WidebodyPTV wrote:jagraham wrote:
And it may turn out that DL is looking at leasing 737MAXes. in which case there would be little if any upfront expense. Especially if a 717 trade is part of the deal.
These negotiations could be brutal indeed.
Leasing is simply a form of financing; even GAAP now requires leases obligations to be reported as debt. Aircraft are generally financed in some form... even aircraft that are paid for in full with cash, are usually either mortgaged or sold then leased back afterward. Just as if you were considering buying or purchasing a car, there's advantages and disadvantages to different forms of aircraft financing.
But DL owns only 13 B717, the other 78 are leased from Boeing. If DL "trades in" those 78 B717 to Boeing, it's certainly not to their advantage. Think about it this way... if you still owed $2500 in lease payments on your car, and your contract specified a purchase option that is at or greater than the car's market value (which is typical of operating leases), would it be to your advantage to trade your leased car in? Of course not -- you will still owe that $2500, whether you keep the car or give it back to the finance company.
In DL's case, it's deceptive to say they're looking at trading in the 717 for MAX. If the rumor's true, then what they're really doing is seeking financial relief from Boeing (e.g. void the lease extension signed last fall) in exchange for agreeing to purchase the MAX.
Leases are debt. Not capital. Leases are expensed as they are paid, while capital purchases often require significant upfront cost that have to be amortized over a period of years. From a tax and from a cash flow perspective, leases are better, all other things being equal. especially if the asset will not be held beyond the lease term.
And if DL seeks financial relief from Boeing (they are the only US major not receiving MAX compensation, for whatever that's worth) by trading in 717s, it's up to Boeing to decide whether to send DL some money or keep the same terms.
Also, the scope issue (more 75 seat RJ flying in exchange for more 110 seat mainline flying) is significant. No MAX fits in the scope, unless DL plans to do a UA and stick an extra big first class in some MAX7s. DL wanted that 75 seat RJ flying real bad and now benefits from it; without scope relief from the pilots union, whittling down the 717 fleet whittles down the 75 seat RJ fleet. Not a big deal right now, but once flying starts to come back it's a really big deal. Because RJs have higher CASM, but lower trip costs by at least half. And if you're going to be flying a plane more than half empty, better to cut the expenses in half. Fly the smallest thing that can fly the route. Which by the way, for mainline, is the 717 after the A220.
And those who feel DL is going to take the capital expense of an extra 50 or more A220s in the next couple of years, well that ain't happening.