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Why Large Airlines Lease, Not Buy?  
User currently offlinereadytotaxi From United Kingdom, joined Dec 2006, 3222 posts, RR: 2
Posted (10 months 3 days 2 hours ago) and read 3772 times:

A 14yr old asked me a question I could not answer.
Why do big airlines,like BA,lease a new aircraft and not buy it? If the leasing company can buy it and then lease it to them and make a profit why does the airline not buy it and make a profit? His words.
Can I get a good 14yr old answer pls? TIA  


you don't get a second chance to make a first impression!
10 replies: All unread, jump to last
 
User currently offlinemandala499 From Indonesia, joined Aug 2001, 6842 posts, RR: 75
Reply 1, posted (10 months 3 days ago) and read 3696 times:

Quoting readytotaxi (Thread starter):
Why do big airlines,like BA,lease a new aircraft and not buy it?

Airlines don't have enough spare cash do dish out 60 million a month or 300 million a month for when aircraft gets delivered.

It's like why use a credit card when you have cash? Why take out a mortgage on your house? Why rent when you can buy? etc...

Then we go to:

Quoting readytotaxi (Thread starter):
If the leasing company can buy it and then lease it to them and make a profit why does the airline not buy it and make a profit?

The answer on a non-aviation term... "why do we have banks? if banks can buy the house and lease it/let you pay mortage and make a profit, why don't you buy it and make a profit?"

It's all in the finance.  



When losing situational awareness, pray Cumulus Granitus isn't nearby !
User currently offlineDalmd88 From United States of America, joined Jul 2000, 2541 posts, RR: 14
Reply 2, posted (10 months 2 days 23 hours ago) and read 3645 times:

Some large airlines do buy outright. DL is currently buying all the 737-900 fleet with cash. We are leasing the 717 fleet though. One reason for lease is flexibility. Say the lease is eight years. As your routes and loads change you can easily get rid of aircraft that don't fit your airline anymore. Some also sell a airplane they own and lease it right back to raise cash. That happens a lot during bad times. Usually airlines lease for the same reason people lease cars (common in US). They don't have to give up large amounts of cash to buy outright or pay out less of a rate than a loan for ownership.

User currently offlineImperialEagle From United States of America, joined Jan 2006, 2529 posts, RR: 22
Reply 3, posted (10 months 2 days 22 hours ago) and read 3593 times:
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Quoting Dalmd88 (Reply 2):
DL is currently buying all the 737-900 fleet with cash.

At one time both DL and NW bought with cash.     



"If everything seems under control, you're just not going fast enough!"
User currently offlineprebennorholm From Denmark, joined Mar 2000, 6424 posts, RR: 54
Reply 4, posted (10 months 2 days 18 hours ago) and read 3516 times:

The alternative to leasing isn't very often to hand out own cash. Most often the alternative is borrowing the money in a bank.

Now, many airlines have a rather poor credit rating - an indicator of the risk of bankruptsy. The lower the credit rating, the higher interests the airline must pay for the loans.

Also in case of a bankruptsy the assets are in most cases "frozen" while the bankruptsy court is ruling. It is very inconvenient to have planes parked on the ground for months, maybe years, because the court cannot sell them until the accounts have been settled. It adds to the risk involved, since the planes lose value while parked, and that risk is added on top of an already high interest rate for loans.

A leasing company, on the other hand, can take back their planes the same day as bankruptsy is being declared, and lease them to another airline company.

Quoting readytotaxi (Thread starter):
A 14yr old asked me a question I could not answer.
Why do big airlines,like BA,lease a new aircraft and not buy it? If the leasing company can buy it and then lease it to them and make a profit why does the airline not buy it and make a profit? His words.
Can I get a good 14yr old answer pls?

Tell what I wrote above to your 14 years old friend, and he will immediately understand that sometimes it is cheaper to lease than to buy, even if the leasing company makes a profit on the deal.

And the flexibility issue, mentioned by other posters, is of course also very valid. But it comes with a grain of salt. When you lease planes on a rather short term contract, then the leasing rate goes north, while you get a sweeter deal with the leasing company when you sign a contract for many years.



Always keep your number of landings equal to your number of take-offs, Preben Norholm
User currently offlineStarlionblue From Greenland, joined Feb 2004, 17019 posts, RR: 67
Reply 5, posted (10 months 2 days 14 hours ago) and read 3406 times:

In essence, the airline is paying the lessor a fee to shoulder some of the risk of ownership. This is the same concept as paying an insurance company a fee to shoulder some of the risk of home or car ownership.


Leasing shields a company from holding a lot of capital and removes uncertainty about cash flow. Instead of having to save up 150 million for every time you get a new plane, you spend a regular amount of money monthly over the life of the lease. Once the lease is over, the aircraft goes back to the lessor. No worries about selling, and no uncertainty about sale price.



"There are no stupid questions, but there are a lot of inquisitive idiots."
User currently offlineMax Q From United States of America, joined May 2001, 4445 posts, RR: 19
Reply 6, posted (10 months 2 days 12 hours ago) and read 3378 times:

Aren't there tax advantages to leasing as well ?


The best contribution to safety is a competent Pilot.
User currently offlinenomadd22 From United States of America, joined Feb 2008, 1847 posts, RR: 0
Reply 7, posted (10 months 2 days 8 hours ago) and read 3267 times:

Quoting Max Q (Reply 6):
Aren't there tax advantages to leasing as well ?

The taxes are different. Whether or not it's an advantage depends on things like your profit margin. You have lease costs as overhead but you miss out on depreciation deductions.



Andy Goetsch
User currently offlineTheCol From Canada, joined Jan 2007, 2038 posts, RR: 6
Reply 8, posted (10 months 17 hours ago) and read 2800 times:

Generally air carriers will opt to lease aircraft if they don't foresee long term utilization in their operational business plan. Dropping upwards of 30 million dollars on aircraft that will only be in the fleet for 5-10 years isn't the most viable financial option for a lot of carriers. That's in addition to the other reasons that are mentioned above.


No matter how random things may appear, there's always a plan.
User currently offlineFlyboyOz From Australia, joined Nov 2000, 1985 posts, RR: 25
Reply 9, posted (10 months 12 hours ago) and read 2740 times:

Some airlines wants to try out with the new aircraft - whether it's useful to fly between A and B and enough capacity or not. also is it good to make profit? That's why they want to lease one or two new aircraft. If they are happy with that aircraft, then they will buy them. If they are not happy with that... then sent them back. For example, CX leased some A340-600s but not happy with them... then return them and buy lots of B777-300ERs.

Some airlines aren't happy with Boeing 787's late delivery. That's why they have to lease some A330s for a while and then return to leasing company after they go them.



The Spirit of AustraliAN - Longreach
User currently offlineHAWK21M From India, joined Jan 2001, 31679 posts, RR: 56
Reply 10, posted (10 months 10 hours ago) and read 2704 times:

A small duration usage would normally warrant a lease than a purchase.....if its a long usage likelyhood the purchased deal would be cheaper.


Think of the brighter side!
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