From a tweet by SMBC Aviation Capital, Southwest will lease 12 new build 738MAX with the first delivery starting in July 2019. Wonder if this will push out 12 older -700's? Also wondering what airline backed out of the leases for WN to pick them up so close to delivery dates?

They could be sale and leaseback aircraft from WN's existing order book. Without further details it is possible Southwest has just concluded a financing deal with the lessor rather than it being a fresh order.

Isn’t sale and lease back is what airlines in financial trouble do?

Bobloblaw wrote:

Isn’t sale and lease back is what airlines in financial trouble do?

Depends on the lease terms, no?

Bobloblaw wrote:

Isn’t sale and lease back is what airlines in financial trouble do?

Nope. It's also a way of making a load of money!

Airlines like Ryanair and Southwest can make cash by buying cheap at the factory gate, then reselling to a lessor at a higher price. The big orders attract the biggest discounts. The cash from the sale then goes back into buying the next aircraft in the order. It also has capital benefits and tax implications that mean leasing is an efficient way to expand a fleet.

Cubsrule wrote:

Bobloblaw wrote:

Isn’t sale and lease back is what airlines in financial trouble do?

Depends on the lease terms, no?

Lessors will give airlines like Southwest the very best rates as they are rock-solid profitable. An airline with their kind of balance sheets and history is a guaranteed place to put their money and get paid back regularly. It's also why airlines like WN and FR can order hundreds at a time; they know banks and lessors will be ready to cover their deals thanks to their creditworthiness.

Thanks. It’s just i recall TWA doing this.

Finnair made a lot of money from the sale-lease back of their early A350s purchased at A350mk1-> A350XWB conversion prices.

Channex757 wrote:

Bobloblaw wrote:

Isn’t sale and lease back is what airlines in financial trouble do?

Nope. It's also a way of making a load of money!

Airlines like Ryanair and Southwest can make cash by buying cheap at the factory gate, then reselling to a lessor at a higher price. The big orders attract the biggest discounts. The cash from the sale then goes back into buying the next aircraft in the order. It also has capital benefits and tax implications that mean leasing is an efficient way to expand a fleet.

Doesn't it make more sense for an airline that likes to turn over it's fleet rather quickly though (like EK) rather than an airline like WN that keeps its planes for a long time?

SMBC press release:
https://www.smbc.aero/news/smbc-aviatio ... t-airlines

"The transaction involves placement of twelve (12) B737 MAX 8 aircraft from SMBC Aviation Capital’s orderbook, with the first aircraft set for delivery in July 2019."

So it's no sale & leaseback transaction. 12 more 737-8s for WN

How many -800s do they need for Hawaii service? It seems like it might be around 12. Leasing 12-MAX8s might help back-fill the rest of the network starting at peak season.

Bobloblaw wrote:

Thanks. It’s just i recall TWA doing this.

True, some airlines with financial problems do this as it is one of the few ways to raise much needed capital (the other being selling off divisions). PanAm did this with their 747 fleet after it had sold off all of it's other non-aviation assets (such as Intercontinental Hotels) and still ended up selling chunks of it network off.

I believe that Monarch Airlines agreed a deal with Boeing in which it was to sell back it's Max8 aircraft and then lease them back however they went bust before they could take delivery.

It is also possible that rather than sell & lease back the airline can take out a mortgage on an airframe, effectively taking out a loan with the aircraft used as collateral.

Phil
FlyingColours

DaCubbyBearBar wrote:

From a tweet by SMBC Aviation Capital, Southwest will lease 12 new build 738MAX with the first delivery starting in July 2019. Wonder if this will push out 12 older -700's? Also wondering what airline backed out of the leases for WN to pick them up so close to delivery dates?

No airline backed out. SMBC had had these birds already on order, SW is now just the home for them. +12 birds to SW, that is all. It makes sense for SW because if they would order direct, the wait would be a lot longer.

cledaybuck wrote:

Doesn't it make more sense for an airline that likes to turn over it's fleet rather quickly though (like EK) rather than an airline like WN that keeps its planes for a long time?

Well now we know it's not a sale and leaseback. However, lessors will give preferential rates and all sorts of sweeteners in deals where the lease can be twenty years or even more. Many leases come with break clauses where the plane can be handed back without severe penalties at certain times, or come with a renewal deal attached after ten or so years meaning the airline benefits from cheaper payments.

Imagine you are a lessor. Southwest agrees to take your aircraft and is looking for a deal which will last twenty years. Wouldn't you sweeten that pot as far as possible to get their iron-clad business? An Emirates ten year type lease means you are stuck with trying to remarket that asset after it comes back. Southwest in the meantime wants to keep it for virtually all its useful life.

It's a very simplistic way of describing it, but that's what the basic policy is. Put investment capital into blue chip deals and your return might be a bit less, but is secure. Warren Buffett has made a lot of dough doing just that sort of deal.

cledaybuck wrote:

Doesn't it make more sense for an airline that likes to turn over it's fleet rather quickly though (like EK) rather than an airline like WN that keeps its planes for a long time?

We don't know the terms of the lease. Maybe the leasing company's targeted return on capital is lower than WN's. WN makes pretty good money. Say I want to make 18% when I invest my money but you're happy making 15%. Shazam.

Remember when there was a huge crowd on here saying WN will never take the 738? Ah, those were the days

Less than 6 months until delivery. That’s a pretty quick turn around, or is that normal for aircraft leases? I’m curious if these frames were invluded when WN said they’re taking delivery of 45 airframes this year.

Bobloblaw wrote:

Thanks. It’s just i recall TWA doing this.

It’s done for a variety of reasons;
- to raise capital;
- to profit off a low acquisition price;
- to balance the risks of ownership;
- financing rate was unattractive;
- etc.

Yes, TW did it to raise cash, but there’s many other reasons it’s done.

LotsaRunway wrote:

How many -800s do they need for Hawaii service? It seems like it might be around 12. Leasing 12-MAX8s might help back-fill the rest of the network starting at peak season.

Current speculation is that WN will start Hawaii this summer. WHY?

1) It missed the expensive holiday season
2) The shutdown means it will miss expensive spring break and Easter.
3) So why start in April or May when demand and fares are low?
4) Answer -- June is the start month (assuming ETOPS finally happens)

Thus adding new aircraft in June makes sense.

Can the MAXs allow WN to fly to Hawaii from additional gateways beyond what the current etops 738s permit? PHX, LAS, DEN?

bb

jetblueguy22 wrote:

Remember when there was a huge crowd on here saying WN will never take the 738? Ah, those were the days

Can you find one person who said that?

Channex757 wrote:

Bobloblaw wrote:

Isn’t sale and lease back is what airlines in financial trouble do?

Nope. It's also a way of making a load of money!

Airlines like Ryanair and Southwest can make cash by buying cheap at the factory gate, then reselling to a lessor at a higher price. The big orders attract the biggest discounts. The cash from the sale then goes back into buying the next aircraft in the order. It also has capital benefits and tax implications that mean leasing is an efficient way to expand a fleet.

Tax implications too. A purchased aircraft must be amortized, while the entire cost of a leased aircraft can be written off.

All airlines do this. It’s an easy way to add cash without taking on debt,take debt off the balance sheet and lease costs are tax deductions.

jagraham wrote:

Channex757 wrote:

Bobloblaw wrote:

Isn’t sale and lease back is what airlines in financial trouble do?

Nope. It's also a way of making a load of money!

Airlines like Ryanair and Southwest can make cash by buying cheap at the factory gate, then reselling to a lessor at a higher price. The big orders attract the biggest discounts. The cash from the sale then goes back into buying the next aircraft in the order. It also has capital benefits and tax implications that mean leasing is an efficient way to expand a fleet.

Tax implications too. A purchased aircraft must be amortized, while the entire cost of a leased aircraft can be written off.

Sorry, but that is not remotely true.

Monthly lease payments would be recognized in expense each month, and counted as a deduction from taxable income.

A purchased airframe (and all of its appreciable components) will have a certain % of the cost depreciated each month as the service life is used up. The depreciation expense is also a deduction from taxable income, it's just a different amount than the lease expense.

dbo861 wrote:

Less than 6 months until delivery. That’s a pretty quick turn around, or is that normal for aircraft leases? I’m curious if these frames were invluded when WN said they’re taking delivery of 45 airframes this year.

It is less than 6 months from ANNOUNCEMENT until delivery. Boeing requires longer to configure the aircraft and I'd guess that the agreement between WN and SMBC was signed at an appropriate time for that.

bob75013 wrote:

3) So why start in April or May when demand and fares are low?

Starting service to new destinations when demand is lower can make a lot of operational sense. Much easier to work the bugs out when there is some slack in the system.

Depreciation is a non cash expense where as lease is a cash expense.

osupoke07 wrote:

jagraham wrote:

Channex757 wrote:

Nope. It's also a way of making a load of money!

Airlines like Ryanair and Southwest can make cash by buying cheap at the factory gate, then reselling to a lessor at a higher price. The big orders attract the biggest discounts. The cash from the sale then goes back into buying the next aircraft in the order. It also has capital benefits and tax implications that mean leasing is an efficient way to expand a fleet.

Tax implications too. A purchased aircraft must be amortized, while the entire cost of a leased aircraft can be written off.

Sorry, but that is not remotely true.

Monthly lease payments would be recognized in expense each month, and counted as a deduction from taxable income.

A purchased airframe (and all of its appreciable components) will have a certain % of the cost depreciated each month as the service life is used up. The depreciation expense is also a deduction from taxable income, it's just a different amount than the lease expense.

What is the current US depreciation schedule?
For the country the leasing company is based in (or is it US based?), How many years may they depreciate in?

Either way, this is probably the quickest way WN could acquire MAXes.

Lightsaber

DfwRevolution wrote:

jetblueguy22 wrote:

Remember when there was a huge crowd on here saying WN will never take the 738? Ah, those were the days

Can you find one person who said that?

viewtopic.php?f=3&t=35297&p=229145&hilit=SOUTHWEST+737+800#p229145

Ahhh, the good ole days. Just one of many threads.

Some countries are swimming in excess US dollars, so many financial institutions like to use aircraft leasing as a means of transferring of US currencies into assets that are naturally pegged to the US dollar.

As such, the rates being offered can be very attractive to airlines operating in the US.

I think we will start seeing the US major airlines financing / leasing aircraft from these countries.

Norwegian recently shead a number of MAX8 with this same company I believe in their cost restructuring.
WN probably got an attractive long term lease rate.
I think these will help the early retirement of the first delivered 700NG.

Flyguy

In a sale / leaseback, if there is a difference in declared value between what the leasing company pays versus what the leasee paid, it won't be profit. The difference will be the fitout has been capitalised. Or ditto for engine maintenance. Or working capital. Or residual value amendment. Or...........

Would you rather incur $50m profit at the front or back end of a lease? In 2019 or 2034 dollars?

As for lease flexibility, there just can't be too much in a lease, unless all parties are willing to risk tax effectiveness reviews and unwinding. And that doesn't just affect the leasor and leasee, but also all the funding participants.

lightsaber wrote:

osupoke07 wrote:

jagraham wrote:

Tax implications too. A purchased aircraft must be amortized, while the entire cost of a leased aircraft can be written off.

Sorry, but that is not remotely true.

Monthly lease payments would be recognized in expense each month, and counted as a deduction from taxable income.

A purchased airframe (and all of its appreciable components) will have a certain % of the cost depreciated each month as the service life is used up. The depreciation expense is also a deduction from taxable income, it's just a different amount than the lease expense.

What is the current US depreciation schedule?
For the country the leasing company is based in (or is it US based?), How many years may they depreciate in?

Either way, this is probably the quickest way WN could acquire MAXes.

Lightsaber

Depreciation is 15 to 25 years straight line for most airframes. Varies by country. Sub assemblies vary widely. I think USA is 20 years.

https://www.iata.org/publications/Docum ... sition.pdf

It makes a huge difference if the airline is not going to use the aircraft for 20 years.

It is interesting that WN felt the need to quickly acquire more 7M8s.

wnflyguy wrote:

Norwegian recently shead a number of MAX8 with this same company I believe in their cost restructuring.
WN probably got an attractive long term lease rate.
I think these will help the early retirement of the first delivered 700NG.

Flyguy

The oldest 73Gs have just around 80,000 hours on them (much less than many of the the 733s when they were parked) and WN was adding 73Gs until very recently. Is the imminent retirement of the first ones really all that pressing?

sxf24 wrote:

dbo861 wrote:

Less than 6 months until delivery. That’s a pretty quick turn around, or is that normal for aircraft leases? I’m curious if these frames were invluded when WN said they’re taking delivery of 45 airframes this year.

It is less than 6 months from ANNOUNCEMENT until delivery. Boeing requires longer to configure the aircraft and I'd guess that the agreement between WN and SMBC was signed at an appropriate time for that.

I'm thinking that it's six months before the airplanes are ready, and SMBC doesn't have a taker. Time to make a deal.

wnflyguy wrote:

Norwegian recently shead a number of MAX8 with this same company I believe in their cost restructuring. WN probably got an attractive long term lease rate. I think these will help the early retirement of the first delivered 700NG.Flyguy

I think you are pretty close here.
SMBC had obviously had someone in negotiations or in line to lease these 10 birds and backed out before WN got involved here.

I suspect SMBC made a pretty good sweetheart deal to WN so SMBC would not have to eat them.
Last I checked Aluminum is really tough to chew.


Okie

As the global market cools, this is a way WN (and healthy balance sheet airlines) can get good deals to bring on new capacity sooner.

SANFan wrote:

Can the MAXs allow WN to fly to Hawaii from additional gateways beyond what the current etops 738s permit? PHX, LAS, DEN?

bb

Hey B-, it’s my understanding as far as DEN with the Max. I am 99% sure PHX & LAS are on their short list of destinations out of the Islands.

MO11 wrote:

sxf24 wrote:

dbo861 wrote:

Less than 6 months until delivery. That’s a pretty quick turn around, or is that normal for aircraft leases? I’m curious if these frames were invluded when WN said they’re taking delivery of 45 airframes this year.

It is less than 6 months from ANNOUNCEMENT until delivery. Boeing requires longer to configure the aircraft and I'd guess that the agreement between WN and SMBC was signed at an appropriate time for that.

I'm thinking that it's six months before the airplanes are ready, and SMBC doesn't have a taker. Time to make a deal.

Boeing does not allow configuration changes 6 months in advance.

WN will not take planes in a different configuration.

Leases take A LONG time to negotiate.

For those talking about depreciation, remember that President Trump's Tax Cuts and Jobs Act allows for "bonus" depreciation of up to 100 percent of the price of the new asset in the year in which it is placed into service (through 2024 for aircraft). So you can write the thing off against profits for tax purposes very quickly. That's a huge incentive to buy capital goods now. I know this affects business aircraft; not sure how it affects airline investment, though.

jagraham wrote:

Depreciation is 15 to 25 years straight line for most airframes. Varies by country. Sub assemblies vary widely. I think USA is 20 years.

https://www.iata.org/publications/Docum ... sition.pdf

It makes a huge difference if the airline is not going to use the aircraft for 20 years.

Depreciation of commercial aircraft is a little more complex in most countries, with different rates for air frames, engines, interiors and even IFE.

And comparing rates of depreciation is only half the story, if residuals are ignored.

The depreciation period is trending down, especially for NB aircraft, with some major operators depreciating to zero.

Two big players fall outside the norm. QR 12 and EK 15, though somewhat hypothetical given they increasingly don't directly own their fleets.

Interiors are mostly depreciated to zero in 5-10 years. IAG is 5 years, but actual refurbishment cycle seems closer to 10.

Of course even the value of a new aircraft is not clear cut, as the starting point to depreciate. Air frame and engine OEM's provide credits, usually in the form of retrospective discounts. For example, an airline (or leasing company) orders 40 aircraft in four tranches each of 10 aircraft. To keep the numbers simple, lets say they are purchased for USD400m less USD100m per unit discount, with 25% payable (USD25m) for every delivered tranche.

On completion and payment of the 1st tranche, the customer receives a credit of USD250m, which can be applied to the next tranche, or for parts, or training, or even the bottom line (some countries do not permit such flexibility).

On completion and payment of the 2nd tranche, the customer receives a credit of USD750m (USD250m on tranche 1, USD500m on tranche 2).

On completion and payment of the 3rd tranche, the customer receives a credit of USD1,250m (USD250m on tranche 1, USD250m on tranche 2, and USD750m on tranche 3).

On completion and payment of the 4th tranche, the customer receives a credit of USD1,750m (USD250m on tranche 1, USD250m on tranche 2, and USD250m on tranche 3, and USD1,000m on tranche 4).

Bobloblaw wrote:

Thanks. It’s just i recall TWA doing this.

TWA was already in very poor financial trouble. They could not cover the bills when they sold/leased back & got less favorable rates.

Spacepope wrote:

wnflyguy wrote:

Norwegian recently shead a number of MAX8 with this same company I believe in their cost restructuring.
WN probably got an attractive long term lease rate.
I think these will help the early retirement of the first delivered 700NG.

Flyguy

The oldest 73Gs have just around 80,000 hours on them (much less than many of the the 733s when they were parked) and WN was adding 73Gs until very recently. Is the imminent retirement of the first ones really all that pressing?

A lot of the early 700 are MX queens these days.
While they do not have as many cycles as some of the -300 they still are used and abused. The Extra seating revenue plus lower MX costs with the MAX8 makes sense for the early retirement of the -700.

Flyguy

Polot wrote:

Finnair made a lot of money from the sale-lease back of their early A350s purchased at A350mk1-> A350XWB conversion prices.

I have always wondered about those deals and how they were converted as AB continually changed + upgraded the (contracted) product.

Finally of course the transition was complete from a A330MAX all the way to the fully-fledged 777 competitor then named the A350XWB(!)

I have long suspected that certain operators must have been sitting very, very pretty by that stage.

(Of course it is an exact parallel to the BA situation which was the same only worse - there BA was also contractually committed to the mad pricing of the 787s sold during the "drug rush" period - except that those early 787s were also costing the crown jewels to build - EACH! )

(Maybe a bit of exaggeration here & there - but hey, it's a.net after all!)



cheers

brindabella wrote:

Polot wrote:

Finnair made a lot of money from the sale-lease back of their early A350s purchased at A350mk1-> A350XWB conversion prices.

I have always wondered about those deals and how they were converted as AB continually changed + upgraded the (contracted) product.

Finally of course the transition was complete from a A330MAX all the way to the fully-fledged 777 competitor then named the A350XWB(!)

I have long suspected that certain operators must have been sitting very, very pretty by that stage.

(Of course it is an exact parallel to the BA situation which was the same only worse - there BA was also contractually committed to the mad pricing of the 787s sold during the "drug rush" period - except that those early 787s were also costing the crown jewels to build - EACH! )

(Maybe a bit of exaggeration here & there - but hey, it's a.net after all!)cheers

Apologies - looks like it has been dumped into the wrong thread - nothing much to do with WN & the lease deal, of course!



cheers

wnflyguy wrote:

Spacepope wrote:

wnflyguy wrote:

Norwegian recently shead a number of MAX8 with this same company I believe in their cost restructuring.
WN probably got an attractive long term lease rate.
I think these will help the early retirement of the first delivered 700NG.

Flyguy

The oldest 73Gs have just around 80,000 hours on them (much less than many of the the 733s when they were parked) and WN was adding 73Gs until very recently. Is the imminent retirement of the first ones really all that pressing?

A lot of the early 700 are MX queens these days.
While they do not have as many cycles as some of the -300 they still are used and abused. The Extra seating revenue plus lower MX costs with the MAX8 makes sense for the early retirement of the -700.

Flyguy

WN has a lot of short hops (MAX has no advantage) and a lot of smaller markets where the extra seats depress prices. I expect the 73Gs to dribble into retirement onesey twosey when they are worn out.

william wrote:

DfwRevolution wrote:

jetblueguy22 wrote:

Remember when there was a huge crowd on here saying WN will never take the 738? Ah, those were the days

Can you find one person who said that?

viewtopic.php?f=3&t=35297&p=229145&hilit=SOUTHWEST+737+800#p229145

Ahhh, the good ole days. Just one of many threads.

Thanks!

Large retailers also do sale-leaseback transactions on their stores, and not because they're in trouble. It's for capital and cash flow, plus taxes. One reason, they prefer to locate and develop new stores themselves. When a critical mass are completed and generating cash, they do a pooled sale-leaseback to recover the money. The lease rate is predictable and they get a better return on the cash investing it in more new stores or other growth opportunities.