Leasing

In August 2001, a deal was announced between GE Capital Aviation Services and China Southwest Airlines in which GE Capital would lease nine Boeing B737 jets to China Southwest. On the same day, a spokesperson for Singapore Airlines announced the purchase of three Boeing B777 planes. The list prices on these aircraft? A Boeing B737 will set you back a cool $46.5 to $64.5 million, while prices for the newer, bigger 777 begin at $152 million! These transactions raise a number of issues. With such expensive assets, why would one company choose to lease and another choose to buy? And why is GE Capital, which does not manufacture aircraft, in the business of leasing them to airlines? This chapter provides answers to these and other questions associated with leasing.

Leasing is a way businesses finance plant, property, and equipment.1 Just about any asset that can be purchased can be leased, and there are many good reasons for leasing. For example, when we take vacations or business trips, renting a car for a few days is a convenient thing to do. After all, buying a car and selling it a week later would be a great nuisance. We discuss additional reasons for leasing in the sections that follow.

Although corporations engage in both short-term leasing and long-term leasing, this chapter is primarily concerned with long-term leasing, where long-term typically means more than five years. As we will discuss in greater detail shortly, leasing an asset on a long-term basis is much like borrowing the needed funds and simply buying the asset. Thus, long-term leasing is a form of financing much like long-term debt. When is leasing preferable to long-term borrowing? This is a question we seek to answer in this chapter.2

Up-to-date news and articles on the leasing industry are available at www.monitordaily.com..

1We are indebted to James Johnson of Northern Illinois University for helpful comments and suggestions on this chapter.

2Our discussion of lease valuation is drawn, in part, from Chapter 24 of S. A. Ross, R. W. Westerfield, and J. F. Jaffe, Corporate Finance, 6th ed. (New York: McGraw-Hill, 2002), which contains a more comprehensive treatment and discusses some subtle, but important, issues that are not covered here.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

26. Leasing

© The McGraw-Hill Companies, 2002

PART EIGHT Topics in Corporate Finance

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