Woes of Aircraft Leasing Companies Could Mean Higher Ticket Prices ‎

<http://www.nytimes.com/>
<http://www.nytimes.com/> The New York Times

_____

October 6, 2009

Woes of Aircraft Leasing Companies Could Mean Higher Ticket Prices

Aircraft leasing has grown from a niche market to a $150 billion industry.
Such companies own or manage 34 percent of the roughly 18,000 commercial
airliners flying today, according to Ascend, an aviation consulting firm in
London.

The lessors up for sale own a total portfolio of more than 1,800 planes,
valued at about $57 billion. But analysts say the value of those assets is
declining rapidly. Over the last 12 months, commercial aircraft values have
fallen by an average of about 15 percent to 20 percent, according to Ascend.
For planes older than 10 years, appraised values have dropped by as much as
35 percent.

By NICOLA CLARK

PARIS — They own or manage more than one-third of the airliners in the sky
and, despite the turmoil in the global economy, are still turning
significant profits.

Yet many of the world’s biggest jet-leasing companies — top customers for
Boeing and Airbus — are sinking in debt and scrambling for cash. Several are
now up for sale but having difficulty attracting buyers.

When the dust eventually settles, analysts say, many lessors will probably
face higher borrowing costs. And that could increase the cost of flying for
airlines and passengers.

“There is a lot of disarray,” said Ron Wainshal, chief executive of
Aircastle, a leasing company with a fleet of around 130 commercial jets.

Historically, aircraft-leasing companies have tended to profit from
downturns, when airlines put off orders for expensive new planes in favor of
taking them on lease until business improves. They have also capitalized on
dips in demand to negotiate better prices from aircraft manufacturers.

But the current environment has placed many lessors in a bind. As passenger
and freight traffic began to tumble this year, airlines started parking
their own jets by the hundreds and returning leased planes once their
contracts expired. The financial crisis that began last year, meanwhile,
made it almost impossible for leasing companies to raise the cash they
needed to refinance debt on existing planes and to pay for new ones they had
contracted to buy.

International Lease Finance Corp., or I.L.F.C., a unit of the troubled
insurer American International Group, is among the more high-profile
victims. Although it reported a 10 percent rise in second-quarter net
profit, to $237 million, I.L.F.C., the world’s second-largest lessor by
fleet size, after GE Commercial Aviation Services, a unit of General
Electric, has been unable to gain access to the capital markets since its
parent company sought a $180 billion bailout from the United States
government late last year.

A.I.G. has been looking to sell I.L.F.C. and other noncore assets as part of
its restructuring. But the sale effort has been hampered by a number of
factors, including roughly $32 billion in outstanding debt that will need to
be rolled over in the next two to four years.

“A big issue for everybody today is refinancing debt as it comes due,” said
Mr. Wainshal, the chief of Aircastle, which is based in Stamford,
Connecticut. “I think being bigger is now actually much worse because of the
difficulty in lining up a larger pool of funds.”

I.L.F.C. is not alone. CIT Group, another struggling American finance group,
is looking to sell its CIT Aerospace leasing subsidiary, while Babcock &
Brown Aircraft Management and Allco Finance Group, both of Australia, are
also up for sale by parents that filed for bankruptcy this year. Last month,
Royal Bank of Scotland — the recipient of a British government bailout worth
£20 billion, or about $31.9 billion — said it had hired Goldman Sachs to
help find a buyer for its RBS Aviation Capital unit.

Over the past two decades, aircraft leasing has grown from a niche market to
a $150 billion industry. Such companies own or manage 34 percent of the
roughly 18,000 commercial airliners flying today, according to Ascend, an
aviation consulting firm in London.

The lessors up for sale own a total portfolio of more than 1,800 planes,
valued at about $57 billion. But analysts say the value of those assets is
declining rapidly. Over the last 12 months, commercial aircraft values have
fallen by an average of about 15 percent to 20 percent, according to Ascend.
For planes older than 10 years, appraised values have dropped by as much as
35 percent.

“Market conditions are still highly uncertain, especially for older
equipment,” said Richard Aboulafia, an analyst at the Teal Group, an
aerospace consulting firm based in Virginia. “It’s tough to gauge the
outlook of a company’s value when you don’t know when asset values will stop
falling.”

Adding to the pressure on values is the steady stream of new planes coming
off assembly lines at Boeing and Airbus. Airlines have taken roughly 2,000
airplanes out of their fleets over the past year, but manufacturers have
delivered 1,000 new planes in the same period, said Eddy Pieniazek, a
director at Ascend.

“All indications are that asset values will stay soft and lease rates will
do likewise, especially as we head into the winter,” when air traffic
traditionally falls, Mr. Pieniazek said.

Patrick Harris, president of HMG Aviation, an aviation finance consultant
and aircraft appraiser in Boca Raton, Florida, said: “This is not an
environment in which to be selling any hard assets. People are not coming to
the table willingly.”

Which is why anyone who has the resources to wait out the crisis, will,
analysts said. A.I.G. and Royal Bank of Scotland are now majority-owned by
their respective governments, which gives them significant breathing room.

“A private enterprise would have been forced to sell a business like
I.L.F.C. at a huge loss,” said Adam Pilarski, an economist and senior vice
president at Avitas, an aviation consulting firm in Chantilly, Virginia.
“Governments can wait until the market picks up.”

There have been some hints recently that investors and lenders are growing
more confident about the aviation sector in general amid signs the declines
in air traffic may be slowing . Delta Air Lines and American Airlines, for
example, raised a combined $950 million from the sale of high-yield bonds
last month, while Qatar Airways said on Sept. 29 that it had secured two
loans worth $700 million from European and Japanese banks for the purchase
of new planes.

Yet when money does start to flow back to leasing companies, some said it
was unlikely to come at the same low rates the industry enjoyed in the past.

I.L.F.C., for example, used to be able to borrow very cheaply in the U.S.
commercial paper market by virtue of the triple-A credit rating attached to
A.I.G. before the crisis. Whoever ends up buying the company will — in
addition to taking on mountains of existing debt — need to come up with a
different financing model that most likely will involve borrowing money on
more expensive terms.

“Anybody that ends up acquiring I.L.F.C. or RBS or CIT is going to have to
deal with that issue,” said John McMahon, chief executive of Genesis Lease,
an Irish lessor that last month was acquired by the Dutch company AerCap
Holdings for just over $300 million in stock.

Analysts predicted that the higher costs of capital would translate into
higher lease rates and other fees that lessors typically charge airlines for
the use of their aircraft. “The cost of leasing will be going up,” said Mr.
Pilarski, the Avitas economist. “This will increase the cost of flying.”

Some small- and mid-sized leasing companies could follow the lead of AerCap
and Genesis Lease, merging in the hope of lowering their funding and
operating costs through larger economies of scale, some analysts said.

“There are certainly merits to scale,” said Mr. McMahon, the Genesis Lease
chief.

Most agree that when the industry does finally emerge from its turmoil, the
landscape will look a bit different. Having been badly burned twice in the
last decade — by the September 2001 terrorist attacks and the current
financial crisis — many airlines are moving toward leasing more of their
planes, rather than buying them directly from manufacturers.

“Lessors will reorder themselves and I think they will eventually end up
with a bigger share of aircraft ownership than they have now,” said Mr.
Wainshal, the Aircastle chief. “Within 10 years, they’ll probably own half
the market. A lot of that will be for financial reasons, but also because
operationally it gives airlines much greater flexibility.”

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