Dry Leasing Rights explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The same aircraft, leased two different ways, produced two entirely different cost structures — and the difference showed up in a single quarter's profit.
The decision
In April 2016, it was reported that SpiceJet planned to substitute all its wet-lease aircrafts with dry lease planes by June 2016 in an attempt to cut costs and speed up operations. "Since wet lease planes are more expensive for daily operations and come with a longer turnaround time, the decision to replace them with dry-lease planes was taken", SpiceJet chairman Ajay Singh told The Hindu.
Seven planes were inducted on wet-lease plans after Mr. Singh was announced the Chairman in 2015; in order to salvage the troubled airline. It was also the first time for an Indian carrier to have inducted planes on wet-lease plans for domestic operations. However, the airline soon faced the consequences in the form of rising costs and delayed operations.
This strategy proved to be a turning point for the airline as it posted a profit of INR 73 Crores in the first quarter of 2016, which rose to INR 149 Crores in the first quarter of 2017. Though the airline suffered a loss of INR 33 Crores due to the depreciation of the rupee, it was partially offset by the replacement of wet-lease planes with dry-lease planes.
A wet lease supplies the aircraft with crew, maintenance and insurance. A dry lease supplies the aircraft alone; the lessee crews and operates it.
So the two are different bundles. The wet lease bundles an asset with a service — which is the same structure the Standard warns about in franchising, where while charging Royalties, Franchisors also offer various services to the Franchisee and discounting the Cash flows using Royalty Rate may significantly overstate Brand Value.
The valuation discipline is identical: split the payment into the part that buys the asset and the part that buys the service, and do not attribute the whole of it to either.
The operational point in the case is the longer turnaround time. Dry leasing rights let the carrier deploy its own crew and its own maintenance scheduling, so utilisation rises. That is a benefit of control — and control is one of the three tests an intangible must satisfy.
The turnaround difference also explains why the switch was measured in cost and in speed. Higher aircraft utilisation spreads fixed lease cost over more sectors, which improves margin without any change in fares.
Note finally the honest complication in the numbers: a loss of INR 33 Crores due to the depreciation of the rupee ran against the gain. Aircraft leases are dollar-denominated, so the switch changed the operating economics while leaving a currency exposure that a with-and-without model must hold constant between the two scenarios.
Valuing the arrangement
The natural method is with and without, comparing value of the business with all assets in place as of the valuation date against value of the business with all assets in place except the subject intangible. Here the two scenarios are not hypothetical — the airline ran both, a year apart.
| Wet lease | Dry lease | |
|---|---|---|
| What is supplied | Aircraft, crew, maintenance, insurance | Aircraft only |
| Daily operating cost | More expensive | Lower |
| Turnaround time | Longer | Shorter |
| Operational control | With the lessor | With the lessee |
| Q1 profit | INR 73 crore (2016) | INR 149 crore (2017) |
The Standard requires that all other factors relating to valuation should remain constant between the scenarios — so the year-on-year comparison here is an indication, not a valuation. Fuel prices, fares and traffic all moved between the two quarters.
Where the right sits in the framework
A lease grants contractual rights, so identifiability is satisfied. Note however that Ind AS 116, Leases governs the accounting for the lease itself — VS 302 is concerned with valuing rights of this kind, not with displacing the leases standard.
Common mistakes
- Attributing a whole wet-lease payment to the aircraft, ignoring the services bundled with it.
- Reading a year-on-year profit movement as the value of dry leasing rights.
- Letting currency and fuel assumptions differ between the with and without scenarios.
- Overlooking utilisation gains from control of crew and maintenance.