How does an airline finance the purchase of an aircraft? | What is an Equipment Trust Certificate (ETC)?

 

Have you ever wondered how airlines finance their purchase of aircrafts?

 

One of the common routes used extensively by airlines to purchase an aircraft is via Equipment Trust Certificate (ETC).

 

What is an Equipment Trust Certificate (ETC)?

 

ETCs are debt instruments issued for financing purchase of an asset in a manner which facilitates the company to keep the possession of Asset for utilization while paying for it over a time.

 

It is used by companies for financing purchase of an asset (for airlines, it is aircrafts) which requires heavy capital expenditure. It allows the company to use the asset immediately while paying for it over a period of time.

 

Let us understand, how?

 

A trust is set up which issues debt certificates to investors and the fund raised through these certificates is used by the trust to purchase the asset (here aircraft).

 

The possession of asset (aircraft) is kept with the trust and then trust leases the asset (aircraft) to the company (airline) for its utilization.

 

The lease payments by the company (airline) to the trust will be utilized by the trust to pay off the interest and principal obligations to the ETC investors.

 

At the end of the tenure, after due payments are made, the trust transfers the title of the asset (aircraft) to the company (airline).

 

This way Airline was able to use the aircraft while paying for the aircraft over a period of time.