Wet Lease Agreements: Ideal Solution for Start-up Airlines09 January, 2010
A wet lease is a leasing arrangement whereby the lessor (ie, an airline or aircraft operator) provides an aircraft, along with its crew (either complete or only cockpit crew), maintenance and insurance (both hull and third-party liability), to a lessee (ie, another airline or aircraft operator). The lessee pays the lessor in proportion to the hours operated. The four main elements involved in a wet lease are therefore the aircraft, the crew, maintenance and insurance.
Commercial aircraft operators may resort to aircraft leasing in order to:
- obtain access to newer aircraft models;
- improve fleet flexibility when initiating new routes or aircraft types;
- permit them to increase or decrease capacity quickly;
- remove residual value risk; or
- reduce cash outlays to preserve working capital.
Short-term wet lease agreements
The Civil Aviation Act (2920), the Law on the Organization and Tasks of the Directorate General of Civil Aviation (5431), and the regulations and instructions issued by the Ministry of Transport regarding aircraft leasing are the fundamental basis for aircraft leasing between domestic and international aircraft operators. In this regard, international aircraft operators can lease an aircraft from a local aircraft operator provided that the following conditions are met:
- Both the lessee and the lessor must hold a valid operating license. Where the lessee is an international aircraft operator, it must be licensed by a civil aviation organization that is a member of the International Civil Aviation Organization.
- Wet leased aircraft must be airworthy during the leasing period.
- An authorization of the wet leased aircraft owner must be stated on the financial leasing agreement for the wet leased aircraft that has been imported by financial leasing and registered in the Civil Aircraft Register.
- Short-term wet lease agreements must specify the course route, flight or operation dates and the division of liability (technical, operational and insurance) between the parties.
- Insurance certificates for both parties must be issued in order to comply with liability provisions stated on the short-term wet lease agreement. In addition, the agreement must determine that the aforementioned certificates are valid for leasing.
In practice, short-term wet leasing agreements often enter into force without the permission of the Directorate General of Civil Aviation being granted. However, even in such cases, a form should be filled in and submitted to inform the directorate general about the agreement. Furthermore, although short-term wet leasing offers convenience for both lessee and lessor, it is limited to operations equaling a maximum of 72 hours flight a month. If a short-term wet lease agreement covers operations exceeding 72 hours a month, it will be deemed a general wet lease agreement and must comply with the terms and conditions of such agreements (including obtaining permission from the directorate general).
In the context of the Civil Aviation Act, managing directors of aircraft operators (whether lessor or lessee) will be responsible for the accuracy and validity of documents regarding aircraft wet leasing and for keeping such documents up to date. For both general wet lease and short-term wet lease operations, the technical, operational and other administrative liability of the operation will rest with the lessor of the wet leased aircraft during the leasing period, but commercial responsibility will remain with the lessee. These provisions must be determined in the leasing agreement.
Furthermore, under the Civil Aviation Act, passengers must be notified that the aircraft is subject to a wet lease. In this context, a local aircraft operator that leases its aircraft from either another local aircraft operator or an international operator must provide its passengers with information on the de facto operator (ie, the lessor) as soon as possible or, at the least, before boarding.
Local aircraft operators can take advantage of short-term wet leases only for flights for which permission has been granted. In addition, lessor operators can operate wet leased aircraft for a minimum of one year. Wet leased aircraft should hold a noise certificate in compliance with International Civil Aviation Organisation standards (Appendix 16, Section 1, Chapters 3 to 8 and 11).
General wet lease agreements
Under the Civil Aviation Act, general wet lease agreements require approval from the directorate general, valid for a maximum of six months, before they can operate wet leased aircraft. The application must be made 30 days before the operation date, in order to obtain the necessary approval of all documents submitted to the directorate general.
Provided that all duties and responsibilities stated on its operation licence are met, the lessor will become the operator of the leased aircraft. Crew training and competence, maintenance of the wet leased aircraft and all other responsibilities will be borne by the lessor. The lessee shall take responsibility only for commercial matters, which must be stated explicitly on the wet leasing agreement. Furthermore, the number of wet leased aircrafts of any given lessee cannot be more than the number of its fleet. All necessary technical and operational controls must be made by the local operator. The wet lease agreement will be cancelled if the standards fall below those specified by the directorate general.
Wet lease agreements are regulated by the Civil Aviation Act and associated legislation, and are ideal and convenient for start-up airlines, when exploring new routes or during seasonal fluctuations and sudden peaks in demand. In addition, wet lease agreements arguably also fulfil the interim needs created by long-term fleet expansion plans, while maximizing market share in the immediate term.