Why do airlines lease?
05-01-2006, 11:38 AM
#21
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I think it depends on the kind of lease Airlines can get. There is a wet and dry lease. Wet being you (the airline) are in charge of getting your maintenace done or dry lease meaning the Lessor is responsible for Maintenance. Dry leases are more expensive. Wet leases are less expensive. EX a 737-300 wet lease is 150,000 a month. versus same type A/C dry lease 190,000 and up per month.
05-01-2006, 12:25 PM
#22
Gets Weekends Off
Joined APC: Nov 2005
Posts: 1,425
Originally Posted by ERJ135
I think it depends on the kind of lease Airlines can get. There is a wet and dry lease. Wet being you (the airline) are in charge of getting your maintenace done or dry lease meaning the Lessor is responsible for Maintenance. Dry leases are more expensive. Wet leases are less expensive. EX a 737-300 wet lease is 150,000 a month. versus same type A/C dry lease 190,000 and up per month.
Ummm, no. Wet leases most certainly would be much more expensive (wet lease think "turn key"):
ACMI - Aircraft, Crew, Maintenance & Insurance
The LESSOR provides the aircraft, one or more complete crews (including engineers) including their salaries and usually allowances, all maintenance for the aircraft and insurance, which usually includes hull and third party liability. The LESSOR will charge for the block hour (choc off to choc on) and depending on the aircraft type sets a minimum guaranteed block hours limit per month. If the airplane flies or not, the LESSEE must pay the amount for the minimum guaranteed block hours.
The LESSEE has to provide all fuel, landing/handling/parking/storage fees, crew HOTAC including meals and transportation as well as visa fees, import duties where applicable as well as local taxes. Furthermore the LESSEE has to provide passenger/luggage and cargo insurance and in some cases need to cover the costs for War Risk. Furthermore the LESSEE has to pay the over flight/navigation charges. This point is a bit complicated. When flights are operating they use a flight number, which is issued to airlines by the ICAO. In order to cover the costs of air traffic control services, states over flown will send a bill to the owner of the flight number, which can be readily identified by its code. The aircraft owner will probably have a code, but will not want to use it because he will end up paying the bills. Therefore, an ACMI lease requires that the LESSEE provide his own flight number, so that the bills can be directed to him. Thus, an ACMI lease can usually only take place between two ICAO member states airlines unless other arrangements have been made between LESSOR and LESSEE.
The LESSOR provides the aircraft, one or more complete crews (including engineers) including their salaries and usually allowances, all maintenance for the aircraft and insurance, which usually includes hull and third party liability. The LESSOR will charge for the block hour (choc off to choc on) and depending on the aircraft type sets a minimum guaranteed block hours limit per month. If the airplane flies or not, the LESSEE must pay the amount for the minimum guaranteed block hours.
The LESSEE has to provide all fuel, landing/handling/parking/storage fees, crew HOTAC including meals and transportation as well as visa fees, import duties where applicable as well as local taxes. Furthermore the LESSEE has to provide passenger/luggage and cargo insurance and in some cases need to cover the costs for War Risk. Furthermore the LESSEE has to pay the over flight/navigation charges. This point is a bit complicated. When flights are operating they use a flight number, which is issued to airlines by the ICAO. In order to cover the costs of air traffic control services, states over flown will send a bill to the owner of the flight number, which can be readily identified by its code. The aircraft owner will probably have a code, but will not want to use it because he will end up paying the bills. Therefore, an ACMI lease requires that the LESSEE provide his own flight number, so that the bills can be directed to him. Thus, an ACMI lease can usually only take place between two ICAO member states airlines unless other arrangements have been made between LESSOR and LESSEE.
Wet Lease
Is basically ACMI as explained above. The period can go from one month to usually one to two years. Everything less than one month can be considered as ad-hoc charter.
Is basically ACMI as explained above. The period can go from one month to usually one to two years. Everything less than one month can be considered as ad-hoc charter.
Dry Lease
Is the lease of the basic aircraft without insurances, crew, maintenance etc. Usually dry lease is utilized by leasing companies and banks. A dry lease requires the LESSEE to put the aircraft on his own AOC and provide aircraft registration. A typical dry lease starts from two years onwards and bears certain conditions as far as depreciation, maintenance, insurances etc. are concerned. This depends on the geographical location, political circumstances etc.
There is generally two types of dry lease, an Operating Lease and a Finance Lease.
Operating Lease: generally a lease term that is short compared to the economic life of the aircraft being leased. An operating lease is commonly used to acquire aircraft for a term of 2-7 years. With an operating lease the aircraft doesn't appear on the Lessee's balance sheet.
Finance Lease: also known as a capital lease, is defined when on of the following conditions are met:-
1) at the end of the lease term the Lessee has the option to purchase the aircraft at an agreed price.
2) the lease payments are more than 90% of the market value of the aircraft.
3) the term of the lease is over 75% of the aircraft's usable life.
With an finance lease the aircraft appears on the Lessee's balance sheet, as it is viewed as a purchase.
Is the lease of the basic aircraft without insurances, crew, maintenance etc. Usually dry lease is utilized by leasing companies and banks. A dry lease requires the LESSEE to put the aircraft on his own AOC and provide aircraft registration. A typical dry lease starts from two years onwards and bears certain conditions as far as depreciation, maintenance, insurances etc. are concerned. This depends on the geographical location, political circumstances etc.
There is generally two types of dry lease, an Operating Lease and a Finance Lease.
Operating Lease: generally a lease term that is short compared to the economic life of the aircraft being leased. An operating lease is commonly used to acquire aircraft for a term of 2-7 years. With an operating lease the aircraft doesn't appear on the Lessee's balance sheet.
Finance Lease: also known as a capital lease, is defined when on of the following conditions are met:-
1) at the end of the lease term the Lessee has the option to purchase the aircraft at an agreed price.
2) the lease payments are more than 90% of the market value of the aircraft.
3) the term of the lease is over 75% of the aircraft's usable life.
With an finance lease the aircraft appears on the Lessee's balance sheet, as it is viewed as a purchase.
As for why it's a good idea to lease an aircraft - consider that small business owner. He might be able to bring enough capital to finance the purchase of say two aircraft. Using that same captial he might be able to finance leasing on 10 aircraft. His return on investment (known as ROI) is much greater because he can leverage more $$ by leasing.
Using previous example:
Flying 100 hours per month per aircraft, $90x100 hrs x 2 aircraft = $18,000 gross income. $40x100 hrs x 10 aircraft = $40,000 gross income.
However, if he does not fly AT ALL for the entire month, he will still have to make lease payments on those leased planes. He will lose a lot of money. Had he purchased the aircraft outright, he could park them and not lose very much (except for indirect operating costs). Hence why NWA retrofitted their DC-9's and when they don't need them, they just park them.
Another example is real estate. Let's say you bought a house 2 years ago for $150,000. You paid cash. Now, 2 years later it's worth $200,000 (and you sold it). You made $50,000 with an investment of $150,000 (a 33% return).
What if you financed that house and made monthly payments of $850 (interest only) for two years. Your outlay was $20,400 but you made $29,600 ($50,000 gross profit - $20,400 interest payments - a 145% return). If you had $150k, you could do this for 7 houses, and assuming they all appreciated from $150k to $200k you'd make $207,000 as opposed to $50,000 with the same initial amount of cash. It's essentially trading on margins, and it can be risky.
Clear as mud? There are arguments to be made for each in various situations.
Last edited by fosters; 05-01-2006 at 12:37 PM.
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