Monday, February 13, 2017

Buy-Sell-Leaseback??? Airplanes!!!

Sell and lease back is strategic financial positioning.
The first thing on the table is get the definitions out of the way;

Winging It Made Simple

Image result for accounting nightmare

Wet Lease:

A wet lease is a leasing arrangement whereby one airline (the lessor) provides an aircraft, complete crew, maintenance, and insurance (ACMI) to another airline or other type of business acting as a broker of air travel (the lessee), which pays by hours operated.

Dry Lease:

A dry lease is a leasing arrangement whereby an aircraft financing entity (lessor), such as GECAS or AerCap, provides an aircraft without crew, ground staff etc.

Sell-Lease back:

Selling an entity aircraft asset to a leasing company and then lease back from same lessor for the same aircraft is usually results in a long term dry lease. The action turns the lease into an income statement type expense coming from its operation. At which point the former asset can no longer depreciate during its limited depreciation term allowed in the balance sheet (assets = liabilities) otherwise stopping any interest expense accrued. 

Blithering discussion:

Example: Tax worksheet modeling takes advantage of depreciation during a five-seven year depreciation schedule allowed, where it has has a limited duration of time for income tax write-offs claimed. In this case a 787 worth hundreds of millions is depreciated with the majority of its value during the first years of ownership. An entity can take a significant portion of any airplane value applying it towards the Income Tax liability during its early years of service.

However, to maximize cash flows and make efficient use of its assets an entity can sell its asset to a leasing company thus eliminating the remaining depreciation towards asset value. The lease back portion of the deal moves the aircraft out of its balance sheet status (which has a limited remaining depreciation advantage with a longer term loan interest expense value remaining) into an operational expense condition by the amount of the periodic lease payment amount. 

Instead of having an asset under generally accepted accounting principles, it morphs the asset into a lease expense on the Income statement. The leverage of this transaction reduces assets and reduces liabilities at the same time while moving cash flows to a monthly leasing expense line found on the Income statement for profit and loss and becomes an EBIT item affecting any Income Tax liability down the road.

The relationship of having aircraft for revenue routes and operating expense is greatly changed. Rather than asset and liability relationship for company valuations, the move has an immediate change in the relationship affecting the profit loss condition reported each year. Cash (liquid assets) is freed up for making more purchases using a leveraging lease back move for its inventory.

What occurs by this example: an airline buys the aircraft valued at purchase price through paying cash and borrowing money for the aircraft. The aircraft value is the asset while the cash is a reduction of its liquid assets. The money borrowed for the purchase is a corresponding liability amount equaling the asset balance reduced by cash plus adding the airplane’s valuation to the asset balance.

There is much more occurring with this example that can be explained reasonably and with limited information. The important point is aircraft companies needing fast access to more airplanes often divide its inventory up with buying and leasing its inventory. An entity can take advantage of both its assets for income tax purposes and/or its profit and loss record growing its retained earnings into an asset value.

Finding error is to human. Accounting is inhuman.

"T" Accounting Example:

Transactions for balancing assets = liabilities

Cash reduced: -10 million down payment

Airplane Value: + 100 million

Loan: -90 million

Asset Balance: 100 million

Loan of: 90 million equals the Asset Balance of 100 million via its -10 million cash reduction combined with $90 million loan.

THE LAST BUT NOT LEAST ITEM: Sale of asset to leasing company at a higher amount than the original purchase price from the manufacturer can become a significant capital gain for an entity strapped for cash.

More definitions and More Coffee Needed


Inventory or property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

"growth in net assets"

"For every asset there as an equal liability for said person or company or corporation. Assets equal liabilities and remain in balance of value concerning each person, company, or corporate entity."


1.  A reduction in the value of an asset with the passage of time, due in particular to wear and tear.
 devaluing, decrease in value, lowering in value, reduction in value, cheapening, 
o   Decrease in the value of a currency relative to other currencies.
 Plural noun: depreciations


offset (an item of expenditure) as an expense against taxable income.

Income Statement:

Also known as the profit and loss statement or statement of revenue and expense, the income statement is the one of three major financial statements in the annual report and 10-K. All public companies must submit these legal documents to the Securities and Exchange Commission (SEC) and investor public. The other two financial statements are the balance sheet and the statement of cash flows. All three provide investors with information about the state of the company's financial affairs, but the income statement is the only one that provides an overview of company sales and net income.

Profit or loss:

An income statement or profit and loss account (also referred to as a profit and loss statement (P&L), statement of profit or 
loss, revenue statement, statement of financial performance, earnings statement, operating statement, or statement of operations) is one of the financial statements of a company and shows the ...

Balance sheet:
1.  A statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.


What’s left over goes to the government J

The incredible mess above requires a 4-5 years of accounting and another 10 years for understanding. Having the 4-5 years down there remains another ten years for understanding. Therefore, keeping it somewhat simple is the goal and only for making a point. Understand what a “wet lease” and “dry lease” are and then understand what and “asset” and “expense” can do for a company.

If an airplane is an asset then there is a liability offsetting the asset such as loans and stockholder ownership. However, if an airplane is a lease it is not an asset, but an operational expense. No asset, no depreciation expense and no liability. An airline who is strapped for cash when expanding its fleet will buy, sell and leaseback aircraft leveraging its capital support its expansions at the same time.

Moving an asset off the books allows an airline to expense the total aircraft, crew and maintenance applied to a revenue stream as expenses. If the airline makes a profit (P/L), it can add that profit to a retained earnings process. Tax advantages arise in this flow. An asset is not part of the P/L revenue statement, only through depreciation expense, which is limited to Tax laws on depreciation schedules over time. 

However when leasing, it becomes an expense item as described in the above paragraph. This condition allows airlines to leverage its cash stream of uses for down payments and increase its fleet of revenue producing aircraft at the same time. No longer will it have to borrow billions of dollars for aircraft purchases and come up with the cash for entering into those types of financing. The lease becomes a pay as you go proposition matching revenue streams coming from each aircraft it leases with revenue and expenses. 

It must remain competitive with its peers during growth periods and leasing leverages a competitive position extending its inventory. When economic times change in the travel industry, drop those leases within a shorter time period rather than having to sell any owned aircraft risking a severe discount and experiencing a loss.