One Reason Airlines
Keep Flying Despite
Huge Losses: GE
No. 1 Aircraft Lessor Aims
To Avoid Grounding Planes;
One Side Effect: Low Fares
December 14, 2004; Page D8
It's a financial miracle that U.S. airlines have kept flying despite $25 billion in losses over the past four years.
Gee? No, GE.
General Electric Co. has been a major behind-the-scenes player in keeping troubled airlines in the air. It isn't alone, but it has made some of the most significant moves, such as a recent deal with
US Airways Group Inc. that gives the airline more hope for survival.
For travelers, such help amounts to a subsidy of low fares. Instead of airlines going out of business, the financial assistance has kept a lot of seats in the air, and airlines have slashed prices to historically low levels to fill them.
Plenty of deep-pocketed entities have helped airlines through the recent crisis. From the government to several aircraft-leasing companies to
American Express Co., which sells tickets and has a business in frequent-flier miles, many parties have been willing to renegotiate debt and give carriers more cash on top of bad loans. The state of Indiana even loaned hometown carrier ATA Airlines $15.5 million to keep it flying, preserving -- at least temporarily -- both local jobs and air service. On top of that, airline employees have made deep sacrifices to keep carriers flying.
But no single entity has done more than GE to keep the sickest airlines flying world-wide. GE says it has invested more than $7 billion in airlines around the world since the 2001 terrorist attacks. GE helped prop up America West Airlines and helped finance Air Canada's reorganization. GE is the biggest creditor at bankrupt UAL Corp., the parent of United Airlines, with $1.6 billion at stake. Ditto for US Airways, where GE has nearly $3 billion at stake, according to financial filings.
This fall, GE struck a deal to loan
Delta Air Lines $630 million and help it avoid a bankruptcy filing. And just recently, GE agreed to free up an additional $140 million that US Airways owed it, taking a convertible loan instead of cash. That deal still is subject to bankruptcy-court approval and other conditions.
For GE, the world's largest aircraft-leasing firm, pumping money into airlines is in part a way to avoid potentially huge losses from an airline collapse. GE, which has 1,239 airplanes and $29 billion of airplane loans and leases, has an interest in keeping its leased planes in circulation.
GE says it only does deals where it thinks it can profit -- and is plenty willing to take back airplanes from failing carriers and rent them someplace else. When it helps prop up airlines, it's "because we think we make a lot of money on it," says Henry Hubschman, president and chief executive of GE Capital Aviation Services and the transportation-financing unit of GE Commercial Finance. "The time you do best is when they are most in need of money," he says.
While airlines are losing billions, the commercial-aircraft unit, known as Gecas, still is making millions. The unit earned at least $450 million in both 2002 and 2003, even after write-downs of more than $200 million a year. GE expects similar results this year.
Mr. Hubschman says GE is standing firm at some U.S. carriers he won't name -- and says GE likely will pull planes out of failing airlines soon. Already, GE has a still-unannounced deal to take 18 airplanes out of the U.S. and lease them abroad. GE also has taken back planes from many foreign airlines, such as Brazil's Varig and Italy's Volare.
But if the airline can show a good business plan, GE is willing to help the carrier through tough times. It weighs that along with the likelihood it can find a new home for its airplanes and what it would cost to move planes.
Propping up carriers after Sept. 11, 2001, proved to be a good strategy for lessors, avoiding a crush of grounded airplanes. The market for used planes has improved considerably since then. Now, they can pick and choose who to prop up and, if need be, judiciously redistribute their planes.
At Delta, GE signed a three-year loan that Delta said was "secured by substantially all of Delta's remaining unencumbered assets." One thing GE asked for in return was a provision for Delta to take about 40 small regional jets in the future, if GE wanted. GE happens to have 39 regional jets on lease at US Airways.
At US Airways, GE has hedged its bet. The carrier was in need of cash last month, and GE was willing to help -- but it also wanted to start limiting its exposure by taking some of its airplanes back. US Airways agreed to give up only 25 -- 10 Airbus 319s and 15 Boeing 737-300s. GE says it already has found new homes for all 25. (These planes are unrelated to the other 18 GE planes soon to leave the U.S.) Foreign airlines will take the 319s; the 737s likely will be converted to cargo carriers.
US Airways says the latest GE deal, which includes lots of deadlines and financial hurdles, is a "catalyst" toward completing its restructuring. But it also requires the airline to come up with another $100 million in liquidity by January. "It shows momentum and it's a vote of confidence from our largest creditor," spokesman Chris Chiames said.
Analysts and competing airline executives bemoan the industry's inability to shed unprofitable capacity. If an airline or two went out of business, the finances of the survivors likely would brighten. But it's hard to ever get the airline industry to economic equilibrium, because so many stakeholders are willing to pump in new money and bet better days are ahead.
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Write to Scott McCartney at
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