It’s more about the principle than real-world accounting standards. Just as “leasing” isn’t “leasing”, the IFRS probably knows all kinds of “assets”. As said before: AS is about plausible models. So I want to get the terminology right and the basic working principles (so it could in theory be used as an entry-level educational tool), but not a 1:1 simulation of reality that takes every single legal subtlety into account. But this small feature we’re discussing here shows how hard this can be…
I’m very excited that you are looking at this issue. And, thank you for consulting the community on it.
I strongly support your general approach. The current system is not at all realistic; bringing it closer to realism should be the goal.
A few thoughts. First, I don’t think there should be a huge difference between credit financing, leasing and renting, from a systemic point of view. The weekly payment for the finance, lease or rent all depend on basically the same components:
- the vendor’s risk-weighted cost of capital (i.e. the purchase price of the airframe, the current interest rate, and a profit-margin that is adjusted based on the credit rating of the airline)
- if the airline has not committed to purchasing the airframe (i.e. leasing or renting), the depreciation in value of the airframe over the term of the contract, OR
- if the airline has committed to purchasing the airframe (i.e. financing), the capital repayments over the term of the contract
- if the airline has not committed to purchasing the airframe (i.e. leasing or renting), the anticipated cost to the vendor of re-marketing the aircraft at the end of the lease or rental period (since it could end up parked for a few months)
- the size of the deposit
- the size of the balloon payment, and
- the penalties for breaching the contract early.
Short-term rentals exist in real life, so I think it would be good to try to reflect them in AS. Including re-marketing expenses amortised over the (short) rental term would make shorter rental and lease terms more expensive, which is also realistic.
Second, I think you will need to consider a few ‘unrealistic’ tweaks, to reflect the fact that AS is not a perfect real-life simulation. In the real world, airlines genuinely plan to lease airframes for 12+ years, and to fly them for 20+ years. Players on long-term AS servers might plan that far ahead (but I doubt it, especially since AS’s profit margins are 4x those in real life). Players on short-term servers definitely will not plan that far ahead, because there is no reason for them to. Smart players could game that system, by signing 10, 20 or 30 year leases (at low costs) when they will clearly never play for that long.
As such, you may want to cap the length of contracts at (for example) 3 years. But, if you cap the length of finance contracts (which involve repaying the capital cost of an aircraft over the duration of the contract), you may also need to increase the depreciation rate by a commensurate amount. Otherwise, finance contracts will be far more expensive than leases.
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Finally got around to do some number crunching. You can find the read-only sheet here (but feel free to make your own copy to play around with), the relevant sheet is the “Harmonized Models” one:
Assumptions and AirlineSim specifics
- All this is based on the weird relationship of real time to game time in AS (everything in practice works on a weekly basis but the parameters are based on years)
- The goal is to achieve an initial improvement with minimal changes to existing code/systems/practices, so leasing and credit financing work (more or less) exactly the same way they do today, but the underlying formulas are different.
- The model assumes the purchase of a new aircraft with respective depreciations. Need to look into the best parameters for the purchase of used aircraft.
- To keep things simple, I assume that the leasing rate is simply the annuity the lessor would have to pay to finance the aircraft (without a down payment) + the weekly depreciation of the aircraft (because the lessor is and possibly remains the owner of the aircraft) + an arbitrary profit margin (covering anything from risk over re-marketing costs to…well…profit).
- Since leasing in AS is essentially a renting-model, the down payment for a leasing contract is actually a deposit refunded after the contract ends. I’ve ignored any imputed capital costs for that in my model.
Parameters
- Periods: This is more or less the key parameter, because it determines how big the weekly installments both for leasing and financing will be. Currently a leasing rate in AS is 0.5% of the aircraft value, which one could interpret as 200 periods. The current loan contracts use 260 periods for repayment. The latter actually leads to leasing rates in the general ballpark of the current model. Anything considerably lower than 200 periods would increase the overall leasing rates quite a bit.
- Interest rate: One of the less logical parameters, the interest rate in AS is based on the prime interest rate which in turn is computed based on the global weekly success of all airlines. In my model I treat it as an annual interest rate, though. All in all, this seems to work rather well if one of the goals is to not throw everything we have overboard and introduce a completely new pricing scheme for aircraft financing. You can plug in values anywhere between 1 and 25% and IMO, the resulting values look pretty feasible.
- Depreciation to Zero: Another years-based parameter I took this straight out of AS as it currently works. I wouldn’t touch it for now.
- Lessor Profit Margin: Could be anything, really. In my opinion, it should be something > 0%, though.
- Down Payment %: 5% is what is currently used on the aircraft market. When buying new aircraft it actually starts at 10% and can go up to 90%. Need to look into what makes sense here.
Assuming we leave everything else untouched, leasing contracts would just run forever with the option of purchasing the aircraft at some point at its book value (change of those terms are a different story). All in all, this is a very simple and risk-free model that players know and love.
Credit financing would also stay pretty much the same except for the hugely different way repayment and interest are computed and paid. We need to think about what that means for early redemption. I also think that payments for loan contracts should be able to drive you into the reds as they do now, meaning they carry a higher risk for a lower price (compared to leasing).
May I suggest reducing the depreciation from 24 years to maybe 10 or 12 ? It really makes no sense to depreciate over 24 years of real life on our accelerated scheme.
It’s like you picked the only think in my post which I explicitly suggested to leave untouched and recommended to change it, while not commenting on anything else. Trolling or really your only concern with my proposal? 
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I know you wrote you would not touch that now. But I still think it’s worth to voice opinion that 24 years is way too long for depreciation. And yes I read the full post and reviewed the Excel sheet. Everything in there is done on 260 periods and it looks really odd to have 1200+ periods for depreciation, if after 5 years loan is paid off. And no, I am not trolling.
This is kind of related to this:
None of this makes any real sense. It’s just that we have certain price levels that everyone’s used to and changing these without adjusting (or at least checking) everything else can result in big disturbances, especially in existing game worlds.
I am not much of a fan of the 260 periods either as they are a classic “magical number” that someone more than a decade ago came up with (probably me) for no other reason than “meh, looks about right”.
That said: I plugged in 12 years and even 5 years for fun and the values don’t change as much as my gut would have made me assume. So I guess we could make it a game world-specific parameter (as we could make all of these, really…would probably make for some nice variations between game worlds if financing an aircraft suddenly cost 5 times as much ;)) because I’m worried what would happen on existing game worlds if that parameter changed (I generally don’t trust my code).
Martin, I think your general approach looks good. Based on the slreadsheet and yiur explanation, you have clearly decided to take a simpler, less revolutionary approach - make the current sytem work, rather than building a new system with more complex variables. That seems fair to me.
A few technical notes:
- the financing formula double-counts the interest costs: column J sums columns H and I, but both of those columns already include the interest costs in column E. That seems wrong to me?
- it took me a minute, but I understand why leasing includes a profit margin but finance does not - the lessor has to make a profit above their borrowing costs for leasing, but the bank’s profit is built into the interest rate they charge airlines to finance a plane. But…
- will leasing and financing both use the Prime interest rate, or will one or both of them use the risk-adjusted rate depending in the credit rating of the airline? It seems to me that risk needs to be built into both models somewhere - and that the simplest way to do that would be to have both formulas use the risk-adjusted rate.
On a related note, would you consider updating the formulas for airlines’ credit ratings? At the moment, almost everyone gets AAA, which is unrealistic, and removes some strategic depth from the game. It pushes people to simply focus on growing their airline as fast as possible, rather than building its financial health.
I can see a link between your planned fixes to finance, and the credit ratings - at the moment, we get AAA ratings for equity and asset ratios, even when our airlines are very thinly capitalised. Most airlines have their $10m starting equity plus 5% lease deposits, which is really very little equity. Tightening up those equity criteria would create an incentive for players to finance aircraft, to boost their equity over time.
Yes, for now and as a first step. We can always expand on that later.
Yes, indeed. Fixed it!
Yes, essentially we could use the customer-specific interest rate (the prime rate for secured loans adjusted by the customer’s rating) as the profit margin, but the lessor’s interest rate for the basis of the financing component. Although the latter only makes partial sense…it’s an imputed component in my formula and in practice, most players won’t calculate that way. On the other hand, players currently have no influence on the leasing rate either, so that should be fine. For AS-provided leasing we can of course use the prime rate directly.
Probably something for a separate topic and a later patch 
I think it’s not so good that this conversation is only in English. Gamers who can only speak German are outstretched. It’s probably just paying trolls, whats is a problem.
Google translated the incoming post quite strangely, as an example “You should ask the plane”
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Ok, but then let’s please also start a seperate discussion in Spanish, French, Chinese, … (you get where I am going - these are at least ICAO languages as opposed to Germany). I think there are not many other branches where English is so commonly and widely used like aviation.
It’s almost ludicrous to request a discussion in an International board to be held in German just because of ones own educational shortcomings.
I am a German myself btw…
And let’ leave it at that. Any further comment concerning the language this topic is discussed in will be deleted.
Martin, best you stomp all the old game world, because you’re rid of this annoying problem!
At least, since there are exclusions, are the findings summarized in a German-written blog with meaningful sentence formations? And I do not mean an English blog, which then again, thanks google, must be translated and then no longer makes sense?
If any new financing parameters will be developed you will read about it. For sure in German.
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In my view, the credit financing is broken because it’s too expensive. Not sure how the installment is calculated (because I only lease), but in AS, it says “weekly” rate is X.XX%. Just wanted to remind you that, in the real world of finance, no matter how frequent the payment is charged, the rate X.XX% is annualized, i.e. the weekly rate should be used as X.XX%/52. To fix the credit financing, we need to first make sure the calculation is correct.
The borrower should also be able to choose the tenor of the loan, e.g. 5yr, 7yr, 10yr, 30yr, etc., and can choose bullet loan or amortized loan.
On the leasing side, currently the system is obviously a perpetual leasing, which can also be considered as a 5% downpayment perpetual credit financing, and weekly payment is 0.5% of book value. If we treat perpetual term as 30yr and no residual value, we can easily get the effective weekly rate as 0.53% (27.56% annualized), which is already expensive as crazy as your credit card APR… However, if a player liquidate his/her holding after 5-year of playing, the effective rate to this player is 0.25% weekly (13.2% annualized) (for the lessor, its investment return is calculated differently because of the aircraft residual value). Now you should understand why everyone is leasing.
If AS developers don’t have much finance knowledge in amortized loan, you can simply use the PMT function in Excel. Please play with it and you should be able to make the credit financing correct.
BTW, I’m guessing that the current credit financing is bullet loan, which I think is perfectly fine even though it may not be a common way in reality. As long as you make the interest rate correct, it can be quickly fixed.
Have you see this post of mine above: Aircraft Financing: Fixing leasing and credit financing
It links to a spreadsheet outlining what I have in mind for the future + the underlying assumptions specific to AS.
The spreasheet looks good in general, a very good direction. Some thoughts:
- Interest rate at 1.5% is too low
- Offer different loan tenors, e.g. 1yr, 5yr, 10yr. And the longer tenor, the higher interest rate, the longer tenor should pay more interests, but longer tenor loans should have lower weekly payment.
- Leasing should be better for short-term operation, while purchasing is better for long-term profitability.
- Tweak other things to make sure not to go from one extreme to the other extreme. May need to set up additional rules such as upper limit of borrowing (as a function of total equity)