Sale-and-leaseback: Why did IndiGo kill its golden goose?
The model is considered to
be a basic fundamental behind the company's success story
LATEST
NEWS : A combination of factors
ranging from a new accounting standard to lack of good value proposition for
the A320 neo aircraft in the lessor market might have forced IndiGo
to reconsider the sale-and-leaseback model — one of the basic fundamentals
that contributed to the airline’s success story.
With 118 of its 131 aircraft on
operating lease, IndiGo has been the most active user of sale-and-leaseback
financing under which a lessor will purchase the aircraft from the airline and
lease it back. This removes the debt from the airline’s balance sheet and
allows it invest its equity for some other purpose. Even though the company
doesn’t agree to this, revenue from such transactions has helped to boost its
profit. Industry sources say that the company makes a profit of $4-5 million
per aircraft for each transaction. For the fourth quarter of FY17, 24 per cent
of its total profit of Rs 619 crore came from such transactions.
Why would the company kill its
golden goose? One primary reason is the change in the type of aircraft. From
2015, the airline started inducting the new-generation A320 neo model, which
has been plagued by engine issues. Thanks to the persisting problem, lessors
are not keen. “Currently the engine problems are challenge to operations, it
will be very difficult to place the A320 neos with reasonable price at least
for next two years, with more than 40 neos coming in for IndiGo by end of FY18,
it makes sense to hold onto them and capitalise later,” a rival airline
official said.
ALSO READ THIS: IT searches Karnataka minister's houses, resort
where Congress MLAs holed up (Roundup)
Comments
Post a Comment