Flight school leasebacks can be tricky business for airplane owners.
The flight training business has co-opted the term “leaseback” to mean an aircraft management and marketing arrangement between an airplane owner and the school or club.
The keys to a successful leaseback are knowing:
- How to calculate your break even rental rate.
- What type of airplane increases your chances of success.
- How to negotiate a deal to maximize your potential and minimize your risk.
1. Calculating Breakeven and Profit beforehand
Your flight school partner will look at leasebacks as a business and you should too–ruthlessly. Include all your costs, both direct and indirect in the hourly rental rate.
My Piper Warrior costs would look like this in a leaseback.
- $4600 Insurance (airplane goes under school fleet policy, owner pays the premium)
- $1500 Annual inspection
- $1200 Tie-down
- $650 Data subscriptions (EFB and GPS data)
- $250 24 month IFR certifications ($500/2 > ELT, transponder, pitot-static system)
- $400 Accountant
- $7,200 Aircraft loan (assuming a $55,500 loan, 10 years, 5.5%.)
$15,800 Total Fixed Costs ($1,317/mo)
Variable costs per hour
- $41.65 Fuel ($5.00/gal and 10 gph tach time = about .833 Hobbs to tach time ratio)
- $1 Oil
- $17 Maintenance
- $18.67 Engine reserve
- $1 Prop reserve (2021 OH price is ~$980; overhaul requirement depends more on prop condition that time in service).
$79.32/hr Total Variable Costs
Decades of leasebacks have shown that it takes about 50 hours per month to break even with the typical 4-seat trainer. We’ll use that figure to calculate a breakeven rental rate; the formula is
[(fixed costs + (variable costs * rental hours)) / rental hours]
Using my Warrior’s figures: $1317 + $3966 = $5,283 total cost for 50 hours of flying. or $105.65/hr, not including the flight school’s fee.
There is no profit in breaking even and that might be fine for someone looking to just defray the cost of ownership. To make a profit will require more flight hours or a higher rental rate or a lower management fee. In 2021, the going rate for a Warrior equipped like mine averages $135/hour. Here are a few profit scenarios based on that and 25 flyable days per month.
If your leaseback airplane works 167 hours per month–6.67 hours/day–it accumulates 2000 hours (a typical TBO) in just 12 months.
Maintenance cost will be more per hour, as more things break more often in a demanding use environment.
Northern climates have fewer flying days available than warmer, sunnier places, thus likely fewer available flight hours per month.
*Airframe depreciation. Depreciation is the value your airplane loses as the airframe time builds. For example, a 6000 hour Cessna 172 might sell for $65,000 today and $55,000 after it has accumulated 8000 hours. That $10,000 of airframe value has to be factored in somewhere or you end up losing it when the airplane is sold. A conversation with your CPA is required here since tax depreciation factors into this and you will probably capture it on the back end as a deduction versus on the front end through the rental rate. The point being to not overlook the airframe value loss as a real cost.
2. The Best Type of Airplane
The best type has 4 characteristics.
- Minimal or no owner emotional attachment
- 21st-century avionics
- Mid-time airframe hours
- A knowable airplane
Let’s unpack those four things.
No emotional attachment
A leaseback airplane is a machine whose purpose is to manufacture flight hours. The more it flies the lower your cost per flight hour and the greater your profit potential. For your own peace of mind it’s best to look at a leaseback airplane in terms of economic attachment with emotional attachment confined to happiness that it’s making money for you.
21st century avionics
The best type of airplane is one that students, CFIs, and pilots want to fly and avionics is a factor in that. An airplane with at least basic, panel mounted, IFR GPS will be more versatile and appeal to more students/renters than one without it.
The more sophisticated the panel, the higher the rental rate. Upgrading the panel of a 40-year-old 4-seater with enough technology can make it a technically advanced aircraft (TAA) that can take a pilot from student through commercial ratings for less money than a newer airplane. This makes it appealing to both renters and the flight school, while producing more revenue for you.
Mid-time airframe time
High time airframes are not good leaseback candidates as they have less rental appeal. Brand new student pilots might not know the difference between a 4,000 hour and a 12,000 airplane but CFIs and rental pilots do. One reason I bought my own airplane was because of the tired airplanes at the FBO where I was renting.
Should you buy a factory new airplane to be put into service immediately to defray the cost of ownership? That’s a conversation to have with your CPA and lender. In a high use environment lenders may not be thrilled about a leaseback because the airplane’s value can depreciate faster than the equity builds.
A knowable airplane
Extended downtime and cost surprises can kill leaseback viability. To reduce these possibilities the best type of airplane for a leaseback is one that is knowable. That is, you know what to expect operationally and financially.
A rental environment will quickly surface maintenance unknowns. You want to reduce this possibility by thoroughly understanding the maintenance history and characteristics of the airplane.
Looking through my Warrior logs, for example, turned up continuous landing gear, vacuum system, and door maintenance during its leaseback years. Things you would do once in 5 years of private use shift to 4 or 5 times per year in a leaseback. Knowing this about Cherokees would set my operating cost expectations were I to put it into another leaseback.
A zero time engine?
Should you start your leaseback with a zero time engine to avoid downtime? The math doesn’t support that unless you are right at TBO or the engine is problematic to the point of excessive downtime
Suppose you’re considering leaseback duty with a 1500 hour engine and 2000 hour TBO. The replacement engine plus removal, shipping, reinstallation amounts to $30,000. You set aside $15 per tach hour for engine reserve over the remaining 500 hours. At TBO you have $7500 set aside for the new engine that you would otherwise not have.
3. Structuring a Deal that Safeguards Your Interest
Working with the right school or club is the foundation of a mutually beneficial leaseback.
A leaseback is built on your asset, your capital, and your risk. You should be comfortable and confident with the terms of the deal to safeguard your interest and assure it’s a mutually beneficial arrangement.
Get to know the operator and have them introduce you to other owners in the program. Examine the records of similar planes in the fleet. It’s a red flag if they are unwilling to do any of these things.
Your asset, your capital, and your risk. You are are in the leaseback left seat and everything is negotiable. That doesn’t mean you’ll get everything you want and you might (and should) decline a deal that has confidence gaps. Some things you might want to negotiate:
- Pilot qualifications. You can limit pilot qualifications to, say, private pilots or better to reduce the harder usage of student pilots.
- The rental rate. If your goal is profit instead of breaking even then you may need a higher rate than what the school would charge or you set the rental rate (a fairly common scenario).
- A minimum hours guarantee. If breakeven hours cannot be guaranteed then you are subsidizing the flight time of renters to the degree that minimums are not achieved. In a truly mutually beneficial arrangement why would your leaseback partner not guarantee a minimum?
- Revenue share model. Fixed fee per flight hour for the school or a percentage split?
- Management fee reduction. While 20% is common there’s nothing that says you can’t negotiate a lower fee, after all it’s your asset, your capital, and your risk.
- What you pay to fly your own plane. Typically you pay the rental rate less the FBO cut to fly your airplane.
- Availability of your plane for you. Can you bump a scheduled rental to fly your own plane? Doing that too often will turn renters toward other planes, hurting your revenue.
- Renters insurance. It’s another layer of deep pockets between you and the lawyers should anything go wrong.
- Maintenance discount if the operator is doing it, 10% is common; alternatively, you choose who does maintenance.
- Maintenance process and authorization. Your authorization for work over X dollars, which vendors for parts, how and when you will be notified of required repairs, etc.. What will be deferred to the annual and what will be fixed at the 100 hour inspection or even sooner?
- Airplane care – renters. Examine the current fleet to see how those airplanes are cared for and add items of concern. Cleanliness, preheat requirement for winter operation, who pays for the battery after someone leaves the master switch on or damage from failing to secure the flight controls.
- Surcharges. Avgas prices can be volatile; be sure this is accounted for in the leaseback agreement if the school/club is renting wet.
A leaseback can work if you go into it with a hard-nosed, business mindset, the right type of airplane, and the right leaseback partner.
Have you been in a leaseback or are you considering it? Please share your experiences in the comments below!