ALOHA CASE QUESTIONS

Is Aloha airline considering an operating lease or a capital lease? What is an operating lease? What are the advantages or disadvantages does it have over a financial lease or debt?

Go to the balance sheet of an airline and show how the treatment of a capital lease is different from the treatment of an operating lease?

What are the pros and cons of each of the financing alternative given in the case?

Which alternative did you choose? Why? Provide a quantitative analysis to support your choice.

What are the key drivers in the case? Use spreadsheet to identify the key drivers in the case and perform sensitivity (change inputs and see its effect on output) and scenario analysis (worst case, normal and best case).

***NOTES***

Buy the Plane

Buy the Plane outright using a 7 year loan

Loan terms

$14,000,000 at 12% annual rate with Quarterly payments of $746,105

Fixed Cost for 7 Years at 12%, (entire amount at 12%)

Residual Value at the end of 7 years to be $12,880,000 million (mimum price for aloha to buy the aircraft from the lessor).

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Marginal Tax Rate of 0 due to not having enough taxable income to utilize the tax shield

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Realize full value of the Tax shield with corporate tax rate of 40%

Lease the Aircraft

See exhibit 1 for lease terms and payments

28 quartly payments of $563,000 (4.022% of purchase price) paid at the end of each quarter

Must pay the seller $250,000 to hole the aircraft for the lessor with a reimbursement

7 year operating lease, with options to buy or renew at the end of 7 years

Aircraft value at the end of the 7 years will either

Appreciate by 30% over the 7 years

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Lost 30% of initial value by the end of the 7 year lease

Loan Terms:

Aloha can borrow $14 million at 12 percent annual rate with quarterly payments of $746,105 to fully amortize the loan in seven years.

Lease Terms:

The airplane is leased for a seven-year period. Quarterly payments are due at the end of each quarter (in arrears as opposed to in advance).

Terms defined

The APP is $14 million.

Base Lease Term: 7 years.

Basic Rent: 28 quarterly payments of $ 563,000 (4.022 percent of the purchase price) for 28 quarters paid at the end of each quarter

Deposit: The Lessee must pay the seller $0.25 million to take the plane off the market and put it aside for the Lessor. Upon execution of the Lease Agreement, the Lessor will reimburse the Lessee for the principal amount of the deposit.