Discussion Forum 3
Aircraft leases are leases used by airlines and other aircraft operators. Airlines lease aircraft from other airlines or leasing companies for two main reasons: to operate aircraft without the financial burden of buying them, and to provide temporary increase in capacity. The industry has two main leasing types: wet leasing, which is normally used for short-term leasing, and dry leasing, which is more normal for longer term leases. The industry also uses combinations of wet and dry leasing. For example, when the aircraft is wet leased to establish new services, as the airline’s flight or cabin crews become trained, it can be switched to a dry lease.
As chief financial officer (CFO), you have to decide if the company will agree to an operating lease or a finance lease and explain why you made that decision. Under what circumstances might you decide to change your mind and why?
Discussion Forum 3
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Discussion Forum 3
In this case, I will choose a financial lease for the airline. In this type of lease, the lessee is given certain ownership benefits and a way to finance many of the costs involved in acquiring the asset (Chand, 2019). Furthermore, the lessee can also claim depreciation benefits and even receive ownership of the aircraft at the end of the lease period or be given the opportunity to purchase the aircraft if the company chooses to, thereby giving it the chance to benefit from the equity built up. The financial lease provides low periodic or monthly payment, and the transaction is treated as both asset and liability and is considered for bookkeeping (Chand, 2019). Unlike an operational lease, the payment must not be fully expended though interest can be deducted (United Nations International Trade Statistics, 2016).
This is why a financial lease will be the best option for me, as the CFO. The lease lasts longer than one year and though the lessor still holds the legal title, the lessee is still given full responsibility for the owner. The goods will be excluded as merchandise and from services as well because it is treated as a loan to the lessee (Chand, 2019). During the repayment, a small portion of financial intermediation services indirectly measured (FISIM) is considered if an intermediary is used. These provisions give the company some independence and privacy while using the leased aircraft (United Nations International Trade Statistics, 2016). It will enable long-term planning with aircraft and the company as well. Therefore, I would recommend it instead of an operating lease which is more of private and temporary ownership than a permanent plan.
References
Chand, S. (2019). Leasing: Definitions, Types, Merits and Demerits. Your Article Library. https://www.yourarticlelibrary.com/law/leasing-definitions-types-merits-and-demerits/23516
United Nations international Trade Statistics. (2016). Leasing of Aircraft — Financial Leasing. https://unstats.un.org/unsd/tradekb/Knowledgebase/50663/Leasing-of-aircraft-financial-leasing