Question

Under what specific financial condition does an airline choose to lease an aircraft rather than own it to improve its balance sheet&#x27;s return on assets?

Accepted Answer

An airline chooses to lease an aircraft rather than own it to improve its return on assets when it wants to lower the total value of assets reported on its balance sheet. Return on assets is a financial ratio calculated by dividing net income by the total value of a company’s assets. Because this ratio uses total assets as the denominator, reducing the size of that denominator increases the overall percentage. When an airline purchases an aircraft, it must record the plane as a long-term asset on its balance sheet, which increases the total asset value. By opting for an operating lease, the airline rents the aircraft instead of buying it. Under traditional accounting standards for operating leases, the aircraft does not appear as an asset on the balance sheet. Consequently, the airline achieves the same operational capacity to generate revenue while maintaining a smaller asset base. This process artificially inflates the return on assets ratio, making the company appear more efficient at using its resources to generate profit compared to a competitor that owns its fleet outright.

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Under what specific financial condition does an airline choose to lease an aircraft rather than own it to improve its balance sheet's return on assets?