenance especially costly for airlines. Indigo offloads its aircraft before they reach their first heavy maintenance check.

  7. Interior are not a major cost driver. Seats are mostly airline specific but don’t cost enormously. Inseat video is significantly costlier, but most narrowbodies don’t have it and it lasts -8 yrs anyway. Lavatories aren’t moved in front and aft. Galleys are pretty standard. Inserts like ovens and coffee machines change per airline. A radical upgrade like the new Diehl or Zodiac aft galley complex does about 900k per aircraft. Then there is the strip/paint job.

    • An interior for a 777-300ER is around $10m. A single aisle perhaps $1m. Ain’t chicken feed.

      • The interior isn’t replaced during refits. Seats, galley details like inserts, IFE, livery, maybe bin extension and you’re pretty much done. Sometimes seats get only new covers..

  8. Do we know who started flipping aircraft on warranty expiration or shortly after that originally?

    Does Ryan Air do lease back as well?

    Curious on the history and the progression.

  9. Hi Bjorn

    You mention that the risks are shared between airline and leasing company. I was under the impression that normally an operating lease is used in aircraft leasing. An operating lease leaves ‘the risks and rewards of ownership’ ie the residual value solely with the finance or leasing company. Could you elaborate on your comment please.

    • This is correct for a speculative lease where the leasing company place a speculative order for e.g. an A320neo and then chase lease customers for it. The lease can then be made as an operating lease of different kinds (with crew or not, with maintenance included or not etc). A sales/leaseback is different, the operator place the order and then invites leasing companies to bid for the aircraft before delivery, best deal gets the aircraft at delivery and the operator then rents it from the buyer, the leasing company, to operate it. If they can’t find a use for the aircraft the operator is the title holder before delivery not a leasing company, therefore the operator has to find a solution with the OEM, most likely a deferral.

      Hence the risk is shared by the operator (might have to take the aircraft or pay penalty) and the OEM (can’t place an aircraft under production).

  10. If, unfortunately, the worldwide economic situation slows down to the point of a true recession then it will be interesting to see whether DL’s clear penchant for buying lift on the cheap (eg, used aircraft with the same or only “differences training” type certificates as DL already flies from generally well regarded operators w good maintenance departments – see the MD90s and B717s (MD95) they snagged for just about nothing). Might some of these lessors be motivated to unload nearly new A32x or A33x/B737x or 777-x?

  11. When they go into bankruptcy then they get unloaded for them.

    Prior to that they cut each other throats trying to place aircraft.

    • Thats where you have someone like EXIM or the french government equivalent take the loss. Thats what a guarantee the financial entity cant meet the payments means. Its all structured so the airlines or leasers can walk away without much cost. I saw somewhere that even a highly regarded airline like Qantas has 100s individual shelf companies for each plane they own or operate.

      Last time there was a big slump EXIM alone took the loss on the chin for about $8 bill, and that was well before the aircraft sales boom. It could be 10x next time around

  12. Just wanted to understand:-

    When Indigo places such a huge order, what is the discount it would get?
    Would it be fair to assume that no competitor of Indigo would have received this type of discount giving Indigo a sustainable advantage?
    Why would Indigo now want to own instead of sale and leaseback? Is A320 NEO not a preferred aircraft by lessors now or owning has cost advantages?


  13. IndiGo It is the fastest growing and also the largest airline in India.Perhaps you should take a closer look on why IndiGo is the only airline in India that has produced consistent profitability since it was set up in 2006. Big decision by indigo.. What will be further consequences nobody knows.

  14. The big decision by indigo. There seems to be a maintenance or resale price point in 5 years which means waiting 3 additional years worth it.

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