When you go to the aircraft market and buy an aircraft on credit, isn't the "installment" what the weekly loan payment will be? I won an auction of a B717, and the installment said something like 90k. Now when I go to my financial schedule, it's showing a loan payment of like 300k.
Credit buying is bad, especially for a new airline. They got this thing called interest.. which is a killer.
Lease is the way to go. No one ever buys on credit.
I have written something similar before but can't find it so please excuse if people have seen this before!
For this example I am going to use an aircraft on the market now...it's a 1 year old E195 in GATOW reg C-AFTM. The next bid information tells me if I bid;
- Base Price = 34,076,079 AS$
- Down Payment = 1,703,804 AS$
- Installment = 124,509 AS$
- Leasing Depot = 1,703,804 AS$
- Leasing Rate = 170,380 AS$
- Interest Rate = 1.75% (Changes airline to airline so check yours)
Here are my options...
CASH (see base price)
This is the easiest one to explain. You buy the aircraft out right there and then, for a princely sum of 34,076,079 AS$. There are no installments or leasing rates to pay as you own it 100%. When you own an aircraft 100% you may also lease it to others, or transfer it to non-listed subsidiaries. Technically this is the cheapest option in terms of long term ownership costs. However for that same 34,076,079 AS$ you could lease 20 of the same aircraft, increasing routes, frequencies and income. So cheaper on ownership cost...but in terms of making a successful airline...probably not (at the beginning anyway)
CREDIT (see Down Payment & Installment)
Now the most complicated. Credit is where you buy the aircraft using the banks money. You then have to pay the bank an installment and interest every week. Very rarely is this a good option to take. Let me explain with numbers. First you will have to make the one off down payment of 1,703,804 AS$. This is done when you place a bid/order the aircraft. Then your weekly costs will change and reduce weekly, you will pay the installment plus interest on the part of the aircraft you don't own yet. Because you own a little more every week this reduces weekly. Your interest is based on you interest rate which is different player to player, however mine, and for this example is 1.75%.
Week 1:
34,076,079 AS$ - 1,703,804 AS$ = 32,372,275 AS$ = Money stilled owed to bank
32,372,275 AS$ / 100 x 1.75 = 566,514 AS$ = Week 1 interest paid
566,514 AS$ + 124,509 AS$ = 691,023 AS$ = Total Paid at end of week 1
This does decrease like I said but with such a small installment this leaves you at...
Week 100 (almost 2 years down the line):
20,045,884 AS$ / 100 x 1.75 = 350,802 AS$ = Week 100 interest paid
350,802 AS$ + 124,509 AS$ = 475,311 AS$ Total Paid at end of week 100
The most expensive and complicated option. Yes by far. You cannot transfer, sell or lease this aircraft as you do not own it 100%. I suggest if you are a new player and have brought an aircraft this way then a restart is a good option.
LEASING (see leasing depot and rate)
Very simple. You do not own the aeroplane, you pay a deposit and then a weekly rental rate. So for example you pay your deposit of 1,703,804 AS$ at the beginning. Then every week 170,380 AS$ leasing rate. This is fixed. You cannot transfer or lease out the aircraft as you do not own it. However you can return it at anytime. When you cancel the lease you will have to wait until the leasing rate is due (once a week) before the aircraft is actually returned. Then you will receive the deposit back 1,703,804 AS$ - 170,380 AS$ the last weeks rent.
LONG TERM
Lets go back to the week 100 example the totals paid for the same aircraft all in at week 100 would be....
- CASH = 34,076,079 AS$
- CREDIT = 60,020,593 AS$
- LEASING = 18,741,804 AS$
Cash once again you own it, credit you still don't own 100%, leasing you don't own it. But I think the numbers speak for themselves. Leasing all the way
Hope that made sense and my maths isn't too far off!
Thanks
Ian
Cash once again you own it, credit you still don't own 100%, leasing you don't own it. But I think the numbers speak for themselves. Leasing all the way
How can the numbers speak for themselves, if you have three different situations after 100 weeks (like you said a sentence before)? You have to take the recovery value into account, otherwise your numbers are manipulated to support your slogan: "Leasing all the way".
I agree with you that leasing is the best solution for beginners without any experience, not because that's the cheapest method, but because it is the most flexible one. You can cancel the leasing at every time, and you have a clear statement about your costs. It is also the best method for short time usage of a plane. For long time usage and more experienced players it is better to do the maths on an individual base again. Cash may win, and even Credit is sometimes a suitable choice. Leasing all the way? No, thanks! ;)
Hi Helios,
The 3 different situations are outlined with the total cost after 100 weeks. It clearly shows that leasing is by far the cheapest as well as the most flexible way of taking an aircraft off the used aircraft market.
So lets talk long term and when certain methods become cheaper than the other. This is based on 1.75% interest rate and on the aircraft I used above. This should be the same for all aircraft as I imagine that all leasing/credit rates are the same % of the aircraft cash price. (1= Cheapest, 3 = Most Expensive)
WEEK 1 - WEEK 190
- Leasing
- Cash
- Credit
WEEK 190 - WEEK 623
- Cash
- Leasing
- Credit
WEEK 623 - Onwards
- Cash
- Credit
- Leasing
So in terms of long long term I would agree that Cash is clearly cheaper. However to make it pay you have to have the aircraft for 190 weeks (or 3 years and 34 weeks). I propose to you that almost 100% of airlines that are set up on AS will not last for whatever reason for 3 years and 34 weeks, let alone an airline keeping the same aircraft for that long.
Therefore for someone asking for help leasing is cheapest nearly 100% of the time for a player to bid for an aircraft off the used aircraft market.
Hope that makes sense!
Ian
Credit is a good option if you want to buy some planes and you have some upfront money.
Here is what i do:
I buy the aircraft on credit. I repay instantly approx 75% of the credit. Of course i can do that because i have money being an older company with good profits. Then the rest is payed on a weekly basis. This way the interest payed to the bank is not that big.
What i would like is to have an option to set the weekly payment myself (not to be automatically set). This way i could pay let's say 2.000.000 each week and have the credit payed sooner with less interest.
Of course this cannot be done by a new player.
Credit is a good option if you want to buy some planes and you have some upfront money.
Here is what i do:
I buy the aircraft on credit. I repay instantly approx 75% of the credit. Of course i can do that because i have money being an older company with good profits. Then the rest is payed on a weekly basis. This way the interest payed to the bank is not that big.
What i would like is to have an option to set the weekly payment myself (not to be automatically set). This way i could pay let's say 2.000.000 each week and have the credit payed sooner with less interest.
IMO if you can buy 75% of the aircraft you can just as well buy 100% of it.
It would still be MUCH cheaper in the end for you to lease the aircraft until the time have gathered 100% of the needed money to buy it.
One reason for this that is not immediately apparent is that the value of the aircraft will drop over time, but the value of your loan will not! AirlineSim does not have any inflation built in making credit/loans even worse then in reality ( disregarding the fact that you pay totally unreasonable weekly interest fees ).
CASH CREDIT LEASING
Heres the chart to support what I am saying. This is applicable to the used aircraft market as that is what the OP was interested in. If you purchase an aircraft from new with the airline contributing a higher % then the credit line will move down the chart. Cash will always be cheaper than credit. With a higher % by the airline then it is just a shorter time period between Leasing been cheaper than Credit
Thanks
Ian
Yes, maybe i could pay 100% but at a 787 the additional 25% is approx 30 million which i can use for something else.
If you use just pure mathematics then yes it would be cheaper in the end to lease it. But you forget something. After a certain number of weeks (which in case of credit partially repayed is less then the initial number of weeks) i have an aircraft for which i don't have to pay the leasing fee. So at the end of every week i have one leasing fee worth of extra money which i can use as i please. Not to mention that some of the routes operated by widebody aircraft are not profitable unless you own the plane.
The 3 different situations are outlined with the total cost after 100 weeks. It clearly shows that leasing is by far the cheapest (...) way of taking an aircraft off the used aircraft market.
Sorry, but this is not true, because you don't take the recovery value into account. The numbers you've shown are therefore not the total costs, but the total expenses. By just looking at the expenses a leasing model will always win within shorter periods, that's the whole sense of such a financial model (to reduce the initial costs clearly). If you want to present the total costs, you should take the recovery value into account. By doing that you will see that leasing isn't the cheapest way to get a plane even for shorter periods in terms of total costs over the whole period, just in terms of total expenses. And it is still the most flexible way, and therefore in my opinion the best choice for beginners, like I said before. For all others it depends on the market situation, the long term plans, and so on to determine what's the best way to go.
Sorry this is obviously something I've missed...can you explain to me recovery costs?
But you forget something. After a certain number of weeks (which in case of credit partially repayed is less then the initial number of weeks) i have an aircraft for which i don't have to pay the leasing fee. So at the end of every week i have one leasing fee worth of extra money which i can use as i please.
If you check post number 3 and any further posts I have not included the leasing fee in credit or cash as you do not pay that? At the end of every week if you have purchased the aircraft outright yes you can claim you have won on the leasing fee but it only evens out after 3 years if buy off used aircraft market. If you have brought on credit you have saved on leasing but you see on week 1 you have to pay at least 4x the money you saved on repayments and interest
I think by recovery costs he refers that you can sell the plane afterwards.
Sorry this is obviously something I've missed...can you explain to me recovery costs?
Without checking the details (so don’t nail me down on that), the depreciation period is 20 years and we have a linear depreciation in airlinesim, which means within 100 weeks the value of your demo plane decreased by 3,276,546 AS$, the recovery value 30,799,533 AS$. The total costs are therefore just 3,276,546 AS$ over 100 weeks, but of course you have high initial costs. And besides the theory, it is not that easy to find a buyer for a plane at that price. On the other hand, even if you sell it for just two-thirds of the recovery value you have total costs of 13,748,387 AS$ over 100 weeks, clearly less than the total costs for leasing over that period.
As I said before, leasing is more flexible and needs lower initial costs, that is good for beginners, it is good for expanding your business, for testing new route or for using peaks of the AGEX. But it is not cheaper at all. 
also keep in mind, that owning a plane allows you to borrow more money for a lower rate from the bank if you require it. so opportunity cost would need to be factored in, as well.
but I agree with all of you: lease IS the way to go for beginners!
So recovery cost is basically sell value? Ok I agree that is something that I have overlooked but then I'm not sure it would be safe to assume that you will be able to sell it at anything above 50% of its value to another player.
Even using the 13,748,387 figure it would only be profitable after 70 weeks which is still quite a long life time (although far less than 190!) for an airline in AS
We have no exact figures, and it is not really possible to make an assumption. Sometimes you need AS to buy it (which means 10%), sometimes it is possible to sell it above the market value. It depends on the type of plane and the market situation. But here we are talking not about practical issues, but about a theoretical comparison based on the plain numbers. And therefore we should use the full recovery value, otherwise the whole calculation renders pointless (because we are able to include more factors on a practical base).
Of course we do not have full and exact figures, and unless AS really want to share them with us we will never know. If we should use the full recovery value (best case scenario) we should on the same merit be able to use the AS buying method at 10% value which would be the worst case scenario.
In which case if we re visit the chart there should be an orange area rather than a line which is the unknown dependent on sale value.
I agree that cash purchase could only cost you the value of depreciation, however I believe the chances of that are minimal, therefore I would not base any business plan in real or virtual life on a minimal chance. I would have to take into account worst case scenario more than best case scenario
Well, the recovery value is fix, and that's what should count if you take a look at the theoretical numbers (like you did). The rest are practical scenarios, and if you want to include the best and worst case for the real market value, you can also include a lease-out situation. Of course, it is your chart and your choice. I just wanted to point out that you forgot the recovery value ;)
... sometimes it is possible to sell it above the market value. It depends on the type of plane and the market situation.
Hi,
I own a few hundred planes, and I sell them when they are around 3 years old. Next time I shall put my planes on the market at book value (price of a new plane minus depreciation). But I can already tell you now that none of these planes will find a buyer. And we're talking about popular planes like 73G's and 739's.
Tempelhof is a mature server, and I find a buyer if I put these planes up at 80% of their book value. But nobody has ever put a higher bid. And if you talk about less popular planes... I once offered a 3 year old 767 300ER for 48 million. That was less than half the book value. After three months I have taken the plane off the market. It still flies for my airline now ;-)
You can sell a plane above it's book value if the plane is fully depreciated. In other words, if the plane is 20 years old.
But I agree with Ian. You will make far more profit (10 to 15 times more) if you lease 20 planes than if you buy one plane. I would however advice everybody to buy planes... if they don't want to expand anymore and if they can pay the planes cash.
Enjoy the weekend,
Jan
PS
it would be practical if you actually could sell a plane at book value. At this moment you either ask 5% less or 5% more than the book value.