as a tag on to why a leasing company should renegotiate, here is an article I just found.
Delta's Pains Extend to Planes
Provided By: The Atlanta Business Chronicle
Last Modified: 7/19/2004 10:08:10 AM
A bankruptcy filing by Delta Air Lines Inc. would likely cost the companies that own many of Delta's planes tens or even hundreds of millions of dollars.
Bankrupt carriers United Air Lines Inc. and US Airways Group Inc. each have gotten at least $900 million in concessions on their airplane leases.
More than 50 prominent American companies own airplanes that they lease to Delta at interest rates ranging from 9 percent to 12 percent or more. The companies include Altria Group Inc. subsidiary Philip Morris Capital Corp., .The Walt Disney Co., Verizon Corp. subsidiary Bell Atlantic Credit Corp., and subsidiaries of AT&T Corp. and Bank of America N.A.
If the carrier (NYSE: DAL) ends up in bankruptcy - which CEO Jerry Grinstein has repeatedly warned is possible - these and other companies will have to renegotiate the terms and interest rates of their Delta plane leases under bankruptcy court supervision.
Right now, Delta has 838 planes across its operations, with 348 of them owned and leased through an outside company and 490 of them owned by Delta, according to statistics provided by Delta. Those figures include planes used by Delta's low-fare service Song and its subsidiaries Comair Inc. and Atlantic Southeast Airlines Inc.
Delta spokesman John Kennedy declined to discuss the carrier's leases.
"A 25 [percent] or 30 percent decline in value is somewhere in the neighborhood of what we'll probably see here," said Bill Rochelle, a partner with New York law firm Fulbright & Jaworski LLP who specializes in airline bankruptcies. "The process is filled with pain and suffering all around. Nobody gets out unscathed."
United (OTC: UALAQ) said in its recent annual report that it expects to save $900 million annually over the next five years from its aircraft restructuring efforts, and US Airways (Nasdaq: UAIR) also said in its annual report that is has saved $967 million from its restructured aircraft financing deals.
American Airlines Inc. (NYSE: AMR), which has narrowly avoided bankruptcy thus far, cut its aircraft rental payments by $150 million in 2003 and is selling off some planes to further reduce its obligations.
Rochelle pointed out many of Delta's plane lessors are probably hesitant to give steep cuts right now because none of them can tell what cuts - if any - the other lessors are giving.
"It's all very cloudy until bankruptcy actually occurs and everybody can see what everybody else is doing," Rochelle said. "That's when the real concessions come."
He added, however, that Delta is probably trying to renegotiate some plane leases now in its ongoing efforts to cut costs and avoid bankruptcy like American did. Delta management also is seeking a $900 million reduction in pilot pay, in addition to across-the-board cuts, to help the airline better compete with low-cost carriers.
Industry watchers and analysts have speculated Delta may file for bankruptcy as soon as October or November. At the end of the first quarter, Delta had a whopping $20.6 billion debt load and cash reserves of $2.7 billion.
The company's second quarter results are scheduled to be released July 19, and Delta's net losses are expected to be high because of two noncash charges totaling $1.65 billion. The charges are related to deferred income taxes and pension contributions, and they will not affect Delta's cash position.
Regardless of whether Delta ends up in Chapter 11 bankruptcy, many of the owners of Delta's planes have probably already set aside enough money to cover any losses they may incur on Delta leases, according to local bankruptcy attorney Dan Kolber, a partner with Atlanta law firm Gambrell & Stolz LLP.
"This isn't the sort of thing that takes an investor by surprise, especially given what United and US Air have been through," said Kolber, who is a former executive with the now-defunct startup carrier called Air Atlanta.
Disney (NYSE: DIS), for example, said in its most recent quarterly filing that it was "monitoring the recoverability" of plane leases it has with Delta and FedEx Corp. (NYSE: FDX), and that it may have to write off as much as $119 million if Delta files for bankruptcy. Disney took a write-down of $114 million in the third quarter of 2003 for its plane leases with United. Disney spokesman John Spelich declined to comment for this story.
AT&T Corp. (NYSE: T), which holds leases on seven Delta planes worth a collective $72 million, has written off .$310 million related to its aircraft leases over the past two years and warned investors in its recent annual filing that it may face additional losses if its aircraft leases are restructured further. AT&T spokesman Dan Lawler declined to comment further.
Verizon (NYSE: VZ) has taken charges totaling $301 million over the past two years, most of which came from its plane leases, according to its annual report. Verizon spokesman Bob Varettoni declined to comment for this story.
John Mulligan, CEO of Altria's (NYSE: MO) Philip Morris Capital Corp. (PMCC), declined to comment on his company's plane leases. However, PMCC told investors in its annual report that it was shifting the focus of its finance lease portfolio to an emphasis on "maximizing gains and generating reliable cash flow" instead of focusing primarily on growth. PMCC is the largest Delta plane owner, with 19 aircraft worth $241 million.
Leases on airplanes and other heavy machinery became a popular investment tool in the bullish 1990s economy among cash-rich companies looking for ways to shelter some of their money.
In a healthy economy, plane leases are attractive because they often yield higher-than-average interest rates (usually .9 percent or more), and the companies that own the planes can claim tax write-offs each year on the depreciating value of the aircraft.
Aircraft are also considered easier investments than other heavy machinery such as railroad cars or construction equipment because they are easy to transport and can sometimes be converted to cargo or military planes if the commercial passenger market is weak.
The leases also allow airlines to pay lower monthly rental fees - $100,000 to $300,000 per month depending on aircraft type and lease terms - instead of buying planes outright for tens of millions of dollars each.
And at the end of the lease term (typically 10 to 20 years), the owner still has some equity in the plane, which can be sold.
"It's a very good way to do some tax-advantaged investing," Rochelle said.
The problem for Delta and its peers, such as United and US Airways, is that many of their plane leases date back .10 years or more, and those deals were done at higher valuations and often with back-end load clauses that make them far more expensive than today's leases.
"The rates on some of these old leases are way above today's market - sometimes by a factor of three," said Clive Medland, senior vice president at air transportation consulting firm Simat, Helliesen & Eichner Inc.
Monthly lease payments for a Boeing 737, for example, might be cut from $200,000 to $90,000 under bankruptcy court oversight, he said.
One thing in favor of plane owners who lease to Delta is the likelihood that the carrier will want to keep all or most of its planes in service even if a bankruptcy filing occurs.
Delta's fleet is still relatively young - the average age is 12 years - and the carrier has made no overtures of changing its aircraft type or scaling back from any of its hubs.
Another bright spot for Delta plane owners is the weakness of the secondary plane market.
There currently are 230 passenger jets owned or leased by American carriers in long-term storage in deserts in the Southwest, according to data compiled by BACK Aviation Solutions, a Connecticut firm that tracks airline fleets. Nineteen of those planes are Delta's.
Worldwide, there are 1,217 cargo and passenger jets in long-term storage out of a total of 18,091 aircraft, or 6.7 percent, BACK Aviation data shows.
That means the owners of Delta planes would probably be more inclined to negotiate their leases with Delta so the carrier keeps using their planes, Rochelle said. The other option is running the risk of not finding a new buyer and having to put the planes in storage where they draw little or no revenue.
"If [owners] take their plane back, they will have the great pleasure of parking it in an Arizona desert and paying for storage and maintenance," Rochelle said. "The only other thing you can do with these planes is use them as a giant, expensive paperweight."
Cheers, Wil
