Glossary
Free glossary of Airfinance, aircraft finance and aviation finance terms

This is a simple introduction to some of the more common terms used in aviation finance. This is a personal attempt and it is not a replacement for legal or financial advice.
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

ACMI LEASE
An abbreviation of Aircraft, crew, maintenance and insurance lease (see Wet Lease).
AFTK
An abbreviation of available freight tonnes-kilometres. The number of tonnes of cargo an airline carries multiplied by the number of miles they fly.
AIRCRAFT ON GROUND (AOG)
Commonly referred to as AOG. Grounded aircraft can happen for many reasons such as engine problems. Lessors also use the term when they have aircraft off-lease.
AIRLINE
The operator (but often not the owner) of commercial passenger or freight aircraft.
AIRWORTHINESS DIRECTIVE
A regulation issued by an aviation authority, usually to correct a fault on aircraft.
APK
An abbreviation of Available Passenger Kilometres.
APPRAISER
An organization or individual that provides valuations. Most finance deals require two independent valuations. The International Society of Aircraft Traders runs the most respected qualifying scheme for appraisers.
ASK
An abbreviation of Available seat kilometres. The number of seats a carrier has, multiplied by the number of kilometres they fly.
ASM
Abbreviation Available seat miles. The number of seats a carrier has, multiplied by the number of miles they fly.
ASSET VALUE GUARANTEES
A type of insurance, usually provided by manufacturers, although some insurance companies are active in this market, which guarantees to a third-party such as an airline or financier a certain value for an aircraft at a specific point or points in time. Critically such insurance is always subject to the aircraft meeting certain "return" or maintenance criteria.
ATK
An abbreviation of available tonnes-kilometres. The weight of passengers, accompanied baggage and cargo an airline carries multiplied by the number of miles they fly. ICAO recommends that airlines convert passengers and accompanied baggage into weight assuming a combined weight of 90 kg. Some airlines use higher assumed weights, hence their ATK data may not be comparable with other airlines.
AVIATION WORKING GROUP
A group of manufacturers and financiers that represents the aircraft finance industry, the Aviation Working Group was the driving force behind the Cape Town Convention.http://www.awg.aero/
AVN48
A clause in insurance agreements used by the Lloyd's Market Association and the International Underwriting Association in airline insurance policies. Clause AVN48 lists certain war risks that are excluded from coverage under the airline's hull, spares, passenger, and third party liability policy. The changes would rule out coverage in the event of a hostile terrorist attack using radioactive materials, electromagnetic pulse devices, chemical and biological weapons.

B

BACK-TO-BACK LEASE 
When an aircraft is leased to an intermediate lessor and then sub-leased back to the lessee.
BALLOON PAYMENT
The final payment due at the due at the end of a mortgage, finance lease, commercial loan or other amortized loan that is disproportionately larger than the regular instalment. loan is not fully amortized over the life of the loan with the remaining balance occurring as a larger single "balloon" payment. In operating leases the final rental or lease payment may also have a larger balloon payment.
BARGAIN PURCHASE OPTION
When the lessee (usually an airline) has the right to purchase an aircraft at a value lower than the expected market value. This is usually at then of the leasing term but may also be available at intermediate dates. It is usually determined based on calculations designed to repay the financier in full.
BASE VALUE
The most controversial of all aircraft values, the base value is, as ISTAT says, an open, unrestricted, stable market environment with a reasonable balance of supply and demand, and assumes consideration of its "highest and best use."
BUYER FURNISHED EQUIPMENT
Equipment that the aircraft buyer sources and purchases and supplies to the aircraft manufacturer for incorporation into the aircraft. Includes in-flight equipment, seats galleys. BFE costs can be considerable. Qatar Airways closed a $140 million facility to finance its BFE In 2005 (see Airfinance Journal February 2006).

C

CALL OPTION
The right, but not the obligation, to purchase an asset in the future. Often added to tax leases, where the lessee has the right to purchase the aircraft, at say, 12 years.
CAPE TOWN CONVENTION
The Cape Town Convention is an international legal standard for aircraft leases and security interests, making repossession easier for financiers. The Aviation Working G defines the Cape Town; convention as a treaty designed to facilitate asset-based financing and leasing of aviation equipment, expand financing opportunities, and reduce costs - thereby providing substantial economic benefits. It does so by reducing a creditor's risk and by enhancing legal predictability in these transactions, including in the case of a debtor's insolvency or other default. The Cape Town Convention entered into force in 2006 and the final texts of the Convention and Protocol can be viewed on
UNIDROIT'S
website. The Cape Town Convention applies in countries (Contracting States) that have ratified or acceded to it (ratification).
CARGO CONVERSION
The process when an aircraft is converted from a passenger aircraft into a freighter. This typically involves the addition of a cargo loading door and strengthening of the floor.
COMBI
An aircraft type which has space for passengers and freight on the main deck.
COMPREHENSIVE APPRAISAL
An ISTAT term for an appraisal that includes a physical inspection and a review of records. Often needed for re-registration of the aircraft in a different country.

D

DESKTOP APPRAISAL
The basic type of an appraisal, where the appraiser estimates the value of the aircraft and assumes the aircraft's condition. Usually provided for mid-time, mid-life aircraft (ones that n exist).
DRY LEASE
An operating lease where the lessee is responsible for operating the aircraft, providing the crew , maintenance and providing insurance.

E

EXPORT CREDIT AGENCY (ECA)
Export credit agencies, commonly known as ECAs, are government funded institutions that provide loans and insurance for domestic companies that export. In aviation, ECAs typically support airc manufacturers with their overseas sales to foreign airlines. The rules for ECA support for aircraft financing are governed by an OECD agreement called the Aircraft Sector Understanding that came into operation in 01-Feb-2011.
ENGINE EXCHANGE
A service offered by engine manufacturers and lessors, where airlines can swap an engine that needs maintenance for one that has just been overhauled.
ENGINE POOLING
Engine pooling happens when airlines, lessors or manufacturers create a pool of spare engines which any member of a pool can use. This can be problematic for financiers of aircraft and engines need to know which engine their security interest applies to.
ENHANCED EQUIPMENT TRUST CERTIFICATE (EETC)
An EETC is a bond backed by security interests in aircraft and their related lease rentals and insurance protection usually issued by a single borrower (either an airlin aircraft manufacturer). Equipment trust certificates were originally developed for railway rolling stock, and then enhanced with properties such as tranching and credit support to make them more applicable to aircraft. In the United States, a special provision of the bankruptcy code called "Section 1110" ensures that financiers can recover their aircraft within 90 days of default by an airline, hence repossession is relatively easy. Until recently very few EETC transactions had been closed for non United States airlines but they have been possible in creditor-friendly jurisdictions such as the UK and Australia and will be increasingly possible in other countries with the advent of the Cape Town Convention.
ESCALATION CHARGES
Manufacturers add escalation charges to aircraft orders to protect themselves against inflation when customers order aircraft to be delivered in the future. Escalation clauses have used for many years in a variety of industries, and all aircraft and engine manufacturers have used them. While escalation may go unnoticed when inflation is high, customers that order aircraft in a downturn often find that they end up having to pay far more than the aircraft's market value when the aircraft are delivered (see Airfinance Journal April 2005).
EX-IM BANK
The Export-Import Bank of the United States is the North American export credit agency. EX-IM Bank supports a wide variety of industries but is closely associated with Boeing, supporting the US airc manufactuer's sales of aircraft to overseas airlines and lessors.
EXPORT CREDIT
Countries where aircraft are manufactured will often guarantee financings to help secure aircraft sales. The Export-Import Bank of the United States guarantees financing for Boeing aircraft. Fran Coface, Germany's Hermes and the UK's UK Export Finance support Airbus aircraft. UK Export Finance also supports Rolls-Royce engines. Brazil's BNDE's guarantees Embraer aircraft with Export Development Canda supporting Bombardier. Export credit agencies typically guarantee a maximum of 85% of an aircraft's value. There is also a home country rule for Airbus and Boeing where the agencies agree not to finance aircraft in each other's countries (see July/August 2005).
EXTENDED DESKTOP APPRAISAL
Another ISTAT definition, similar to a desktop appraisal, but which also relies on information on maintenance condition from a client, the aircraftâ€&tra operator, a manufacturer or another appraiser or consultant's report.

F

FINANCE LEASE
A financing structure where, instead of extending a mortgage loan directly to an airline, a financier will lend the money to a special purpose company which will obtain the balance of purchase mo from the lessee, often by advance payment of rent. The Lessee will pay rent to the special purpose company which will repay principal and interest to the financier during the term of the financing. This structure is often preferred to a mortgage loan as it gives the financier the ability to enforce security interests as owner AND mortgagee rather than just as mortgagee as certain jurisdictions may not be very creditor friendly to "mere" financiers.
FINANCIAL APPRAISAL
Values the aircraft upon the income potential from its lease and residual value.
FRENCH LEVEAGED LEASE (FLL)
French tax lease where French financial institutions invest in aircraft in return for depreciation allowances. Mainly a domestic product since 2001, although there were special allowances for companies located in former French colonies, although these are said to be more difficult to structure than straightforward French leases. Rarely seen following a European Union investigation into whether they are a subsidy.
FRENCH OPERATING PRODUCT (FOP)
A French tax lease largely reliant on withholding tax that is most often used in China. The Sino-French Double Tax Treaty has a special provision to give credit to any French entity recei income from China. Chinese withholding tax is set at 10% (although this can be reduced to 6% for leases) and French banks get credited for this by their local tax office. The banks then pass some of this credit back to airlines. Airlines also benefit from some withholding tax exemptions from the Chinese tax authority. First developed by BNP Paribas. The product can also be used in other countries including Turkey and China.
FULL APPRAISAL
When the appraiser actually kicks the tyres and looks at maintenance records and inspectsthe aircraft and its maintenance records.

G

H

HUSH KIT
Equipment used to make engines quieter in order to meet noise requirements.

I

IJARA
Islamic leasing. An ijara or lease financing involves the Islamic investor (or a special purpose vehicle) purchasing an asset and leasing it to the lessee for a rent that is either agree advance or adjusted regularly throughout the lease period, by consent, by reference to an "expert" or, in some cases, by reference to an interest-based index. An ijara is an operating lease with the lessor retaining ownership of the asset after the lease expiry but can be turned into a higher purchase arrangement by the grant of an option for the lessee to purchase the asset on a specified date (ijara-wa iqtina). Islamic law or "shari'a" usually requires that the management, maintenance and insurance of the leased assets are the responsibility of the lessor so as to justify the profit made by the lessor, although mechanisms exist for the responsibility for these to be effectively passed back to the lessee.
INTERNATIONAL SOCIETY OF TRANSPORT AIRCRAFT TRADERS (ISTAT)
An industry body for people involved in the trading of commercial aircraft. ISTAT also certifies aircraft appraisers. The society runs an excellent conferenc the US each year, a good one in Europe and a fantastic cocktail party at either the Paris or Farnborough Airshows each year. See www.ISTAT.org for more details.

J

JALCO
Abbreviation A Japanese lease with a call option (see Japanese operating lease).
JAPANESE LEVERAGE LEASE
Now only available for domestic airlines, the Japanese leverage is a traditional tax structure with the investor taking 20% of the aircraft's value and borrowing the rest.
JAPANESE OPERATING LEASE
An operating lease where a Japanese corporate buys the equity portion of an aircraft in order to get depreciation benefits. The main criterion here is the 90% test, under which the aggregate lease rentals during the lease term must not exceed 90% of the lessor's total cost (including interest and fees) for acquiring the asset - ie, full payout structures must be avoided. Typically, a JOL will involve the purchase of the aircraft by a Japanese lessor, which leases it on operating lease to the airline. The JOL will generally be leveraged by a term loan facility provided to the lessor to fund the debt portion of the acquisition cost of the aircraft. While the rent payable by the airline may be related to the lessor's funding cost, it is often insufficient to pay off the amortizing loan. In such cases, the lender will need to look to the proceeds of sale or re-leasing of the aircraft for repayment of the unamortized principal.
JOL
Abbreviation - Japanese operating lease

K

L

LIST PRICE
The price that aircraft manufacturers quote (but rarely charge) customers.

M

MURABAHA
A type of Islamic finance, Murabaha deals are more usually found in trade finance, typically involving the purchase and sale of commodities to generate a profit, which is a substitute for interest payments commercial loan. Kuwait's first low-cost airline, Jazeera Airways, closed an innovative Islamic pre-delivery financing in 2005 (see Airfinance Journal June 2005). Under the terms of a Murabaha agreement, the airline instructs the financier to purchase commodities under a deferred payment arrangement. The financier then sells the commodities to release funds, which are then made available to the airline. The airline then reimburses the financier the cost of the commodities it purchased on an installment basis, which includes an agreed mark-up. The mark-up is the bank's profit and is used as a substitute for the charging of interest. The mark-up can be calculated as a fixed lump sum or as a percentage of the financed amount. This type of structure is Shariah-compliant because the bank takes the title to the commodities, and therefore assumes real risk to itself and the airline through the buying and selling of commodities.

N

O

OEM
Original equipment manufacturer, e.g. Airbus, Boeing, CFM, GE, Rolls-Royce.
OPERATING LEASE
A lease where the lessor retains the risks and rewards of ownership and where the aircraft will eventually be returned to the lessor at the end of the lease term. For the lessee, current accounting definition is that the lease is off-balance sheet although this is expected to change in 2016 or 2017 with the introduction of a new accounting standard by the International Accounting Standards Board.
OPERATING LESSOR A company that owns aircraft and leases them to airlines.

P

PAX
An abbreviation of passengers
PMA Parts
Parts Manufacturer Approval Parts or PMA parts are manufactured or designed by companies that are not the original equipment manufacturer (OEM). They usually do not have access to the original manufactu data so design their own parts and have to prove to the FAA, under FAR 21.303 regulations, that their parts are as good, or even better, than the original.
PRE-DELIVERY PAYMENT FINANCING (PDP FINANCING)
Aircraft manufacturers require customers to make down-payments before aircraft are delivered. These are usually paid in the 24 months prior to delivery. Banks will often finance these although there are certain challenges in perfecting security interests as manufacturers are resistant to assigning all aspects of the purchase contract such as the discounts or "credit memoranda" granted to the purchaser. In the event of default under the financing, the financier would need to find a new purchaser of the aircraft or else purchase the aircraft itself and seek a lessee to operate the aircraft and pay rentals.

Q

R

RENT
Amounts payable by the airline, normally on a monthly basis, for the lease or rental of an aircraft from a Finance Lessor or Operating Lessor. Rental amounts may include amounts payable in respect of Maintenance Reserves

S

SHOP VISIT
Same as an overhaul, when an engine is sent to a workshop for maintenance.
SPANISH OPERATING LEASE
(SOL) An operating lease where Spanish investors received depreciation benefits for investing in aircraft. Often called a SOL. The aircraft is owned by the Spa investor, who then leases it onto a special purpose company, that then leases it on to the airline. Airlines typically have the option (but not the obligation) to buy aircraft later. Iberia Airlines closed the first aircraft SOL in September 2005.
SUKUK
An Islamic bond financing. A sukuk (which works in a broadly similar way to a conventional securitization) is a bond or certificate that provides an investor with ownership or part-ownership in the underlying as usufruct, or service. A sukuk is often combined with other Islamic structures such as an ijara, a mudaraba or a murabaha. The nature of the underlying asset and terms of the sukuk must be agreed on the subscription date. The sukuk represents beneficial ownership of the underlying assets and therefore entitles its holder to receive a pro rata share of profits generated by the asset (not a fixed return tied to their face value). A sukuk can also be issued in tradable form and listed on applicable investment exchanges.

T

TIME AND MATERIALS
Engine repair shops and lease contracts often quote on a time and materials basis. This includes labour for teardown, inspection, repair costs, material replacement and a degree of life-limited part replacement

U

USUFRUCT
A common legal term in Islamic finance. Basically the right to use or operate an asset that belongs to someone else.

V

W

WET LEASE
An aircraft lease where the aircraft is operated by the lessor, on behalf of the lessee. Also known as an ACMI Lease - Aircraft, crew, maintenance and insurance lease.
WHITE TAIL
An unsold aircraft that has been built by a manufacturer.

X

Y

Z

Appraisal terms - adapted from the ISTAT Appraisers Directory http://www.istat.org/appraisers.htm Islamic definitions from Think Islamic (Airfinance Journal September 2005) by Robert Fugard and Olga Petrovic, from Linklaters, Aircraft Financing (Third Edition), Euromoney Books, Edited by Andrew Littlejohns and Stephen McGairl.