Why are leases so common in aviation?
Posted by Mike__O@reddit | aviation | View on Reddit | 155 comments
In the automotive world, leasing is considered to be BY FAR the most expensive way to own a car. Pretty much every person educated in finances strongly advises against leasing because it will cost you substantially more in the short term with no long-term payoff at the end.
It seems very different in the aviation world. Leasing is incredibly common. Airlines lease airframes, engines, APUs, and avionics. Sometimes the entire airplane is leaseed, sometimes parts of it are.
How does the economics of airplane leasing work that make it more appealing to penny-pinching airlines? Is it just a matter of lack of available capital/debt capacity?
DBond2062@reddit
Another feature of leases is that airplanes aren’t just sitting at the dealership for you to buy and take home today. Backlogs can be a decade or more to actually get a plane delivered after ordering, while a lease may be much faster from order to delivery. You can also cancel a lease much faster than you can sell a plane if the industry takes a downturn.
EveningPair3966@reddit
Depends on the tax law and regulations where you are based.
Where I'm from, a lease means you do not retain ownership of the asset. The lease is classed as an operating expense and therefore and expense. Translated to a tax deduction.
allenrfe@reddit
I think part of it is tax law. The company that owns the part can write off depreciation, and they company that leases it can write it off as a loss.
I worked at a company that leased equipment form a company that existed simply to lease equipment to the company i worked for. Both companies were owned by the same person.
PckMan@reddit
A lot of things that don't make sense in the consumer market make a lot more sense on a B2B level. Airlines and aircraft operators are already on razor thin profit margins. Leasing to each other and maximising the profit potential of their fleets makes a lot of sense for both sides, and obviously the pricing is set up in such a way that this makes sense. It's a "scratch my back, I scratch yours" arrangement.
Car leasing is also often the better option for businesses too, when they're leasing entire fleets, because they get better rates and terms. But you can't expect the average Joe to walk in and get such a deal for themselves.
mpbo1993@reddit
Never heard it’s the most expensive way of owning a car. Where I live it’s the cheapest way to own a car. Lowest payments, minimum capital tied to an asset, pretty low interest, etc. same for planes, + business can deduct leasing as operational costs, and so do many people with cars.
Frewtti@reddit
It's cashflow management.
Lets say business is good, you renew lease.
Business slows, you don't renew lease.
No buy/sell headaches, or surprise gain/loss.
mishap1@reddit
For businesses leases are often tax deductible as OPEX. It also reduces risk by minimizing capital tied up in a single asset. Businesses don't need to operate on the same timeline that people do since their unit of performance can be quarterly or annually vs a typical career.
Eat_Locals@reddit
Pretty sure capital is like 90% of it. Much easier to get out of a lease than be stuck with so expensive an asset.
roadsign68@reddit
I would also add to this that by using it as OPEX they don't have to report it as a long term liability which helps the balance sheet look better.
WeaverFan420@reddit
Echoing the other guy who said to brush up on ASC 842.
Operating leases are no longer able to be excluded from the balance sheet. All leases 12+ months, which airplanes would definitely belong to, are now required to be capitalized. There is a right of use asset and accompanying lease liabilities that must be accounted for for all such leases, and the liability for lease payments over 12 months away will be long term liabilities.
roadsign68@reddit
I finished accounting school 10 years ago and don't care to read another publication about it lol. Good to know though, it makes sense to me.
NiceGuy531@reddit
You may need to refresh your knowledge of ASC 842.
WeaverFan420@reddit
This 100%, this commenter is operating pre-2018
mduell@reddit
Depreciation of a capital asset like an airplane is also deductible, sometimes even on favorable terms.
OptimisticMartian@reddit
Also to add, traditionally air lines are shitty credits (ie they went bankrupt all the time) and many would not have been able to get favorable terms in a loan. Having a lease would have allowed them access more financing, as does getting asset backed loans which many also do. Recently though at least the US airlines are much stronger and haven’t had that limitation as much.
FormulaJAZ@reddit
And don't forget, businesses use money to make money. They make more profit using that money in their business than they would save in finance or lease expenses by paying cash for a vehicle.
DullMind2023@reddit
Finally the correct answer.
AgileDepartment4437@reddit
It's for simple financial reasons.
If you are wealthy enough, you can certainly choose to always buy the newest aircraft or highly cost-effective used ones.
However, if you don't pay in cash, you will inevitably bear a substantial debt burden, lose cash liquidity, and be unable to further develop the company.
ltcterry@reddit
If you buy an airplane it's a capital expense that must be depreciated over many years. If you lease it then it's a current year expense. If times get hard you simply pay a penalty and are out of the lease rather than having to continue to own expensive airplanes.
Cptknuuuuut@reddit
"In the automotive world, leasing is considered to be BY FAR the most expensive way to own a car."
It depends on the conditions. Often/most of the time, it is. But you can also get leases that are (sometimes significantly) cheaper than the car depreciation.
My company leased two electric vehicles (MG4) for 150€ a month over 4 years. That comes down to a total of 7.200€. Buying the car would've cost 35.000, more if you account for capital cost or a credit. You can get that same used car for 13-15.000 now. And that is what the car seller sells them for. If you sell it to them you'd probably get 11-13.000 max.
ILikeFlyingMachines@reddit
And still a large amount of people do it, and a majority of commercial customers.
Substantial-Reward70@reddit
It’s not the same for a normal person vs a business.
For a normal person it may never be cheaper than owning the car. For a business it can even be profitable.
Popular-Rock6853@reddit
A normal person can't afford to buy a car on their own.
r34p3rex@reddit
Leasing EVs is almost ALWAYS cheaper than financing it. Manufacturers are desperate enough to unload inventory that they always set unrealistically high residuals which gives the leasee a way better deal than financing
Messyfingers@reddit
Dealers aren't fond of EVs either because there's virtually no maintenance, whereas the idea of a lease and potential sale, or another lease in a few years keeps business going. Auto dealerships are at least like the aero engine business where sales are basically just the vehicle to the aftermarket cash cow.
ILikeFlyingMachines@reddit
And airlines are businesses
yousirnaime@reddit
I own a business and lease my cars
100% tax write off for leases . Airline Businesses do the same.
Financing you have to depreciate the asset and write off interest. There’s an argument for it if you have the right plan but it’s not right for me
You’re trading the small chance at building equity in the future for a guaranteed 30ish% discount on every dollar spent toward this vehicle
Salsalito_Turkey@reddit
You get to write off 100%, but airlines and similar businesses have to follow accounting rules for “capital leases” where they actually have to record the lease as an asset and depreciate it. It’s all very complicated, but the airlines have an army of accountants working on this sort of thing so I’m quite confident that they’re doing the most coat-effective thing they can.
CaptainPonahawai@reddit
Bonus depreciation as well now. Doesn't require the same gross weight as 179.
Salsalito_Turkey@reddit
Man, that gross weight limit really screwed things up. Imagine what things would look like if tradesmen of the past 25 years could have gotten the same tax benefits from buying vans instead of half ton pickup trucks. We’d have so many more van options on the market, like they do in Europe.
CaptainPonahawai@reddit
Agreed. Large US trucks make sense for towing and off-site hauling, not inter-city jobs. My friend who is a GC still has a 30+ year old truck as its so much smaller, and has the same bed size as his full size that hauls the trailer/equipment.
Same with people who need to meet clients or drive clients around. Instead of a sedan or other efficient vehicle, many purchased massive SUVs.
yousirnaime@reddit
Thanks for the tip, fam!
CaptainPonahawai@reddit
Same here.
The new bonus depreciation rules do make purchasing viable now (unless purchasing a 179 eligible vehicle previously), but leasing is simple and less effort.
Stoney3K@reddit
For commercial customers it makes sense to lease vehicles because it's an insurance against downtime.
Sternenschweif4a@reddit
I think it kind of depends on the country as well. In a lot of them it's not the most expensive way.
ILikeFlyingMachines@reddit
Kinda doubt it. A 8 year old car has basically no deprecation, hard to get cheaper than that.
ray_oliver@reddit
But an 8 year old car also has no warranty (generally) and may be at the point where maintenance and repairs are becoming more frequent. It's a trade off.
dcode9@reddit
Not necessarily the age of the car, but how many miles and if regular maintenance has been done. There are exceptions of course because some manufacturers are better than others, but my point is I'm more concerned about mileage than age of a car.
Pokerfakes@reddit
Change that 8 to "80s" (or older) and you'll start seeing the point where things balance out again. By that time, it's almost a "car of theseus" situation, with all the major drivetrain components having been replaced or rebuilt at some point, and you can have a "new" car for half the price (or less) of a new car.
halfty1@reddit
You got car leasing backwards. It costs you more in the long term, not short term.
BadMofoWallet@reddit
See I get this logic if you’re going without a car after the lease is up, but if you keep renewing it, what’s the point of leasing besides having a new car every odd number of years
Prefect_99@reddit
Because people don't have the money upfront.
halfty1@reddit
That’s why it’s bad over the long term vs buying.
Getting a new car every couple of years is exactly why many people like to lease though. Not everyone likes to keep the same car until the wheels fall off. Financially that is the smartest thing to do of course, but car buying is heavily influenced by emotion not raw financial logic.
swordrat720@reddit
Also, with a lease, you get a new car every 2-3 years, with a similar payment. Plus insurance, you know how much you’re spending every month. If anything breaks on the car, you’ve got no unexpected expense. You just take it to the dealership and they fix it.
ONeOfTheNerdHerd@reddit
Yep. With how expensive vehicles are now and not built to last, plus features and repairs increasingly paywalled, the additional cost of leasing might actually be the better financial choice.
ABoutDeSouffle@reddit
The math doesn't check out. If modern cars are more expensive to own, then the leasing rates will also go up. Leasing companies know TCO better than the average consumer ever will.
ONeOfTheNerdHerd@reddit
The math itself won't check out, but it's not factoring in the intangible headache, cost and restrictions of maintenance on these new vehicles. There's no way to predict future maintenance and repair costs that have so many chips, integrated parts (have to buy a whole assemblies to replace a part) and proprietary software you have to use dealership repair shops. And all of it is built to fail. So many parts that used to be repairable have been engineered to fail and require full replacement. Factor in supply chain issues...
What I'm saying is the extra cash cost is worth not being locked into an expensive vehicle you're barred from fixing on your own and costs so much you can't afford the repairs because plastic parts and planned obsolescence. I'm looking at it pragmatically, not just the numbers.
FLGirl777@reddit
Or you buy and no car payments for multiple years
Kruse@reddit
You're still making payments each time there is a significant repair or maintenance. In the end, it all probably comes out about even.
ABoutDeSouffle@reddit
Nonsense, the leasing company wants to make a healthy profit. Buying a car and saving monthly for repairs is always cheaper.
throwingeverything99@reddit
This is just so factually untrue it's mind boggling. If we're talking the cheapest long term option, it's buying used and it's not even close.
BadMofoWallet@reddit
Definitely not, I have 2 cars both owned outright a 2023 and a 2021, I’ve had a running spreadsheet for them both for costs and factoring in lifetime lease payments (with 0 money down leases) vs. buying and owning for at least 5 years, it’s still cheaper than leasing costs over that period of time. And I tend to keep my cars until they’re 7 years old before all the problems start, my 2021 I’m gonna be trading in fall of 2028 (when last MY cars go on “sale”), if I could choose though I’d love to go without a car altogether but currently not an option.
I’ve had my cars paid off for the last 2 years and I’ve had 0 repair costs only maintenance expenses (70$ oil changes every year when I get the dealer coupons in the mail and a new set of tires for the 2021 since it’s a sportier car with shorter tire life than the 2023 suv)
Kruse@reddit
Plus, at least with all modern cars, the tech features inside them change so frequently that leasing makes more sense if you want to keep up with connectivity and safety features.
BadMofoWallet@reddit
Or you can just buy it and not have car payments after 3 years or just buy cash if possible?
slpater@reddit
And there are brands will even do the maintenance for free. So if youre otherwise nice to your cars and dont damage them, you get a new car that, in theory, should be extremely reliable. And dont have to deal with any of the long term consequences of keeping the vehicle on the road.
SaturdaysAFTBs@reddit
It’s universally bad long term. There are tax implications that can change the calculus.
Joatboy@reddit
Depends on the projected residual values vs reality. You "win" in a lease when the leasing company overestimates the residual value.
LounBiker@reddit
No repair costs.
BadMofoWallet@reddit
I’ve never had to deal with repair costs in the 1st 3 years of a vehicles life because it’s under bumper to bumper warranty?
halfty1@reddit
Sure, but if you own it you will pay for repairs after the warranty is over.
Buying a new car every 3 years isn’t financially better than leasing for 3 years. If you are going to get a new car every 3 years it is smarter to lease unless you drive a ridiculous amount of miles.
BadMofoWallet@reddit
Oh I don’t disagree I just think cars are the worst investment so I always say, if you are going to buy one, get it certified pre-owned and learn basic maintenance items like changing filters/oil/coolant flushes… buying new or leasing to me is poor financial planning but then again, most people like new and shiny…
JoyousMN_2024@reddit
Buying the CPO car model someone just returned from leasing is probably the very best deal LOL.
I tend to buy new, then drive it into the ground. Once it's paid off, and I usually do that as quickly as possible, I drop insurance to liability only.
EvenMoreCoconuts@reddit
Spot on—for me, buying a new car seems like one of the biggest wastes ever (from a purely financial point of view). The car depreciates the most in its first 2-3 years, so why not buy at the end of THAT, and if you get a CPO vehicle then you can rest a bit easier maintenance wise.
Badrear@reddit
If you drive a ridiculous amount and insist on getting a new car every few years, a lease may still be your best bet as long as you bake the extra miles into the lease at the beginning. The upfront miles charge will usually be lower than paying for them at the end.
I_like_cake_7@reddit
I agree. I personally know some people who trade their car in every few years and buy instead of lease. You’d be better off leasing if you’re switching vehicles that frequently. I think some people just don’t like being tied down to the terms of the lease or they have poor impulse control and decide to upgrade their vehicle after a few years even if that wasn’t the plan when they bought it initially.
thb202@reddit
That unfortunately is the point. At least here in the uk many people are obsessed with having the latest number plate digits as a status symbol and think cars are broken after 100k miles.
(At least that keeps the used prices low for those of us who have a brain!)
IllustriousWedding94@reddit
You're wrong. I love the value of a used car, and I totally get that a well maintained car will last 20 years with ease. And I could not care less about the number on my plate.
But I do like having a box fresh car with the latest tech on board. And I don't pretend that it's cheaper than buying a six year old car. But I might be able to make the maths work against a 3 year old.
EasyAsAyeBeeSea@reddit
Well that's a big one for many people, they always have a new car and never have to worry about any major repairs.
There are also certain tax incentives that work best with leases.
I also leased my EV as a hedge against depreciation. The actual interest rate I'm paying is similar to if I was financing and in 3 years I can walk away if the car has dropped in value significantly.
halfty1@reddit
Yes I also leased my EV. With the incentives and credits only available for leases EVs for a while were a weird case where it was financially smarter to lease them than finance/buy out right. Not sure if that is still the case with the end of all the credits.
oskich@reddit
EV technology also evolves quickly, so leasing can be a way to avoid getting stuck with an obsolete vehicle that can be hard to sell (at least compared to new ones).
ILikeFlyingMachines@reddit
But you always have a brand new car. And brand new planes for example are more attractive for customers, use less fuel and need less maintenance
Stoney3K@reddit
Also keep in mind that many planes are leased out to lots of different customers as a service (either as time sharing or wet leasing), so it's more like renting a bus with a driver than you're leasing a car to have parked in your back yard.
Because planes sitting on the ramp cost lots of money, so every hour that a plane can spend flying is an hour that can be billed to someone. And since you're not always there to use the plane yourself, you lease or share it out meaning it has to be in top condition all the time, nobody wants to get into someone else's beater.
TuloCantHitski@reddit
That’s basically the point for leasers. They like having a new car with the newest features without having to go through the used car process, etc.
Pokerfakes@reddit
The point is that most cars aren't going to have a major breakdown in the first 60k miles, especially if you get your oil changes.
Beyond that 60k, the risk of mechanical breakdowns just goes up and up. Parts are going to wear out no matter how good your maintenance is, and eventually the engine will need rings and valves, then bearing races, etc. Usually not before the 300k+ mile mark these days, but it's going to happen; it's only a question of when.
Getting a new car every 2-3 years means (usually) that you never have a car with more than 60k miles, so you never need to worry about getting a rebuild. (Unless the car has a major design defect, but even in that scenario, it'll be covered under warranty.)
SlumppShady@reddit
you have to be the right kind of person to lease ig. I know a guy and he just doesn't give af about the car. He drives and drives, maybe changes the oil at 10k, then two years later gets another car on lease. Monthly payment never changes, bro is just always in a new car.
rhineauto@reddit
You’re still responsible for regular maintenance when you lease a vehicle
valueflyer@reddit
Depends on the brand. BMWs have included maintenance on all leases up to 3 years/36k miles.
rhineauto@reddit
Well aware. You're still responsible for actually following through and getting the maintenance done, though.
YKRed@reddit
Not financially is their point
TigerUSA20@reddit
I think it’s primarily because a maintained airplane can last 30-40 years and have a relatively ratable decline in value over that time.
A car / vehicle loses most of its value in 5 years, and while it might last 12+ years, odds are generally against it.
funnydud3@reddit
I actually disagree that car leases are all bad. I came to this conclusion after buying $100,000 car that my girlfriend cashed two months later. It was instantly unsellable worth I don’t know, maybe 30 grand after $40,000 of repair repairs. I had to keep that car a long time want it or not. Also high-end cars like this lose so much of their value diving off the lot.
For every day cars, yes buy it. For anything you little expensive don’t
YKRed@reddit
People well versed in finance aren’t necessarily opposed to leasing…
Financing a new car is a horrible financial decision, as typically the car depreciates faster than you pay it off. That leaves you with the option of having to pay to sell it, or roll your debt obligation into a new loan. Leasing works better for some people since the cost is just monthly, without the added responsibility (repairs) of ownership.
cyberentomology@reddit
Interestingly enough, Southwest is largely going in the opposite direction, and getting out of most of its leases, preferring to fully own the aircraft.
cyberentomology@reddit
Short answer: it converts capex into opex.
Scared-Amphibian4733@reddit
You said: "In the automotive world, leasing is considered to be BY FAR the most expensive way to own a car. "
I say, depends on the use case.
Awalawal@reddit
Agree. Leasing is simply a different kind of loan/financing. It isn't inherently good or bad--just depends on the terms. It's not hard to calculate what the interest rate is that you're paying on a lease. People who have leased electric vehicles over the last 5 years have made out like bandits compared to people who got long term loans on them.
Delicious-Sky-9384@reddit
For any given capital value, you can get more planes if you lease a lot of it rather than purchase all of it even if you borrow against the asset value. The airlines can make profits off those additional planes.
Airlines purchasing new usually have a planned lifetime and can set up lease terms to match, with the owner leasing to some other airline when first lease is done. This also lets airlines control how many different models are in the fleet, because having real old equipment presents maintenance and cockpit crew training issues. Also at that level, pressurized planes and engines have a pretty predictable lifetime whether hours or cycles, and that facilitates both leasor and lessee profitability.
LPNTed@reddit
OP. Why do all businesses make the decisions they do? To maximize profit. It may not 'seem' to make sense, but trust me, businesses don't do something as intentional as leasing versus buying without understanding how much more money they make by going one way or another.
ABoutDeSouffle@reddit
OP understands this but would like an explanation. I think that's very reasonable.
Separate-Fishing-361@reddit
Aircraft are leased to be a defined operating expense instead of a depreciating asset. Transfers between operators aren’t taxable events. At a given point early in its lifetime, reliability and maintenance costs are fairly predictable.
The risks in operating aircraft are mostly filling them with passengers/cargo and fuel.
Even with a car, if you decide up front to keep it exactly 3 years, leasing it removes the worries about resale value and selling it/trading it in. This makes more sense if you’re using it for business.
91jack2@reddit
I lease my cars for the same reason many airlines lease their planes. It’s an operating expense, not an investment, because I know it will depreciate and if I keep it past payoff the monthly operating expense and downtime will continue to increase. Is it cheaper? Absolutely not. Do I enjoy driving a new car every 3-4 years, with little risk of out-of-pocket expenses or downtime? Absolutely.
NeedleGunMonkey@reddit
"educated in finance" is just your term for being financially wrong with crudely applied financial conventional wisdom
Aviation leases allow operators to distribute financial risk because they're not expending capital or drawing on credit to increase their fleet for short term operations or to fill the gaps.
The same is for leasing cars. Someone wants to operate a car for the short term and doesn't have to be on the hook for the long term.
GGCRX@reddit
I don't usually consider 3 years to be "short term."
Leasing a car is almost always a poor financial proposition. You spend 3 years paying for something, and you don't get to keep it. Whereas buying, you spend 4 or 5 years paying for it, and you don't end up with nothing at the end.
People educated in finance can understand why you'd lease an airplane as an airline without automatically assuming this means a private individual leasing a car is also a great idea.
devildog2067@reddit
If you think “spending 4 or 5 years paying for” something is “buying”, you’re wrong.
Buying is writing a check. Everything else is just different flavors of financial products. The difference between taking a loan on a car and leasing a car come down to specifics of the car and the deal, not “leasing is worse than buying”.
GGCRX@reddit
I completely agree that loans are another financial product designed to get you to pay more for something than it's worth, and where possible people should pay cash for cars.
On the other hand, if the choice is between getting a car loan or getting fired because you can't make it to work, suddenly the loan starts to make a lot more sense.
And while you're completely correct that a loan (even the 0% ones the dealerships love to advertise) will cost you more than just paying cash, so will leasing the car and at least at the end of the arrangement, you own a car.
Temporarily, yes. That upside down amount is going to be worked into the lease agreement - they will get their money. Leasing is not going to make the bad financial decision you made when you bought that overly-expensive car on credit go away.
And then after the lease is over, they still have to figure out how to pay for another car.
I think the main problem with much of the financial industry is that it does not understand how lower-income people operate. This is a segment that is paying more than the rest of us are for almost everything. We buy a $300 pair of shoes and wear it for 10 years. They can't afford that so they buy a $100 pair of shoes and replace them every year or two. That applies to almost everything they buy. If a $600 office chair lasts more than 5 years, you spent less on it than the guy who has to buy a new $200 chair from OfficeMax every couple of years.
It's expensive to be poor.
The lease will get them out from under the loan, yes, but it will also obligate them to years of payments with no vehicle to show for it at the end. It's just kicking the debt bomb down the road.
devildog2067@reddit
Odd that you "agree with" something I never said.
Loans are a financial tool, like any other. They can be used well or poorly.
I'm doing an office buildout I could pay cash for, but I'm borrowing the money instead. It'll cost me more money, but the value of keeping the cash on hand in case a client is ever late paying me and I am short on payroll outweighs the cost of the interest I'll have to pay (which I can tax-deduct anyway).
Nope. At the end of the lease you walk away. If the car is upside down it's the leasing company's problem. That's basically the whole point -- you are paying a premium to offload the risk. When you buy the car the leasing company agrees to a (future) residual value. If the car is worth more than that future residual, the leasing company wins (or the customer can buy out the lease and monetize the residual). If the car is worth less, the leasing company has to eat the loss. Lots of people made bank coming off their leases during COVID, and the lots more stuck financing companies with the loss getting new leases during COVID.
GGCRX@reddit
Now you're coming off as being intentionally obtuse. Unless you're getting that loan from your parents, you're probably paying interest. Whatever you use the tool for, the tool was designed by the bank to get you to give them money on top of the purchase price of whatever you're buying.
Which is why the people selling the leases work very hard to make sure that doesn't happen, or at least that if it does, it's within the margin that they can fleece someone on the used car lot for.
This is why I really hate MBA-think. It doesn't work, but people preach it as though it's the word of God. You're paying a premium to not have anything at the end of the lease, which means you're trading the risk of being temporarily upside down on a loan (that ends once you pay it off) for the risk of being without a car in a society that for the most part requires you to have one.
If you lease a car, they have you over a barrel when the lease ends. You will either pay them what they demand for the car whether it's worth that much or not, or you will have to go find another way to obtain a car. The dealership would love that alternate way to be signing a new lease, and it doesn't take too much financial acumen to figure out that if the dealership wants you to do something, it's probably more for their financial benefit than yours.
It's so much fun to get mired down in the details of what risk happens when and where you can offset it that you lose sight of the overall picture, which is that the person needs a car and ideally would find the most cost-effective way to obtain one.
I would be hard pressed to come up with a scenario in which a lease was the answer to that goal.
Further, car leases are not marketed to people who are thinking about "paying a premium to offload the risk of future residual misalignment with the ideal." They're marketed to people who say "I want to pay $600 per month for a car and that's as far as I'm going to get on the financial math."
They are custom tailored to appeal to people who are not thinking of best practices for their overall financial health, whether that's because they're rich and are willing to pay a premium (not for offloading risk, but for offloading inconvenience) or because they are not rich and are bad with money.
devildog2067@reddit
Yes. That's literally the point.
Perhaps you know you won't want to have one.
... no? No one buys out leases if the residual is more than the car is worth.
Like, say... continuing to make a monthly payment for one? Which is the situation you'd be in if you take a 5 year loan instead of a 3 year lease?
I literally presented you with one -- a short-term employment contract in a place that's far away from where you normally live.
GGCRX@reddit
And I literally gave you a better alternative than a lease for your scenario, which you promptly ignored so you could move on to cherrypicking half-sentences to try and prove yourself right.
devildog2067@reddit
I have known literally dozens of people who did that exact thing. It's a quite common theme with certain kinds of contract work. Not everyone is willing to take several days to drive their car to a new location, or bother with buying a car they will then have to sell when they leave.
What do you do if your job ends, and you need to go to where the next job will be, and you haven't been able to sell the used car yet? There's real value, actual monetary value, in the convenience of just giving it back to someone who has to deal with it.
The thing you seem incapable of realizing is, NOT EVERYONE IS YOU. Some people care about different things than you do. I spend money on things I'm sure you'd consider a waste, every day -- because I value the convenience or the satisfaction or whatever more than I value the extra money it cost me.
A lease is a financial tool that makes sense in some circumstances for some people. It doesn't generally make sense for most people, but pretending it never makes sense is stupid. There's lots and lots of reasons why leasing a car (especially if you own a business) can make a ton of sense. The fact that you personally don't ever expect to be in any situation where those reasons apply doesn't mean they don't exist.
GGCRX@reddit
And the thing you seem incapable of realizing is that we are talking purely about best financial practices. That doesn't mean that everyone who doesn't follow them is dumb, it just means they didn't follow them.
You said it yourself. You lease a car on that contract job for the "convenience of just giving it back." Yeah, that's my point. You're paying extra for convenience, just like I've been saying all along.
Paying extra for convenience by definition is, from a purely financial standpoint, worse than not paying extra for convenience. If you can afford it, go nuts.
Many people will choose that option. Doordash would not exist if people weren't willing to pay $25 for a sandwich for the convenience of not having to go get it themselves for half price or make it at home for less than a buck.
Either way, having your lunch delivered is not as financially sound as making it at home.
I think it's really funny that we've been arguing all morning because you're having trouble separating the concepts of finance and convenience.
devildog2067@reddit
There is no such thing as "best" financial practices. There is only what's best for a given circumstance.
Paying extra for convenience is NOT, "by definition, worse". Convenience has its own value.
I know people who did the used car thing when they went to Europe for a 1 year or 2 year contract job (I used to be a physicist, and worked at CERN). They thought they were saving money. Some of them weren't able to sell their cars before they had to go back to the US. So those cars just sat in the CERN parking lot, rotting. They never got their money back out of those cars. If they'd just taken advantage of one of several leasing programs, they'd have been able to give the car back (or ship them back to the US, depending) and avoided the loss associated with the abandoned vehicle.
(This was a chronic problem at CERN when I was there, btw -- google "abandoned cars CERN" if you don't believe me)
Convenience IS finance. Time is money. I pay for the first class seats and the helicopter ride into Manhattan from Newark not because I like to waste money, but because that saves me \~3 hours total per round trip and it means I can get in and out to visit a client without losing an evening. That lets me either go home and be with my family, or go visit a different client in a different city on the same trip.
Finance is not about "saving money". Money is a tool that you use to do things. Sometimes spending it is the right answer. I'm sorry you can't wrap your head around that idea.
GGCRX@reddit
I think our disconnect is that you keep bringing up examples that do not apply to the majority of people who sign lease agreements.
They don't work at CERN. They don't have clients they need to take helicopters to see in order to save time so they can make more money elsewhere.
They work in a cubicle or even at Walmart and they need a car to get to work so they don't get fired. Increasing convenience by leasing a car will only cost them money, because they cannot make enough money in the time saved to make up for the extra they spent on the lease.
The people the leases are really marketed to are the wealthy serial car traders who know up front that they're paying extra for convenience, and to the crowd who intentionally overestimates their tax burden so they get a bigger refund because that's "free money."
It's that latter crowd that is harmed by leases, and it makes up a huge percentage of the population.
There is an exception to every rule, and, sure, you got me. If your billing rate is sufficiently high to need a helicopter to fit more clients in, then you might be one of the edge cases where a lease makes financial sense.
For the vast majority of the population, that doesn't apply. They lease a mid-range car and then at the end of the lease they turn it in and lease another because they're laser focused on monthly payments and not considering what that translates to in terms of actual money spent over time, and on average, they end up spending a lot more in lifetime transportation costs than people who buy.
NeedleGunMonkey@reddit
Your financial blindspot is not being able to comprehend why someone might lease to avoid depreciation.
Buying a Toyota Camry and driving it until the wheels fall off is the best financial decision. But if someone wants a luxury car with a high depreciation and unknown/questionable long term reliability - and they can afford the lease payments regardless and aren't poor people trying to live it large - leases avoids depreciation and they can get another new luxury car in 3 years time on lease without the depreciation hit.
potatolicious@reddit
Predictable cashflows are very attractive and it's a bit surprising people have so much trouble understanding it. This applies to many things, where the choices boil down to:
For people for whom the car is not a major part of their expenditures the predictable cashflow is very attractive and the downside (higher expected net expenditure) is a tolerable cost for said predictability.
MICKWESTLOVESME@reddit
Another attractive part of leasing is the ease.
When you work 60-80 hours a week, having to deal with car repairs, or even selling a car every couple of years, the extra cost of having to deal with nothing is very attractive.
It’s the main reason I lease, I hate dealing with cars and don’t want to spend my free time thinking about it at all.
GGCRX@reddit
Yes, well, rich people who swap their luxury cars like normal people change socks have financial advisors to tell them what to do, and as we all know, they play by different rules than normal people.
For the majority of the population, leasing is a terrible idea.
The depreciation argument is particularly ridiculous. You're paying for the depreciation. It's factored in to what they charge you for the lease. It's just that once you're done paying for it, you lose the car and now have to go pay depreciation again.
Not a big deal if you were going to trade the car in anyway, but trading in a car is also generally a terrible financial move compared to selling it yourself.
You're talking about things that rich people can afford to do, and that they do because they want the convenience and aren't worried about the financial hit. That's fine, but we're talking about from a purely financial perspective, and from that perspective the rich person is losing out too - it's just that they can absorb the loss and are willing to do so.
Applying rich-person car-leasing financial practices to everyone in a blanket statement is just as absurd as recommending that someone on welfare look into tax loss harvesting or a 1031 exchange. Pointless. They aren't in the club.
devildog2067@reddit
If you were moving somewhere far away to take a contract job that you knew was only going to last 2 years, would you lease a car or buy one?
GGCRX@reddit
I would either drive something I already own out to the location, or buy a used car when I got there for cash if it was overseas or something, which I would then sell for probably close to what I paid for it and certainly less than I'd spend on 2 years worth of lease payments.
Not universally true, but thank you for agreeing with my point.
Any financial advisor worth their salt will tell you that trying to "look rich" is a horrible financial move.
devildog2067@reddit
If you buy a used car that you can later sell for close to what you paid for it, you’ll have to deal with maintenance on it. Is avoiding that risk worth some extra cost?
It is to many people. If it isn’t to you, that’s fine. But you keep insisting that everyone else must value the same things that you do.
Financial advisors are, mostly, a waste of time and money. None of them are worth their salt. If they knew how to make money, that’s what they’d be doing.
NeedleGunMonkey@reddit
ok.
wade822@reddit
But…. You do get to keep it. Actually even better - you get the option to keep it. At the end of every lease is a clause to buy out the remainder of the car. If the car is worth more than the residual value, you buy it out and pocket the difference by selling it. If the car is worth less than the residual value, you give it back to the dealership and they eat the loss.
xXCrazyDaneXx@reddit
Unless you're Norwegian in the 2010's...
RevoGz@reddit
Norwegians long haul was squeezed out of business by IAG, particularly by BA, when Norwegian opened Gatwick to Fort Lauderdale and Oakland, they did too, even though BA already had flights into miami International and Ssn Fran. They actively sabotaged Norwegian and started a lcc airline called level just to take Norwegians market.
Its a pretty well known case in aviation business.
xXCrazyDaneXx@reddit
And Norwegian had way, way too much exposure to cover anything but a 100% smooth ride...
Upstairs-Bit7544@reddit
Wait til you find out about how airlines manage their fleet
IllustriousWedding94@reddit
Where did you invent your opening line from? My brand new lease car is £160 a month, 4.7 metres long and a full 5 seater. That's £3800 over two years.
Show me a cheaper way to buy new.
Given that someone needs to make a profit , show me a 3 year old car of roughly equivalent spec that will cost less over 2 years.
Same for a 6 year old car.
9 year old car. Now maybe you can beat the cost of leasing a new car. But maybe the car won't be quite as nice?
ciumpalaku@reddit
What if said alone has to cut 20% of the routes next year? Will they have to spend time and resources to sell 20% of the fleet? And potentially take a loss on some of them? And what odd they need to bump back the routes t by 30% in 3 years? Do they buy again? What if there is no supply on the market?
tominboise@reddit
Capital equipment is often leased for a couple of reasons.
One - the Lessee doesn't have the capital or credit to buy the equipment. Leasing lets them preserve the cash/credit for other uses.
Two - the Lessee wants to expense the lease against their operating budgets as opposed to their capital budgets. Often done because of tax implications or accounting practices at the company. They lose depreciation expense but gain an operating expense. Sometimes it's better to have one or the other.
orbit99za@reddit
You also get Wet leases and Dry leases, sometimes with full crew as well.
Its amazingly once you dive in to it.
That's how airlines put in more planes in the busy season, or if they are short due to repairs.
Here they often fly without any colour's and are just white.
messick@reddit
> Pretty much every person educated in finances strongly advises against leasing
Zero of those "every person educated" are CPAs who handle business finance. Purchases are uncommon in the aviation world the same reason they are in the automotive: Lease costs can be considered operating expenses that are immediately written off in the year they take places.
A purchase would mean keeping an asset on the balance sheet and depreciating it over time and then finally figuring out the "real" cost once the asset is sold or whatever. With a lease you literally know all the numbers before the ink is dry on the contract.
bonnies_ranch@reddit
Not sure how it is in the US but car leasing is often pretty cheap here in Germany and when you factor in depreciation, maintenance and repairs, it's often among the cheaper options of obtaining a car
Tricky_Big_8774@reddit
In the US, personal car leasing is an established scam industry. They market it around freedom from personal responsibility and getting a new model every 3 years. That's attractive to enough people that they are able to set pricing where it's barely cheaper than purchasing the car short term.
wade822@reddit
OP - you’re wrong about car leasing, and the same logic exists for airplane leasing.
Leasing a car is beneficial to the purchaser for a few reasons:
1) you don’t have to pull cash out of the market and into a depreciating asset. My money continues to make ~10% per year in the markets, while I pay ~2-3% on the interest of the lease. 2) you have the option to buy out the vehicle after the lease. Is the vehicle worth more than the residual value? Great! Buy it out and profit the difference. Is the vehicle worth less than the residual value? Great! Give it back to the dealership to eat the loss.
The same logic can be used for aviation leases, albeit these often don’t have a purchase clause:
1) airliners typically cost >$100 Million, sometimes upwards of $300 million. Airlines are a razor thin margin business, and dont often have this kind of cash sitting around. It therefore makes sense to lease the large capital payments, and keep the cash for a ‘rainy day’ or other investments into the business.
darkcton@reddit
Except Ryanair who for some reason have a ton of cash on hand
SaturdaysAFTBs@reddit
Leasing means you let someone else figure out the financing for you, freeing up your capital for other projects. Buying a commercial plane is expensive, in the hundreds of millions of dollars. If you try to arrange this financing yourself, you will carry a huge balance sheet comprised of planes and financing liabilities, plus the equity “down payment”. If you lease, the down payment is typically less and you offload a lot of the residual / exit value risk since you just turn the plane back. Lease liabilities also typically fall junior in the bankruptcy waterfall to secured debt.
The biggest issue by far though is airlines that lease have smaller balance sheets which means they have better return on assets, less financing execution risk, etc.
TLDR: it’s usually more capital efficient to lease vs buy.
277330128@reddit
A big reason is cost of capital. Very very few airlines are investment grade. So their cost of debt is high relative to lessors.
adjust_your_set@reddit
Airplanes are 30-35 year assets, cars are maybe 10-15 year assets if you’re lucky. Plus they cost a lot more and are revenue generating assets. The idea with financing a revenue generating asset is to match up your cash flow over time.
You don’t want to have an outflow of $50 million on day 1 then recover that over 12 years. Usually there is a better use for that money over a long time frame. Ideally, you match your outflow up with your inflow so the asset is net cash positive every year you operate it.
Leases generally have lower cost of capital, so give you a better NPV value when comparing between a cash purchase, or mortgaging the aircraft.
Some airlines build their business model on flying a new plane for 12 years then returning it and replacing it with another new plane. This is an idea scenario for leasing.
hatlad43@reddit
There you go. Airlines lease airplanes because the airplanes make money.
Fluid-Soil9231@reddit
Re: autos, New York State sales tax on cars is so high that the long term expense of leasing is a relatively minor negative arb. That’s part of why luxury cars have a lower barrier to entry in our state.
Fluid-Soil9231@reddit
For what its worth there appear to be multiple excise, sales and use taxes on aircrafts, varying by state, but tending to be nontrivial and the most common exemption seems to be for inventory only. At high enough prices any upfront sales tax would make leasing look more attractive. Spreads out the pain.
SlideRuleFan@reddit
Are you asking about the airlines or GA?
What you call an airline is actually a flying credit card company. Leasing the planes makes sense; all they're trying to do is move credit card customers from one lounge to another. They lease the lounges, too.
As a GA pilot, you can lose your medical if you sneeze hard enough and give yourself an aneurysm or blood clot. Then you're stuck with a very expensive hangar queen. Owning a plane is a huge liability when you're one untied shoelace away from never flying it again. A lease can give you better short term convenience and exclusive access at the cost of more$$$. But if you're laid up you can walk away at the end of the term. Or roll away.
You mentioned being educated in finance. My finance textbook came with software that shows the exact break even point between buying and leasing for various scenarios. There's a solution for everybody.
Of course, in the words of the great Western philosopher Kramer, leasing is for suckers.
skunimatrix@reddit
Leases come out of operations budgets. Purchase becomes a capital expense and has to be deprecated over time. From an accounting standpoint a lease for businesses is just easier.
vorko_76@reddit
As others pointed it out, you got the initial assumption wrong
frat105@reddit
Completely different economics vs car leases. Transport aircraft are revenue producing assets, they aren't utilitarian. Same reason why retail stores don't purchase their storefronts but lease them. Airlines would bleed cash if they had to capitalize aircraft and financing them creates debt on the balance sheet. They need to keep cash and borrowing power and aircraft just need to be an operating expense all up.
DrEarlGreyIII@reddit
I’ve purchased or leased around 100 cars in my life, and I just want to point out that a lease is NOT necessarily the most expensive way to own a car. If you’re savvy and understand the components of a lease and the market conditions, it can be the least expensive way to purchase a car. I’ve made plenty of money buying cars at the end of a lease and immediately selling them back to the deal or to a private party. You just have to know how the game is played, and understand the market conditions and vehicles that make a lease advantageous.
atrawog@reddit
Because quite often the leasing companies have a way better credit rating than the airlines making it cheaper to lease a plane compared to buying it with debt.
And I'm sure that there are all kinds of tax optimisation opportunities if you're leasing from a foreign lessor.
52-61-64-75@reddit
It's pretty common financial knowledge that leasing is worth it if you can use the money you aren't spending up front for other stuff that make you more than the interest you pay on the loan or financing
Diver_105@reddit
For one it keeps their fleet new and in working order.
ebegrowi@reddit
I don’t know of the exact economics of airline leasing but most of the time, a company needs something (airframe, engine) for a short period of time for operations. Ex: Breeze leased engines from EgyptAir for the A220 because they had a few engines out of service for repair without a return timeline. So leasing the engines helped keep their operation running
Icy_Huckleberry_8049@reddit
massive difference in the costs associated with them and the tax write offs
Swimming_Way_7372@reddit
I could take the millions of dollars to buy an asset and then be out of money. Another option is I can lease the asset and take the dollars amd reinvest them into things that make more money than they would lose on the terms of lease. OPM (other people's money) is how rich people buy stuff.
eagle_two@reddit
Also, if you are a small or recently launched airline, you just do not have the hundreds of millions to buy a small fleet of airplanes, and you cannot borrow this money at a reasonable cost since you do not have any assets to secure the loans. So you lease from someone who does.
CaptainPonahawai@reddit
"Educated in finance" by who? Dave Ramsey?
eagle_two@reddit
A whole range of compelling reasons, depending on the airline:
It avoids having large expensive assets on the books of the airline. Lower overall capital needs, higher % return on capital employed. Leasing a plane is essentially leverage.
The lessor can often get better credit conditions as they are far larger and more physical asset heavy than most airlines. Small airlines often do not have the size and capital to buy planes, they have no other option than renting.
Airlines can get valuable flexibility from the lessors. For example, they can negotiate options to return leased planes early, options to exchange for larger types at some point in the future if demand is strong,...
Leasing can include things like maintenance planning and service level agreements where the airline is compensated if a certain percentage of availability is not met. This also means the airline can have lower overhead if they do not need for example a maintenance facility.
GGCRX@reddit
Leasing gives you more flexibility. If the global economy craters and passenger demand is cut in half, having a bunch of unneeded airplanes around that you either have to mothball ($$) or maintain ($$$) will cost you more than just turning in the lease.
hibob729@reddit
Designer-Salary-7773@reddit
Overwhelming majority of A/C are acquired by corporations. The tax/cash consequence and accounting is pretty diff from what you or I (as individuals) would see.
Dr_Lexus_Tobaggan@reddit
An older gentleman who would know one told me, "If it flys, fucks or floats... Rent it"
Impressive-Yak-7449@reddit
OP do you have $250 million on hand in cash? Now do that another 30 times to buy the rest of your 777 fleet.
Also, when leased, it's easy to reduce or increase your fleet size.
Competitive_Work_249@reddit
The operational margin it provides pays off in the long run. Similar to you using a credit card. Even though it charges you interest, the other perks and security you get (in case it gets stolen) pay off for it. While initially it may not make sense if you look at cold hard numbers, operationally, it makes sense. Not all airlines are like this though, us based airlines tend to own their aircraft more while a country like India has most of them leased, so it depends on the market and the regulationary conditions as well.
West_Good_5961@reddit
Because everything is astronomically expensive. Most airlines could never afford to own their aircraft.
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