Financial Accounting Assignment

Mehak Jain

1. Why might airline managers choose to lease rather than purchase their planes?
Ans.
The pros and cons of purchasing and leasing aircraft.

Some companies may be subject to requirements prohibiting aircraft ownership due to

shareholder or insurance liability concerns.
A lease arrangement may be more flexible than purchase of an aircraft.
An experienced professional can customize provisions and options in your aircraft
lease to meet the specific business, tax, and accounting requirements of your
company.

Aircraft leasing is an alternative to purchase that may provide advantages to some companies.
Whether its right for your company depends upon the specific needs and capabilities of the
company.
Control versus flexibility
If you own the aircraft, you may have virtually complete control over its use. Depending
upon the resale market for the aircraft and how long you are willing to hold it, you may be
building equity. However, there is less flexibility with ownership. The aircraft you purchase
may become obsolete or the companys aircraft needs may change over time. A substantial
down payment may be required to purchase an aircraft, depleting the companys working
capital and adversely affecting your debt-equity ratio. In addition, payments towards purchase
may be higher than available lease arrangements. Some companies may be subject to
requirements prohibiting aircraft ownership due to shareholder or insurance liability
concerns.
A lease arrangement may be more flexible than purchase of an aircraft. A lease can enable a
company to get in and out of aircraft use more easily through shorter-term commitments and
without the prepayment penalties that might be triggered upon sale of a mortgaged aircraft
and the risks and responsibilities of aircraft ownership.
Tax advantages
Ownership of an aircraft will generally give you the right to depreciate it for tax purposes.
However, only interest, not principal, will be deductible. If the company has insufficient tax
liabilities to take advantage of depreciation deductions, leasing might provide a cheaper
method of acquiring use of an aircraft. Also, a company with international operations may

have optionsin terms of structuring the acquisition of aircraftthat make the option of
leasing more desirable than purchase.
Balance sheet advantages
One reason to choose a lease over purchase is that it can minimize the cash flow required to
provide what is, in effect, a service (transportation), rather than an asset, necessary to
company operations. In most cases, the company has no inherent interest in owning aircraft,
only in using aircraft. Even companies in business directly involving aircraft, such as the
airline industry, often lease. Currently, about half of the commercial aircraft operating
worldwide are leased.
Since lessors assume a residual value to the aircraft being leased, they can typically offer a
lower rental payment. However, to optimize the cash flow benefit, leases usually must be for
a longer term. In addition to freeing up cash, leasing also may help keep your lines of credit
open.
Leasing also can remove long-term debt from the balance sheet. Under many lease
agreements, lease rental payments will qualify as an expense, not debt, under applicable
accounting rules. Companies looking to clean-up their balance sheets may prefer leasing to
purchase of aircraft.