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Author Topic: Taking out big loans... worth it ?  (Read 1424 times)

Dutch Mill

  • Former member
Taking out big loans... worth it ?
« on: October 11, 2009, 12:35:37 PM »
Hi guys..

Just wanted to ask what you guys think about taking out big loans.
I see some airlines with over 50 aircraft on order. The only reason I believe this is possible is that they are taking out big loans.
With my current revenu and aircraft I am able to take out a loan of over 50 million. I could use this to order a significant amount of aircraft.
But what do you guys think.. is this worth it ?

thanx in advance.

Online mtnlion

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Re: Taking out big loans... worth it ?
« Reply #1 on: October 11, 2009, 12:50:59 PM »
In my opinion it's not worth it. The slots are long gone when you get the last (not fuel efficient)MD11 of 50 you have on order...  ::) And some of those airlines don't need to take loans. I could place an order for 20 A343s without taking a loan as I've huge cash reserve.

For example one of my "rivals" in JFK has ~150 aircrafts on order!? And there's practically no slots left (at least when he gets them deliverd). Ok, he might replace some of his old planes but what is he going to do with the rest??
« Last Edit: October 11, 2009, 12:55:23 PM by mtnlion »

Offline Sigma

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Re: Taking out big loans... worth it ?
« Reply #2 on: October 11, 2009, 07:57:46 PM »
For example one of my "rivals" in JFK has ~150 aircrafts on order!? And there's practically no slots left (at least when he gets them deliverd). Ok, he might replace some of his old planes but what is he going to do with the rest??

That competitor you speak of, Empire, is using one of the best strategies one can at slot-tight airports like JFK.  Another one of your competitors, Pantheon, is doing the same thing.

And that is that, between the two of them, they've snatched up 50% of the slots at JFK through, primarily, the use of smaller planes -- Empire is using F100s, and Pantheon ATRs.  They turn these planes 3-6+ times a day flying regional routes and snatch up slots.  Leaving you, who went with larger planes, with few slots to work with.  You got fewer planes over time than they did and your planes turn slower.  So they've essentially starved you out of slots.

Then, they take all that money they're making and buy larger planes.  Then, as the new planes arrive, they close routes that the small planes are flying and put larger planes on them flying longer, more profitable flights.  An ATR may have flown to a place 3 times a day, using up 3 slots at JFK -- but they can put an A340 on that route once per day, then use the other 2 slots to fly somewhere else in the country.  In this way, a single regional jet can give up enough slots for 2-4 heavies.

So you may think that JFK is out of slots for growth, but it really isn't.  They're sitting on plenty of slots for growth.  Even if there was not a single slot left, they could easily grow their pax numbers 2-3 times what they are today simply by putting larger aircraft on the slots that they have today.  A fleet of 50 ATRs can be sitting on enough slots flying short regional routes, to allow one to easily support a fleet of 200+ A330/340s on long-range domestic or international routes.

Now, as for the OP's question -- it is absolutely worth it in my opinion to take out loans for new aircraft.  Waiting to save up the cash can add months, even years onto the production queues for aircraft.  And since a single plane can generate $500-$1,500K per week in gross profits, you're crazy not to.  A delay of just 6 months can cost you $20 million dollars in lost opportunity costs by waiting for the cash rather than taking the loan.  But, if you're going to do it, don't extend the payments out too long.   I think if you can't afford to pay off the loan within 1 year then you shouldn't take it out in the first place.
« Last Edit: October 11, 2009, 08:05:58 PM by Sigma »

Online mtnlion

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Re: Taking out big loans... worth it ?
« Reply #3 on: October 11, 2009, 08:29:16 PM »
Good points Sigma. But I'm afraid it's not that simple! As I said, even by replacing all of the old planes they have, there wont be enough slots (Because they don't have so many long range airliners on order)... And closing routes costs image and it costs a lot for an airline.

Then if they still do want enter into long-haul, all the routes are taken and > there's going to be competition and > the ones with lower price and better fleet are going to win/survive...
But yes, of course they both are in a good position and I've no idea how much they've cash... Maybe I will get my ass kicked, but one has to have faith in his own strategy  ;D
« Last Edit: October 11, 2009, 08:41:56 PM by mtnlion »

Offline k900

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Re: Taking out big loans... worth it ?
« Reply #4 on: January 04, 2010, 10:55:36 PM »
It's that simple.

One other thing, since the 'Statistics' page was changed and now doesn't just show the value of an airline based on the value of aircraft, it's improved the game. Some airlines have a high value because they own, for example, a rake of A310's- all over 10 years old and really inefficient. Between the D checks and the cost of flying them, the value isn't really value, is it?

Sigma got it right about transitioning, over time, from regional flying to long haul ops. And, maybe Jet Apple will go bankrupt and free up some slots??? ;-) Then I will have to take out a loan and order a bunch of a/c.

Kieran

Empire Airlines (JFK).

ucfknightryan

  • Former member
Re: Taking out big loans... worth it ?
« Reply #5 on: January 05, 2010, 12:20:50 AM »
In my admittedly limited experience I have to agree with Sigma.  Loans can definitely be worth it.  I'm about to place my first really big loan (relative to the size of the company) to make my first large aircraft purchase in Dawn and I'd have to wait another year and a half, doing basically nothing, to save up the cash to place the order. These aircraft are for fleet renewal and are going to save me some serious cash on leasing, so 1 year+ delay in delivery costs way more than the loan.  Heck, a 1 year delay would cost me more $$ than 1/6 of the aircraft I'm ordering.  Now you could argue that I should place the order incrementally instead of borrowing the funds, but then I'd have to give up a rather large discount and subject myself to unexpected delays because someone else placed orders in between mine.

//While I have stuck to only 1 year loans in the past, I might break my rule and spread part of this one out over 2 or 3.  I could afford to do it in 1, but a bit longer term and the payments are == to the leasing costs of the aircraft I'm replacing.  So I'm debating between a single painful year, or just waiting 3 years to see my savings.

Online mtnlion

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Re: Taking out big loans... worth it ?
« Reply #6 on: January 05, 2010, 08:46:31 PM »
kieran900 you can only hope that Jet Apple would BK. I'm getting record profits even with high fuel prices  ;D Besides I'm not even taking my share of slots in JFK. You should hope Pantheon to BK8)
  OH, He did!  :o  
« Last Edit: January 05, 2010, 08:49:20 PM by mtnlion »

Filippo

  • Former member
Re: Taking out big loans... worth it ?
« Reply #7 on: January 06, 2010, 12:33:52 PM »
kieran900 you can only hope that Jet Apple would BK. I'm getting record profits even with high fuel prices  ;D Besides I'm not even taking my share of slots in JFK. You should hope Pantheon to BK8)
  OH, He did!  :o 

the slot situation in JFK is now much better than the one in Cairo :D

 

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