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Author Topic: Cancel Lease Options  (Read 1084 times)

Offline LemonButt

  • Members
  • Posts: 1895
Cancel Lease Options
« on: December 10, 2011, 11:17:47 PM »
I understand the purpose of having penalties for cancelling leases early, especially with the transfer of money among players.  Right now there is a minimum amount of time to hold on to aircraft, but can still be exploited.  I think there needs to be an alternative option for cancelling a lease.  For example, I have a lease for 7 years on an aircraft while every other aircraft in that fleet type I have leased for just 1 year.  It's going to cost me $20 million to cancel that lease today, when the fact is if you're the leasing company you will have the aircraft re-leased in 6 months time, if not sooner.  This is madness.

I found a REAL contract from United Airlines for aircraft leasing: http://contracts.corporate.findlaw.com/operations/equipment/4636.html

Page 43/44 states that if a lease is terminated before the period is over, the company has to be notified in writing 6 months prior to it happening.  25 days before the lease is to end, this is unchangeable.

To adapt this to AWS, I think we should be able to "give notice" of 6-12 months to leasing companies that the lease will be cancelled early.  This will automatically shorten the lease to the specified end date and would require a new lease signed (at a presumably higher rate) to retain the aircraft after the new end date.  This helps airlines regulate fleet commonality much better so they aren't killed with cancellation fees.  For example, people in MT6 who got a 742 and now have buyers remorse (or how about long contracts on a Concorde?) can salvage their airline by giving notice instead of paying obscene amounts in cancellation fees.

This could potentially be abused by players by signing a 15 year lease and then giving notice right before a C/D check to have an ultracheap lease.  There needs to be a minimum lease period of lets say 2 years to allow you to give notice and avoid a lump sum cancellation fee.  So if you lease for 1.5 years and want to give a 6 month notice, you can't--this is where you'd pay the 50% of the remaining lease.  The whole money transfer issue between players can still happen rather easily--it just takes longer.  If the maximum amount you can transfer is 50% * 1 year, you're not talking about a lot of money.  If the aforementioned aircraft was leased for 7 years and I held on to it for 7 months and cancelled, I could put $20 million in another airline's coffers.  If I lease 1 aircraft per month this way, it starts to add up VERY quickly.

Edit: I forgot to include buying a currently leased aircraft.  That is where the cancellation is 70% (!)...you're paying the lease on an aircraft they wouldn't even own if the deal went through.  This would be like renting an apartment with a 5 year lease and buying the apartment outright after year 2...you wouldn't pay 3 years rent to landlord on top of the purchase price.
« Last Edit: December 10, 2011, 11:24:01 PM by LemonButt »

forsberc

  • Former member
Re: Cancel Lease Options
« Reply #1 on: December 11, 2011, 10:41:20 AM »
I like the idea because I've definitely had buyer's remorse in the past.  :( However, I feel there should still be a fee of 10% of the remaining lease amount if cancelled early.

For argument sake, lets use this as an example:

Lease rate: $27,778/ week (Total 15 Year Amount= 20,000,000)
Lease time: 15 years
Minimum Lease Time: 1.5 years

After 20 months, this airline wants to cancel the lease. At 10%, the airline would owe 1,733,391. This would cancel out any savings associated with the decrease annual lease rate.

---
In order to to counteract the maintenance issue of dropping the aircraft just prior to heavy maintenance, I think there should be an added maintenance/ usage fee.

Example:
Weekly A Check Cost: 1,000 (48,000/ year)
Monthly B Check Cost: 5,000 (60,000/ year)
Annual C Check Cost: 100,000 (December 2012)
8 Year D Check Cost: 800,000 (December 2012)

Anytime a lease is cancelled, the airline must pay a 2 year fee of 50% of the remaining maintenance to be performed. Thus if an airline canceled the lease on January 2011, the total remaining maintenance expense is 1,216,000. The cancellation maintenance fee would be 608,000. However, if they cancelled it January 2009, they would only owe 208,000.

---
This, coupled with the lease cancelation fee, would provide a sizable penalty while providing airlines flexibility. Obviously foresight is necessary and this system could make an airline bankrupt if the play takes out a "foolish" lease. However, I personally feel that that is the name of the game.

For the "stupid" B742 purchase, I could see having one lease abolishment clause per airline for the entire game to be allowed with the following criteria:
1) completed within one year of lease initiation date
2) Only for computer leased aircraft.

---


All in all, good idea about tweaking the cancelation clauses. And excellent find regarding the leasing contract.

Offline LemonButt

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Re: Cancel Lease Options
« Reply #2 on: December 11, 2011, 02:57:44 PM »
Actually, after reading your comment, I think the easiest thing to do to keep it stupid simple is just say there are two cancel rates: one of which is 50% of the remaining lease and another that is the cost of a C-check + 50% of a D-check.  Whichever is lowest is what you'll pay.  So if a C-check is $1 million and a D-check is $6 million on an aircraft, this would be the $4 million option to cancel.  If the same aircraft has a 15 year lease with 10 years left at $1 million/month, this would be $120 million in leasing fees and thus 50% would be $60 million.  Instead of paying $60 million, you would be on the hook for $4 million, which is more than sufficient to get the aircraft fixed up and re-leased in a few months time.

Offline alexgv1

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Re: Cancel Lease Options
« Reply #3 on: December 11, 2011, 03:00:53 PM »
Paying for maintenance that would have come under the lease will be a big help to player aircraft brokers and lessors.
CEO of South Where Airlines (SWA|WH)

forsberc

  • Former member
Re: Cancel Lease Options
« Reply #4 on: December 11, 2011, 06:45:57 PM »
Paying for maintenance that would have come under the lease will be a big help to player aircraft brokers and lessors.

Agreed. +1

And I like your idea LemonButt. Much simpler.

Offline Sanabas

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Re: Cancel Lease Options
« Reply #5 on: December 12, 2011, 05:56:36 AM »
Actually, after reading your comment, I think the easiest thing to do to keep it stupid simple is just say there are two cancel rates: one of which is 50% of the remaining lease and another that is the cost of a C-check + 50% of a D-check.  Whichever is lowest is what you'll pay.  So if a C-check is $1 million and a D-check is $6 million on an aircraft, this would be the $4 million option to cancel.  If the same aircraft has a 15 year lease with 10 years left at $1 million/month, this would be $120 million in leasing fees and thus 50% would be $60 million.  Instead of paying $60 million, you would be on the hook for $4 million, which is more than sufficient to get the aircraft fixed up and re-leased in a few months time.

A new a340-300 costs just under $2 million/month to lease in MT6. C-check + 50% of d-check is only 1.8 million. Dropping the price for terminating a long-term lease isn't a bad idea, but dropping it below the price for 1 month's lease seems a bit excessive.

Going from a 5 year lease to a 15 year lease on an a340 saves 150k a month. So after 1 year, you'd already have saved enough to pay that suggested termination fee in full.

Offline LemonButt

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Re: Cancel Lease Options
« Reply #6 on: December 12, 2011, 01:41:34 PM »
A new a340-300 costs just under $2 million/month to lease in MT6. C-check + 50% of d-check is only 1.8 million. Dropping the price for terminating a long-term lease isn't a bad idea, but dropping it below the price for 1 month's lease seems a bit excessive.

Going from a 5 year lease to a 15 year lease on an a340 saves 150k a month. So after 1 year, you'd already have saved enough to pay that suggested termination fee in full.

Yes, but the D-check in 8 years will be substantially more than when it is brand new.  Also, if you have a new A340 and drop the lease immediately, you still have a brand new airplane versus one that's old and been beat to hell.  A 15 year lease may be cheaper by 150k, but you also have the minimum time to hold on to it of 18 months.  Perhaps the minimum leasing time needs to increase to make this work? 

forsberc

  • Former member
Re: Cancel Lease Options
« Reply #7 on: December 13, 2011, 06:37:44 AM »
How about we just simplify it all and only include maintenance fees to maintenance inside the "lease period." If the lease is short and heavy maintenance isn't in it, then the owner should be expecting to pay for the maintenance anyway.

However, I could see an operator adding a "minimum" lease period to the aircraft to help avoid this.

snowmen10

  • Former member
Re: Cancel Lease Options
« Reply #8 on: April 11, 2012, 04:38:41 PM »
A new a340-300 costs just under $2 million/month to lease in MT6. C-check + 50% of d-check is only 1.8 million. Dropping the price for terminating a long-term lease isn't a bad idea, but dropping it below the price for 1 month's lease seems a bit excessive.

Going from a 5 year lease to a 15 year lease on an a340 saves 150k a month. So after 1 year, you'd already have saved enough to pay that suggested termination fee in full.

It doesn't matter.
C-check + 50% of d-check is $2.6M in MT6. Also you need to lease the aircraft during the time it does C/D check, which is 80 days in total, which comes to $5.3M. So if you want to terminate a lease it will cost you $8M, and of course other fix costs during these 2 months. You need about 4.4 years of saving to save enough to pay that suggested termination fee in full, not 1 year.

I think LemonButt's idea is very good. If you want to terminate the lease in a shorter time, it's good for leaser to get a plane that doesn't need to do C/D check. He can put it on the market again.

To make it extreme, we can even do a full C/D check fee with the duration of C/D check, plus 10% of these total amount.
Which in A340's case it's ($4.4M + $5.3M) * 1.1 = $10.67M. You need about 6 years to turn it around if you want to make a profit. Which by the time you get to 6 years your company already grows to big to even want to save the minimal saving on this.

I really want to cancel a lot of lease right now as I can buy new aircraft to replace some of the route. But now I can't unless I file bankruptcy.

 

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