As part of diversification strategy, Chinese banks are setting up aircraft leasing subsidiaries to cater for the increasing market in the Asian-Pacific region. Recently, Chinese ICBC Bank established a wholly owned subsidiary, ICBC Leasing which is expected to conclude a sale and leaseback agreement for three aircraft at the end of July, with Chinese Eastern Airlines Company.

The deal will see the seller offer to the buyer the three aircraft while at the same time leasing back the previously sold assets for six years. Upon expiry of the term, the seller will buy back the aircraft  at a discounted price.

It is expected that this arrangement will improve the seller’s cash flow and enhance its liquidity position. Sale and leaseback arrangements are increasingly being used as a major source of aviation finance.

A sale and leaseback transaction is an arrangement in which one party sells an asset and the buyer immediately leases the same asset back to the seller.

A sale and leaseback transaction allows the seller (new lessee) to make full use of the asset while freeing capital for use elsewhere.

These transactions are attractive for companies that hold a number of assets and are seeking to divest surplus capacity.

It is also desired for companies seeking to cut down operation costs. As the new buyer is also the lessor, the transaction is such that the he will remain liable for repairs and maintenance while the seller enjoys use of the asset at a rental. 

Lastly, a sale and leaseback is desirable for a company in financial distress and experiencing liquidity problems.

A sale and leaseback would free some capital for the company's use while at the same time ensuring that the company does not lose use of the asset. The sale and leaseback arrangement might grant to the seller (lessee) the option to buy back the asset on the happening of a condition precedent.

The advantages of sale and leaseback transactions for a buyer is that he gets to buy the aircraft at a lower market rate and also gets to enjoy tax benefits associated with the purchase.

Sale and leaseback transactions are thus a source of finance for the seller while for the buyer they are  a mode of investment.

There is a great need to finance the world's expanding fleet of aircraft. It is estimated that over $ 30 billion is required each year for aviation finance.

The most conventional forms of aviation finance are aircraft leasing and aircraft mortgages. Aircraft leases are in turn classified as dry or wet leases on the one hand or operating versus capital leases on the other.

With a wet lease, the lessor of the aircraft (owner of the plane) provides the crew while with a dry lease, the lessee only leases the aircraft Sale and leaseback arrangements in aviation finance, are a hybrid between sale and leasing and incorporate both features.

The ICBC and Chinese  Eastern Airlines Company arrangement was a domestic sale and lease back arrangement.. Where the arrangement is cross border, then elements of international law come into place. For example tax laws.