Far-reaching effects from airline bankruptcies
By Rachel Beck
ASSOCIATED PRESS
11:30 a.m. September 30, 2005
NEW YORK – It might be tough to see how a major airline filing for bankruptcy has anything to do with the likes of Walt Disney Co. or AT&T Corp. That is, until you realize that they lease planes that the carrier flies.
Recent Chapter 11 filings by Delta Air Lines Inc. and Northwest Airlines show that companies with no obvious link to the airline industry made big-time bets on commercial aircraft leasing, seeing it as a lucrative place to park some of their excess cash.
But when deals like this go bad, shareholders of the companies that placed these wagers are finding that they still can be hurt by the airline industry's financial mess.
It's not that Disney and others are renting out their corporate jets. They gain ownership of commercial planes, often as part of complex financing deals, and then rent them out to airlines to use. The leasing programs aren't something new, and companies generally acknowledge them in their annual reports.
For a long time, investors didn't have much to worry about. The lease deals were largely considered fail-safe, providing steady income and tax benefits due to the depreciation of the planes.
And in strong economic times, these agreements were thought to be easy money. Since planes are considered "portable assets," as described by industry consultant Robert Mann, should one airline run into financial trouble, it wasn't too difficult to repossess them and arrange for another lease at another carrier.
That now seems to be history. The first hit to this business strategy came when the 2001 terrorist attacks left the airline business struggling to survive amid a massive downturn in travel. Today, airlines are facing crippling gains in fuel costs at the same time they are struggling with increased labor and benefit expenses.
The result: The market is filled with aircraft, depressing leasing prices and the value of airplanes.
Also, certain older planes might be nearing the end of their economic life – which generally runs about 15 to 20 years – and now in most cases are more expensive to operate than newer models. As Mann describes it, the latest generation of 737s put out by Boeing are 50 percent more fuel efficient than models from the 1980s. "At these fuel prices, airlines have to decide if it is worth keeping certain aircraft active," said Mann, who operates out of Port Washington, N.Y.
That's surely something that Delta and Northwest will address during their bankruptcy proceedings. They will likely try to end certain aircraft leases as well as renegotiate certain lease terms on older aircraft to get lower rates.
This is bad news for their leasing partners, many of which have already started acknowledging the damage.
Disney has said it would take a $68 million after-tax charge because its aircraft leases with Delta were fully impaired as a result of the bankruptcy filing. The media and entertainment conglomerate also said the impairment could speed up tax payments of as much as $100 million. Disney invested in airplane leases in the 1990s, but no longer makes such investments.
Telecommunications company AT&T said it would take a $90 million charge for its investment in aircraft leases to Delta and Northwest. Computer services company Electronic Data Systems Corp. said it would take a third-quarter charge of $26 million to write down the value of its aircraft leases with Delta, which it has had since 1988.
And investment bank Morgan Stanley, even before the recent airline bankruptcy announcements, said that it was exiting the leasing business entirely because of continued airline-industry weakness. It will take a $1 billion charge for the planned sale. Wow! when did these rocket scientists wake up??
For investors, this mess should serve as a wake-up call. "It's just a reminder of how broadly intertwined American business can be at times," wrote Jack Ciesielski, author of the popular industry newsletter The Analyst's Accounting Observer, in his Web blog.
As he points out, portfolio managers might avoid airline investments because of their recent financial troubles and instead put their money into companies they consider to be more stable and growing. But ultimately, they still have been exposed to that airline industry's troubles if the companies they have their money with are involved in aircraft leasing.
Of course, should the airline business bounce back from its current woes, then worries over the lease agreements will go away – that is, until the next big problem in the industry crops up.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck@ap.org
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