An aircraft lease is a maintenance bet before it is a financing

For most of my career, the choice between leasing and buying an aircraft was presented to boards as a financing decision. The airline needed an aircraft. It could borrow and buy one, or it could pay a lessor a monthly rent. Analysts compared the interest rate implied by the lease with the company's cost of debt, added a view on the aircraft's value at the end of the term and declared a winner. I did that analysis for an airline in Brisbane, and then priced it from the other side of the table for six years at a lessor in Dublin. I now think it starts in the wrong place.

An aircraft is an airframe that lasts decades, attached to engines that consume money on a timetable of their own. Engines must go into a shop for overhaul after a set number of hours or cycles, and an overhaul on a regional jet engine can cost several million US dollars. Landing gear, auxiliary power units and heavy airframe checks follow separate cycles. The question that decides whether a lease is a good one is rarely the rent. It is who pays for those events, when, and in what condition the aircraft must be handed back.

What the balance sheet now shows, and what it still hides

Lease accounting changed in 2019. Under AASB 16, the local standard that mirrors its international counterpart, an airline now records most leased aircraft on its balance sheet as a right-of-use asset with a matching lease liability, rather than describing them in a note as operating leases. That was an improvement. Directors and lenders can see the scale of an airline's fixed commitments, and gearing can no longer be flattered by renting instead of borrowing.

But the standard was built around the rent, and the rent is only part of the commitment. Most aircraft leases also require the airline to pay maintenance reserves, monthly amounts set aside against future engine and airframe events, or to return the aircraft in a defined maintenance condition and compensate the lessor for any shortfall. How those obligations are measured depends on the contract and on judgements about future flying, and the figures that reach a board are estimates resting on many assumptions. They deserve as much scrutiny as the lease liability and seldom receive it.

When I arrived at Saltbush, 28 of our 39 aircraft were leased. Our board papers showed the lease liabilities clearly and the reserve payments as an operating cost. What they did not show was the size of the return conditions we would face as each lease ended, or how those conditions interacted with our own maintenance plans. Two turboprops due back to their lessor in 2023 needed engine overhauls before return that nobody had budgeted, at a combined cost of about A$9 million. We had paid reserves on both. The reserve balances did not cover the full cost of the shop visits, and the difference was ours.

The second price in every lease

At the lessor I learnt to treat return conditions as a second price, negotiated separately from the rent and often worth more to the lessor. A lessor can accept a lower monthly rate if the aircraft comes back with freshly overhauled engines, because that condition decides what the aircraft can earn on its next placement. Airlines, smaller ones especially, tend to negotiate hard on the rent and accept standard return terms, because the rent sits in this year's budget and the return is a decade away.

I now ask for every lease proposal to be presented as a total cost over the full term, including reserves, expected shop visits, return conditions and the cost of an aircraft standing idle while it is prepared for return. On that basis the comparison with ownership often changes. An owned aircraft also needs its engines overhauled, but the airline controls the timing, can run an engine closer to its limits when the aircraft is near retirement and keeps the value of maintenance it has paid for. A leased aircraft hands that value back to the lessor.

None of this means owning always wins. Leasing transfers the risk that a type falls out of favour and its value collapses, and it preserves borrowing capacity for a company that needs it elsewhere. New aircraft with better fuel efficiency are often available only through lessors who placed large orders years earlier, at prices a regional airline could never negotiate alone. Those are real advantages, and in some years they decide the matter.

Match the aircraft to the contract

For a business like ours the deciding question is usually duration. Our charter contracts with resources companies run for three to seven years. A new aircraft lease typically runs for ten to twelve. If we lease a new jet to serve a five-year contract, we carry the remaining years at our own risk, hoping to find another customer whose needs fit the aircraft. If the contract is renewed, that works out. If it is not, we hold a twelve-year commitment against a five-year revenue stream.

In 2022 that question decided our largest fleet investment. We needed six more jets of about 100 seats for two new charter contracts. One option was to lease six new-generation aircraft for twelve years. The other was to buy six mid-life aircraft of the type we already flew, with engines overhauled before delivery, for about A$138 million in total. The new aircraft would burn about 18 per cent less fuel, which our commercial team rightly said mattered to customers reporting their own emissions. The mid-life aircraft matched the contract terms, shared spares, simulators and pilot qualifications with our existing fleet, and could be sold or dismantled for parts if the contracts ended.

We bought the mid-life aircraft. They have earned a better return than the lease option would have, and I would make the same decision on the same facts. I should also say plainly that the fuel-efficiency argument has grown stronger since. A resources company weighted emissions heavily in a 2025 tender, and we lost that contract partly on that ground. Our next fleet decision will price that risk explicitly rather than leave it as a qualitative note at the end of the paper.

The lesson I would offer any board is simple to state. Ask for the comparison between leasing and owning as a total maintenance and return cost over the period the aircraft will actually earn money, not as a contest of interest rates. Ask how many of those years the revenue is contracted. And ask what the airline plans to do with the aircraft once that contract ends, because the lessor will certainly have asked.