Airline Industry 102: SPVs (Special Purpose Vehicles)

In addition, Aircrafts are expensive to buy. A single 787, as an example, will cost about $200M (at list prices). Even a 737 will cost about $70-80M (at list prices). It’s, therefore, not a practical possibility for most airlines to buy their fleet using their own cash. The two main options are: a) lease the aircraft or b) borrow money from a lender.

The biggest risk hurdle that banks and financiers face in providing money to the airlines is Bankruptcy risk. A fundamental question they ask is “How can we ensure that if they go bankrupt, the aircraft will not be possessed by other creditors and deny us the opportunity to get part of our money back?” SPVs are the answer they have come up with to that question.

At its simplest, the SPV is a sort of holding company that will take ownership of the aircraft until the airline has finished the loan payments (typically 10-12 years after delivery). When the financial terms are agreed between the bank and airline, the SPV is created. At delivery of the aircraft, the SPV takes ownership of the aircraft and leases it to the airline. This way, if the airline goes bankrupt during the term of the loan, creditors can’t claim the aircraft as an asset of the airline as it technically does not belong to them. This makes it Bankruptcy Remote.

The lease payments made on a regular basis reduce the loan until it’s paid down (In very much the same way as a hire purchase transaction). Once the loan is paid, the SPV is unwound, and ownership of the aircraft is transferred to the airline.

Lastly, there is no naming convention for the SPVs. Some use the Manufacturer’s Serial No (MSN 12345 Ltd), others use a standard formula (XYZ 1 Ltd or XYZ 2 Ltd) and still others might chose the name of some thing local like the names of wildlife or a tourist attraction.

KEY POINT: The SPV exists to protect the lenders and that structure is used purely at their request.

This is the end of class 102