Question
Amazon's Battle for the Air Just Got Easier; Airlines are dumping old planes, giving the e-commerce giant the perfect opportunity to expand its cargo fleet
Amazon's Battle for the Air Just Got Easier; Airlines are dumping old planes, giving the e-commerce giant the perfect opportunity to expand its cargo fleet at a time of constrained supply
Wall Street Journal; New York, N.Y.; 01 May 2020.
Due to Covid-19, airlines are now dumping older planes. According to international advisory firm Ishka, lease rates are down: Renting a Boeing 747-8 freighter is 13% cheaper than in January. Amazon might even consider using some of its vast cash holdings$27 billion at the end of Marchto start owning its own fleet. The market value of five-year-old 777s and Airbus 330s is down almost 10% this year, Ishka said
Jupiter Airline Ltd (JAL) is evaluating the possibility of tendering for the license to operate international flights from Canberra to Queenstown (NZ) for a 5-year period. If its bid is successful, JAL will have to acquire a new aircraft. The company can either purchase this aircraft or lease it. Details of these alternatives are as follows:
- Purchase: The purchase price of the aircraft is $60 million. It could be depreciated at a rate of 15 per cent per annum, straight-line. The estimated disposal value in 5 years' time is $20 million.
- Lease: The annual lease payments would be $15 million, payable at the beginning of each year, with a lease residual of $20 million. The after-tax interest rate on an equivalent loan is 11 per cent per annum.
The company income tax rate is 30%.
REQUIRED:
(a) Advise if JAL should purchase or lease the aircraft from financial perspectives? Show all workings.
(b) Calculate the maximum annual lease payment acceptable to JAL? Show all workings.
(c) What could be the non-financial motives of leasing for JAL? Advise if JAL should purchase or lease the aircraft from non-financial perspectives based on the current market conditions? Justify your answer.
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