Answer ... Secured lending: This is the prevailing choice for procuring business jets and a limited number of sizeable commercial aircraft by operators or owners. It can be acquired through local banks, which in substantial transactions often form lending syndicates. The financier may stipulate the equity contribution required from the borrower, lessee or operator and subsequently fund the remaining amount, securing a vested interest in the aircraft. An inherent advantage for the lender is the right to reclaim the aircraft in the event of default.
One notable advantage of this structure for owners is the ability to annually deduct depreciation costs from their financial accounts. Nonetheless, alternative structures may offer more favourable interest rates and increased flexibility.
Operating leases: These present more adaptable financing frameworks for owners and operators. A notable example is Nigeria’s voluntary participation in the pilot phase of the International Civil Aviation Organization’s Carbon Offsetting and Reduction Scheme for International Aviation, which commenced in 2021. Operators engaged in operating leases possess the flexibility to adjust their fleet to incorporate aircraft that meet new environmental requirements. Consequently, operating leases – available as either dry leases or wet leases – are commonplace in Nigeria.
Dry leases constitute longer-term arrangements, typically spanning three years or more. The lessee benefits from the opportunity to evaluate the aircraft during the specified period without an immediate commitment to purchase. However, the advantages and drawbacks are contingent upon the legal and tax classification and recognition of the lease.
With the introduction of the International Financial Reporting Standard (IFRS) 16 on leases, effective as of 1 January 2019, global reporting requirements for tax purposes underwent significant changes for the majority of airlines, owners and operators. In Nigeria, Federal Inland Revenue Service (FIRS) Information Circular 2010/01 previously guided the tax implications of leases, categorising them as either operating leases or finance leases.
Under an operating lease, the lessee cannot recognise the aircraft as its own asset. No subsequent laws or circulars have been issued by the federal government or the FIRS concerning the implementation of IFRS 16, which altered this stance for lessees. Lease rentals may still be recognised as expenses for lessees until guidelines are provided for reporting the ‘right of use’ rather than expenses.
The advantage for the lessor lies in retaining ownership of the aircraft and receiving consistent rental income throughout the contract duration. However, the disadvantages for lessors are contingent upon various factors, including:
- the aircraft’s classification;
- its age;
- the anticipated residual value; and
- the aircraft’s condition upon redelivery.
These factors predominantly hinge on the lessee chosen by the lessor, following a thorough due diligence process. They significantly influence the aircraft’s condition upon return or potential repossession in the event of default.
Conversely, wet leases are typically shorter in duration, sometimes as brief as three months. This arrangement is commonly employed when the lessee lacks an air operating certificate or requires the aircraft for only a limited period – for example, contract operations for events such as Hajj. A wet lease provides the lessee with the advantages of the aircraft, crew, maintenance and insurance. While this assures the lessor that the aircraft remains under the control of its crew, operating costs within the region may be higher for the lessee.
Finance lease: Finance leases in Nigeria closely resemble those in other common law jurisdictions. They encompass longer-term arrangements in which the lessee assumes the responsibilities of aircraft ownership. These leases may be structured:
- through a combination of operating leases with an option to purchase at the lease’s conclusion; or
- via a hire purchase mechanism where the buyer contributes equity and the seller amortises the remaining payments and interest over time.
Irrespective of the method employed, the overarching aim is the transfer of aircraft ownership from the financier or lessor to the borrower or lessee upon full payment of the loan amount.
In certain finance lease structures, a special purpose vehicle may be employed in a tax-favourable jurisdiction with which Nigeria has established a double tax treaty. This arrangement benefits both the lessor and lessee. Notably, finance leases remain unaffected by the implementation of IFRS 16. They are also highly advantageous for the lessee, as it is legally permitted to claim capital allowances on the leased aircraft while simultaneously deducting interest payments as expenses.