New user to the game- had a quick question in Otto.
I ended up buying a bunch of MD-88 on credit for payments of like 44,000 downpayment 440,000. the leasing/purchase costs seemed to be almost identical so I figured might as well own it....
On my cash flow screen, it shows that in a week from the buying date I owe another payment of 500,000+???
The book value on the aircraft range from 8M-12M so are the loans really paid back in 20 installments? What am I missing?
You are missing about 2.5% interest of the due amount, per week. Let's say you got an aircraft valued at 12 million and you still have 11 million to pay.
Your payment will be 300,000 weekly interest + principal repayment (I think principal repayment is spread over several years).
Ah I see. I think I made a big boo boo then haha. I "own" 11 planes and have to pay exorbitant compounding interest every week (didn't realize that). Not sure if I can recover. Better just restart or do you think I can get out of the hole? I'm making about 1M per day but owe 6M by Sunday.
I would say that loans would usually be a bad idea. Over time, you will pay less than leasing the plane in total with a loan and own the plane, for sure (after 5 years actually).
But when you compare this with the added flexibility enabled by leasing (change planes whenever needed, no surprises), and the fact that for the price of the rent you could lease at least twice the number of planes (which, in the beginning, is just essential)...
In the end, I would definitely reset and start again with leasing.
You'll have all the time you need to think about long-term plans when you have a strong, well-established airline with stable income.
I'll attempt to give you some basic pointers. Feel free to ask for clarification or more detailed information. Also if you can give us your server we may be able to better assist.
Leasing is nearly always the best way to obtain an aircraft. The primary reason is because it is the cheapest method. Purchasing an aircraft on credit will allow you to eventually own it outright, however the weekly cost is much higher than the lease rate. Overall not great for a starting company with $10mil.
As far as aircraft types are concerned: Used aircraft are often the best way to earn cash quickly but this also depends greatly on your business model and the size of the aircraft you want.
As a new company you can usually purchase leased, lightly used, Dash8 Q400 aircraft (depending on your server) but you need to find a good market for it. They are usually best for short haul routes.
If you are looking for something bigger/faster used 737 classics (300, 400, 500) are very cost effective and if they are available. There are many different types that are good so I wont list them all but those are a good place to start.
Also keep in mind that starting with long haul routes will be extremely difficult or impossible unless you are interlining with a very large company at your hub.
Excellent discussion lease/buy/credit