Question

Many U.S. Firms Use Leases Leasing is big business for U.S. companies. For example, business investment in equipment in a recent year totaled $709 billion. Leasing accounted for about 31% of all business investment ($218 billion). Who does the most leasing? Interestingly major banks, such as Continental Bank, J.P. Morgan Leasing, and US Bancorp Equipment Finance, are the major lessors. Also, many companies have established separate leasing companies, such as Boeing Capital Corporation, Dell Financial Services, and John Deere Capital Corporation. And, as an excellent example of the magnitude of leasing, leased planes account for nearly 40% of the U.S. fleet of commercial airlines. In addition, leasing is becoming increasingly common in the hotel industry. Marriott, Hilton, and InterContinental are increasingly choosing to lease hotels that are owned by someone else. Why might airline managers choose to lease rather than purchase their planes?

Answer 1

Airlines Manager prefer leasing planes rather than buying simply because of the high costs involved. For instance the total start up capital that went into AirAsia India was around $100 million, they are operating A320's which would cost them around $90-$100 million apiece if they buy it outright.

Also, airlines have to cover a lot of other costs to remain operational - below mentioned are the costs involved: -

- Employee Cost,

- Auxiliary equipment,

- Repairs & Maintenance, and

- Airport fees etc.

So, for them spending such a huge amount on aircraft is not feasible. Even for airlines that have huge capital at hand that money can be spent on encouraging growth rather than purchase of aircraft because they can spend a fraction of the amount to get tens of planes on lease and increase their operations manifold.

Leasing a plane is much cheaper than buying one. Moreover, under the leasing contract, there are certain benefits which the leaser provides like absorbing the maintenance cost for the first 3-5 years, etc. In case where an Airline has to wrap up its operations, it is easy for them to raise their hands up, say in case of our beloved Kingfisher Airlines. The company had no assts and all the aircrafts were leased.