Why do airlines lease?
 

Somewhat off topic, but I am curious. I heard that a majority of the airlines lease all of their aircrafts. Why do they do this? Doesnt it make sense to pay into something you can keep and invest into?

Are you implying that an airplane is an investment? Pretty good joke if that's the case.

Own vs. lease
 

One reason involves taxes. If you're making little or no money, you have no use for the depreciation and amortization tax writeoffs that come with airplane ownership, but a big financial institution with lots of income could use those writeoffs. You can sell airplanes you own and lease them back, or the financial institution can buy new ones, often at a volume discount, and lease them to you.

Okay..With the airlines going down hill I just assumed that it wouldnt really be feasible for them to lease because they are paying more than the worth of the aircraft. But anymore I guess they are just lucky to be around from year to year.

UPS pays CASH for all of it's airplanes. UPS does "lease" a few of it's aircraft. UPS OWNS the leasing company!

Part also has to do with the upfront costs of acquiring an aircraft. It is often cheaper in the short term to lease aircraft, allowing a carrier to bring more aircraft to the fleet.

Why do people lease a car?

Because they can't afford to buy one.

And WHY do we care???

One benefit is the flexibility to trade up to more technologically advanced aircraft, if your lease is structured that way.

In today's environment, the big reason is probably that you can get airplanes on property with little capital outlay.

Because UPS is such a great and stable company that it can afford to pay CASH for every airplane. It's so superior financially that it could buy every airline in the US and just make a small dent in the amount of free cash on hand it has.

ive always wondered this and some of it makes sense and some of it doesnt.
indeed if you are starting up and cant afford to outright buy planes then you lease them because it costs you practically nothing and you just give a percentage of your earnings back to the leasing company.

But take my old flight school as an example. He leases all his planes and I heard for each hour that he rents the plane he owes 50 bucks back to lease company and then the rest of the money, lets say $40, is his to go towards whatever. Once he makes enough money to actually buy a plane wouldnt that make more sense cause then all $90 bucks an hour goes back to him?

This seems like the smart idea but, im the pilot not the managment, and managment are the really smart guys who get paid millions of dollars to lose billions of dollars, so there must be something im missing?

You're an idiot.

Buy vs. lease
 

Perhaps. Unless he wants to use the money he has saved up to expand and diversify his business or send a kid to college. Lots of small businessmen want to limit the amount of money tied up in depreciating assets, in case of an economic downturn. Many small businesses fail for lack of a cash reserve.

I think part of it is that the Airline industry requires SOOOOO much cash just to operate that they really cant afford to buy a plane. They have to use the capital to pay for other things (i.e. Fuel, Wages, Etc.) If you look at their financial statements they are operating on a 10% margin, meaning for every dollar they earn, they actually get to keep .10, the .90 cents goes to paying for operations. I didn't realize the margin was so low.

I was/am considering the trucking industry, however they are almost like the airline industry in that there is a low operating margin and it is hard to even show a profit.

Let somebody else deal with the aircraft when it's old, and unmarketable. By leasing an aircraft you don't have to deal with. You also don't have the aquisition costs and depreciation associated with owning.

Also, Boeing and Airbus usually have huge markdowns for large orders. An airline with a fleet of 100 or so aircraft of various needs. If they were to purchase them outright it would be much more expensive than GECAS or IFLC, who purchase dozens of the type and then leases them.

Nope
 

That is the silliest thing I have read in a long time. Come on Browntail, are you serious? If UPS decided tomorrow to buy Southwest, I can assure you that it would make a significant dent in your beloved's pocketbook. And that's only one airline.

Don't have to pay for much when the majority of the fleet is second-hand and at least 10 years old. God, those DC-8s have to be pushing 40.

Let's see, 75 NEW 757s, 32 NEW 767s, 53 NEW A300s, 8 NEW 747-400s, 10 (possibly 20) NEW A380s.

Financials......
 

Well when I read browntail's pompous statement of UPS's financial ability, I did research because I just wanted to quash that attitude......
unfortunately, he is right....to a point. From a financial perspective when you measure everyone's market capitalization (company's liquid worth) UPs is one big elephant. here are the #'s as of the time of this writing:
Airtran 1.2B (Billion)
Jetblue 1.8B
Continental 2B
Usairways 3.5B
United 4.5B
American 4.7B
Delta/Northwest virtually worthless as compared to above #'s.

total worth of above RELEVANT legacy/LCC's equals 17.7Billion

Southwest Airlines alone is 13B
Fedex is 35B

UPS TOTAL WORTH IS 51 BILLION.

they may be bigger, but UPS cannot buy out industry with "pocket change" as browntail implies. Now for the question of lease vs. buy....if you are a UPS and have no pax to woo away from a competitor with a shinier plane, then buying is the better road since you will most likely either scrap your airplanes 100 years from now and they will pay for themselves many times over. But if you are a start-up and have limited Capital, then lease may work better because you can get brand new assets with full warranty,with the option to renegotiate when markets are better or to dump them in favor of a new model (787) which may have far better economics than your A330's that you are stuck with. I guess it all depends on what your circumstance are.
after 9-11, lease rates were dirt cheap, and even power by the hour.

Airplanes, like cars are not good investments, but like a Hertz or enterprise leasing companies like ILFC or GECAS can make some serious $$$ while allowing smaller, or tighter airlines to quickly move in and out of planes allowing them to adjust to changing market conditions and economics more aptly than the bigger gorillas with hundreds of DC-9's or early 737's.

hey Browntail, I think it's awesome that you have the fortune and blessing to work for UPS. Im sure you worked hard to get there and deserve every bit of what they allow your family in terms of QOL,...but please never forget the big airlines of yesterday that had god-like status and ended up being bought for piecemeal by the very small-fries they thumbed their noses down on. Im sure their pilots had change of hearts when they now changed their white hats for widgets and were just happy to stay in a cockpit...let alone any cockpit.

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"):

Airlines generally 'dry lease' their aircraft unless they are supplmenting their operation (ie there are various ACMI carriers, also known as 121 supplemental carriers). Polar, Omni, etc. provide extra 'lift' when airlines need it (an example would be around xmas time with UPS and FedEx).

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.

Ohhh, your right I mixed the two up again, I always do that. Thank you for clarifying I hate to post inaccurate info.. Good info too....