We just released the first maintenance patch of the year and we are already preparing the next one: Maintenance patch 2019-02 will focus mostly on changes and improvements affecting the aircraft market, including long-requested “safety features” to keep people from accidentally stepping into the “credit financing trap”.
This got me thinking, though: Obviously, the way loans work at the moment isn’t very realistic, doesn’t add much to the game and is even dangerous (see above), especially to new players. Those safety features are essentially treating symptoms of an underlying problem: Credit financing has been broken since it has been put into the game literally ages ago.
For the past few years, my design goal for AS has been to strive for a realistic simulation, especially in terms of nomenclature and mechanics, while making sure that new and updated features actually add tangible game play benefits and don’t just exist for window dressing. Hence, let’s start with analyzing how leasing and credit financing typically work in reality and what their differences are (In rough terms! Reality is a lot more complex, as always-):
Disclaimer: The term “leasing” can have various different meanings in English, including that of what we call a “credit financing” here. What we call “leasing” in AS would probably be called an “operating lease” in American English.
- Both are ways so finance an aircraft, while leasing in AS currently is more akin to renting one.
- In both cases, it’s typically a bank or a bank-like institution that provides the financing, not another airline (while such models do of course exist, like wet-leasing, )
- With credit financing, the aircraft becomes the property of the airline and the airline has to bear amortization while also paying interest and redemption on the corresponding loan. With leasing, the bank/lessor owns the aircraft and the airline pays a combined rate that only shows up on the income statement, not on the balance sheet.
- In both cases there’s typically a down payment, a set amount of installments and a final payment. After the latter, the aircraft typically becomes the full property of the airline and the leasing/loan contract terminates.
- In case of leasing, there might be the option to not pay the final payment and return the aircraft to the lessor or renewing the lease instead.
- Loan payments typically are annuities, so the rate stays the same each period but the ratio of repayment to interest changes over time, with the latter initially making up the majority of the rate.
- The lessor will of course have to finance the asset somehow as well and they will pass on the respective costs to the lessee, meaning that leasing rates are just as affected by general interest rates as loans are.
- In either case, cancelling the contract early is either impossible or involves penalties/the loss of the aircraft.
- Oftentimes leasing companies will buy aircraft in bulk and/or without having a customer for them yet to get better rates from the manufacturer.
With this simplified model, we can immediately spot some major differences compared to how AirlineSim handles this:
- The two weeks a leasing contract is binding in AS make no sense. The amount of installments must depend on the general financing terms.
- The very simple formula by which leasing rates are currently computed puts them completely out of touch with actual financing costs.
- The way loans work in AS (at least for financing a concrete asset like an aircraft) is bonkers. It should really be annuities instead of “constant repayment + interest on the full outstanding loan”.
- The option to buy an aircraft when the lease ends is something that should be part of the contract to begin with and that should happen (semi-)automatically.
- I am unsure about how realistic it is for AS airline to be able to provide classical leasing at all or whether airlines should just be able to sell an aircraft but a “bank” provides the financing (if any) to the customer.
Consequently, there are several possible changes that I would like to discuss:
- Harmonize leasing and financing costs by taking into account interest rates and amortization for the involved parties and calculating constant installments based on that.
- Move to proper contracts. All parameters of a contract should be set at the beginning and they should be interdependent:
- Down payment
- Amount of installments
- Final payment (if any)
- Size of installments (depends on the three parameters above)
- Leasing: Option to return or purchase equipment or to renew the lease at the end of the contract. Also which one of these is available and/or whether the lessee can pick them over the course of the contract duration and which one is the default.
- No premature cancellation of contracts at all (because penalties hold huge cheating potential on their own as long as they are paid by one contractual party to another and both are players).
- On the aircraft market, players can choose their desired contractual terms and possibly different financing providers (we could introduce “state-run banks” that support new players with cheap financing or similar) and terms would provide to any aircraft they purchase.
- Loan-financed aircraft offer the owner more flexibility (thinking of future conversion features, for example) and are probably a bit cheaper, but they come with the higher risk and accounting downsides.
Open question: How to deal with player-provided leasing in general? Leasing out an aircraft (if we stick to “leasing” meaning “financing”, not “renting”) is actually two separate transactions: Selling the aircraft (albeit “in pieces” and over a long period of time) and providing the financing for said aircraft. In principle, both transactions allow the provider to generate profits (by selling the aircraft at a price higher than its currently book value and by charging a higher-than-market interest rate). I am wondering whether we should still allow this at all or whether we should introduce a new kind of contract (renting) for inter-airline leases. Or whether to still allow leasing between airlines but with minimal influence on the contractual parameters (no variable financing terms) similar to how it is done today.
All in all, these “more realistic” contracts would make aircraft financing a lot more dependable for players while risks and opportunities would be nicely factored into the contractual terms.
What do you think? My gut tells me that it would make sense to approach this topic before putting bandaids on the aircraft market (some will still be required, but maybe not as many).