Sunday, December 1, 2013

Leases and Wet Leases and Other Boring Stuff

In Financial matters we were directed to the lease opinions that would effect both balance sheets and and operational financials or Revenue to EB IT processes. These slight but important adjustments are seen as mechanism to avert capital risk or benefit the cash models used to extend a company's value. The first part of leasing is knowing what current revenue streams and costs of operations affect the bottom line. A company identifies the two cash streams towards its growth as a viable company.

Part I is ownership of your primary revenue asset.. Buying the 787 was very expensive for Air India, a cash flow deprived Airline in need of assets for making them more money when digging it out of debt. Air India bought 27, 787's from now into the future. The Cash account is infused with borrowed money. The Asset to Liability balance expands in symmetrically fashion as the fleet receivers more 787. Air India in not a bottomless pit of financing and credit. As interest expense expands so does the ability for retiring debt as a constant stream of cash is parsed off to either debt interest or the reduction if principal. The next airplane comes from Boeing next month and whoa, another hit to financial credit card, and the interest or principal payment plan expands. Air India is all so aware of this is going to sell some of its Boeing 787 off the books and replace it with a lease on that same airplane. The leasing company takes on the asset as a risk in return for an income stream through its lease payment. Air India doesn't loose the asset and continue flying it in its revenue stream as always. The cash flow for Air India is given a reprieve through lower expenditures servicing a leased airplane, over servicing a purchased airplane.

A few of the benefits for Lessor vs the Lessee

Lessor.                                                      Lessee (Air India)

End lease ownership of asset             New accounting advantage from an asset
Valuation loss applied to Lessee        Greater Expense controls affecting bottom line
A financial/Revenue mechanism       Full Maximum Use of an asset Value
Opportunity to sell at end lease         Opportunity to buy a replacement Lease end

These few points really shake up the Balance Sheet and or Income Statement allowing fleet expansion to continue to its full objective of filling the market with 27 787's and meeting its goals. The 787 is hoped to resuscitates Air India. They are quietly tweaking its inventory through leasing or buying. There are so many more implications at this point, like expanding your status for future purchasing or leasing returning value from a revenue source as the 787 with less up front cash. The 7 units leased 787 or conversions from a buy program, opens up Air Iindia for more acquisitions of 787. Seven are moved in a different spot in accounting match the value flow of the aircraft with the expense flow and not  weighing down its financial picture as a steep burden it could never recover from in the cash flow department.

Wet Leases:

I own an airplane and a operational staff to fly it. You can lease my team and airplane, and stuff, if you need a hauler until you get your own toy. That is what LOT is doing during the winter months is providing a 787 for some charter company or vacation scheme for the winter. Cash flow is important for the off season in LOT's operational scheme. Flying from Warsaw Poland to Chicago IL during winter is a slow period for all Northern tier destinations in North America ffrom Poland. Providing  a wet lease is ideal for shoring up cash flows year around, but preferable during "off peak periods".

Short Term leasing hits the books differently than a Long term lease. Its a 30 day rental period and you won't find airlines doing this unless its in Hollywood on a movie set doing an airplane movie.

Long Term lease works when buying a 787 from a customer, then leasing back to that same customer, i.e. the likes of Air India. The customer uses the same signing day agreements without the airplane ever leaving your hanger. Theyy have made a profit on that day selling the 787 and leasing it back. Welcome aboard to Air India.
Air India accounting spread sheet ajusts and "viola", the books look better for buying more aircraft.