First-time airplane purchasers are often tempted to offset the high cost of aircraft ownership by leasing their airplane back to an FBO, flight school, or charter operator. Such leaseback arrangements typically look great on paper, but are fraught with pitfalls for the unwary aircraft owner. An expert explains how to avoid getting stung by doing your homework.
June 7, 1998
|About the Author ...
Brian Jacobson has over 12,000 hours
in all types of general aviation aircraft from trainers to jets. He has been
flying since 1970, and earned most of his certificates and ratings on the East
Coast in the early 1970s.
His first aviation employment was as sales manager at Air Worcester, Inc.,
an FBO in Massachusetts. Through the years, he worked for several FBOs selling
airplanes and flying charters. For nine years, he was chief pilot for a division
of ITT based in Providence, Rhode Island, and later was a bizjet captain for
Textron, Inc., out of Providence, Augusta, Georgia., and Pontiac, Michigan.
During those years, he flew real-world IFR in all sorts of weather and some of
the most congested airspace in the world.
Since 1988, Jacobson has been a member of
the National Aircraft Appraisers Association, and owns and operates a firm
called Great Lakes Aircraft Appraisal, appraising airplanes for buyers, sellers
and financial institutions. He also helps individuals and businesses buy
aircraft by evaluating their needs, recommending the type of aircraft they
should purchase, and helping them locate and procure those aircraft.
Jacobson is also a professional aviation writer. He is a contributing
editor for AVweb, Aviation Safety, and IFR
Refresher; a contributor to Plane &
Pilot; and can be heard on Belvoir Publications' Pilot Audio
In October 1996, he published his first book,
Flying on the
Gages, in which he discusses his experiences flying IFR. In May, 1997, his
second book was published: Purchasing & Evaluating Airplanes. His books are available from Odyssey Aviation Publications.
The typical owner-flown airplane
flies less than 100 hours a year. Since many of the costs of ownership-annual inspections,
insurance, hangar, and so forth-are fixed costs that don't vary with flight time, it's
often difficult to justify the cost of owning an airplane that flies so little.
Some pilots want the benefit of owning their own airplane, even though they know they
won't fly it enough to justify it. Others simply don't have the financial wherewithal to
make the purchase unless the airplane can generate some kind of guaranteed income. That's
how the "leaseback" was born.
At the same time, many small FBOs, flight schools and charter operations-and some
larger ones-have problems with finances as well in today's environment. Most banks want
the operator to have at least a 15 to 20 percent equity position in any airplanes they
finance, and coming up with those down-payments can be very tough for the typical
undercapitalized aviation business. So, the operator goes looking for someone else to buy
the airplane and lease it to back to them.
In theory, such a leaseback arrangement sounds good because both parties get what they
want out of the deal. In practice, however, there can be many problems with leasebacks
that stem from how the lease is written, who controls the airplane, and who pays the
Stacking the deck
More often than not, leaseback contracts are written to in such a way to stack the deck
in favor of the FBO, flight school or charter operator who will be using the airplane.
Frequently, the other party to the agreement is a brand new private pilot (or even a
student pilot) who is talked into buying an aircraft and leasing it back to the FBO or
flight school without having any idea how to go about buying an airplane, or developing
the knowledge needed to look out for his or her own best interests.
Before you even consider getting involved in a leaseback arrangement, you need to learn
as much as possible about how to purchase an airplane. (There's a wealth of information
right here in AVweb's Used Aircraft section.) You also need to investigate
the legal ramifications of the proposed leaseback contract, and have a clear understanding
of how it will work on a daily basis.
If an FBO or flight school operator shows a student a particular airplane and urges him
to buy it and lease it back to the operator, the student is already way behind the power
curve (but probably doesn't realize it). That's because the student has already entrusted
his life to the operator and his flight instructors during the course of learning to fly,
so why shouldn't he trust the same people when they tell him that the airplane is a good
There are several reasons. For one thing, the airplane may not be suitable for the
prospective purchaser's needs. The purchaser may be pushed by the operator into buying an
airplane that he or she doesn't really want or need, simply because it fits well into the
operator's training or rental fleet.
Even if the type of airplane is appropriate, the particular airplane might not be in
good condition or fairly priced. Until an airplane has undergone a thorough pre-purchase
inspection-ppreferably by an independent mechanic who has no stake in whether or not the
sale goes through-there is always some doubt about its condition. If, for example, the FBO
or flight school operator is leasing an airplane from someone else who wants sell, it is
in the operator's best interest to find another party to buy it and lease it back to him.
Under such circumstances, the operator may not provide the best source of guidance for the
inexperienced student or private pilot about the correct procedure for buying an airplane.
Do your homework
Before entering into a leaseback arrangement with any FBO, flight school or charter
operator, you should look carefully at the airplanes in the existing fleet. Many operators
pay no attention to the cosmetics, and rental pilots seem to have something against a
well-appointed airplane. They tear the seats, ruin the carpet, leave the plane full of
beer cans, cigarette butts and other junk, and generally don't care about keeping the
airplane in decent shape. If the operator's fleet of airplanes appears dirty and abused,
you can be sure that your airplane will wind up looking the same way if you lease it back
to that operator. If you wind up having to re-paint your airplane and replace the interior
at the end of the lease, it will not be cheap...and you will not be reimbursed by the
Rental airplanes often live a tough life. They often sit on windy ramps with no control
locks installed. Master switches are often left on. For some reason, rental pilots seem to
hate adding oil to the engine, no matter how low the dipstick reads. If you wind up having
wind-damaged control surfaces, frequent battery replacements, or an early engine overhaul,
the cost will most likely fall on your shoulders as the owner, and not the operator's.
The most common form of leaseback arrangement is where the operator rents the airplane
at a stated hourly rate, keeps a portion of the revenues, and passes the rest along to the
aircraft owner. The owner is then responsible for all costs associated with flying the
airplane including fuel, maintenance, insurance, and long- and short-term expenses such as
engine overhaul, paint, and interior refurbishment. Usually such an agreement will specify
that the operator (or some other facility designated by the operator) will do the
maintenance. Sometimes a small discount off the shop standard labor rate is offered, but
most of the time parts are sold at full list price.
Running the numbers
Take, for example, a Cessna 172 that rents for $60 per hour. The flight school might
take 20% of that, or $12 per hour, leaving you with $48 per hour to pay all the bills.
|Sample Operating Costs
(Per Flight Hour @ 250 Hours Per Year)
|Direct Operating Costs
|Fuel @ 75% Power
|Oil & Oil Changes
|Avionics Repair and Replacement
|Total Direct Operating Costs
|Indirect Operating Costs
|Total Indirect Operating Cost
|Total Operating Cost
The cost of fuel is going to be close to $20 per hour. That may seem a little high, but
keep in mind that students tend to fly the airplanes with the mixtures full rich, and
renters are likely to do the same thing, at least on short flights. That leaves $28 for
everything else: insurance, hangar rent, scheduled and unscheduled maintenance, reserve
for engine overhaul, and avionics repairs.
The average cost of an engine overhaul for the Lycoming O-320-E2D engine is $11,000.
There is no point in buying a cheap overhaul because you will only wind up doing it again
at an additional cost. If the engine goes the 2,000 hour TBO it costs you $5.50 per hour.
Direct operating costs include the cost of fuel, maintenance and engine reserve for
overhaul. The fixed costs, or indirect expenses, include hangar fees and insurance. The
direct cost per hour will be the same no matter how many hours the airplane flies. The
indirect cost per hour will vary with the number of hours flown. So, if the airplane flies
a great deal during the year the hourly breakdown of the indirect costs will decrease,
thereby decreasing the overall hourly operating costs. But an airplane that flies a lot
requires maintenance and engine overhauls sooner as well.
Few operators will make a guarantee regarding the number of hours the airplane will fly
per month. If there is a verbal promise made by the operator make sure it gets written
into the contract. Chances are that will be a stumbling block. That's because if the
operator has to pay you if the airplane is not flown he might as well own the airplane
himself. That lack of any guarantee is what makes the leaseback attractive to operators
because they can have airplanes sitting around at times when business is slow at no cost
Another less-common leaseback scheme is where the flight school pays the direct
operating costs of the airplane. Of course the owner gets even less money per hour and is
still responsible for any unscheduled maintenance that may be required.
Read the fine print
Pay close attention to any leaseback contract you sign. You should have an aviation
attorney review it to be sure you understand it completely. There could be a requirement
that you pay the operator his hourly profit when you fly the airplane. That could make
your own flying expensive. There might be a clause that states that only the operator will
have the right to determine how scheduled and unscheduled maintenance will be completed.
That could mean that you have no say in how the engine is overhauled, when it is needed,
or who does it. All you get in that case is the bill. It might say that if you have the
airplane booked and a renter desires it at the same time that you can be bumped to another
airplane and that you will pay the full hourly rental cost.
The one thing you must remember when you lease an airplane back to an operator is that
you are likely to have the same problems you had when you rented. That means finding
schedules full when you need an airplane on short notice, not having the flexibility to
take your own airplane on a long trip because someone has it booked for part of the time
period you would be away, and infrequent weekend availability because that's when everyone
wants to fly.
So, before you get involved with a leaseback-especially if you are considering one
because you cannot afford to own and operate an airplane on your own-be sure you do your
homework. You might be far better off to continue renting for a while and saving money for
the eventual purchase when you are in a better financial position to afford your own