dalmd88 From United States of America, joined Jul 2000, 2535 posts, RR: 14
Reply 1, posted (1 year 6 months 1 week 6 days 15 hours ago) and read 2447 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.
rfields5421 From United States of America, joined Jul 2007, 7607 posts, RR: 32
Reply 2, posted (1 year 6 months 1 week 6 days 14 hours ago) and read 2435 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.
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.
BE77 From Canada, joined Nov 2007, 455 posts, RR: 0
Reply 3, posted (1 year 6 months 1 week 6 days 12 hours ago) and read 2400 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 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.
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.
jetstar From United States of America, joined May 2003, 1642 posts, RR: 10
Reply 5, posted (1 year 6 months 1 week 5 days 2 hours ago) and read 2116 times:
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.