Money To Made From Leaseback?

[Ukridge]

Real sorry about this link as I have to leave it to the reader to run it through their browser for translation. I could not find an English language report on this topic:

http://www.spiegel.de/wirtschaft/0,1518,347777,00.html

It is interesting though, because it describes how O'Leary of Ryanair has purchased new 737 aircraft from Boeing for 27M USD per plane. The article contends that the market value is worth closer to 40M USD. Ryanair may be able to immediately sell this aircraft to a leasing company at a price significantly closer to 40M than 27M (exact price unknown of course) and then lease the planes back. Quite a margin for profit. EasyJet has cemented a similar deal with Airbus according to the report.
I have to admit that I was rather shocked to learn that the former colonists were "dumping" a little more than tea into the harbour and have advanced to throwing aircraft onto the European market, but such apparently is the contest between Boeing and Airbus.
Is this not a fertile field for Star/United to enter? I would think that every airline could enter this game until such point that the lease market was saturated with new aircraft. One would imagine this to be a fine way for United to relieve themselves of the still functioning, but rather quaint and outdated 767s.
Frankly I am surpirsed that a lease company would pay so much over the 27M. What prevents a leasing firm from striking the same deal with the manufacturers that the carrier itself can?
Seems as if it is a great opportunity for the carrier if it works, but I am not sure just how it can hold up other than a one-off windfall.
Cheers

 

[WorldTraveler]

It could work for other carriers or leasing companies but the greatest opportunity has probably passed. Ryanair got the best deals on jets because they were taking airplanes right after 9/11 when the aviation industry was collectively frozen in place. The European LCCs knew what they wanted to do as far as expansion goes and got the lowest prices from the suppliers. Further, if anything the legacy carriers have typically overpaid for airplanes because they tend to buy during the boom cycles.

 

[Ukridge]

"Ryanair got the best deals on jets because they were taking airplanes right after 9/11 when the aviation industry was collectively frozen in place"

Actually the tenor of the article implied that RyanAir had recently ordered these aircraft (737 Next Generation) and that O'Leary was at the Boeing office to ink the deal. EasyJet had cemented their orders with Airbus in 2003, so I would be led to believe that these events were far enough removed from 2001 to be indicative of new bargaining.

 

[enilria]

   It is interesting though, because it describes how O'Leary of Ryanair has purchased new 737 aircraft from Boeing for 27M USD per plane. The article contends that the market value is worth closer to 40M USD. Ryanair may be able to immediately sell this aircraft to a leasing company at a price significantly closer to 40M than 27M (exact price unknown of course) and then lease the planes back. Quite a margin for profit. EasyJet has cemented a similar deal with Airbus according to the report.

[post="258130"][/post]​

This is not at all unusual. Everyone from US Airways to JetBlue pulls the same trick. The purchase price is a highly guarded secret. Even the mortgagee usually doesn't know it. In nearly 100% of cases the mortgage or the lease is at MSRP for the airplane and the airline pockets the difference. While this is great for cash position, it is not strictly a gain. The rates for the lease or the payments on the mortgage are set by the "market value" of the plane and the market value in this case is the inflated price the bank/lessor just paid for it. Further if the lease is terminated early the lessor or mortgagee is indemnified against any difference between fair market value and current value.

Look at it like this. I bought a house and didn't have enough cash for the down payment. The house was $180,000 and the downpayment was going to be $18,000 to avoid PMI. You can have the mortgage on the house be $198,000 and have the seller write you a cash check (rebate) for $18,000 which you then use as your downpayment. The mortgage record show the sale price was $216,000. $198,000 loan + $18,000 downpayment. So basically you financed the downpayment. Is this a profit? Not really, because you still owe $198,000. It's more like a 90% secured loan. That's what the airlines do.

 

[peasant]

What enilria said.

Lease payments = mortgage or rent.

Basically, say that you bought a house for 120k. It is now worth 180k. You go to the bank and remortgage it, at the 180 value, not the 120. Have you made money? No, because you now have to repay back a large mortgage, but you've got cash for your new business.

There was a scam going on with EETC pre 9/11 in the States - much like enilria's example of the house. People would only lend money to the airlines for low rates if asset backed. But many US airlines and advisors got very inflated valuations, allowing high borrowing.

e.g. say a B757 bought in bulk cost 50m USD. But a single B757, on lease at peak season to a holiday carrier, had (say) a value of 80m USD.

All the B757 of Airline YY were then valued at 80m USD.

Ryanair are doing the same thing. It is stupid from the lendors POV, because they are lending on "retail" valuation, not "wholesale"

And in the case they need to collect on the collateral, all of Ryanair's a/c would be on the market, so can only realise the wholesale price...

 

[Busdrvr]

Ryanair are doing the same thing. It is stupid from the lendors POV, because they are lending on "retail" valuation, not "wholesale"

And in the case they need to collect on the collateral, all of Ryanair's a/c would be on the market, so can only realise the wholesale price...

Which is why most airlines would likely pay a higher lease rates (and higher implied interest rates) in this case than if they had only sold the jet to the leasor for it's fair value. There ain't no free lunch. It's like rolling into a dealership, picking up a brand new Denali you financed at 10% for the full sticker price, and bragging to your buddies about the $5000 you made from the rebate checks, while you're buddy got a loan for $5000 less at 4% and applied the rebate to the price. It's a cashflow "trick" that will come back to bite you, and it seems to be in vogue at Blu and FRNT.

 

[enilria]

It's a cashflow "trick" that will come back to bite you, and it seems to be in vogue at Blu and FRNT.

[post="258823"][/post]​

It's much more widespread than you think and it's not new. It's been around at least 10 years from just my personal experience. It's in vogue everywhere because airline's can't raise cash so they do a sale and leaseback at the inflated retail price to raise cash they can't get anywhere else. The mortgagee/leasor can get the short end of the stick in a reorganization because they will be hard pressed to get the elevated lease rate caused by overfinancing in the regular market.

Conversely, these transactions are usually only done on new in demand airplanes which makes airlines afraid to strike down the lease in ch11 court as the lessor may take the fleet to Asia leaving the airline without enough airplanes. This last paragraph is what has been going on at UA for the last 2 years. UA is afraid to refuse the leases on their newer airplanes that are overfinanced via this method so even with all their leverage against labor they still probably have 150 planes that are overfinanced with payments way over market.

 

[enilria]

One more thing. Lately GE has been letting lots of airlines like US Airways/United/IAir/etc out of their current lease payments to save them cash. You should be asking why GE hasn't been taking huge charges for lost income on these airplanes. GE structured these deals like this:

Year 1 : No payment
Year 2: 50% Payment
Year 3: 150% payment
Year 4: 200% payment
Year 5: 200% payment

In this way GE doesn't record a loss because the money is still coming, but the airline is eventually hosed.