From: "Phil Payne" 

> It's not just that he (and GE Capital) are de facto big "customers" --
> it's that as lease packagers and financiers, they tend to be more
> cool-eyed and objective than even the airline execs. For them,
> performance and operating costs and load factor guesstimates are all
> subordinate to "will this sucker make money over time?"

I worked for Itel in 1978-9, before the fall.  We leased all of Lufthansa's
Jumbos and a whole lot of other aircraft - I think the Frankfurt office
portfolio was around 30 major aircraft.

Back then leasing was relatively risk-free.  A lease is nominally a very
simple financial arrangement - one of my jobs was to examine every lease
that came in.  The sales team would arrange the lease and present it to
F&A. This was a complex process - it ain't just go/no go.  As well as
deciding whether it was a good deal for the company, you had to work out
which components of it met the corporation's commission plan guidelines. 
The salesman had agreed one number with the airline, but the lease itself
might have a schedule with 20 or 30 positions on it.  Sometimes more.  Some
components had different accelerators above "guideline net present
value" and you had to come to agreement with the salesman about
distribution of net present value across the positions.  He would naturally
suggest he'd given a discount on this major position with a low commission
accelerator but he'd over-achieved on this position with a high commission
accelerator.  Knocking these things apart is hard work and I got involved
in several firefights.

Bear in mind some of these were long projects.  A salesman might be
involved in selling a lease for two commuter aircraft for six months, and
had a natural interest in his income.  If you went to the toilet, you'd get
followed in: "How's it going?"

(And if you really want hard work, try rewriting selected positions of an
existing lease and THEN calculate the saleman's commission on the delta
between the old npv and the new npv.)

A simple go/no go would be done by F&A.  Then the whole package was
passed to peer reviewers, of whom I was one.  These things could be 80
pages.  Four of us would sit in a conference room with a bottle of Metaxa
and a filter coffee machine.  Each had an HP-12C and a copy of the package.
 We had a white board.  It was called: "Hunting the worms."  If
you found what you thought was a worm, you wrote it on the white board. 
Any other reviewer could erase it without comment, but if they agreed
they'd add a tick. Generally, silence prevailed.  The process sometimes
lasted days and finished when the last of the reviewers finished the last
page and not before.  Our court of jurisdiction was Frankfurt, and back
then all submissions had to be in German - so the lease package was in
German.

But - in those days it was possible to insure any shortfall between
residual value (a mathematical construct within a lease) and true market
value via the Lloyds "J" policy.  That option vanished in 1980,
so the game became much more serious and risk assessment was introduced.

Essentially, it meant that the calculation had to be based on a likely
MARKET value rather than a RESIDUAL value.

The airlines' view of operational economics is very complex.  Just looking
at a machine, its capacity and range is simplistic.  E.g., if it breaks
within the area we want to operate it in, how far away, efficient and
expensive is service to get it back in service?  Reliability is VERY
important to airlines, as is serviceability - they have to meet their
service goals.  There are just so many parameters in these models, many of
which are proprietary.

The most profitable trick is rewriting existing leases to extend them at a
lower monthly rate.  If an airline is struggling, you can reduce their
monthly lease costs by extending the period.  It's very simple maths and
extremely lucrative for the salesmen, who can get as much as 15% of the npv
delta paid as commission.  On a Jumbo extension, it's like winning the
lottery.  But you wind up flying in older airframes.

--- BBBS/NT v4.01 Flag-5