Turnaround: Air India proposes shift from sale and leaseback

Air India is proposing to shift from sale and leaseback to outright purchase of 15 of the 27 Dreamliner aircraft it has ordered, in a bid to save about USD 225-300 million as part of the turnaround plan.
A proposal to this effect has been sent to the government for approval, as the national carrier feels that the shift to the outright purchase system would provide a much better internal rate of return, airline officials said here.
While leaseback turns out to be more expensive in the long run, an airline does not get the benefit of the residual value of an aircraft after its lease expires as it is enjoyed by the lessor, they said.

Sale and leaseback is a financial transaction where one sells an asset and leases it back on a long term and continues to use it without owning it.
The sources said the redelivery cost (after the lease expires) of a widebody aircraft like the Dreamliners is very high at almost USD 20 million while for narrow-bodies it is about USD 10-12 million.
Such high redelivery costs would be avoided if the planes are owned by the company, the officials said.

Air India, which has seven aircraft on leaseback and has offered five more through that process, now plans to turn to the outright purchase mode for the remaining 15, they said.

At present, the airline has a total of 17 Dreamliners in its fleet with one more slated to be delivered in December. The last of these planes is to be delivered by September 2016.
Under the future global accounting system International Financial Reporting Standards which would become mandatory for all nations in a few years, all long-term leases would have to be shown as both assets and liabilities which would also enhance the burden on the airline's aircraft leases, the sources said.