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DocLightning
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Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 5:27 am

Friend flew from SFO to HKG and is now flying back (he's an A.nutter, he can identify himself if he likes) and I noticed that both aircraft that he was on (UA 744s) were bank-owned. One by Wells Fargo and the other by US Bank.

Why doesn't UA own these fully-depreciated planes?
-Doc Lightning-

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747WanSui
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 5:32 am

It is very common for airlines to not "own" their aircraft, but instead lease them from leasing companies while taking full responsibility for operations and maintenance. This helps airlines reduce costs and increase profits, especially with an airline like UA which once declared bankruptcy in the early 2000s.
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LAXintl
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 5:37 am

As of December 31st, United owned 15 of 23 remaining 744s in the fleet.

Not very different at Delta. They only own 5 of they 744s.
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United1
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 5:54 am

Quoting 747WanSui (Reply 1):

It is very common for airlines to not "own" their aircraft, but instead lease them from leasing companies while taking full responsibility for operations and maintenance. This helps airlines reduce costs and increase profits, especially with an airline like UA which once declared bankruptcy in the early 2000s.

BK doesn't really have any impact on UAs fleet at this point....UA owns around 2/3rds of their fleet and leases the rest.

All of the new aircraft that UA has taken from Boeing in the past few years have been purchased vs leased btw...

[Edited 2016-02-10 21:57:51]
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Viscount724
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 5:59 am

Quoting LAXintl (Reply 2):
As of December 31st, United owned 15 of 23 remaining 744s in the fleet.

Not very different at Delta. They only own 5 of they 744s.

The 763s are as old as the 744s and UA's 2014 annual report fleet data page (as of December 31, 2014) shows 19 owned and 16 leased. Same for the slightly older 752s with 45 owned and 28 leased. Average age of the A320s is only 3 years younger than the 744s with 51 owned and 46 leased.

The only UA mainline types where all aircraft were indicated as owned in the 2014 annual report were the 787-8s, 787-9s, 739ERs and early non-ER 772s.
 
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777222LR
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 11:35 am

Well hey, that friend is me.   Hello from somewhere between HKG and SFO. Slightly north of Hawaii, taking a very southerly route tonight with some mighty tailwinds (over 200mph in fact).
 
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DocLightning
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 3:35 pm

Quoting 747WanSui (Reply 1):

It is very common for airlines to not "own" their aircraft, but instead lease them from leasing companies while taking full responsibility for operations and maintenance. This helps airlines reduce costs and increase profits, especially with an airline like UA which once declared bankruptcy in the early 2000s.

I'm aware of this but without explaining how it reduces costs and increases profits, this is the kind of answer on A.net that just doesn't help.
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IAHWorldflyer
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 3:52 pm

Doc, I'll take a stab at this, though first I'll say I don't do finance as a career.
When you take a plane "off the lot" from Paine Field at Boeing, you have to give Boeing the money in full. They don't do financing options. So, if you want to own the plane, as a company, you're shelling out some serious cash, which might impact your bottom line profit/loss for the year. When you lease a plane, it's like renting an apartment, so you only have a much smaller fixed expense to post against your revenues for the year. Therefore, your balance sheet might look better.
So a leased plane is not a tangible asset you own, but leasing helps improve cash flows and let's you hopefully show a larger profit than were you to spend over $100 million on a new plane.
 
DLPMMM
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 3:56 pm

Quoting DocLightning (Reply 6):
I'm aware of this but without explaining how it reduces costs and increases profits, this is the kind of answer on A.net that just doesn't help.

It has to do with the company's internal cost of capital and the lease rate's internal rate of return.

In a nut shell, sometimes the effective interest rate a leasing company gives for an aircraft lease is less than the interest rate that the company would have to pay to borrow the money to buy the plane on the open market.

It is strictly a finance decision. The companies often sell their owned aircraft to leasing companies and then lease them back in order to reduce debt, keeping their leverage down, and the perceived financial riskiness of the company, which keeps their interest rates down.

I hope that helps.

[Edited 2016-02-11 07:59:13]
 
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Polot
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 3:58 pm

Quoting IAHWorldflyer (Reply 7):
When you take a plane "off the lot" from Paine Field at Boeing, you have to give Boeing the money in full. They don't do financing options.

Of course they do, the division is called Boeing Capital Corporation. Whenever you are financing something (e.g. a house or car) the seller gets the money in full. You are just repaying whoever paid all the money to the seller over time + interest (whether that be a bank, BCC, or someone else).

Almost every airline when buying, not leasing a plane, are financing it. Rarely are they paying for it in full upfront with their own money.
 
113312
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 3:59 pm

It's a bit more complex than stated above. When an airline, or any company, buys an aircraft, they are allowed to take accelerated depreciation on their corporate taxes. This is a big deduction to offset the cost of the capital outlay. Once the asset is depreciated, that tax advantage is gone. But if the aircraft is then sold and leased back, the lease payments are again treated better in taxes than owning the asset outright. Lease costs, maintenance costs and operating costs all offset income just as individuals who lease cars for use in their business.
 
shaq
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 4:00 pm

Adding to what IAHWorldflyer says, it doesnt affect profits, but liquidity.
In cash, they would have 100m less, that affect cashflow, but in the paper they would see less cost because it would be only depreciation cost.
BUT, if you are in a rainy year, you will prefer to have the cash in hand. .
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a380787
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 4:02 pm

It's also a way for a board to artificially boost their short-term RoA metric, but over the longer term, may suffer from higher TCO.

But in today's short-sighted way of managing only for the next quarterly earnings, a lot of these decisions are made poorly (or with a hidden agenda)
 
United1
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 5:09 pm

Quoting a380787 (Reply 12):
But in today's short-sighted way of managing only for the next quarterly earnings, a lot of these decisions are made poorly (or with a hidden agenda)

All of the aircraft UA has taken delivery of in the past few years were purchased by the company. None were leased....
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a380787
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 5:16 pm

Quoting United1 (Reply 13):

All of the aircraft UA has taken delivery of in the past few years were purchased by the company. None were leased....


Good good. My statement was made in general, not specific to UA.
 
Flighty
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 5:55 pm

Each example is different. There are strategic aspects -- sometimes you get a good deal because there is no alternative customer.

General situation is like this DocL. UA's cost of capital may be like 11% (in the bad days). US Bank's cost of capital is likely closer to 4%. This means US Bank could borrow the money itself (or you can think of it that way) for 4%, and charge UA the equivalent of the payments at 8%, and have a pretty good chance of making some money. Meanwhile, UA is also getting the plane cheaper than if it borrowed and bought. If UA defaults or returns the plane, however, and its resitual value is lower than expected, the bank could lose money.

In a nutshell, it is good to remember that banks exist because that is more efficient than each company and each family having their own personal bank. (Which is how they do it in countries that lack adequate rule of law).



[Edited 2016-02-11 10:00:01]
 
Planesmart
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 7:53 pm

An aircraft can be bank-owned this year, owned by a different bank next year, leased in Y3 for 5 years, then airline owned.

Ownership of used aircraft, operated by the same airline, is dynamic, sometimes for funding reasons, sometimes for tax reasons.

New aircraft are quite different.
 
ckfred
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 8:35 pm

Another financial tactic of airlines is to sell aircraft that are fully depreciated, and then take the aircraft under a lease. When an aircraft is fully depreciated, there are no further tax deductions for the aircraft, other than the cost of maintenance. Sale and leaseback generates cash and creates another tax deduction.

I seem to recall that by the mid 1990s, AA owned very few of their 727s, because they had been sold and leased back.
 
N1120A
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 8:39 pm

Quoting Flighty (Reply 15):
In a nutshell, it is good to remember that banks exist because that is more efficient than each company and each family having their own personal bank. (Which is how they do it in countries that lack adequate rule of law).

So, Japan has inadequate rule of law?
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IAHWorldflyer
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 11:21 pm

Quoting polot (Reply 9):
Of course they do, the division is called Boeing Capital Corporation.

Sorry, I wasn't aware of BCC. When I toured the Boeing plant a couple years ago, the tour guide made a really big deal about how Boeing doesn't deliver the plane to a customer until funds are wired into their account. She then went on to take a dig at Airbus, saying that Airbus financed planes for their customers, but Boeing did not. Obviously, she forgot to mention BCC's existence!
 
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ua900
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RE: Why Doesn't UA Own Its 744s?

Thu Feb 11, 2016 11:36 pm

Quoting DocLightning (Thread starter):
Friend flew from SFO to HKG and is now flying back (he's an A.nutter, he can identify himself if he likes) and I noticed that both aircraft that he was on (UA 744s) were bank-owned. One by Wells Fargo and the other by US Bank.

Why doesn't UA own these fully-depreciated planes?

Having worked for Wells, I can tell you that *a lot* of planes are bank owned, both new and older, across many airlines and countries. As others have said, UA owns some of them, same as with the 777s for example.

Now, as to why, it really depends on the terms of each deal/package, it's highly situational and as others have said there can be accounting advantages.

But for the 744, if you're an airline, there are a couple downsides to owning one in addition to accounting, e.g. resale value and disposal opportunities. You may not as good at that as a bank, much like most banks don't count operating aircraft among their core competencies.
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