Article originally appeared in the October issue of Ground Handling International.

Authored by Paul Gentile

According to the Equipment Leasing and Finance Association (ELFA), 78 percent of U.S. companies use some form of financing when acquiring equipment. As organizations’ needs are evolving, more businesses are migrating toward using assets through flexible payment solutions rather than owning them outright. This is especially true in light of the current economic climate: financing or leasing ground support equipment can enable ground handlers, airlines, and airports to preserve capital, gain access to the newest equipment and have the flexibility to support changing business and financial needs.

Why lease?

Determining whether to lease, finance or purchase equipment ultimately comes down to how well established the ground handling company is, what its needs are and the amount of risk it is prepared to accept.

While an established, stable ground handler with a longstanding vendor relationship may feel more comfortable purchasing new equipment, owning ground support equipment can generally present more financial challenges than leasing the equipment.

Making the initial purchase requires a large amount of cash up front, which ties up working capital that could have otherwise been spent on supplies, personnel or training. There are fewer upfront barriers when leasing, so that working capital is conserved; and more financial flexibility is realized from the beginning, an especially attractive option for newer ground handling companies.

When leasing, fixed monthly payments enable more accurate budgeting throughout the term and makes for easier cash flow forecasting. At the end of the term, the equipment can then be purchased, upgraded to new equipment or financing can be continued on the same unit of equipment.

Leasing options

There are several financing solutions available to those acquiring ground support equipment. The best option for an organization will depend on the desired use of the equipment.

One financing option is a Fair Market Value lease, or an FMV lease. An FMV lease is typically leveraged when a customer just wants to use the equipment and wants multiple options available to them at the end of the lease term (which is typically 24-72 months). At the end of the lease term, the lessee can choose to trade in the equipment for newer models and renew the lease term on the new equipment, return the equipment altogether and end the contract, or purchase the equipment for its residual value. With an FMV lease, the financing company owns the equipment, but offers customers the lowest monthly payments.

Another option is a Dollar Purchase Option, sometimes referred to as “dollar-out” or a “buck out.” Customers who choose a Dollar Purchase Option are pretty sure that they will want to keep the equipment at the end of the term, but still want the flexibility to have the option to return it, should needs change. With this choice, end-of-term options are limited to either purchasing the equipment for a nominal fee (typically $1) or returning the equipment altogether. The equipment’s residual value is essentially wrapped into the monthly payments, so monthly payments with a Dollar Purchase Option are typically higher than those of an FMV lease. That said, the purchase price at the end of the term is significantly lower as a result.

Finally, there is the ability to finance the GSE through monthly payments (an asset-backed loan) that ultimately lead to ownership. In going down this route, a customer takes out a loan that is spread over a defined term, after which the title is transferred and the customer owns the equipment. Acquiring a loan essentially offers no options other than to own at the end of the term.

Added benefits

Through leasing GSE, ground handlers can alleviate the burden of ongoing maintenance, which is often time-consuming and costly, especially when entire rebuilds are required. When leasing GSE, service, software, training and maintenance are often bundled into the monthly payments, which can minimize unplanned equipment expenses.

Leasing can also aid in getting assets into customers’ hands faster, as executing a lease agreement is generally a quicker processing than generating a purchase order and buying equipment. This speed is particularly beneficial in instances where supplemental equipment is needed on short notice, like if a piece of equipment breaks or the volume of work suddenly increases.

It can also better support sustainability initiatives by offering the ability to upgrade to new electric or hybrid equipment at the end of a lease term, and cycling the used equipment back into the secondary market at a more affordable rate.

Conclusion

Leasing ground support equipment can be an excellent choice, offering companies more ease in financial planning, more choices and more flexibility, especially in turbulent economic times. As the aviation industry continues to evolve, ground handling companies must stay ahead of industry trends and preferences, taking them into consideration when deciding how to acquire equipment, in order to remain successful.