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In late 2013, an analyst at WNG Capital LLC, Wenbo Su, must recommend whether the terms of a sale-and-leaseback deal are value adding for WNG. WNG was an operating lessor of used commercial aircraft manufactured by Airbus Group and Boeing Corporation. The lessee in the deal was a small private airline based in the United Kingdom. The essence of the transaction was to transform the airline from being the owner of certain aircraft in its fleet to being the lessee of the aircraft for the ensuing 12 months. The airline would have full use of the aircraft, but would not own the aircraft or have use of the aircraft after the end of the lease. The cash flows to all parties were complicated, and Su planned to conduct a thorough analysis of the proposed lease terms before making a recommendation to WNG’s CEO, Michael Gangemi. The student’s challenge is to assume Su’s role and develop a discounted cash flow analysis to estimate the NPV to WNG Capital. The broader discussion of the case prompts students to answer how the airline benefits from the deal. This analysis and discussion form the basis of understanding the value of leasing as a value-adding financial product.
The primary learning objective of this case is to provide students with a comprehensive exercise in the economics of lease financing. The case illustrates how a lease is an alternative for borrowing and therefore is properly valued based on prevailing interest rates; it provides the opportunity for students to recognize that cash flows must be valued according to their respective risks (i.e., the residual value for a lease carries substantially more risk than a monthly lease payment); it illustrates how the distribution of value between lessor and lessee is largely determined by the respective bargaining positions of the two parties and their respective alternatives. A secondary objective is to underscore important insights about capital markets, financial innovation, and financial contracting. To answer why leases exist students should understand that leases exploit capital-market imperfections, thus making leasing attractive for the lessor and lessee.