Leasing vs purchasing GSE

GSE Reports
Len Kirsch, Partner, Edinburgh Midwest Aviation Partners offers advantages of leasing and purchasing GSE.

The question of whether it is preferable to lease or to purchase ground support equipment is dependent on many factors, including accounting and tax issues, interest rates, and availability, and is country or even region specific, and these factors change from time to time, and given recent economic turmoil and inflationary pressures and supply chain problems having arisen from factory closedowns during Covid-19, these factors are constantly changing.

We recognize that having the option to buy or to purchase new GSE is a luxury for many and that in many parts of the world, companies have to do whatever is necessary to obtain useable GSE, whether new or used, in whatever form and method is available.

Moreover, while inflation affects most of the world, in some countries or regions inflation has been a constant, and often is tied into other variables such as devaluation or armed conflict, struggling economic conditions, the effects of global warming or simply weather events whether heightened recently or simply part of everyday life. Moreover, production at some equipment factories is still slow, and the means of transportation are both slow and expensive. In other words, obtaining GSE remains difficult.
In some areas of the world, with strong winter conditions, or heavy rains, or extreme heat, the life of a typical piece of equipment whether motorized or not is significantly shorter.

One of the most important factors which obviously affects costs, is how the purchase or lease of equipment is taxed and accounted for in financial statements. In the US there are sales and use taxes, which vary from state to state. Sales tax is usually payable on purchase but a lessor which utilizes a resale certificate can pass on and spread out the sales tax during the life of the lease.

Rules over deductibility and amortization also differ. In Europe and other regions, VAT taxes treat these transactions differently. When leasing, VAT is spread out during the life of the lease. Thus, companies should seek professional tax advice before entering into a lease transaction.

Pros to leasing
Leasing provides the following advantages: (1) Preserves cash, (2) by reserving cash, it is easier to maintain cash which can be used to support working capital needs for such expenses as payroll, training, etc., (3) provides access to the newest equipment, (4) helps embrace sustainable solutions, (5) supports changing business and financial needs, (6) less upfront barriers, (7) better future financial forecasting due to fixed monthly fees, (8) finance leases allow a party to purchase leased GSE at the end of a lease, and (9) allows the possibility of escaping heavy maintenance when the GSE is older and requires more frequent repair and new parts.

While some commentators claim that leasing allows a lessee to rely on existing warranties, warranties are sometimes shorter than the life of leases.

In normal times the above reasons for leasing make sense for some companies, assuming that leased GSE is available at a reasonable cost. At those airports with crowded ramps due to among other reasons too much GSE, the idea of pooling GSE owned and maintained by a lessor such as TCR continues to make sense. Pooled GSE can be maintained more quickly and cheaply by a master lessor, and each lessee utilizes only such equipment that it needs from time to time.

Let’s also not forget that a finance lease is not exactly a lease. In reality, it is a loan where the lessee has the option of either purchasing the equipment at the end of the lease, which if based on a straight-line depreciation may be for a nominal cost, or if based on residual value, if done correctly, can be purchased for a fair market value cost.  

There are of course many good reasons to own GSE. Excess GSE provides certain competitive advantages, including the ability to competitively bid for new airline or airport contracts. If owned free and clear of any liens, or if an existing loan is at a rate which is now considered low, your company may be the envy of others, especially if you have a good maintenance department and have a large stock of spare parts.

If your company owns excess GSE that is unlikely to be utilized in the near future, in today’s market the value of this used equipment is relatively high so it can be sold, which could help finance the cost of upgraded GSE. By reconditioning used GSE, its lifetime can sometimes be extended long after it is fully amortized.

Other factors are pressures or even regulations requiring handlers to utilize environmentally sustainable GSE. Advances in technology have significantly improved the overall efficiency and usability of GSE and dramatically cut fuel costs. As remote tugs and other equipment become available, the shortage of labour in some areas of the world create additional pressures to upgrade GSE.
Thus, a decision to lease or buy is never easy. If the option exists, then all of the above-mentioned factors should be considered.

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