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Author Topic: A/C lease deposit as security, not advance payment  (Read 673 times)

Offline Mr.HP

  • Members
  • Posts: 2730
A/C lease deposit as security, not advance payment
« on: October 21, 2012, 11:20:37 AM »
Hi,

Searched "deposit" and found no result, so here we go

Right now, we're paying an advance payment of 4 months for every leased used A/C, lease start at 5th month and a 50% of future lease payment penalty if lease is canceled

Can we change the system, so that airlines pay lease in their first month, and the deposit is used as security. We're gonna have several benefits:

- Airlines will be charged for extra repair if A/C are returned in worse condition than agreement. It's annoying if owner lease out A/C at 100% and get it back at 70% or so
- Airlines might be charged for re configuring A/C back to its original state (if owner determine so from the beginning)
- To protect owner if leaseors sign such a long lease contract, just to be BKed several months after that
- To protect leasers also, if they want to cancel the leasing sooner, then they just forfeit the deposit. The amount of deposit will depends on the time lease. Longer lease will require larger deposit (e.g. up to 12 month lease deposit). I've seen many new players signed long lease contract and has many fleets. And they were unable to remedy this to save cost because they couldn't afford to pay the 50% lease of this one single A/C that accounted for their 4th fleet. BK was the only option
- To protect newly start airlines from misleading green numbers (aka profit). Some airlines think they are doing OK for the first few months because they are making profit. But when the leasing kick in in the 5th months, they start bleeding cash and unable to cure the situation, as they have invested pretty much on A/C

Cheers,

HP

Ricademus

  • Former member
Re: A/C lease deposit as security, not advance payment
« Reply #1 on: October 21, 2012, 01:51:04 PM »
What a great idea, as a newbie I would find this idea a lot better than the current strategy.

brique

  • Former member
Re: A/C lease deposit as security, not advance payment
« Reply #2 on: October 21, 2012, 02:25:21 PM »
Interesting idea with a lot of plus points :

BUT... and it is a big but... almost kardasian in its bigness...

If I can lease for 15 years with, say, a 12 month deposit ; then by breaking the lease early, I lose the 12 months : but thats what it costs to break a lease 2 year early now : so, long-lease for the hefty discount (which can save me 20-25% of the base lease price), then break it any-time after 6 years of lease, I'm now ahead on the maths, and no overall penalty for breaking it 9 years early. And I can gain even more benefit by leasing new aircraft for 15 yrs and dumping them on 7.99yrs, avoid the d-check and have paid well below market-rate for the time I had it. And the broker has to use the lost deposit to d-check it to put it back in the market : so, what have they gained from this 'security deposit' as compensation for the broken contract? Less income, less recompense and no reason to allow lease-terms above 4-5yrs as player-brokers will have to put caps on lease terms to keep the lease price high enough to make the business worthwhile.

It would also require the AI brokers to do the same, otherwise player-brokers would not be able to compete at all in the market, that said, as a player-broker, I'd not be trading under those kind of terms anyway.






Offline Mr.HP

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  • Posts: 2730
Re: A/C lease deposit as security, not advance payment
« Reply #3 on: October 22, 2012, 01:22:11 AM »

If I can lease for 15 years with, say, a 12 month deposit ; then by breaking the lease early, I lose the 12 months : but thats what it costs to break a lease 2 year early now : so, long-lease for the hefty discount (which can save me 20-25% of the base lease price), then break it any-time after 6 years of lease, I'm now ahead on the maths, and no overall penalty for breaking it 9 years early. And I can gain even more benefit by leasing new aircraft for 15 yrs and dumping them on 7.99yrs, avoid the d-check and have paid well below market-rate for the time I had it. And the broker has to use the lost deposit to d-check it to put it back in the market : so, what have they gained from this 'security deposit' as compensation for the broken contract? Less income, less recompense and no reason to allow lease-terms above 4-5yrs as player-brokers will have to put caps on lease terms to keep the lease price high enough to make the business worthwhile.


brique, I see your point. Of course, that is just my idea, if we want to implement it, we need more detail rules about it, such as a well balance between lease time and deposit

Let's take an example using the figure I can get in MT7. Leasing an A321-200 worth 70M for 8 year, rate is 937K, and 876K for a 14.5 year lease

Then, I sign a long lease and cancel it 1 month before D check like brique said. Under the current system, the total cost will be 876 x (8 x 12) + 50% x 876 x (6.5 x 12) = 118.260K (1).

The total cost as my suggestion will be: 876 x (8 x 12) + 12 x 876 = 94.608K (2)

So it's a less revenue of 23.652K

However, if comparing (2) to a leasing of 8 years with total cost: 937 x 8 x 12 = 89.952K (3), I think it's quite fair, as you still earn 4.656K more.

To make it more attractive to player-brokers, we can make it 2 month deposits for every year lease, then the (2) above will be: 876 x (8 x 12) + 14.5 x 2 x 876 = 109.500K. Not a big loss if compare to (1), and a big win if compare to (3)

In addition, we can add "D checks deposit" for any lease go over the D check date, if player break the rule before D check expire, they'll lose that deposit, plus the leasing deposit

Quote
as a player-broker, I'd not be trading under those kind of terms anyway.

Please remember that this is an airline sim, so playing brokering sim is not that encourage

To conclude, my idea is to help the new players who sign a super long lease contract without knowing the risk. If they are required one hell amount of cash for deposit, they won't make such a long lease

Cheers

HP
« Last Edit: October 22, 2012, 01:27:14 AM by Mr.HP »

brique

  • Former member
Re: A/C lease deposit as security, not advance payment
« Reply #4 on: October 22, 2012, 02:10:15 AM »
I wasn't blowing the concept out of the water, just pointing up an aspect that could skew leasing in favour of ridiculous long cheap leases which no-one has any intent on fulfilling : fixing that by increasing the deposit required to a level necessary to prevent that would create another issue : for new players the deposits would drain the start-up cash at a horrendous rate, also given that lease payments would kick-in immediately, there would be little financial room for buying slots, marketing and covering the period until revenues get high enough to cover overhead : the current 4 month 'holiday' does at least give some room for spotting then fixing early problems.

yes, some new players ignore the warnings, given in the manual, in the guides, FAQs and on the forums, and blow all their funds on day1 : and yes, some repeat this time and time again to a level of infamy but most do learn by BK#3 : that's the purpose of the Beginners Worlds : a softer environment where new players can mess-up and learn from their errors.

But the 'real' game worlds should not be easy and not structured to be 'fool-proof' or 'risk-free': bad business decisions should be punished, smart decisions rewarded ; managing cash-flow is a key skill and, frankly, anyone who doesnt/cant/wont do that is doomed regardless of how much hand-holding is put in place.

Offline Mr.HP

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Re: A/C lease deposit as security, not advance payment
« Reply #5 on: October 22, 2012, 03:44:35 AM »
I agree that there's no perfect solution. Every idea has benefits as well as drawbacks somewhere

Personally, I always make 2-3 years lease contract for my first few A/C, so that will be 4-6 months deposits, not a big deal for new airlines

Moreover, I'm not sure about airlines world, but aren't people pay a deposit and first rent right away for their house/room?

Just some thoughts. Thanks brique for your feedback, we need all the feedback for new idea to be implemented

HP

brique

  • Former member
Re: A/C lease deposit as security, not advance payment
« Reply #6 on: October 22, 2012, 02:53:02 PM »
Sorry to be so negative: was late and I was tired and a bit grumpy...

There is one way that might make it effective for used aircraft : abolish the discount for long leases so there is no reason to 'over-lease': and/or : make all leases one-year term only then let auto-renew kick-in, or not if you prefer to send-back.

There is an issue then with new planes :solution there is more complex : but I'd go in the direction of a hefty prepayment element: its half there already: on direct purchase, you can pay 20%, then balance on delivery: so, on leasing new : why not pay 20%, then lease on delivery, with the 'lease value' derived from the 80% balance: then its annual auto-renew :incentive then to keep the aircraft but 'rewarded'with lower lease cost.

Actually, same idea could be applied to used aircraft too.


Offline Mr.HP

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  • Posts: 2730
Re: A/C lease deposit as security, not advance payment
« Reply #7 on: October 22, 2012, 03:35:54 PM »
Emm, not quite get what you meant, so correct me if I'm wrong

For new A/C lease, did you mean we pay 20% A/C value right when ordering as a returnable or nonreturnable deposit? Then lease is paid (at lower rate than now) month by month when the A/C delivered, and the contract is renewal on an annual basis?

It's unlikely to be welcomed unless the monthly rate is much lower than the current model

This is way too much if applied for used A/C. Newly start airlines can't lease good A/C which values > 40M. Even 20M A/C means 4M deposit

If you want to keep people from making over-lease, my suggestion should work well. Newly start airlines aren't required too much cash up front for leasing a valuable A/C, whereas yours almost locks them out of those A/C

Cheers,
HP

brique

  • Former member
Re: A/C lease deposit as security, not advance payment
« Reply #8 on: October 22, 2012, 04:05:35 PM »
Its none returnable : but, by having the 20% discount on the standard lease price, you effectively 'save' it back : thus, longer you keep the plane, the less you will lose when you return it : keep it past the 60months mark, and you start gaining as by then, you have recovered the deposit and will still have the cheap lease : a sort of loyalty bonus.

Personally, I'd be happy to offer a 25% discount to some-one putting up a 20% deposit : actually, there is no reason why the current 'direct purchase' options (20%,40%, 60%) could not be used to similar effect in leasing : the bigger your deposit, the less you pay as lease : go further : if you choose to buy-out the lease at the annual renew point, instead of re-leasing it ; there is no penalty for doing so, you just 'lose' the 'unrecovered' portion of the deposit : buy it at 1 yr in : that's a big sum : but at 5yrs in, it would be practically zero.

The leaseco gets the full lease value for the eventual term and then the current value of the aircraft when sold, with the penalty for an early send-back of the deposit. The buyer saves on their weekly outlay, recovers the deposit that way, then can break without further penalty or choose to buy the aircraft without having to stump up over-value due to unexpired lease term.

Its not dis-similar to personal car lease plans : big deposit ( I've seen 33% quoted), then monthly term based on the balance : its how they make it look so cheap.

 

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