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Hong Kong Dragon Airlines Limited (B): Lease vs. Buy Decision  
Product Ref: 09/458C Company: Hong Kong Dragon Airlines Limited

Product Type: Case Industry: Airlines

Related Product(s): Teaching Note
Authors: Ko Wang   Su Han Chan   Andrew Lee
In order to protect its operation from 2007 onwards, Dragonair needed to replace a spare engine that was deemed beyond economic repair back in late 2002. Three options were available to address this need. First, Dragonair could purchase the engine outright, which would require it to place an order with the manufacturer 12 months in advance and pay an upfront deposit. Second, the airline could choose a sale-and-leaseback transaction with a leasing company whereby it would sell the engine it purchased to the leasing company and then lease it back from the leasing company for an agreed period. Third, the airline could lease a new engine directly from a leasing company, in which case the leasing arrangement would be the same as the sale-and-leaseback transaction.
Functional Area : Finance & Investments

Learning Objective: This two-part case series require students to decide which of three alternative methods Dragonair should use to acquire a spare engine for its fleet. The alternative methods are: an outright purchase, a direct lease, or a sale-and-leaseback arrangement. The important issues highlighted are the unique aspects of engine leasing, the cash flows relevant to a lease versus buy decision, the proper discount rates to use, and the influence of the residual value.
Length: 10 pages Country: Hong Kong SAR

Pub. Year: 2010 Level of Difficulty: 2
This product type is available in the following language(s):      English
Related Information: N/A
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