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Assessing Ownership Options Available Today
Owning vs. Leasing an Aircraft

by Keith G. Swirsky, Esq., Galland, Kharasch, Greenberg, Fellman & Swirsky, P.C.

Owning.  A primary factor in deciding whether to purchase an aircraft is the level of anticipated aircraft usage, i.e., will the aircraft be used enough to justify the acquisition and ownership costs? Ownership may make financial sense when the aircraft is flown at least 300 hours each year. At about 300 hours, the amortized cost of full ownership of the aircraft may become less than the amortized cost of chartering or fractional ownership.

One alternative for owners who do not expect to use an aircraft at least 300 hours a year is joint ownership of a single aircraft by two or more purchasers. Under a joint ownership arrangement, the full cost of acquiring, operating, and maintaining the aircraft is shared among the joint owners. However, joint owners also share use of the aircraft so they must carefully select partners whose anticipated use of the aircraft – in terms of flight hours, scheduling, and geographic location – is compatible with their own.

To reduce the cost of aircraft ownership, owners can hire a company to charter the aircraft to third parties when the aircraft is not otherwise in use. Rarely, if ever, will revenue from third party charter activity cover the full cost of aircraft ownership and operations, so an owner should consider third party charter activity solely as a means to help offset the fixed costs of ownership, and, even then, third party charter activity may not significantly offset the fixed costs if the owner places too many scheduling restrictions on the charter company.

Another advantage of ownership, in the context of business use aircraft, is eligibility for depreciation deductions, although owners must meet very strict IRS regulations on passive activity loss rules.

There are disadvantages to owning an aircraft too: an aircraft owner must commit time and energy to managing the aircraft, including hiring pilots, renting hangar space, scheduling maintenance, and obtaining insurance.  Alternatively, owners can hire a management company to perform all necessary management services for a fee.  The majority of aircraft management companies in the United States are owned and operated as small businesses by pilots. Aircraft management companies exist at large and small airports all over America and the world, and can serve as a means for an aircraft owner with limited aviation experience to "buy" the necessary experience.

Leasing.  Leasing offers the same availability benefit as full ownership without the initial financial commitment required to purchase an aircraft. The most common lease is the operating lease, in which the lessor retains title to the aircraft, but gives possession of the aircraft to the lessee.  Another type of lease is the financing lease. A financing lease provides the lessee with an option to purchase the aircraft at the end of the lease term, and resembles a mortgage or an installment sale in that the purchase price of the aircraft at the end of the lease, when added to the total amount of rent paid during the lease period, will be roughly the same as if the aircraft had been originally purchased on credit. A financing lease is most desirable when the cost of borrowing money is low compared to the return on capital available in other investment media.

When negotiating a lease, a critical issue involves the tax deduction for depreciation of the aircraft. The IRS permits the depreciation of aircraft over a period of six tax years, yielding potentially lucrative tax benefits. However, many lessees cannot benefit from aircraft depreciation deductions because they may be used only to offset the lessee’s income from passive activities or because the lessee does not otherwise generate significant taxable income. Fortunately, a lease may be structured to make these deductions available to the lessor rather than the lessee. The lessee may, therefore, be able to negotiate a lower least rate for the aircraft in exchange for allowing the lessor to enjoy the benefit of the depreciation deductions.

Leasing can be as costly as full ownership, both in terms of operating expenses and commitments of time and energy to manage the aircraft, because a lessee generally must arrange for, and pay for, all fuel, maintenance, hangar, pilot employment, and insurance to the same extent as an owner. Of course, lessees may avail themselves of the services of an aircraft management company to the same extent as an owner. The major risks of owning the aircraft – such as legal liability and risk of loss from damage or theft – are also just as applicable to a lessee.