United Airlines Capital Budget Discussion

United has many capital expenditure techniques since it's a diverse company with many many different investments. One of the more interesting concepts for United is the purchase and/or lease of aircraft. For this discussion, it would probably be more interesting if I worked for Boeing and discussed the net present value of their $32 Billion dollar 787 Dreamliner program and how the investment will be paid over the next few decades. For United, the concept here is of purchasing and/or leasing aircraft that can last several decades.

I met briefly with an aircraft finance person to discuss how Net Present Value is used. One of the concepts I walked away is that aircraft leases aren't the same as car leases in that most cars are given back to the lessor after a few year. Typically airlines will lease them and eventually purchase them. Since many airlines themselves perform the maintenance then it's more ownership than renting.

United negotiates the aircraft leases up front for example using a net present calculation derived by Boeing but also fine tailored with analysis done by United. The calculation is not straight forward. I wouldn't even want to try to interpret it. The finance person I spoke to is they use the net present value method but it's not a straight cash based measure as traditional. The net present value is still presented by rates, my interpretation of this is that the cash based measure is still normalized as a rate but that's my guess without digging further.

United has just recently taken delivery of the first US carrier owned 787. When the airline was in the negotiations to the new fleet of 787's one of the stronger reasons for purchasing the aircraft was because it's a 2-engine aircraft with less engine costs that can go into new lengthier routes such as Denver to Tokyo. Other things such as reduced fuel costs because of its composite body (fuselage) made it a compelling choice in a rising fuel cost environment. Also customer preference could be driven a better humidity controlled cabin. So besides for the advantage of using Net Present Value for calculating a very long lease and associated interest and other costs, the Net Present Value model also considers the advantages listed such as fuel to mitigate the original cost of the investment.

A primary concern or disadvantage of Net Present Value for leasing agreements is it doesn't directly account for depreciation. However, the depreciation is accounted for in the language of the leasing terms.