Ground support equipment is a key component of the ground handling sector and its rental or leasing has become a major trend within the handling industry over the last 25 years.
However, and to the best of our knowledge, no independent base study has ever been carried out yet on this topic. Our articles are intended to explain and clarify the principles of this concept, whilst outlining what the future might bring with regards to the many challenges that the aviation industry is currently facing. Delvaux takes up the thread.
A critical element
Though no firm figures exist, it is estimated that today there are about 220,000 units of motorised GSE and some 360,000 examples of non-motorised equipment in operation around the world; of which 85% reside in Europe, the US and Asia. GSE represents between 10% and 15% of ground handling operational costs but its strategic value appears much higher, given that it is the essential link between the aircraft and the airport terminal. GSE is thus a critical element of airport infrastructure and organisation.
To outsource (or not) the ownership, the maintenance and the management of such an important part of the value chain is always a key strategic decision, where many factors must be taken into consideration.
This study, which is long overdue, offers an exclusive opportunity to provide a global, structured answer to the numerous requests from GSE users, stakeholders or investors, who regularly ask me for assistance in their GSE or investment strategy since I left the TCR board at the beginning of 2023. Also, it allows us to provide a global consolidation of the articles and updates that have been published on the topic from time to time.
This series of four articles to come are thus aimed at giving a global view of the elements that should be taken into consideration when taking the “make or buy” decision regarding leasing/rental vs ownership. The articles will cover the following four main themes: (a) the different leasing options and their characteristics; (b) the pros and cons of GSE leasing/renting/pooling; (c) the costing, pricing and contractual principles of GSE leasing and (d) the Environmental, Social and Governance (ESG) aspects of this particular model, as well as some additional considerations that stakeholders may have on the matter, both now and in the future.
Whilst the GSE financial lease has already been in place for a long time and was originally provided by or arranged through banks, specific leasing institutions or Original Equipment Manufacturers (OEM) themselves, the appearance of full service leasing/rental and pooling is largely associated with both the development of the independent ground handler and the desire of some airlines to outsource their non-core activities. In the case of full service rental, one can say that it really started in the mid-1990s, with the emergence of some early adopters and suppliers in certain specific regions. Although the early adoption of the concept was quite slow, given the strategic dilemma of whether to outsource GSE to a third party or not, together with the lack of offer in this regard, some key players were successful in building, step by step, the necessary credibility and track record in order to offer leasing/renting services on a larger scale and through increasingly complex arrangements.
Today, GSE leasing/rental is implemented by most of the players in the ground handling sector, whether independent handlers, airlines or airports, in an attempt to reduce investments and costs, to increase flexibility, to have access to the newest equipment and to reduce GSE risks, risks that might relate to misuse, becoming obsolete or the environmental footprint.
A rental or leasing agreement is an agreement through which the user is entitled to use a piece of equipment which he does not own, for a period of time, in return for an agreement to make a series of payments to the owner.
Equipment lease is an alternative to buying equipment and every lease involves two parties. The user of the asset is called the lessee. The lessee makes periodic payments to the owner of the assets, who is called the lessor. Independent leasing firms buy the equipment and lease it to equipment users. They can buy equipment in larger quantities, service it efficiently and, if necessary, resell it at a fair price.
When a lease is terminated, the leased equipment reverts to the lessor. However, the lease agreement may offer the user the option to repurchase the equipment or take out a new lease.
Some leases are short-term or can be cancelled entirely or in part during the contract period at the option of the lessee: they are generally known as operating leases. Others extend to cover most of the economic life of the asset and cannot be cancelled or can be cancelled only if the lessor is reimbursed for any losses: these are referred to as financial leases. Signing a financial lease contract is like borrowing money; it is a source of financing and is equivalent to a secured loan. Regarding the accounting treatment of leasing, and under IFRS, a lease is a finance lease or an operating lease, depending on the substance of the transaction, rather than on the form.
The criteria for a financial lease includes the following:
i) it transfers substantially the risks, rewards and obligations of ownership to the lessee;
ii) there is a purchasing option at lower price than fair value;
iii) the lessee pays 90% or more of the fair value of the asset over a period and
iv) the lease term covers the economic life of the asset. If one of these rules is not met, the lease is generally then classified as an operating lease.
Consequently, the main characteristics of an operating lease include the following:
i) the contract duration is usually much shorter than the life cycle of the equipment;
ii) there is the possibility of interrupting the lease in total or in part before contract term;
iii) there is no buy back option and the risk or opportunity of the equipment remains with the lessor.
Operationally, GSE servicing requires maintenance workshops, specialised technical staff, maintenance plans and spare parts management, all of which are managed by ERP systems. In this regard, leases also differ in the services provided (or not) by the lessor, and deciding who will assume which service, the lessee or the lessor, is a major and essentially long-term decision.
Under a full-service lease, often called full-service rental, the lessor promises to maintain the equipment and manage the fleet himself, whereas under a dry lease, the lessee agrees to maintain the assets and the lessor aims mainly at financing the equipment and transferring its risks to the lessee.
Many financial leases are arranged for brand new assets. In other cases, the equipment user sells an asset it already owns and leases it back from the buyer. These sale and rent-rent back arrangements are common in the case of GSE. In some cases, the lessor might even take over the existing maintenance facility and technical personnel from the lessee in a totally outsourced contract. These contracts are rather complex and the operational aspect of managing the equipment becomes a key factor. Therefore, these lease contracts are most of the time complemented by a Service Level Agreement (SLA).
Pooling of GSE assets is a system where asset use is shared between various lessees: instead of the handlers individually operating their own fleet, one fleet of GSE is shared between all users, and so the total volume of equipment at an airport is based on the peak demand of the airport as a whole, rather than, as currently, on the sum of the peak needs of individual handlers. This optimises the downtime of all users, and so a smaller shared fleet can be utilised, resulting notably in lower carbon emissions and airport congestion. These set-ups are quite complex.
Leasing can take different forms, from a simple dry lease to a sophisticated sales and full-service rent back transaction, and it is not always straightforward to appreciate the risk and reward, nor indeed the contributory value of each option. Accordingly, when facing a “make or buy” decision process, one should carefully understand the essence of each deal and how it would best fit one’s global strategy.
This is why the next article will try to assess the pros and cons of various leasing solutions versus ownership, and will explain why and when companies should lease, and under which format.
It will also give some useful insights on the evolution of the concept and the role each operator in the value chain should play in the future. This is vitally important in view of the gigantic GSE and infrastructure investment faced in terms of decarbonisation*, whilst coping with the legacy of the past.
*It has been estimated that the current GSE motorised fleet replacement value is around US$18 billion