This paper discusses the economics of deploying commercial air transport or air logistics companies. It compares the strategy with the economics of the UAE defense force, which runs its air logistics aircraft. It sets the stage for this debate by discussing the advantages and disadvantages of leasing over owning transport aircraft. Besides, it recommends whether the UAE defense force should obtain a commercial air logistics company. The UAE has an air force, namely the United Arab Emirates Air Force (UAEAF). To date, it has about 4000 people operating more than 368 aircraft (The UAE 5). These people receive salaries and wages at the end of every month, even though many of the aircraft does not fly to full capacity. If the air force decides to lease aircrafts instead of operating its own fleet, it gains the advantage of lowering the cost of operating the air force since the planes will only be called for when required. This move might also mean lowering maintenance costs since the companies that will be operating the leasing of planes business will assume such costs. This paper is organized in two sections. However, before presenting the first section, it gives a summary of the UAE air force. Section 1 investigates the economics of the air force and that of the UAE commercial air logistics companies, which operate in the cargo and passenger industry. However, this discussion is restricted to Strategic Airlift, Tactical Airlift, and VIP transport. The second section offers economic recommendations on whether the UAE defense force needs to deploy commercial air logistics companies.
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From an economic perspective, idle equipments are considered waste. They consume resources without any substantive gain to an organization. Leasing aircrafts means that the companies that lease the aircrafts to the UAE air force will have to operate their businesses in a manner that ensures they remain profitable. The air force has gone through tremendous growth based on the number of aircrafts and its outstanding transport capability. This situation suggests that the air force must provide plans to the companies concerning when they intend to use the planes to ensure they (companies) avail the plane in time and in a reliable condition. Although the plan of leasing aircrafts to the military is based on the idea of lowering the UAE air force budget, companies that operate the plane leasing business must standardize the design of the planes since they serve different customers, not just from the UAE. This situation introduces the problem of customizing aircrafts to fit the diverse needs of the state’s air force. Such customization is crucial since different nations respond to different enemies and threats to their territorial integrity. A nation that faces a threat that involves dealing with people who have sophisticated weapons also needs to have classy equipment. Since an enemy attacks on full knowledge of the existing military capability, it is important for the UAE military to have some secrecy on the capability of its aircrafts. This case is perhaps impossible while leasing standardized aircrafts for military operations.
Part 1: Research
Evidence of Research: Economics of the Air Force
The UAE air force conducts a strategic airlift, which is problematic when leasing aircrafts that are operated by external agents who are not part of the air force personnel. This case limits the probability of leasing aircrafts for military work such as transportation of the air force military personnel during incidents where the nation is under attack. Unfortunately, in military operations, situations arise when there is a need to transport both air force crew and cargo on an emergency basis (The UAE 8). This state of affairs makes it disadvantageous to lease aircrafts to the UAE air force since the move slows or even makes it impossible to respond to disasters. The companies could have leased out the aircrafts to other customers at the time of the emergency.
However, any enemy targets the arm of a government that is likely to respond to the staged attacks. Consequently, military transportation is a tactical airlift activity in the UAE to ensure that enemies do not profile the nation’s military operation strategies, nature, and the capability of the air force equipment to prevent damage. In fact, enemies may have the intelligence on the nature and capability of aircrafts that are leased by the companies, which provide air travel services to the UAE air force. Tactics that are used in the airlift of a nation’s military constitutes a military strategy, which is only peculiar to the given nation’s armed forces (The UAE 11). It is inappropriate to share such strategies with third parties who do business with other nations.
Military aircrafts are also deployed to airlift VIPs such as the president and other dignitaries who the states have the responsibility to provide utmost security during their movements. Aircrafts that are capable of assuring such security are those that are customized for use by a given nation’s air force. Thus, any cost saving by leasing the aircrafts may be overpowered by the potential risks to which such a decision can expose the VIPs.
Observations and Conclusions
Conclusively, the UAE air force aircrafts come with different designs to suit different applications. The air force aircrafts are divided into categories such as the fighter wing and transportation wing (The UAE 10). Both wings have different designs. Some aircrafts have even undergone modernization to some standards that are unknown to other people apart from the top military personnel. For example, 33 Dassault aircrafts underwent modernization in 1998 to acquire standards that were strange to their manufacturers (The UAE 15). This move supports an earlier assertion that the UAE air force or any other military plane needs to have secrecy concerning its capability. This privacy is not achievable when leasing is considered an economic strategy of lowering budgets by the UAE air force.
Conclusion: Decision and Argument
The Economics of Commercial Passenger and Cargo Air Logistics Companies in the UAE
An investigation of the economics of commercial air logistics companies helps in setting the merits and demits of leasing aircrafts. The tradition of operating commercial air logistics companies in the UAE has been characterized by the purchasing of aircrafts. The commercial cargo companies include Emirates Skycargo, Al Rais Cargo, Maximus Air Caro, Falcon Express, Caro Plus, and Etihad Crystal Cargo among others. Passenger airlines include Emirates Airways, Air Dubai, Etihad Airlines, Al Hajar Airlines, RAK Airways, and Daalo Airlines among others. Many of these companies own aircraft fleets. Since all organizations look for strategies of reducing their operational costs with an objective of increasing their profitability, all UAE-based passenger and cargo commercial logistics companies remain open to any strategy that effectively reduces the operation costs.
In cargo and passenger commercial air logistics, leasing aircrafts has both positive and negative economic implications. Many companies purchase their aircrafts via ‘finance leases’ with installments that are designed in the form of rent payments to ensure tax deductibility (Leithen 52). Elsewhere across the globe and in the UAE, some companies are turning on the strategic business direction of operating leases. This observation means that they are renting aircraft. The strategy introduces a new business model in the air logistics in which one organization specializes in purchasing and maintaining assets while the other operates them (Van Nederveen and Turner 96). An emerging question is, ‘if leasing enables commercial airlines to operate effectively by decreasing costs, is it necessary for commercial airlines in the UAE to purchase their aircrafts?’
A primary economic factor that dictates the necessity to buy an aircraft or even rent it entails the expected level of utilization. The main issue here is whether a purchased aircraft will be utilized to make economic justifications of the acquisition and the expected ownership costs. Ownership makes economic sense in case an aircraft flies 300 hours or more annually. At this rate, amortized complete ownership is lower than fractional ownership of charter amortized costs (Swirsky par.1). Thus, companies which own their aircrafts, but they do not fly them at the rate of 300 hours or more annually, need to consider alternative strategies for their commercial operations to make economic sense.
One of the alternatives entails engaging in joint ownership of aircrafts. Under this business arrangement, joint owners of one plane proportionately share the costs of acquiring, operating, and maintaining the plane (Swirsky par.1). Nevertheless, the arrangement has a disadvantage since the proprietors need to choose associates with caution based on air travel duration, position, and setting up of voyages to ensure compatibility. However, placement of scheduling restrictions on the third party may lead to failure to cover fixed costs substantively. Renting to other companies faces incredible challenges, especially when flying hours of the owner coincides with flight hours of the third party that is interested in hiring the aircraft.
Owning an aircraft is advantageous since one becomes eligible of having any depreciation subtracted during the period of aircraft usage, which is about 30 years (Swirsky par.2). However, the owner needs to meet various strict rules of IRS, especially on losses due to passive activities. A major disadvantage of owning aircraft for commercial logistical activities includes dedication of time and energy in aircraft management. This situation involves activities such as scheduling of maintenance, recruitment, and hiring of pilots and other cabin crew, renting of hangar space, acquiring, and financing insurance schemes.
From the above discussions, the UAE cargo and passenger air commercial logistical companies have to consider their capacity to utilize aircrafts or leasing from other companies that own the aircrafts. For big airlines, Van Nederveen and Turner confirm they can own aircrafts other than renting them (97). This assertion makes economic sense upon considering that companies that lease their planes do so with the objective of making profits. Thus, a logistics company can have full time utilization of the plane (300 hours or more yearly). Analogous to purchasing a house, rather than renting, leasing an aircraft is expensive in the long-term. However, the trend of considering leasing aircrafts to reduce operational costs suggests that the airline business is becoming short-term in nature. Indeed, this claim remains a correct assertion upon considering the rapid technological changes in the design of aircrafts so that an airplane may become obsolete before its lifespan expires.
Leasing has the merit of providing an opportunity for equal availability levels in relation to when a company owns an aircraft while it cannot commit monetary resources to acquire one. If cargo and passenger air logistics companies consider leasing attractive depending on their size and operational capacity, they can take the advantage of two forms of aircraft leasing, namely operating and financing leasing. Operating leasing implies that the leasing agent keeps the title of an aircraft. However, the operator possesses the plane. Financing leasing gives an opportunity to the plane owner to buy a plane at its market price at the time when the charter term expires (Swirsky par.2). This approach is only advantageous when the cost remains low compared to revenue capital that is accessible in other investment platforms.
During negotiation for leasing terms, air logistical companies can have some disadvantages that are associated with depreciation tariffs. IRS allows plane cutback deductions for duration of more than half a decade. Unfortunately, the plane owner cannot benefit from the subtractions akin to the fact they are meant to overcome his or her income losses due to passive activities and or since the lessee does not gain significant income to allow taxation (Swirsky par.3). Nevertheless, charters may be prearranged in such a manner that the subtractions are presented to the lessor. The lessee may negotiate for reduced charter rate by permitting the lessor to take a full advantage of depreciation subtractions.
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The need for a large capital outlay makes renting of aircrafts attractive to small air logistical companies in the UAE since such companies do not have to commit the initial capital in purchasing the planes. However, leasing may also be costly just as it is witnessed under the full ownership scenario since the lessee must fuel the plane. Companies that lease the planes also pay money to the owners. The cost is more than the rate of managing the plane. Hence, it becomes expensive to manage the maintenance, hangar, and pilot employment charges. The risk of losing an aircraft due to theft and/or damage equally affects companies that lease them. Their schedule may be interrupted at least in the short-run before they enter into a contract with another owner or even before the lessor delivers another plane.
Part 2: Recommendations for Use of Air Logistics
Leasing aircrafts presents impeccable opportunities for any entity, which does not have an initial financial outlay to procure its own aircrafts. It is appropriate where the UAE air force does not operate full capacity flights. This recommendation suggests that the air force can lease aircrafts from commercial logistics companies, which are also the owners of the planes, only when it (the air force) needs to transport its personnel and cargo. However, amid the short-term cost saving plans, leasing of aircrafts by the UAE air force is inappropriate. From the discussion of part 1, military operations are secretive in nature. Thus, transportation of their cargo and personnel to various destinations should also remain secretive. Additionally, special requirements in terms of the capability of aircrafts that are used strategically and tactically for airlifting military personnel and cargo make commercial airplane inappropriate.
Where the commercial logistics companies consider acquiring planes that meet the specifications of military aircrafts, the venture may be unprofitable since the initial cost of the aircrafts is not justifiable. The cost of leasing will be prohibitive to other people and companies willing to use the aircrafts when they are not in use by the air force. In such situations, such companies will have the planes until they are demanded by the air force. This observation implies that the companies will be operating at suboptimal utilization levels of their aircrafts. The advantage of reduced depreciation levies that are associated with owning an aircraft does not apply in case of the UAE air force.
In the UAE, aircrafts that are used in the air force are owned by the state. Thus, even if they are operated to generate revenue, they will be exempted from taxation. If the air force uses commercial aircrafts to lift its personnel to different destinations, the companies will charge an amount that is inclusive of tax that is levied on profits since entering into a contract with the air force will not imply that the companies are necessarily exempted from taxation. Indeed, saving on depreciation reductions may be lower than the tax that is levied on the companies’ profits. Hence, commercial aircrafts become expensive for the air force in the short and long-term. Based on these reasons and upon considering the fact that the UAE aircrafts conduct strategic and tactical air lifting of the air force personnel and VIPs, it is not recommended to lease commercial aircraft logistics and passenger company aircrafts for use by the UAE air force.
Leithen, Francis. “Sleeping Giants.” Airline Business 24.2(2008): 50-52. Print.
Swirsky, Keith. Ownership vs. Leasing an Aircraft, 2014. Web.
The UAE. “United Arabs Emirates Defense and Security Report.” UAE Defense and Security Report 1.1(2014): 4-78. Print.
Van Nederveen, Gilles, and Lisa Turner. “A High-Tech Aircraft for a Volatile Region.” Aerospace Power Journal 14.3(2009): 96-107. Print.