Wednesday, December 13, 2017
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Air Canada Is Selling 787s And Then Leasing Them Back

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Reader Cole posted in the Ask Lucky forum about how Air Canada is selling some 787s, and then leasing them back. This is actually something that’s a lot more common than most people realize, which is why I think it’s an interesting topic to briefly cover.

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Essentially Air Canada has sold two of their newest 787s for $351 million and then leased them back, allowing them to record a $19 million gain on the sale (which is perhaps more of an accounting exercise than anything). They plan on doing this for more 787s, and possibly other planes in the future as well.

Air Canada negotiated a deal with Boeing when they ordered the planes many years ago (as is standard when ordering in bulk), and the market price is now slightly higher than what they had negotiated at the time. So they’re planning on selling about 10 of their 787s over the coming years, and then leasing them back.

What’s the logic? Per the story in The Globe And Mail:

The goal is to maintain a fleet that is half owned and half leased. Leasing helps keep debt down. If the market for 787s stays healthy – driven in part by its popularity among airlines, which is demonstrated by a long waiting list – Air Canada could continue to book profits from selling some of the planes and leasing them back.

Now, I’m not sure the terms of their lease, and the degree to which they’re actually coming out ahead here.

However, the point is that most airlines prefer a mix of owning and leasing planes, as a way of mitigating risk.

The decision isn’t that different from trying to decide whether to buy or lease a car. If you’re not sure how long you want to keep the car, it could make sense to lease it rather than buy it. Meanwhile if you know you’ll keep the car for a long time, you’re generally better off buying it. The same applies to airlines, except it’s much more complicated, given that we’re talking about a fleet of hundreds of planes, rather than a single car.

Leasing some planes gives Air Canada more flexibility. If there’s an economic downturn or the plane no longer makes sense for Air Canada, they can just return the plane when the contract is up. Nonetheless long term they’re paying a premium for the privilege of leasing (the leasing company has to make money somehow as well), which is why they continue to own many of their planes.

But the logic for why they’re selling now makes sense. If they have an asset, they might as well sell it when its value is the highest, which is exactly what they’re doing.

Also keep in mind that we’re starting to see a more robust used market for widebodies. With some airlines returning 777s after only a decade or so in service, there’s a great opportunity for airlines to get a deal on those used planes.

When you look at airlines’ fleets on, you’ll see all the planes they have leased listed under the “Remarks” section. You might just be surprised by how many planes airlines don’t actually own. For example, here’s a small part of American’s 737 fleet:


So while the Air Canada story is interesting, this is also a lot more common than most people realize.

(Tip of the hat to Cole)

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