Aircraft Leasing: Operating Lease or Finance Lease
More than half of the global commercial aircraft fleet no longer sits on airlines' own books directly — it sits in leasing companies' portfolios.
The basic logic of an operating lease
Under an operating lease, the aircraft stays on the lessor's balance sheet for the lease term; the airline gains the right to use it for a set period (typically six to twelve years) and returns it at the end.
This structure lets an airline adjust fleet size relatively quickly in response to demand swings and avoids a large upfront capital commitment.
The ownership-like nature of a finance lease
Under a finance lease, the airline assumes most of the economic risks and rewards of the aircraft for the lease term; it typically holds an option to purchase the aircraft for a nominal price at the end.
From an accounting standpoint this structure is generally recognized as an asset with a corresponding liability, bringing it economically closer to an outright purchase.
How the off-balance-sheet advantage changed after IFRS 16
Before the IFRS 16 accounting standard took effect, the biggest appeal of an operating lease was staying off balance sheet; with the standard change, most leases now appear on the balance sheet as a right-of-use asset with a corresponding liability.
This change significantly narrowed the accounting gap between lease types, though commercial differences — such as operational flexibility and who bears residual value risk — remain fully in place.
How residual value risk is split between the parties
Under an operating lease, the risk tied to the aircraft's market value at lease end largely stays with the lessor, while under a finance lease that risk largely shifts to the airline.
This risk allocation directly affects how the lease rate is set; the lessor prices in the residual value risk it carries.
Matching lease type to fleet strategy
Airlines facing fast growth or uncertain demand cycles generally favor operating leases to preserve flexibility; airlines flying mature, stable routes may lean toward finance leases or outright purchase structures that sit closer to ownership.
Most large airlines use both structures across their fleet at once, balancing capital structure against operational flexibility.
Aviation and TransportIn asset-heavy transport businesses, financing rests on structuring the asset itself correctly as both security and source of revenue.
Learn moreFrequently asked questions
Is an operating lease always cheaper for an airline?
No; the flexibility advantage is generally priced with a premium. Total cost can end up higher than a finance lease depending on lease term and end-of-term options.
Did IFRS 16 eliminate operating leases?
No; it changed the accounting presentation, but the commercial and operational differences — residual value risk, flexibility — remain fully in effect.
How do leasing companies manage residual value risk?
Generally through a large, diversified fleet portfolio, valuation models based on used aircraft market data, and sometimes manufacturer buyback guarantees.
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