Inventory Leasing and the Benefits / By Kevin Geissler
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Five years ago, GA Telesis pioneered a breakthrough structure to offer airlines an alternative to inventory on its balance sheet. A quarter of a billion in transactions later – inventory leasing benefits still far outweigh the higher cost alternatives.
Leasing has its perks, but with recent changes in accounting treatment, some airlines have shied away from it. However, these airlines are often looking at leasing as a pure financial instrument as opposed to a tool to manage residual risk. While residuals in some asset classes such as aircraft and jet engines are somewhat predictable depending on recessionary cycles, there are other assets that are also affected by pressures on the supply and demand curve derived from fleet age retirements and capacity shifts. For decades, airlines have used leasing as a mechanism for managing some level of their residual exposure, but only recently has it been possible to manage this risk as it relates to the tens of billions of dollars of rotable inventory in airline circulation.
Before we get into the innovative programs GA Telesis has developed, we must acknowledge the incredible challenge airlines face with supply chain management. Think of spare parts for commercial aircraft as insurance against downtime – spending too much will load airlines’ balance sheet with inventory, reducing cash available for other needs. Spending too little increases risk of costly downtime and upset customers. How do companies manage this delicate balance?
Landing Gear and APU
GA Telesis offers short and long term APU and Landing Gear leases, which are airlines’ preferred option when dealing with shop & OEM delays, overhaul programs, or managing seasonal demand. Many times these needs are AOG. Why GA Telesis:
- Quality assets, conveniently located around the world.
- Neatly organized yet thorough minipacks, created by our best in class Records Team, allowing for efficient review by engineers, material planners, and power plant departments.
- Ability to execute transactions quickly and provide logistics assistance along the way.
The Alternative – Inventory Leasing
Given the supply chain burden of owning inventory and the expensive nature of PBHs, GA Telesis has developed customizable inventory leasing programs. Under an inventory lease, the parts are delivered to the airline (as lessee) that enjoys benefits of ownership and full control of parts during the lease. At the end of the lease, the parts are redelivered to the lessor.
In a lease of main base kits to support new aircraft deliveries, the benefits are immediate and significant – replacing the large initial investment with fixed monthly payments. CFOs and treasurers value this predictability as they build forecasts and cash flow models. Further, the lease is structured with flexibility to maximize return on investment for the airline during the life of the lease:
- GA Telesis evaluates removal history with the airline to add highly used components or remove unnecessary components. GA Telesis can monetize removed components in the marketplace to decrease the lease fee, providing the airline with an efficient lease and maximizing return on investment.
- Allow accordion options, so the size can grow with airline fleet expansion.
- End of lease purchase options are tailored to remove the airlines’ residual risk in the asset.
There was a time when aircraft leasing was a small industry with little airline adoption. This was followed by the introduction of engine leases, which also struggled with adoption. Now both asset classes have material participation globally, and the number of leased assets versus owned are nearing fifty percent. Inventory leasing is the next asset class and GA Telesis’ pioneered formula remains an excellent tool to reduce inventory expense, mitigate risk, and to provide airlines the flexibility they need to effectively and efficiently manage their fleets.