Lease or buy? That is the question!

PhD in Economics, Sylvain Bourjade is professor of Corporate Finance at Toulouse Business School. His current research focuses on the impact of leasing on the profitability of airlines. A work that has given rise to a new option that will benefit the students of Aerospace MBA in April 2017.

“Fifty years ago leasing did not exist in the field of air transport. Twenty years ago, it represented 20% of the market. Today the two biggest global manufacturers, Airbus and Boeing, estimate that lease sales are close to 50%,” Sylvain Bourjade says. The professor’s article on the determinants of economic performance in air transport has just been published in a top-tier academic international journal Transportation Research PART A, under the title « Leasing and profitability: Empirical evidence from the airline industry ». Sylvain Bourjade and his co-authors Régis Huc and Catherine Müller-Vibes studied the impact of leasing on the performance of airlines, based on data collected since 1996 from 73 airlines around the world.

Determining the optimal level of leasing

Does the leasing of aircraft promote the performance of airlines? “Yes and no,” Sylvain Bourjade answers. “The question needs to be rephrased. It was long thought that the performance of a company was proportional to the lease level of its fleet. We prove here that there is an optimal level of leasing beyond which profitability is reduced. The performance curve is concave, forming an inverted U”. An additional difficulty: this optimum level varies according to the types of airlines, their business model, their experience, their location and the composition of their fleets. EasyJet has a fleet composed of 35% leased aircraft and achieved a profit level of around 15%; Ryanair, with 12% leased aircraft has a profitability rate of 32% and Vueling’s profitability is estimated at 6% and owns only 1% of its fleet!

“We estimate in our article that more than half of the airlines could increase their profitability by approaching the optimal rate of lease. Moreover, among the top 10 most profitable airlines are the LAN Airlines whose lease rate reaches 40%, but also Air Arabia, which leases 90% of its fleet.”

A new field of application for aeronautic professionals

The leasing business has known unprecedented growth over the last 20 years and is fundamentally changing the landscape of air transport. This is why the module designed by the professor aims at both understanding the history of the leasing industry and the different forms it takes today. “Intuitively we understand that leasing allows flexibility but at the same time is costly”, Sylvain Bourjade notes. “However we must go further and examine all aspects from financing to maintenance”. When and why did this activity come about? How are lessors structured? What is the impact of the emergence of Chinese lessors? How do companies finance their fleet? The many questions arising are proportional to the expertise that will be acquired by Aerospace MBA students. Added value guaranteed.

Sylvain Bourjade has entrusted the running of the Asset Management option to two specialists of air transport, Regis Huc and Mathieu Gaillard. The first co-author of recently published article worked for a number of years within the consultancy firm McKinsey; the second, a TBS graduate (and former student of Professor Bourjade) is employed with GE Capital Aviation Services (GECAS), a world leader in aircraft leasing.

The option will take place on the 13th and 14th of April, 2017, alternating between theoretical modules and real case studies and scenarios.

Join the discussion 4 Comments

  • says:

    Hi Sylvian,

    It is an interesting article but I am not sure how you are evaluating some critical variables when you are deciding between lease or purchase a fleet:

    – Profitability: To start, profitability is a strategic decision for an airline, what I mean with this is that for a specific period an air carrier could choose to sacrify profitability in order to increase market share or expand operations to other regions. In cases like these the desicion of lease or purchase will have a limited efect in the profitability.

    – Market conditions:

    There are some market conditions that affect dramatically the decision between purchase or lease. For example, the current oil prices has become a burden for lessor who purchased too many A320NEO or 737Max, and as a result, the lease rates of these models are going down. Besides that, you can see the cheap cost of financing aircraft for the big banks/lessors (specially Chinese/Japonese) which also is affecting the market. On the widebody side, there are many problems with engines OEMs and remarkability of this type of aircraft is really hard, again dropping the prices.
    Besides that, with the Export credit agency (ECA) frozen for the moment, the financial cost of a purchase order could be more expensive.

    – Size of the airline:

    In the old days for an airline with less than 1 Billion dollars of revenue per year was imposible to get a good deal in a purchase order with Boeing or Airbus. I believe that has changed over the last 10 years and now it is realistic to say that with 300 Millions dollars of revenue per year, an airline is in a good position to negotiate (at leasy fair enough). Notwithstanding that, an airline wth that level of revenue is not that big, and the Pre Delivery Payment (PDP) could prove to be a huge challenge.
    PDP payments could force the airline to chose between other investments or needs instead of the fleet. For example, if an airline has to choose between putting a Purchase Order or begin operations in other country, then the airline will have to choose where to put their CAPEX. In the case of the fleet there are alternatives, but in the case of expanding operations you need the CAPEX.

    By the way, LATAM airlines has not been profitable since 2012 (I am still waiting for 2016 results).

    – Changes in IFRS: The new regulation will have a huge impact for airlines as they will have to include in their balance sheet the leased fleet. Also will affect the Sale and Lease Back (SLB) deals for lessors as airlines will have to split the profit of that transactions 50% during the event and 50% over the period of the lease.

    It will be interesting to see your opinion regarding these variables, that are affecting the market and the desicion making process.

    Best regards
    Bruno Mundaca

    • Emilie Pereira says:

      Dear Bruno,
      Thank you for your comments.
      This post is based on our article published in Transportation Research Part A and most of the answers to your comments can be found in the full version of the analysis:
      Concerning profitability, the properties of our sample are robust to these airlines’ strategies. As you may see in the full version, we control for many macroeconomic variables which capture the evolution of market conditions. As a measure of profitability we use profitability margin that allows us to remove the airlines’ size effects. Finally, we discuss the impact of changes in IFRS regulation in the paper.
      Best wishes
      Catherine, Régis and Sylvain

  • Jeremy Keedwell says:

    Dear all, nice paper that I would like to read further but the link requires an account or access. As an aerospace mba alumni (like Bruno, hello my friend, hope you are well) can we get access ? Thanks, Jeremy

  • […] in the Finance, Economics and Econometrics research lab, will give a presentation entitled “Lease or buy? That is the question!” examining the impact of leasing strategies on the profitability of […]

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