Long term lease far from attractive

[Maarten Otto]

Is it just me, or do others think this is a "only for dumb people" feature as well?

Take the 737-700 for example.

Price is almost 50 million per ac if you buy it.
Lease it for 7 years you pay around 56 million... Monthly leases: 625 250 USD
Lease it for 15 years and you end up over 106 million... Monthly leases: 575 230 USD

To be honest I think long term leases should be more beneficial for the airlines when the ac is leased directly from the manufactuer. the price difference is a mere 50K per month... for what?

Options to make it more attractive is to significantly lower the initial order fee, or to reduce the monthly fee by at least 75K

[Unbornio]

Well.. let's be totally honest.. Would you really want to operate the same plane for 15 years? Passengers don't like flying in old scrap so I'd return it before that awful D check. 

[[ATA] Sunbao]

Is it just me, or do others think this is a "only for dumb people" feature as well?

Take the 737-700 for example.

Price is almost 50 million per ac if you buy it.
Lease it for 7 years you pay around 56 million... Monthly leases: 625 250 USD
Lease it for 15 years and you end up over 106 million... Monthly leases: 575 230 USD

To be honest I think long term leases should be more beneficial for the airlines when the ac is leased directly from the manufactuer. the price difference is a mere 50K per month... for what?

Options to make it more attractive is to significantly lower the initial order fee, or to reduce the monthly fee by at least 75K

It shall be much more expensive to lease, than to buy a plane. You dont have the money yourself and therfore you lease the plane wich off course i much more expensive.

Maby the lease price for the plane after the 7 years is to high, but the start price is just fine.

[thedr2]

50k/month = $9,000,000 over the 15 years.

[Curse]

Well.. let's be totally honest.. Would you really want to operate the same plane for 15 years? Passengers don't like flying in old scrap so I'd return it before that awful D check.  

15 years is not old in AWS and D-Checks should not a problem when you can afford to purchase aircraft what's mostly better than leasing them.

However, 15 year lease does not make any sense, especially when the reduction of leasing costs is the same for 10y-15y.

[CX717]

very ture
A brand new A310-300 lease cost are 1 232 660 USD(1year cost),13 years lease contract are 1 176 490 USD(fixed)
a 13 years old A310-300 only cost 738 420 USD(1year cost),the lease cost drop 40% in 13 years.


for a 13 years lease contract,you have to paid 1176490*12*13=183532440
if you renew year by year for 13 years,you only have to pay 145486358 in total!you save 38 million dollars!

[GDK]

Looks like a new package for long term lease is needed...

[Sami]

if you renew year by year for 13 years,you only have to pay 145486358 in total!you save 38 million dollars!

This is incorrect since lease renewal in 1 year increments does not give you a discount.

[schro]

very ture
A brand new A310-300 lease cost are 1 232 660 USD(1year cost),13 years lease contract are 1 176 490 USD(fixed)
a 13 years old A310-300 only cost 738 420 USD(1year cost),the lease cost drop 40% in 13 years.

You are basing this on the assumption that the plane values will remain static over the 13 years. Chances are, inflation will actually increase the value of the plane over the period of time which would make a 13 year old plane 13 years in the future be worth more in dollars than one is today...

[DenisG]

Inflation will not have a significant effect on the aircraft value development over a distinguished period, rather depreciation and maintenance:

• The mechanical structure of an aircraft or Airframe - Cost depreciates based on an estimate of 25-years of useful-life expectancy, capitalized maintenance allowance for wear and tear over the period leading up to the next overhaul.
• Aircraft engines - Cost depreciates based on an estimate of 10-years of useful-life expectancy, capitalized maintenance allowance for wear and tear over the period leading up to the next overhaul.
• Aircraft spare parts - Cost depreciates based on an estimate of 10-years of useful-life expectancy.
• Undercarriage or landing gear - Cost depreciates based on an estimate of 7-years of useful-life expectancy, capitalized maintenance allowance for wear and tear over the period leading up to the next overhaul.

C- and D-checks have the potential to significantly add value to an aircraft or the maintain value. When aircraft are used as securities backing (ABS), they will determine exactly in the credit contracts, which value-adds will have to be accomplished by when and how.

Cheers,
Denis

[CX717]

This is incorrect since lease renewal in 1 year increments does not give you a discount.

It does not,but since the aircraft value is going down (depreciation),the leasing cost will go down as well.
An average of 3.7% depreciation and 2% inflation already take into account
3.7% per year are roughly calculated from 40% drop of lease cost of a 13 years old A310-300.
MODIFY and first 5 years lease rate are fixed for a new aircraft.
year 1:15010920USD
year 2:15010920USD
year 3:15010920
year 4:15010920
year 5:15010920
year 6:13725861
year 7:13482364
year 8:13243187
year 9:13008253
year 10:12777486
year 11:12550814
year 12:12328162
year 13:12109461
TOTAL:178280118 USD
if you do a long term lease(13 years) 14117880 is the amount you have to pay EVERY year,no change,no depreciation factor nor inflation.
The upper list show,start from year 6,the leasing cost already lower than 14117880.

[CX717]

You are basing this on the assumption that the plane values will remain static over the 13 years. Chances are, inflation will actually increase the value of the plane over the period of time which would make a 13 year old plane 13 years in the future be worth more in dollars than one is today...

I didn't,I said the lease cost drop 40% in 13 years.Is the 13 years long contract assume the plane value didn't drop.
and frankly inflation will not help much on plane value,since the plane value dropping at the sametime as the age and flight time/cycle go up.

[Sami]

You should check again the lease extension costs from the game interface, since some assumptions in that calculation are incorrect. Like I mentioned you are not getting a benefit for renewing the lease in short increments, it's opposite now.

[LemonButt]

I think you should be able to prepay 4 months lease for a 15 year lease and get 8 months free, which means basically the first 12 months of operation (beyond the 4 month prepay) you would be flying the plane for free.  After that, you have 14 years of lease payments.  Since it costs 70% of the lease value to cancel, you can't just cancel the lease after the first year without taking a huge hit.  This would allow airlines to expand quicker by making decisions with short term benefits that could potentially doom them in the long run--especially if it's a gas guzzler.

[DenisG]

The lease calculation is pretty good so far.

If the lease extension costs are significant enough, it will equal out the inflation adjustment of return on equity employed for long lease periods.

First perspective is the aws-numbers I found, second perspective is the calculationwith inflation adjustment, and third is from pure leasing company perspective, as they will always base their calculation on the initial total capital employed, assuming the aircraft remains in possession of the same company thoughout the lifecycle. Number three is the relevant one.

My main results:

• Capex is high in order to give the A310 a value of 81,9m USD after 7,4 years; may however be quite close to real depreciation regarding the overhaul after 7 years (see posting above)
• aws lease prices go down in the long term, while from a financial perspective, they should not. This becomes irrelevant however, as Sami pointed to the lease extension costs that may make up that difference (depends on the mixed calculation)
• overall, I would still like to see leasing rates around 10-15% higher than currently, as they currently offer a pretty low return on capital as interest rates are only at 5% and I calculated 7,5% for a 20 year loan
• Leasing is always based on demand and offer, hence, even if I say that average monthly leasing rates should go up for long-term contracts, it really depends on the market situation and there are only few situations where the financial theory can be employed in that way

Cheers,
Denis

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[slither360]

• overall, I would still like to see leasing rates around 10-15% higher than currentl
  

+infinity

[[ATA] Sunbao]

I think you should be able to prepay 4 months lease for a 15 year lease and get 8 months free, which means basically the first 12 months of operation (beyond the 4 month prepay) you would be flying the plane for free.  After that, you have 14 years of lease payments.  Since it costs 70% of the lease value to cancel, you can't just cancel the lease after the first year without taking a huge hit.  This would allow airlines to expand quicker by making decisions with short term benefits that could potentially doom them in the long run--especially if it's a gas guzzler.

Why on the earth should people get 8 months for free, so people can get out of the lease for free.
If people make a bad leasing choose they have to pay for doing a bad mistake.

[LemonButt]

Why on the earth should people get 8 months for free, so people can get out of the lease for free.
If people make a bad leasing choose they have to pay for doing a bad mistake.

You can't get out of a lease for free.  I was proposing a 15 year lease you'd pay the 4 month prepayment and you wouldn't have any lease fees until month 13.  If you cancel the lease, you would still have to pay 70% of the remaining contract (14 years), which would be more than the plane is worth.  Players would obviously lease for longer periods, but if they aren't strategic their short-sightedness can (and usually will) bankrupt them in the future.  DOTM2 is a perfect example.  A certain large airline bought russian aircraft because they were cheap and readily available and ended up with 200+ aircraft and going bankrupt.

[pascaly]

LB, if you're referring to the airline out of Atlanta, he didn't go bankrupt becuase of the aircraft (he'd bought them anyway, not leased, so not quite relevant).  He bankrupted becuase he wanted to get in to MT5.  I know it was not financial, he was in a healthy financial position.  Assuming of course we're talking about the same guy, I just thought I'd clear it up a bit.

But agree, leasing costs should be higher, to both slow rapid growth and allow some kind of return for lessors.