Financing, leasing, and risk mitigation strategies
Modern aircraft offer improved fuel efficiency, lower carbon emissions and enhanced passenger comfort. At the same time though, composite materials and sophisticated networked avionics make their maintenance more complicated. As a result, while airlines want new aircraft because they are cheaper and better, the cost of ownership is significantly higher relatively than it was a few decades ago. Acquiring an aircraft requires considerable capital investment and careful financial planning.
Half a century ago, most airlines owned their aircraft, but this high cost of ownership means that these days there are several options for operators trying to put a fleet together. This article looks at the range of financial mechanisms that are available that airlines can use to acquire aircraft, including the role of insurance products like the Sompo AXIS Aviation Finance Insurance policy.
01
Some airlines, particularly large national carriers or those with strong balance sheets, opt to purchase aircraft outright. It’s an approach that provides full control over an asset, including decisions about configuration, deployment and resale. It’s a capital-intensive strategy however, with the cost of a single commercial widebody aircraft potentially exceeding $100 million.
To manage the financial burden, airlines that opt for direct purchase typically use debt financing. Common methods include:
While effective, traditional financing is increasingly being constrained by regulatory requirements. Banks must comply with capital adequacy rules such as Basel III,[1] which can limit their ability to offer high-value, long-term loans. Additionally, economic volatility and sector-specific risks can make lenders cautious, especially when dealing with smaller or less established airlines.
02
The limitations and risks associated with direct purchase have meant that leasing has become the most common method for airlines to access aircraft over the last few decades. Leasing offers flexibility, lower upfront costs and the ability to scale fleets up or down based on demand. Leasing currently accounts for more than half of the global commercial fleet.[2]
Lease agreements often include strict return conditions, usage limits and penalties for early termination. Additionally, lessors assess airline creditworthiness carefully, which can limit access for newer or financially weaker carriers.
It’s worth noting here that many airlines prefer to own their widebody aircraft because they can’t afford to take the risk of leases expiring on aircraft they use on high-demand routes which could threaten high-value runway slots. New widebody aircraft can be leased, but it’s more complicated to configure widebody aircraft to an airline’s specific requirements such as seating plans. Narrowbodies are easier, and thus more cost-efficient, to reconfigure, so leasing can make more sense.
03
Larger aircraft manufacturers may offer financing support, especially for strategic customers or those that place large orders. This can include:
Manufacturer support is often tied to long-term relationships and again may not be accessible to smaller carriers.
04
For the last few years, disruption to aircraft supply chains has meant that there can be a considerable length of time between ordering an aircraft and it being ready to enter commercial service.
Sale-leasebacks occur when an airline has signed on the dotted line but then doesn’t want to finance the aircraft. Lessors, who didn’t tend to want to place speculative orders and wait years for aircraft to be delivered for which they may not have lessees lined up, can then step in and purchase the aircraft and lease it straight back to the airline.
This type of transaction allows the airline to:
Sale-leasebacks are commonly used for newly delivered aircraft and can be structured to align with the airline’s financial strategy.
05
As traditional lenders face increasing regulatory and risk management constraints, insurance-backed alternatives have emerged to facilitate aircraft financing. One such product is the Sompo AXIS Aviation Finance Insurance (SAAFI) policy,[3] the first policy being arranged by Willis Credit Risk Solutions for one of our aviation clients working with insurers Sompo and AXIS Capital, both of whom are rated A+ by Standard & Poor’s.
The SAAFI policy is a non-payment insurance product designed to protect lenders and investors from the risk of default by airlines or leasing companies. If a borrower fails to meet its debt obligations, the insurer indemnifies the lender - typically within 10 days of notification. This shifts the credit risk from the borrower to the insurer.
SAAFI helps unlock capital that might otherwise be unavailable due to regulatory or risk concerns. It’s particularly useful for airlines with lower credit ratings or those operating in emerging markets. By enabling lenders to manage risk more effectively, SAAFI contributes to a more resilient and accessible aviation finance ecosystem.
Airlines have a diverse set of options that can support them as they move to acquire aircraft. Each option has its own advantages, risks and suitability depending on the airline’s financial profile, fleet strategy and market conditions. Traditional financing and leasing remain foundational, but innovative strategies like the SAAFI policy are reshaping how risk is managed and capital deployed.
The aviation industry will continue to be pushed forward by a combination of efficiency, sustainability goals, regulatory changes, technological innovation, geopolitical tension and financial challenges. Insurance-backed financing potentially spreads financial risk and, in some cases, could represent a resilient and adaptable financing model that could help support the aviation industry’s long-term ambitions.
