If I buy a new 737-700, and I finance it with the "cheap" 0,5% loan that AS offers, it will cost me 46,5 million plus 8 million intrest (assuming that I pay back capital and intrest over 50 weeks). I have taken into account that I pay less intrest as I pay back more capital each week.
After 50 weeks the plane has cost me 54,5 million, and I end up with a 4 year old plane that is worth 40,2 million. That means the actual cost is 14,3 million, or 286.500 dollar per week. If I lease the same plane, the weekly cost is 232.500 dollar per week. And… I can at any time replace it with a brandnew plane for the price of the seats.
In other words, buying and owning a plane is 15% more expensive than leasing a plane. It should be the other way around.
You have to think about you are not beatable… e.g. I have a Boeing 737-700 HGW (winglets) which flies a 2,000km turn with 56% margin on 100% prices and same route a Boeing 737-800 HGW (winglets) which is leased just does 29%. If someone wanna beat me with a leased plane what should he take? A Boeing 737-700 BGW? This plane can also don’t resist my bought 73W. A Dash 8-Q400A (most profitable plane in whole game) can’t beat the 73W when it’s bought, too… You shouldn’t lose the view on a business which has future. I had once around 280M AS$ earnings but 100M AS$ were just leasing costs! With bought planes it would be maybe 5M AS$… all costs which you don’t have with leased planes…
The flight information page of your owned 737-700 gives you a profit margin of 56%, but it does not include the money you paid cash for that plane, or how much you pay back for the loan every week.
The flight information page of your leased 737-800 gives you a profit margin of only 29%, but it shows all the costs of the plane. If the leasing cost was not included, the profit margin would also be much higher.
Truth is that a bought plane is only cheaper to operate than a leased plane if you pay cash. And even then the difference is small. But if you have to take a loan, leasing is cheaper than buying. That’s putting the world upside down. So either you run an airline with 400 planes, and you have started buying new planes because there is no more room for further growth. Or you run a small airline and you are paying through the nose for your loan.
In reality, airlines lease if they can’t afford to buy. Or if they need planes for peak seasons. But if they can finance/buy (I don’t know if many airlines are rich enough to pay cash) they will buy their planes. And buying will be cheaper than leasing.
I just did those calculations, comparing a leased 737-900ER BGW to a bought on (with full sum as a loan). This is what I end up with at 0.8% interest:
Interest payment: 12.6 million AS$
Leasing payment over the same period (50 weeks): 15.5 million.
Note that a leased plane isn’t your property yet after that time, whereas your bought plane will be. Also, you can pay back the loans at any time (cutting down on interest payment), while you’ll always be stuck with your leasing rate (which doesn’t adjust for age as long as your contract remains active, as far as I know). You could, of course, invest in the plane by buying it, but it’s only really profitable to do this before the 39th week (at least, at 0.8% interest. The lower the interest, the sooner you hit break-even), since after that, the interest payments from the loan bought plane would be lower than the leasing rate (meaning you would have paid more leasing than you would have for interest).
That being the case, the general conclusion is probably still that leasing is the way to go, unless you have mountains of money that you don’t know what to do with. Also, you could consider taking the loans anyway and just lease more aircraft instead of buying a single plane. It’d get you more profit that you can then use to pay back the loans (or invest in even more aircraft).
In the end, leasing will always be the better option, because of both its flexibility and its lower strain on your finances.
if you go straight to the manufacturer to buy a plane, you get a better intrest rate. But following your example, I just went to the bank for a loan and put an intrest rate of 0.8% in my spreadsheet.
Leasing payment over 50 weeks is indeed 15,5 million.
The intrest you pay is indeed 12.6 million, assuming you pay back 1/50 of the capital every week.
At the end of week one, you owe AS 62 million and thus you pay 0.8% on 62.000.000 dollar, or 496.000 dollar.
At the end of week two, you owe AS 62 million minus 1,24 million and thus you pay 0.8% on 60.760.000 dollar, or 486.080 dollar.
At the end of week fifty, you owe AS 1.24 million and thus you pay 0.8% on that last bit of capital, or 9.920 dollar
The above is only the intrest. You also have to pay back the capital. If you buy a 737-900, you pay 62 million plus the intrest as explained above. But by the time the plane is actually paid for, it’s value has dropped from 62 million to 52 million.
You lease a 737-900 for 50 weeks and return it to AS. It has cost you 15.5 million, or 310.000 dollar per week.
You buy a 737-900, use it for 50 weeks and then sell it back to AS. It has cost you 22.6 million, or 453.158 dollar per week.
Well… as long as buying remains 50% more expensive than leasing, I totally agree with you
That makes it only worse, Tim.
As Chillhunter and you pointed out, if you use that 62 million to lease 20 planes instead of buying just one… you will make more profit. A lot more. Conclusion: the economic model is… euh… not yet 100% realistic. Lowering intrest rates or offering a reduction on new planes may be an incentive for airlines to buy more planes.
There still is room for improvements on the balance of some costs, I agree.
Still, buying planes can be a winning strategy, p.e. when looking at MD80s, F100s or older 737s. These planes still come with a good rating regarding passenger prestige and provide a viable strategy for an airline based primarily on BUYING, not leasing planes. Moreover, bought planes also push your credit limit.
FENCC: No offense intended, but: Some of your statements are a bit silly. ATM, the Q400 is a very profitable plane for short-haul flights with limited demand but still cannot beat any CR7/9 for routes >1000km, nor a B737 for routes of this distance or greater. If you only focus on the displayed margin, you’d better not go for any job in management or economics . The CRJ might have higher costs for the same flight, but will be able to rotate once more per day, making it a superior choice in many situations. And there are other planes out there also doing a great job…
The biggest problem is that leasing in AS isn’t portrayed realistically. Companies don’t get leasing contracts indefinitely, they’re always for a set time (though, if you look at KLM, they’re likely long term contracts, dealing with 5 or maybe even 10 years of service). This influences the rate you pay, but also your obligations towards the future. You can’t just cancel the contract without paying a hefty fine for it. This isn’t in place here. As things stand, the problem isn’t with interest being too high, but with leasing being too low for the timespan we’re talking about here. The leasing rates we pay in the game would probably more appropriate for contracts of a far longer duration. The shorter the contract, the higher the fee for the airline. Hopefully we’re going to get something like that in the game eventually.
If leasing would become a bit more expensive, airlines would probably grow slower. That may frustrate us a bit. But it would make the game more realistic. After all, how many real airlines operate a fleet of 100 or more planes, all of which are leased ?
On the other hand… a new server would not be saturated after 6 months.
And @ Plotz:
you are right, and the Q400 has another drawback: it is difficult to compete with narrow body jets. But it’s an excellent plane for short haul and domestic flights.