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Letter from Dan L. Crippen to Curt Weldon regarding report on leasing four Boeing 737 aircraft submitted by the Secretary of the Air Force to the Congress on June 24, 2002 1 (July 2002)

handle is hein.congrec/cbo9711 and id is 1 raw text is: CONGRESSIONAL BUDGT OFFICE Dan L. Crippen, B U.S. Congress bashinton, DC 20515 July 23, 2002 Honorable Curt Weldon Chairman Subcommittee on Military Procurement Committee on Armed Services U.S. House of Representatives Washington, DC 20515 Dear Mr. Chairman: As you requested in your letter of July 8, 2002, the Congressional Budget Office has reviewed the report on leasing four Boeing 737 aircraft submitted by the Secretary of the Air Force to the Congress on June 24, 2002. The Air Force found that it would save $3.9 million (expressed in net present value terms) from leasing these aircraft when compared to an outright purchase-a difference of about 1 percent. In analyzing the key assumptions underlying the Air Force's analysis, CBO found that small adjustments in the assumed purchase price, residual value, or insurance cost would reduce the projected savings from leasing the aircraft or make the purchase alternative the less expensive option. We conclude that the critical assumption in the Air Force's analysis is the fair market value of the aircraft used to estimate the cost of the purchase alternative. Our analysis suggests that this figure may be too high because it does not appear to be consistent with the lease payments and residual value offered by Boeing. In contrast, using a higher discount rate, as some economists recommend, would reduce the cost of the lease alternative relative to the purchase option. The Air Force's 737 Lease Plan The Air Force plans to award a firm, fixed price, multiyear contract to Boeing for four leased C-40 aircraft. (The C-40 is the military variant of the commercial 737 Boeing Business Jet.) Because these aircraft take 18 to 24 months to build, the Air Force plans to lease two used 737 aircraft in the

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