When is it still cost effective to own the airplanes for a commercial carrier?

If an airline is operating with an acceptable market position and healthy finance at the moment of evaluating the acquisition of a new airplane, the buying opportunity should be considered a reasonable decision, according to its business purpose. The importance of being well positioned against the competitors with a relatively good market share set the base for planning to become owner of the airplane expecting to keep them operative for its full lifespan. A sound finance condition is also influential both in case of a pay in full decision, avoiding the risk of an excessive cash reduction, or if opting for a mortgage, allowing bank to charge lower interest rates due to the better creditworthiness.

Nowadays the pay in full option is something actually unbearable from any commercial airlines worldwide and it remains confined to some minor deals involving a few amounts of small and inexpensive regional or executive planes. Financial loans, instead, are usually adopted and often secured by the asset itself. They may be used to fund the advance payments to the manufacturer, which typically begin two years before delivery amounting up to 30% of the price, and successively for the mid-term and the final payments. There are three key variables associated on obtaining the loan from a bank and consequently the most affordable interest rate. These are the loan amount (and the proportion with the self fund), the term (generally 12 years) and the credit rating of the airline (the better it is the lower interest is negotiable). According to a Boeing Capital Corporation research, during 2013 for financing the liner purchasing turning to investment bank loan and capital markets raising increased respectively from 21% to 28% and from 10% to 14% while airline's self fund was reduced from 7% to 5%.

It is clear that the key challenge for an airline, before placing a buy order to the manufacturer, will be to find financing at a competitive rate in an exceptionally tough economic environment (Ali & Hampson, 2013). With carriers revenue which has been reduced in the last five years and banks discouraged to grant credit because of the world economic crisis, a particularly intricate but efficacious mean to buy airplane, called enhanced equipment trust certificates, have experienced a remarkable growth. These securities need the airline to create a trust that, using aircraft as collateral, will collect the capital in the bond markets from small and institutional savers and consequently rent the liner to the airline. Once the repayment period ends the trust repays the investors of the initial capital plus interest earned and the carrier will become the complete and sole owner.

When a carrier management faces a company project that could involve the buying option, typically compared to a dry lease, the final decision is taken based on the total amounts of the cash flows. In general for an established airline a brand new airplanes, especially for a long-term project, is a preferable choice thus it have to pay the list price. Considering that a lessor normally tries to depreciate a liner in 12 years of continuative leasing it is easily understandable that if the sum of all the mortgage payments discounted at the time of the purchase is lower than the sum of the leasing instalments multiplied for the years of usage, the best decision is to buy the airplane. Set a deal for a long term dry lease that exceed an average of 12 years should be more expensive because, if for example the agreement is for 20 years, the airline is going to pay a total lease price much more higher than the initial buying price also with interest added. The leasing company itself merge in the instalments the price paid to the manufacturer, its cost of the capital raising plus a mark-up for its services. This mark-up is something that an airline can avoid if they have the possibility to buy the airplane and become the direct owner without letting a third company gain from the deal, with the exception of the interest paid anyway for capital fund. The decision-making process could go beyond taking into consideration that owning an airplane allows the carrier to sell it at the end of the predetermined period of use. Sell the aircraft as a second hand asset to a minor or third-world' carrier determine another advantage for the initial buy decision generating a future gain, despite the fact that aircraft are depreciating assets and that their future values are volatile and uncertain (Hallerstrom, 2010). For the major airlines, with huge fleet and a separated cargo division, owning airplanes can offer the opportunity to use them firstly for passenger and consequently convert them into freighters giving them a second life when they become obsolete for commercial service.

. Buying the aircraft can be cost effective for those airlines planning to use them for a sufficiently long time when the list price, paid in full or by mean of a loan charged of interest, is cheaper than the sum of a leasing instalments. The advantage of being the owner increase with the opportunity to sell them on the second hand market or convert them into freighter after the end of their passengers' flight utilization.