Question

Leases are one of the most common means by which companies obtain the use of long term operating assets.
Lets look at the airline industry and the effect of leasing.

What you believe are the benefits if any as airlines decide to lease versus buying assets? Why or why not?

Answer 1

Lease- A lease is a contractual agreement, under which the original owner of property permits someone else to use it.

The original owner is the lessor and the user of the property is the lessee.

There are many kinds of leases and subtleties to lease contracts, but the major distinction to be aware of is the difference between operating leases and capital leases. In brief,

• Operating Leases work similarly to a rental contract. When the lease contract ends, the lessee surrenders the leased property to the lessor.
• Capital Leases are so-named because property ownership transfers to the lessee. A capital lease is very similar to a financed purchase. When the lease contract is completed, the leased property remains with the lessee.

If you’ve decided you want to own or run your own aircraft, one of the most important questions you should ask yourself is whether you should buy an aircraft, or simply lease one. And contrary to what you may think, the answer is not as straightforward as just working out whether or not you can afford to buy an aircraft.

In fact, there are many times when a person or company has more than enough capital to buy an aircraft outright, but it is actually a more lucrative solution to lease one. If you still have any doubts, consider this: more than one-third of all aircraft operated by airlines are leased by the airlines themselves.

This is not a behavior owing to the 2008 financial crisis, either. Data compiled by Ascend shows that the ratio of airlines leasing aircraft versus owning them has seen a fairly steady increase since 1980. By 2011, the number of airlines leasing aircraft had exceeded 33.3%.

So, why would an airline with huge amounts of funds available choose to lease an aircraft rather than buy one? There are in fact a multitude of reasons, for both cases.

The Advantages of Leasing

One of the main advantages of leasing an aircraft comes from one of the most obvious and essential places – affordability. If a person or company can’t afford to raise enough money to purchase an aircraft outright, leasing one means they can begin to enjoy the benefits of aircraft ownership regardless.

Even if a company can afford to buy an aircraft, it may well be preferable to lease it instead. There are a lot of different reasons for this. For instance, retaining the money that would have been spent on the upfront cost of an aircraft frees up funds for other avenues of the business. This could mean expanding the business more quickly and ergo driving more success.

The most business savvy minds out there will also be aware of the benefits that leasing an aircraft can have on a company’s balance sheet. Leasing an aircraft does not qualify as either an asset or a liability. Shrewd businesses can use this to make the best of their key ratios.

With this in mind, there are two kinds of leases – capital leases and operating leases. The former is close to a loan in its make-up. All equipment is classed as assets for the lessee. This means the company can take advantage of residual value, tax depreciation and more.

Finally, one huge advantage is that getting the most up-to-date aircraft doesn’t have to be such a burden when leasing. When buying an aircraft, the company will begin to take on the burden of its age over time. To upgrade to a newer model, a buyer would have to be found. When leasing, this is no longer an issue.

The Disadvantages of Leasing

Despite its upsides, leasing will typically cost more in the long term than buying outright. Just like renting a house can be more affordable than taking out a mortgage, but ultimately leave you with no assets to show for your money, so too does leasing have a rather unsatisfying conclusion.

Depending on the type of lease secured, the terms could also lock a lessee in longer than they’d like. For instance, an airline may hire an aircraft for a set term of a year. If they no longer need they aircraft, there is little they can do. This can lead to situations where a person or company is paying for a redundant vehicle. Plus, any damage to the aircraft could prove costly. Lease agreements often have strict clauses about the condition of the aircraft.

The Advantages of Buying

First and foremost, the aircraft will be yours to keep. This means you have a tangible and valuable asset to show for your investment, and if the market becomes favorable to sellers there is the opportunity to turn a profit – or at least a favorable return.

Because you own the aircraft, there is nothing to stop you modifying it to your liking. Whether that means upgraded engines, a unique outer design or brand new interiors, you can custom design your aircraft just the way you like it. With a lease, this is much more difficult and would require the owner’s permission at the very least.

An airline that owns its own aircraft will also go a long way to reassuring its stockholders and customers because these assets naturally double up as substantial collateral. This opens the door to raise funds when needed.

The Disadvantages of Buying

Naturally, a large amount of funds is needed to buy an aircraft – or a fleet of aircraft – without leasing. This can have a knock-on effect on the business, tightening options and limiting the ability to roll out other aspects of the business.

Buying a brand new aircraft may be an appealing prospect at first. But over time, the aircraft will likely depreciate in value. For airlines, in particular, this can be a problem when an upgrade becomes essential. For personal owners, this may not be as much of a problem.

Ultimately, there is no definitive answer as to whether it’s better to lease an aircraft or buy an aircraft. The decision depends on the situation of the individual or company. Even major airlines lease a significant percentage of aircraft, which shows that it isn’t a case of simply having the money available – but spending it smartly.

There are many advantages and disadvantages to both leasing and buying. The best advice is to assess your own situation and make a decision that suits you best, based on your personal and financial situations.

However, Aircraft are considerably expensive purchases, especially when buying dozens of them for your airline. With orders frequently totaling in the billions of dollars, it is hard to imagine how an airline could possibly pay for all of the planes they have. Purchasing huge numbers of aircraft can tie up considerable capital and weigh down balance sheets, which is not viable for many airlines. This is where the aircraft leasing business steps in.

Not many people know that over a third of all commercial aircraft flying today are leased. These aircraft leasing companies, such as the International Lease Finance Corporation, make up a billion-dollar industry. These companies act as middlemen, purchasing aircraft and then leasing them out to airlines.

Benefits of Leasing Over Buying

Leasing aircraft benefits airlines in several ways. First, the amount of capital required to lease an aircraft is significantly less than the amount needed to purchase an aircraft. If capital is limited, which it usually is, an airline may not have enough on hand to purchase several aircraft. Leasing aircraft would allow the airline to operate several planes at once, instead of just having one.

Furthermore, leasing allows airlines to afford new aircraft since capital can be deployed to lease newer planes that were out of range to purchase. This allows the airline to operate newer more fuel-efficient aircraft, as opposed to being limited to purchasing older, more expensive aircraft outright. Newer planes are also less prone to breaking down and also have lower maintenance costs to that effect.

So, as per airlines industry custom, it may be advisable that leasing are more beneficial then buying