Running Head: TEAM SEATTLE: LEASING AT CONTINENTAL
Team Seattle: Will Leasing Fly at Continental?
MGMT 575: Financial Analysis and Management II
Sara Crider, Drew Siebert, Jason Stone, & Darin Wolding
Joel Light
Southwestern College, Winfield, Kansas
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TEAM SEATTLE: LEASING AT CONTINENTAL
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Team Seattle: Leasing at Continental
Continental Airlines was founded in 1934 by Varney Speed lines and renamed to
Continental in 1937. In the early 1980’s the company was acquired by Texas Air Corp. and soon
after merged with Texas International in 1982. In 1983 Continental claimed Chapter 11
bankruptcy and then merged with People Express, Frontier, and New York Air in 1987.
Regardless of the frequent mergers Chapter 11 bankruptcy was filed again in 1990. The latest
merge has been with United Airlines in 2010. Continental continues to operate independent from
United with its head courters in Chicago Illinois. With 2500 departures daily and a fleet of 348
airplanes, Continental remains a common name to many travelers (Scott, 1998).
In this case study it must be determined if leasing will be the most cost effective way to
add two Boeing 757 aircraft to Continental’s fleet for the next fifteen years. Many variables
must be considered in rent or leasing options such as tax deductions, tax credits of ownership and
cash flow considerations. Continental must also assess their tax position and decide if it can take
advantage of tax credits, which would make buying a much wiser decision. Continental must
reconcile the opportunity cost of capital used to purchase a new plane as well. By calculating the
net advantage to leasing it gives all variables relevant to the rent vs. buy decision. Continental
must consider the residual value of the assets in their decision. The residual value is an
opportunity cost to the lessee. This lessee will forgo the benefit of liquidating the asset at the
end of the lease period. High residual value may negate the time value of money benefit
associated with avoiding high initial cash outlay. If Continental can terminate the lease
agreement at any time then the earlier this is done, the greater the residual value (Emery,
Finnerty, &Stowe, 2007).
TEAM SEATTLE: LEASING AT CONTINENTAL
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If Continental believes it will not be in a tax paying position for a decade or longer it
should lease over buy and borrow. Leasing is a positive NPV option at the expected residual
value of $30 million a plane. The salvage value of the asset will be different at any given point.
For this reason, it is difficult to assess the value of early termination. Leasing is the best value
option in this case as well due to the flexibility that it gives the company. The NAL is positive
for the expected salvage value over 15 years. The most cost effective way for Continental to add
two Boeing 757 aircrafts to its fleet is to lease.
TEAM SEATTLE: LEASING AT CONTINENTAL
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References:
Emery, D.R., Finnerty, J.D.,& Stowe,J.D. (2007). Corporate Financial Management (3rd ed.).
New Jersey: Pearson Prentice Hall
Christian, J. Scott, former Continental employee and manager, Bring Songs to the Sky:
Recollections of Continental Airlines, 1970–1986, Quadran Press, 1998.
Sterling, Robert J., Maverick: The story of Robert Six and Continental Airlines
(ISBN 0-385-04057-1), Doubleday & Company, 1974.
Weiner, Eric (October 24, 1990). "Continental Bankruptcy Study Seen". The New York Times.
Press Release. "Press Release | Let's Fly Together". Unitedcontinentalmerger.com.
Retrieved May 3, 2010.