In a lease, the owner (lessor) allows another the use of an aircraft for a fixed period of time or at will. The lease most of us are familiar with is called an operating lease.

An operating lease is a lease whose term is short compared to the useful life of the asset. For example, an aircraft which has an economic life of 30 years or more may be leased to a company for 5 years on an operating lease. This can be a simple leasing transaction where at the end of the lease, the aircraft is returned to the lessor. There may also be the option at lease end to buy the aircraft at Fair Market Value (FMV). If the buy-out is significantly less than FMV, then it isn't a true operating lease, but more of an installment sale. An operating lease has four advantages:

Leasing is less capital intensive> than cash purchase . A company (or individual) can use their cash for other purposes versus keeping it tied up in an aircraft.

Leasing shifts the residual value risk to the lessor. Aircraft values, unlike most property, depreciate over time. Companies that tried to sell their aircraft in 2001 - 2003 saw a significant loss in value over what they probably anticipated.

Leasing is better than financing if your company does not need the tax write-off from tax depreciation. Aircraft can be written off to zero value for tax purposes in eight or fewer years. If during that time period a company expects significant profit, the tax depreciation of an aircraft is one way to protect those profits. If the company (or individual) does not or cannot take the tax write-off, leasing allows the lessor the tax write-off. The user still can write off the lease payments as an expense, so both parties win.

Leases can be for relatively short periods. Leases can run three years or longer. Shorter leases may even be available. If you have a need for an additional aircraft for the next few years only, a lease allows you to walk away at lease end without having to be concerned with selling an owned aircraft. Those who completed their lease in 2001-2003 did not face the loss of residual value that the owner did.

Operating leases also have four disadvantages.

A lease can place restrictions on the operations of the aircraft. A lease may restrict where you can base or how you can operate the aircraft. A lease may restrict geographic regions to which you can fly. A lease may prohibit commercial operations. These can arranged for as part of the initial lease agreement.

Leases have return conditions. When returning an aircraft from a lease, you must return it in some pre-agreed state of condition. The return conditions protect the lessor, not you as the lessee. You will likely pay a penalty for high utilization, or for engines that are not on a guaranteed maintenance program, and wear and tear beyond that accepted in the lease. When you own it, you can fly it as much as you need as you, the owner, accept the residual value risks.

Early returns from a lease can be costly. If you break a lease, you may be responsible for the remaining lease payments.

With a lease, you may loose tax advantages. An aircraft can be written off to a zero tax basis. Leases don't allow you that benefit as the lease payments can only be taken as expenses. This may result in higher short term taxes as the aircraft depreciation allowance can easily exceed the lease payment deduction.

Another type of lease is the synthetic lease. A synthetic lease is a financing hybrid. Typically, the operating company sets up a special purpose entity. That entity acquires the aircraft and leases it to the operating company. The operating company shows the lease on its books as an expense. The special purpose entity tax depreciates the aircraft and since that entity is owned by the operating company, the operating company gets the advantages of tax depreciation as well. Enron got into some trouble over this type of lease, but if executed properly, they are still quite legal and useful.

Leases can work for some companies and individuals. You need to examine your ownership, tax and risk requirements and review the lease documents with your aviation team to ensure your operations will not be constrained.

In December 28, 2006 the FAA released its "final" guidance1 regarding Operations Specification A008 ("Ops Spec A008"). This guidance outlines in specific detail what Operational Control is, who must exercise it, and most importantly, who cannot exercise it. The Operational Control issue is not new; but it was brought to the forefront by recent discoveries in the Air Charter segment of Part 135. Ops Spec A008 is not new, it is merely an effort to confirm or clarify existing regulations. It is pretty clear why 135 Certificate Holders should be concerned as Ops Spec A008 addresses concerns the Federal Aviation Administration has about wet leases, operational control, control over the crew, control of the maintenance of aircraft and other issues. However, why should the owners of aircraft be concerned?