Lease or buy a plane?

AVIATION SUMMARY | JARED KALERA | In mid-2019, Uganda Airlines purchased four Bombardiers and two A330-800 Neos from Airbus. What is remarkable is that these were outright purchases.

A debate from different groups has been whether it was a wise decision to buy or just lease the same. Proponents of each business model will have their arguments well laid out.

First, there are guiding factors such as the purpose of the craft. Is it a private jet, trainer, bush plane, touring or passenger plane? Is your intention a long or short distance point-to-point structure? Mainstream or economy airline. What is the source of funds? Is it a bank, a savings bank or the State?

First we need to know what leasing and buying entail.

Leasing is when an airline wants to start or expand its fleet but doesn’t want to buy or spend on buying planes. They contact a leasing company or another airline with watercraft so they can rent from them. 51% of boats in the world are rented.

The benefits of owning an airplane are immense. For starters, ownership gives the business a good portfolio of assets. The more trades there are, the more assets there are and can easily be used by the company to access lines of credit or even to lease them.

Second, the business is free from third-party control, allowing decisions to be made at their convenience. The company is free from beurocracies and constant interference.

Equity in the trade is in the hands of the owner. He alone is authorized to decide to charter or rent the boat without referring to the marking agreements.

However, buying requires significant capital compared to renting. The cost of purchasing an aircraft could land a number of aircraft under a lease agreement.

Ugandan airlines have new planes

Aircraft ownership as opposed to leasing is still preferred by private companies and high net worth individuals, while leasing is normally used by large corporations to gain the benefits of business jets without showing assets on financial statements .

Public or government companies try to avoid extravagance, hence the balance between leasing and buying (through aircraft finance lines, especially through aircraft finance companies as opposed to to banks) and the heavy tax burdens that can accompany ownership, except for government-owned boats.

Aircraft leases are of three types: wet, dry and wet leases.

Leases with services; this is where the leasing company provides almost everything, from watercraft, cabin crew, pilots, engineers and insurance. However, the tenant dictates the livery. These leases are short-term and are useful when there is a sudden market boom or an anticipated event that will cause the market to boom but for a short period of time.

For example, if there is a World Cup tournament or an international event in a country, an airline will need to acquire more aircraft for that period in order to manage the demand. Since crafts take years to be delivered by a manufacturer, crewed chartering is convenient.

Dry leases; Occurs when only one trade is given. For example, when the Boeing 737 Max was grounded around the world, it fundamentally affected the services and operations of airlines, especially those that depended entirely on this aircraft due to its low fuel consumption and flexibility. .

Southwest Airlines, China South, American Airlines, Air Canada, Lion Air between them had about 700 (seven hundred) 737 planes max. These were all grounded following the crash of Lion Air flight JT 610 and Ethiopian flight 302.

These flight operations were disrupted but they had to troubleshoot and reduce the number of canceled flights in the short term. They had pilots, cabin crew, mechanics but no planes. The best option was to opt for dry leases.

Dry leases are good for big companies like Emirates, Ethiopian to name a few as they have large crew facilities and are able to maintain their standards and crew culture.

Wet leases;

They are a mix of wet and dry. For example, the airline will get an aircraft, insurance and mechanics from the leasing company but provide its own pilots and cabin crew.

Again, this model depends on the modus operandi that the parties deem appropriate.

Proponents of leasing will also say that a lot of start-up capital is saved if one opts for a lease. According to Economic Times, the cost of an Airbus A330Neo is around 296.4 Million USD depending on the configurations you offer while a Boeing 777F (Freighter) will cost you 353.3 Million USD which is prohibitive for a start up or an airline wishing to expand into a short run. Purchasing aircraft is a multi-million dollar business and the procedures are complex. Buying planes to start an airline can basically tie up useful operating capital. Hence the alternative of leasing for which less funds are sacrificed.

  1. The leasing company can start or begin its operations in a short period of time (without waiting years for a manufacturer to deliver handicrafts) with flexible conditions helping it to adapt to the target market. Flexibility also comes when deciding between operating lease and capital lease. For leasing, you rent as if you were getting a loan. The equipment is valued as an asset on the lessee’s balance sheet. Later, the craft becomes the property of the airline.

For the operating lease, the leasing company retains ownership and the airline will have the craft as a monthly operating expense.

  1. The leasing airline avoids certain risks of insurance, personnel management, wear and tear, the headache of boat maintenance.

The purchase of tools, spare parts and the management of international craft standards will be left to the lessor.

  1. Up-to-date, more fuel-efficient equipment requested by customers will always be available. Under the terms of the lease, a leasing company will still be required to take back their craft after an agreed term has expired being obliged to deliver a newer version based on the new business concept a company has at no additional cost. to hire and train staff and crew. The airline leaves the burden of disposing of old boats to the leasing company.
  2. Finally, the airline is able to play in fairly fixed forward rates and expenses. The premium rates being known, the other collateral expenses such as salaries, maintenance, insurance, training and certifications are left to the lessor. It is easier to make predictions, which makes planning easier.

Therefore, whether to buy or lease depends a lot on the business model an airline wishes to adopt, the competition and the cost of financing. It remains to be seen how Uganda Airlines fares in this unstable post Covid environment.

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Jared is an aviation researcher and rally car safety manager. He is the Managing Director of Legal Compliance and Human Resources, Muttico Technical Services Ltd and Co-Director of Amputee Self Help Network Uganda.

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