Free glossary of Airfinance, aircraft finance and aviation finance terms
We have been meaning to produce a guide to Airfinance terminology and definition for many years. Having now started, we realize that we completely underestimated the task.
This is very much a work in progress, if we have missed out any term that you need please email: email@example.com and I will get back to you as soon as possible with a definition.
This is a personal attempt and it is not a replacement for legal or financial advice!
Dickon Harris, Airfinance Journal Editor.
When depreciation is higher than normal rate, normally used for tax purposes.
Abbreviation Aircraft, crew, maintenance and insurance lease (see Wet Lease)
Definition Airworthiness Directive
Engine people describe these as aluminum (or carbon fibre in the case of the 787) tubes with engines attached.
AIRCRAFT ON GROUND
Commonly referred to as AOG. Grounded aircraft can happen for many reasons such as engine problems. Lessors also use the term when they have aircraft off-lease.
The operator (but often not the owner) of commercial passenger or freight aircraft.
A regulation issued by an aviation authority, usually to correct a fault on aircraft.
Abbreviation aircraft on ground.
Abbreviation Available passenger kilometres
An organization or individual that provides valuations. Most finance deals require two independent valuations. The International Society of Aircraft Traders runs the most respected qualifying scheme for appraisers.
Abbreviation Available seat kilometers. The number of seats a carrier has, multiplied by the number of kilometers they fly.
Abbreviation Available seat miles. The number of seats a carrier has, multiplied by the number of miles they fly.
ASSET VALUE GUARANTEES
A type of insurance where insurers, Usually provided by manufacturers although some insurance companies are active in this market.
Abbreviation Available tones-kilometers. The number of tones of cargo a airline can carry, multiplied by the number of miles they fly.
AVIATION WORKING GROUP
A group of manufacturers and financiers that represents the aircraft finance industry, the Aviation Working Group was the driving force behind the Cape Town Convention. (See April 2003 issue for more details.)
A Lloyd's Market Association and the International Underwriting Association that is used in airline insurance policies. Clause AVN48 lists certain war risks that are excluded from coverage under the airline's hull, spares, passenger, and third party liability policy. The changes would rule out coverage in the event of a hostile terrorist attack using radioactive materials, electromagnetic pulse devices, chemical and biological weapons.
When an aircraft is leased to an intermediate lessor and then sub-leased back to the lessee.
When the last rental or lease payment in a lease is substantially larger.
BARGAIN PURCHASE OPTION
This is when the lessee (usually an airline) has the right to purchase an aircraft at a lower rate than the expected market value.
The most controversial of all aircraft values, the base value is, as ISTAT says, an open, unrestricted, stable market environment with a reasonable balance of supply and demand, and assumes full consideration of its highest and best use.
BUYER FURNISHED EQUIPMENT
Equipment that is not part on a new aircraft order, but is needed for operations. Includes in-flight equipment, seats and galleys.
BFE costs can be considerable. Qatar Airways closed a $140 million facility to finance its BFE In 2005 (see Airfinance Journal February 2006).
The right, but not the obligation, to purchase an asset in the future. Often added to tax leases, where the lessee has the right to purchase the aircraft at say 12 years.
CAPE TOWN CONVENTION
The Cape Town Convention is an international legal standard for aircraft leases and security interests, making repossession easier for financiers.
The process when an aircraft is converted from a passenger aircraft into a freighter.
An aircraft type where the space for passengers and freight can be adapted.
An ISTAT term for an appraisal that includes a physical inspection and a review of records, but is more detailed. Often needed for re-registration of the aircraft in a different country.
The basic type of an appraisal, where the appraiser estimates the value of the aircraft based and assumes the aircrafts condition. Usually provided for mid-time, mid-life aircraft (ones that never exist).
Definition Export Credit Agency
Definition enhanced equipment trust certificate
A service offered by engine manufacturers and lessors, where airlines can swap an engine that needs maintenance for one that has just been overhauled.
Engine pooling happens when airlines, lessors or manufacturers create a pool of spare engines which any member of a pool can use. For example, Willis Lease Finance manages a pool of CFM56-3C1s for seven Chinese airlines.
ENHANCED EQUIPMENT TRUST CERTIFICATE
An EETC is a bond backed by aircraft lease rentals. Usually issued by a single borrower (either an airline or aircraft manufacturer).
Equipment trust certificates were originally developed for railway rolling stock, and then enhanced with properties such as tranching and credit support to make them more applicable to aircraft.
The special purpose vehicle that issues an EETC owns the aircraft and leases it to the airline on a finance lease (usually fixed rate). The airlines obligation to pay rent is absolute, and since it is not the true owner, repossession is relatively easy if it defaults.
Manufacturers add escalation charges to aircraft orders to protect themselves against inflation when customers order aircraft to be delivered in the future. Escalation clauses have been used for many years in a variety of industries, and all aircraft and engine manufacturers have used them.
While escalation may go unnoticed when inflation is high, customers that order aircraft in a downturn often find that they end up having to pay far more than the aircraft's market value when the aircraft are delivered (see Airfinance Journal April 2005).
Definition The Export Import Bank of the United States
Countries where aircraft are manufactured will often guarantee financing to help secure aircraft sales. The Export Import Bank of the United States guarantees Boeing aircraft. Frances Coface, Germanys Hermes and the UKs Export Credits Guarantee Department support Airbus aircraft.
Brazile BNDEs guarantees Embraer aircraft with Export Development Canda supporting Bombardier.
Export credit agencies typically guarantee only 85% of an aircrafts value. There is also a home country rule for Airbus and Boeing where the agencies agree not to finance aircraft in each others countries (see July/August 2005).
EXTENDED DESKTOP APPRAISAL
Another ISTAT definition, similar to a desktop appraisal, but would also use information on maintenance condition from a client, the aircrafts operator, a manufacturer or another appraiser or consultant's report.
Values the aircraft upon the income potential from its lease and residual value.
Definition French Leverage Lease
Definition French Operating Product
FRENCH LEVEAGE LEASE
French tax lease where French financial institutions invest in aircraft in return for depreciation allowances.
Mainly a domestic product since 2001, although there were special allowances for companies located in former French colonies, although these are said to be more difficult to structure than straightforward French leases.
Rarely seen following a European Union investigation into whether they are a subsidy.
FRENCH OPERATING PRODUCT
A French tax lease largely reliant on withholding tax that is most often used in China. The Sino-French Double Tax Treaty has a special provision to give credit to any French entity receiving income from China.
Chinese withholding tax is set at 10% (although this can be reduced to 6% for leases) and French banks get credited for this by their local tax office. The banks then pass some of this credit back to airlines. Airlines also benefit from some withholding tax exemptions from the Chinese tax authority.
First developed by BNP Paribas. The product can also be used in other countries including Turkey and China.
When the appraiser actually kicks the tyres and looks at maintenance records. inspection of the aircraft and its maintenance records.
Equipment used to make engines quieter in order to meet noise requirements.
Islamic leasing. An ijara or lease financing involves the Islamic investor (or a special purpose vehicle) purchasing an asset and leasing it to the lessee for a rent that is either agreed in advance or adjusted regularly throughout the lease period, by consent, by reference to an expert or, in some cases, by reference to an interest-based index.
An ijara is an operating lease with the lessor retaining ownership of the asset after the lease expiry but can be turned into a higher purchase arrangement by the grant of an option for the lessee to purchase the asset on a specified date (ijara-wa iqtina). Shari'a usually requires that the management, maintenance and insurance of the leased assets are the responsibility of the lessor so as to justify the profit made by the lessor, although mechanisms exist for the responsibility for these to be effectively passed back to the lessee.
Most Islamic aircraft financings completed to date have used ijara-based structures.
International Society of Transport Aircraft Traders
An industry body for people involved in the trading of commercial aircraft. ISTAT also certifies aircraft appraisers. The society runs an excellent conference in the US each year, a good one in Europe and a fantastic cocktail party at either the Paris or Farnborough Airshows each year. See www.ISTAT.org for more details.
Abbreviation: International Society of Transport Aircraft Traders
Abbreviation A Japanese lease with a call option (see Japanese operating lease).
JAPANESE LEVERAGE LEASE
Now only available for domestic airlines, the Japanese leverage is a traditional tax structure with the investor taking 20% of the aircrafts value and borrowing the rest.
JAPANESE OPERATING LEASE
An operating lease where a Japanese corporate buys the equity portion of an aircraft in order to get depreciation benefits.
The main criterion here is the 90% test, under which the aggregate lease rentals during the lease term must not exceed 90% of the lessors total cost (including interest and fees) for acquiring the asset ie, full payout structures must be avoided.
Typically, a JOL will involve the purchase of the aircraft by a Japanese lessor, which leases it on operating lease to the airline. The JOL will generally be leveraged by a term loan facility provided to the lessor to fund the debt portion of the acquisition cost of the aircraft. While the rent payable by the airline may be related to the lessors funding cost, it is often insufficient to pay off the amortizing loan. In such cases, the lender will need to look to the proceeds of sale or re-leasing of the aircraft for repayment of the unamortized principal.
Abbreviation Japanese operating lease
The price that aircraft manufacturers quote (but rarely charge) customers.
A type of Islamic finance, Murabaha deals are more usually found in trade finance, typically involving the purchase and sale of commodities to generate a profit, which is a substitute for interest payments on a commercial loan. Kuwait's first low-cost airline, Jazeera Airways, closed an innovative Islamic pre-delivery financing in 2005 (see Airfinance Journal June 2005). Under the terms of a Murabaha agreement, the airline instructs the financier to purchase commodities under a deferred payment arrangement. The financier then sells the commodities to release funds, which are then made available to the airline. The airline then reimburses the financier the cost of the commodities it purchased on an installment basis, which includes an agreed mark-up. The mark-up is the bank's profit and is used as a substitute for the charging of interest. The mark-up can be calculated as a fixed lump sum or as a percentage of the financed amount. This type of structure is Shariah-compliant because the bank takes the title to the commodities, and therefore taking real risk to itself and the airline through the buying and selling of commodities.
Abbreviation Original equipment manufacturer, ie Airbus, Boeing, CFM, GE, Rolls-Royce
A lease where the lessor retains ownership and where the aircraft will eventually be returned to the lessor.
For the lessee, the accounting definition is that the lease is off-balance sheet.
A company that owns aircraft and leases them to airlines.
Abbreviation pre-delivery payment financing
Parts Manufacturer Approval Parts or PMA parts are ones that are manufactured or designed by companies that are not the original equipment manufacturer (OEM). They usually do not have access to the original manufacturers data so design their own parts and have to prove to the FAA, under FAR 21.303 regulations, that their parts are as good, or even better, than the original.
PRE-DELIVERY PAYMENT FINANCING
Aircraft manufacturers require customers to make down-payments before aircraft are delivered. Banks will often finance these.
The Islamic finance term for interest.
Definition Residual Value Guarantee
Same as an overhaul, when an engine is sent to a workshop for maintenance.
Abbreviation Spanish Operating Lease
SPANISH OPERATING LEASE
An operating lease where Spanish investors received depreciation benefits for investing in aircraft. Often called a SOL.
The aircraft is owned by the Spanish investor, who then leases it onto a special purpose company, that then leases it on to the airline. Airlines typically have the option (but not the obligation) to buy aircraft later.
Iberia Airlines closed the first aircraft SOL in September 2005.
An Islamic bond financing. A sukuk (which works in a broadly similar way to a conventional securitization) is a bond or certificate that provides an investor with ownership or part-ownership in the underlying asset, usufruct, or service.
A sukuk is often combined with other Islamic structures such as an ijara, a mudaraba or a murabaha. The nature of the underlying asset and terms of the sukuk must be agreed on the subscription date. The sukuk represents beneficial ownership of the underlying assets and therefore entitles its holder to receive a pro rata share of profits generated by the asset (not a fixed return tied to their face value). A Sukuk can also be issued in tradable form and listed on applicable investment exchanges.
TIME AND MATERIALS
Engine repair shops and lease contracts often quote on a time and materials basis. This includes labour for teardown, inspection, repair costs, material replacement and a degree of life-limited part replacement
A common legal term in Islamic finance. Basically the right to use or operate an asset that belongs to someone else.
An aircraft lease where the aircraft is operated by the lessor, on behalf of the lessee. Also known as an ACMI Lease Aircraft, crew, maintenance and insurance lease.
An unsold aircraft that has been built by a manufacturer.
Appraisal terms adapted from the ISTAT Appraisers Directory http://www.istat.org/appraisers.htm
Islamic definitions from Think Islamic (Airfinance Journal September 2005) by Robert Fugard and Olga Petrovic, from Linklaters,
Aircraft Financing (Third Edition), Euromoney Books, Edited by Andrew Littlejohns and Stephen McGairl.