There are many reasons that an airline would like to carry out a sale and lease back of its

aircraft, engines and at times other equipment as well. One of these main reasons are due to its

financial health. Usually when an airline is not doing well financially, it would need to improve

its financial health and take some of the burden off by improving its balance sheet and cash flow

statement. The sale and lease back of aircraft, engines and equipment are a great way to do this.

For the airline in the said case study, they have been going through significant losses in the

recent years and are severely in debt. This has resulted in them having bad credit and not being

creditworthy, which will deter investors and lenders, as well as any potential business partners.

It seems their primary purpose of looking at the sale and lease back of these three aircraft and

two spare engines is because of the huge immediate capital infusion it would have, this will

strengthen their financial position and enable them to have more cash. $15 million would have a

significant impact on an airline’s books if it is struggling for continuous years and needed rescue.

Also, it would be beneficial for the airline to get rid of the burden of depreciating assets and

instead worry about a small monthly lease payment to be made, that too for a short term of 12

months. The airline has been doing many sale and lease backs of aircraft in the 18 months

leading up to this, so they would definitely be comfortable with the process, and they would have

seen the immediate benefit to the balance sheet. Given that the airline is looking to lease the

three aircraft for only 12 months and has done several sale and lease backs in the past year and a

half, it may seem like a strategy for the airline to down size and get rid of excess capacity in the

next couple of years as well.

The Boeing 757-200 might also be too big an aircraft to operate if they are looking to downsize

and may not fit their operating model anymore. What we do know is that the Boeing 757-200 is

more expensive to operate than most other narrow body aircraft, especially with a low fuel

efficiency and high CASK (Kelly, 2017). This will in turn result in the airline having a tough

time getting rid of the aircraft and engines in the secondary market. Another factor which would

contribute to the airline being eager to sell and lease back the aircraft and engines as soon as

possible, is because they know that back to birth traceability is very poor for these three aircraft,

and one of the spare engines is not serviceable either. These factors add to why the airline would

definitely want to find a buyer for these aircraft, engines and equipment as soon as possible, and

if they are lucky get a substantial cash amount from the sale of these. The residual value risk is

essentially taken away from the airline.

The lessor is also giving the airline options for the future, it provides the airline with a “breathing

space” and an opportunity to regroup, reassess and decide whether it would like to extend the

lease of the aircraft beyond the 12 months, in which case the surcharge penalty on the monthly

lease payments would not be applicable anymore. All of these will improve the airline’s financial

flexibility by improving the liquidation position and balance sheet, whilst keeping a low capital

expense. Due to the increased competition, especially in Europe where LCCs are growing

rapidly, it is best to have as much liquidity as possible. Operationally too there will be increased

flexibility, with quick delivery times, where the airline can respond to short and medium

fluctuations in demand, new aircraft technology and market segments without having to make

large scale capital investments (The advantages of sale and leaseback , 2019) . The airline will be

able to continue using the aircraft and engines while freeing up the cash that was tied up.
 In leasing and in borrowing to buy, the airline will not want to spend a large upfront

capital, hence it will look to operate the asset while making installment payments that are usually

monthly. Some leases can be classified the same way as an asset purchase. In a financial lease

agreement, the airline (lessee) is paying off a certain amount (lease payment) every month to a

lessor, and at the end of the lease period will have ownership of the asset. The airline could also

purchase the asset upfront by borrowing the capital from a bank in the form of a bank loan and

be repaying it through monthly repayments. In both borrowing to buy and finance leases, the

accounting treatment remains the same, the lease payments and loan payments are shown in the

balance sheet and income statements. Also, for both these scenarios the benefits of ownership,

depreciation deductions, belong to the lessee (airline) (Raghavan, 2019).

There are also leases named operating leases. In this case the operating lease and the borrowing-

to-buy option are different since in an operating lease the ownership of the asset will remain with

the lessor even after the lease is over, while in a borrowing to buy scenario the ownership will lie

with the airline and monthly repayments to the loan will be been made to the bank. In the event

of the repayments not being made, the bank could repossess the asset. In the case of an operating

lease, the benefits of ownership, depreciation deductions, lie with the lessor. Currently due to

IFRS 16 the operating leases too are being treated like finance leases where they have to be

shown in the airline’s balance sheet and income statement if the lease is for more than 12 months

(Raghavan, 2019). Leasing also usually has more flexible terms than borrowing to buy an asset.

References
Kelly, D. C. (2017). ENG Capital LLC. Charlottesville, Virginia, United States of America.
Raghavan, S. (2019). Commercial Aircraft Leasing Industry Overview. Daytona Beach, Florida, United
States of America.

The advantages of sale and leaseback . (2019, December). Retrieved from XL Business Finance:
http://www.xlbusinessfinance.co.uk/advantages-of-sale-and-leaseback.htm