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Sell & Lease Back - How Does It Work  
User currently offlineHAWK21M From India, joined Jan 2001, 31667 posts, RR: 56
Posted (1 year 6 months 5 days 21 hours ago) and read 2486 times:

Most Airlines nowadays sell their Aircraft to a lending facility or Bank & lease it back from them.....
How does it become a win-win situation for both parties.......why not just buy the aircraft.


Think of the brighter side!
5 replies: All unread, jump to last
 
User currently offlinedalmd88 From United States of America, joined Jul 2000, 2533 posts, RR: 14
Reply 1, posted (1 year 6 months 5 days 16 hours ago) and read 2438 times:

You see this happen a lot when money is tight for an airline. They have an asset, the plane, but need cash for daily operations. So by selling it the free up the value of the asset into operational cash. Leasing it back allows them to still use the asset. For the Bank it is an investment. They loan out the money, get title to the asset and get a monthly return.

To those in the US this sounds a lot like one of those late night TV ads for car title pawns. A notorious bad way to borrow money. It is essentially the same concept but for the airlines the rate is fair, unlike the car pawn.


User currently offlinerfields5421 From United States of America, joined Jul 2007, 7571 posts, RR: 32
Reply 2, posted (1 year 6 months 5 days 15 hours ago) and read 2426 times:

Have you ever leased a car?

The same principle works for aircraft.

If you buy, you are paying for the entire value of the car/ aircraft.

If you lease for X years, you are paying for the entire value of the car/ aircraft - minus the expected value at the end of the lease.

i.e.

$50,000,000 aircraft

Buy - 10 years = $416,667 payments per month + interest

Lease - 10 years - $50,000,000 purchase - $10,000,000 residual value = $333,333.33 payments per month + interest

For the airline

The advantage - they pays only for the 'value' they plan to use of the total aircraft price. Also the airline avoids the risk of the aircraft residual value being less than anticipated.

The disadvantage - they have less flexibility in disposing of the aircraft. They have to negotiate the early return of the aircraft and often have to pay a hefty cash penalty for early return. It can be more difficult to make fleet size adjustments.


For the bank/ investment company

The advantage - strong cash flow for their investment. If the airline has problems with payments, much easier to take the aircraft and lease it so someone else than if they financed a purchase.

The disadvantage - the bank risks having the airline default.


User currently offlineBE77 From Canada, joined Nov 2007, 455 posts, RR: 0
Reply 3, posted (1 year 6 months 5 days 13 hours ago) and read 2391 times:

Quoting rfields5421 (Reply 2):
The disadvantage - the bank risks having the airline default.

And as inferred in the airline 'advantages', another disadvantage for the bank is if the residual value is less than expected (some A340 lessors must have been hit hard when 777's started really getting their legs).
Of course it works the other way for an aircraft that maintains it's value.

Taxation
Taxation is a huge influence. Depends on the country, but often the full cost of the lease is an 'expense' so the cost comes off the revenue top line for taxation purposes for the airline, but owning the aircraft means you can only deduct the depreciated value. So your income taxes would be higher than the extra interest implied in the lease.

Cost of Capital

Quoting dalmd88 (Reply 1):
Quoting rfields5421 (Reply 2):

To add to these replies - getting the cash or the loan to buy a plane is hard and expensive for an airline - similar to getting a mortgage to buy a house. (Maybe worse - would you lend monsy to an airline?).

In some cases the airline might be able to afford it, but even then they might want to save the cash, or be buy a few with their own money and lease the rest - if the deal is all structured together they might get a lower lease rate because they have lowered the risk to the bank by including some of their own skin in the game - in my industry for example this is a good way to leverage any spare cash we have to lower our overall costs by refinancing even a small percentage of loans or leases.

Also, 'Money' (capital) is 'expensive' and hard to find - and as rfields5421 points out, those that have the money like the security of being able to take the plane back if you stop paying the lease. If they lend you the money to buy a plane, you own it (not them), and if you stop paying for it, then they have to stand in line with everyone else to get their money back.Good luck with that!
So, if you are an airline with no money (did I really need to qualify that?) then a lease is often the only way to gete plane in the first place.



Tower, Affirmitive, gear is down and welded
User currently offlineHAWK21M From India, joined Jan 2001, 31667 posts, RR: 56
Reply 4, posted (1 year 6 months 4 days 22 hours ago) and read 2239 times:

Interesting & Educational.

So if Airline Y was to decide on the option it would be .......determined mainly by the duration they plan to use the aircraft for too.



Think of the brighter side!
User currently offlinejetstar From United States of America, joined May 2003, 1639 posts, RR: 10
Reply 5, posted (1 year 6 months 4 days 4 hours ago) and read 2107 times:
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Another advantage is depreciation, if the airline is very profitable, then they have the advantages of deducting the depreciation of the airplanes from their taxes, but if the airline is hardly making money or is losing money, then there is no tax advantage to depreciating the airplane.

In this case if they sell the airplane and lease it back, the leasing company, who is now the owner can depreciate the airplane on their taxes and could lower the lease rates so the airline in effect is getting back the tax breaks in lower lease rates while the leasing company makes money on the leasing of the airplanes.

It just all depends on how the leases are negotiated.

JetStar


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