Optimal demand for operating lease of aircraft

Abstract

Operating lease of the aircraft gives the airlines flexibility in capacity management. However, airlines pay a risk premium to the leasing companies for bearing part of the risks. Therefore, the airlines face a trade-off between flexibility of capacity and higher costs. This paper develops a model for the airlines to determine their optimal mix of leased and owned capacity, taking into consideration that the demand for air transportation is uncertain and cyclical. Empirical results based on the model suggested that the optimal demand by 23 major airlines in the world would range between 40% and 60% of their total fleet, for the reasonable range of premiums of operating lease. For the leasing companies, this indicates huge potential of the market given strong forecast for the growth of air transportation in the next decade.