Airfinance Leasing Corporation: Changing operating leasing

[nonmember]Airfinance Leasing is not just a new company. Kirsten Bartok, its founder and CEO, is trying to create a new market. Bartok, who was one of the launch team of XO JET, believes business jet fleet operators – she prefers this term to calling them fractional companies – should copy airlines and use true operating leases to finance aircraft. ::join::[/nonmember][ismember]

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Airfinance Leasing is not just a new company. Kirsten Bartok, its founder and CEO, is trying to create a new market.

Bartok, who was one of the launch team of XO JET, believes business jet fleet operators – she prefers this term to calling them fractional companies – should copy airlines and use true operating leases to finance aircraft. Airfinance Leasing, which was launched in 2008, is offering operators the chance to structure longer operating leases, with smaller deposits, and truly manage residual value risk.

Operating leases have, of course, been used to finance business jets for many years but Airfinance Leasing’s product is different to the ones that are used in this market. “We are taking the commercial leasing market product and applying it to corporate aircraft,” says Bartok.

This means that lessees can benefit from significantly lower up-front payments. Lease factors – the monthly payments that lessees make – will typically be higher and more like airline rentals, but the security deposits will be smaller than the three to four months required by most business jet leasing companies.

Bartok says that Airfinance will typically take upfront security deposits of between $450,000 and $600,000 for an aircraft worth $22 million compared to traditional business jet leases where deposits would be between $2.2 million and $6.6 million.

Airfinance will take all of the residual value risk so there are no tax savings for the lessee. This makes the product far less attractive to high net worth individuals (HNWIs) and ultra high net worth individuals (UHNWIs) who often benefit from depreciation allowances. Bartok says this is why her product is aimed at air operators not individuals. “We are really targeting air operators – or what have often been referred to as fractional jet companies – there are a proliferation of companies in the US, Asia and Europe that we would be keen to work with.”

This focus also means that the company is not competing with most existing lenders and operating lessors that focus on individuals. “Most lenders still make decisions based on credit and market their services through high net worth individual groups in their banks. These high net worth individuals use operating leases because of tax reasons. We are in a different market.”

Bartok is not copying commercial aircraft leasing entirely. The biggest difference is that Airfinance will not look to re-lease aircraft to new operators when the first lease matures. Instead they will sell the aircraft entirely. Although commercial aircraft leasing companies do trade aircraft they typically expect to manage the transition between several airlines for each aircraft.

Like many commercial aircraft leasing start-ups – and there are at lots out there – Airfinance’s biggest challenge is to find debt. The company is backed by two private equity firms but needs bank capital. This is no reflection on Airfinance. Leasing companies backed by Steve Hazy, the founder of ILFC, the world’s biggest aircraft lessor and the inventor of aircraft leasing, and Domnhal Slattery, the founder of RBS Aviation Capital and JetBird, the European very light jet operator have the same problem.

It is almost 40 years since the first commercial aircraft operating leases were structured. Some 35% of all aircraft operated by airlines are now on true operating leases . Bartok is optimistic that Airfinance can lead the way in business jets. “The industry is still in transition,” she says. “In 2004 when we launched XO JET we thought that our biggest issue would be managing deadlegs and finding owners. In fact the hardest part was finding financing for aircraft.”

Bartok’s Airfinance aims to solve that problem for operators.

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