Airlines’ Choice: Leasing vs. Buying

About 40% of jet aeroplanes currently flying with commercial airlines around the world are on lease (about 8,000 out of 20,000 aircraft) with a prediction to grow to 50% by the year 2020.

Being airlines; capital intensive businesses which require huge up front investments for aircraft, maintenance tools and equipment, lacking any lease option would have prevented the start-up of low cost airlines which – by their own nature – have limited access to credit and funds.

But is leasing always better than buying? As with many questions of this type, there can be more than one answer, depending on particulars.

On the one hand, those in favour of leasing claim the following advantages for the lessees:

Cash flow benefits: no upfront payments needed;
Up to date equipment: with a lease, companies pass the financial burden of obsolescence to the lessor and don’t have to deal with the hassle of finding new buyers at the time of dismissal;
Balance sheet: operating leases do not appear as either assets or liabilities on a company’s balance sheet thus helping to control capital expenditure and sometimes to improve key ratios;
Flexibility to choose between operating and capital leases. Capital leases are similar to loans: the equipment is considered an asset on a lessees’ balance sheet – which gets the benefits (i.e. tax depreciation) and risks (residual value) of ownership. However, in the case of operating leases, the leasing company retains ownership of the equipment and for tax purposes the equipment itself is considered as a monthly operating expense.

On the other hand, the following disadvantages of leasing have to be considered:

Pay more in the long run: ultimately, leasing is almost always more expensive than purchasing, as companies have to pay for financial charges;
Commitment to long term agreements: depending on the lease terms, lessees may have to make payments for the entire lease period, even if they no longer need the equipment;
Lessees don’t own the asset: therefore they need to look after it properly and need to ask permission before doing anything to it (like an upgrade or an alteration).

Similarly, pros and cons of buying have to be considered when taking decisions regarding strategic assets.

Advantages of buying:

Opportunities to exploit the residual value of the assets in case of market upturns;
Possibility of leverage on the assets in case of raising funds by using them as collateral;

Disadvantages of buying:

The initial outlay for needed assets may be too much: lines of credit may have to be tied up and not be used for other functions that can help grow the business;
Eventually, the company may be stuck with outdated equipment as the costs of replacing are not affordable.

So, it’s not possible to simply say that leasing is better than buying because the answer depends on the specifics of each individual situation which needs to be fully analysed in all its aspects. A world without leasing would have not allowed the stunning economic development we have experienced so far, but still buying remains a valid, viable and easier option in many cases.