Jump to content

Photo

Leasing can be cheaper than buying!


  • Please log in to reply
13 replies to this topic

#1
Alpha Waffle

Alpha Waffle

    Ask me about my microphone collection.

  • Member
  • 48 posts

User's Awards

           

EDIT: My initial work missed an important mechanic. See my reply here for the corrected results.

 

---

 

When you purchase an aircraft, you can get a maximum 25% discount off the ticket price by buying in batches of 51 or more. On a $100,000,000 aircraft this means when you buy 50 of them you can get each plane for only $75,000,000. Not too shabby.

As the aircraft ages, it depreciates, which means it will be worth less if you choose to sell it later. However if you do not dispose of your aircraft, this isn't important, as depreciation is an unrealised loss until sale; if you never sell, you never actually take the hit.

Now, when you lease, you pay a fixed monthly price until you terminate the lease by either opting not to renew, terminating and paying a fee, or purchasing the aircraft from the lessor. This may seem like a sunk cost, especially when you realise that only 50% of the lease payments count towards the purchase price! So if over the life of the lease you pay $20,000,000 to the lessor, only $10,000,000 will apply as a "discount" on the sale price.

Here's the important bit, though: depreciation applies to planes that the lessor owns too! If the plane you lease depreciates at 10% per year, the price you buy it from the lessor for also decreases by 10% every year. This means, under the right circumstances, an aircraft can depreciate so much over the life of the lease that you can buy it from the lessor at a discount of 50% or more.

I'll spare you all the math that went on behind the scenes here, but I've made a few plots to demonstrate my point. Essentially any aircraft that depreciates at 12% per year or more will ultimately be cheaper to lease than to buy outright if you wait long enough. The number of months varies based on the actual depreciation rate, but in general, the faster the aircraft depreciates the sooner you can buy it at its maximum discount.

Note that this is the maximum discount re. best retail price. If you lease for too long the buyout price will go to $0, after which point you cannot get any more of a discount, so any lease payments you make will just disappear into the void.

All of this assumes optimal conditions, i.e. you get the best possible lease rate, and everything is compared to the best possible purchase price.

I'm happy to answer any questions!

Attached Files



#2
Nouroog

Nouroog

    AE Addict To-Be

  • Member
  • 10 posts

User's Awards

7    3    2    3   

Interesting point.

Yet, I don't see many aircrafts with a depreciation rate equal or superior to 12% /year.



#3
Alpha Waffle

Alpha Waffle

    Ask me about my microphone collection.

  • Member
  • 48 posts

User's Awards

           

Yes, they are quite rare unfortunately. I know the Boeing 377, Bombardier DHC-7, Bristol Britannia and Ilyushin Il-62M are all above the break-even threshold. The list is not much longer, I'm afraid. 



#4
Alpha Waffle

Alpha Waffle

    Ask me about my microphone collection.

  • Member
  • 48 posts

User's Awards

           

Well, it turns out I missed a very important game mechanic: the ability to extend leases! 

 

If you extend your lease, the new price is based on the current value of the aircraft; if the plane has depreciated, your monthly lease payment will be lower.

 

With this in mind, I've tweaked the calculations to take lease extensions into account. As always, I assume the player makes the best possible decisions; that is, they only extend the lease if the new monthly lease is lower, and they extend the lease as soon as possible.

 

The new results are promising: now, leasing an aircraft that depreciates at 8.5% or more per year will ultimately be cheaper to lease than to buy. 

Attached Files



#5
RubberDuckGaming

RubberDuckGaming

    Duck

  • Member
  • 396 posts
  • Website:https://bit.do/ducktube

User's Awards

      2      

This is really interesting, thanks for doing these calculations. I wonder how this could be used in conjunction with the spamlining strategy.


6DAF18E9-01AB-4C75-BA89-CF609AFA4A8D.jpeg
 
 
 
 
 

 


#6
Alpha Waffle

Alpha Waffle

    Ask me about my microphone collection.

  • Member
  • 48 posts

User's Awards

           

I don't think it would make much of a difference. My profit margins are already at 50%, so even if I got all my planes for free, it would have a negligible impact on my overall valuation.

 

Honestly this strategy of trying to reduce aircraft cost as much as possible would work better for low margin airlines, where every dollar saved can make a difference.



#7
Alpha Waffle

Alpha Waffle

    Ask me about my microphone collection.

  • Member
  • 48 posts

User's Awards

           

(Deleted as duplicate)



#8
Fans Engine

Fans Engine

    Fan of MC-21

  • Member
  • 3 posts

User's Awards

           
Looking at the first graph, do I understand correctly that if the depreciation rate of an aircraft is equal or less than 4.5%, it will be cheaper to buy it than to lease it even without a discount? For example, I buy an aircraft in a used market, or I order just one new from the factory.

#9
Alpha Waffle

Alpha Waffle

    Ask me about my microphone collection.

  • Member
  • 48 posts

User's Awards

           

Looking at the first graph, do I understand correctly that if the depreciation rate of an aircraft is equal or less than 4.5%, it will be cheaper to buy it than to lease it even without a discount? For example, I buy an aircraft in a used market, or I order just one new from the factory.

 

That is correct. Below 4.5%(ish) the discount is negative, so you pay more than retail price by leasing. 



#10
Thatflyerguy

Thatflyerguy

    AE Addict

  • Member
  • 201 posts

User's Awards

2      

sorry to resurrect this. 

 

if your only goal is valuation, then what is the impact here? owning a plane ups your valuation while leasing does not... so profits might be higher but valuation lower, right?


msg-284924-0-43010000-1638583211.gif


#11
Alpha Waffle

Alpha Waffle

    Ask me about my microphone collection.

  • Member
  • 48 posts

User's Awards

           

If you buy a plane for $100,000,000, you trade $100,000,000 in cash for an asset worth $100,000,000. That asset depreciates, so you must make back enough cash each year to compensate for the depreciation of the aircraft to "break even" in terms of overall valuation.

 

By leasing instead of buying, you only have to earn back the lease cost per month to "break even". If the cost of the lease is less than the amount by which the aircraft depreciates, you end up making more money overall. 



#12
Thatflyerguy

Thatflyerguy

    AE Addict

  • Member
  • 201 posts

User's Awards

2      

oh i see, thanks! however, the value you make back would not be significant, right?


msg-284924-0-43010000-1638583211.gif


#13
Alpha Waffle

Alpha Waffle

    Ask me about my microphone collection.

  • Member
  • 48 posts

User's Awards

           

In the grand scheme of things, the difference between leasing and buying isn't significant. It's not difficult to make an aircraft profitable.

 

However, a fleet of 1000 planes making 10% margins vs 30% margins...



#14
Thatflyerguy

Thatflyerguy

    AE Addict

  • Member
  • 201 posts

User's Awards

2      

fair point, that is good to know. thanks!


msg-284924-0-43010000-1638583211.gif





0 user(s) are reading this topic

0 members, 0 guests, 0 anonymous users