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.