Aircraft-Leasing Firms
Able to Drive a Hard Bargain
Demand for Planes Is Up
As Overseas Markets Open;
Pushing U.S. Costs Higher
March 15, 2005
The market for used airplanes has heated up recently, and the new opportunities for leasing companies to rent their jets may shift the survival equation for struggling airlines.
After the 2001 terrorist attacks, airlines had such an oversupply of planes that hundreds were simply parked in the desert and put in storage. Today, the glut is gone. Demand for planes is rising quickly, pushing the cost of buying or leasing planes higher.
For consumers, this could lead to higher ticket prices, and possibly also fewer flights as carriers lose aircraft or are forced to pay more to lease them. Most carriers lease a significant portion of their fleets. In addition, continued high fuel prices, riding on top of a tighter squeeze from leasing companies, could rekindle bankruptcy worries.
Eighteen ATA Airlines 737s are headed to airlines in China, India and Brazil this year.
Until recently, some U.S. carriers benefited from generous leasing deals that were negotiated when times were tougher. Today, however, the giant aircraft-leasing companies are able to drive a harder bargain partly because they are able to get higher prices overseas, particularly in Asia where carriers are growing rapidly.
Some planes are already heading abroad. General Electric Co. -- which is the biggest creditor at several airlines operating under bankruptcy protection -- will take eighteen 737-800 jets from ATA Airlines send them to airlines in China, India and Brazil. GE also is taking 25 planes from US Airways, sending some overseas and some to cargo companies. And GE is taking 10 planes back from Independence Air, a unit of FLYi Inc.
"There's more demand than we have product for," Michael Platt, senior vice president at International Lease Finance Corp., a unit of American International Group Inc. with more than 760 airplanes leased to carriers, told the International Society of Transport Aircraft Trading last week.
While at a conference in Phoenix, he got an e-mail from another new startup looking for planes in India, where government restrictions are being loosened. People in the U.S. worry about jobs going to India. Airplanes are headed that way, too.
The squeeze will likely come next fall when airlines spend the money they make during the summer travel season and start watching cash reserves deplete. Last week, Delta Air Lines, with one of the weaker cash positions among airlines, said it expects to end this year with less cash in the till than it had at the end of 2004 unless it sells some assets. Delta said it expects a "substantial" loss this year for the fifth consecutive year. Last year, Delta had a $5.2 billion loss.
Delta was on the brink of a bankruptcy filing last fall before securing cost savings from its pilots' union and added financing from American Express Co. and General Electric. But now, Delta says that if oil prices stay at current prices over $50 a barrel, it will pay $750 million more for jet fuel than it had planned for this year, and it may have to seek protection from creditors in bankruptcy court.
If it did that, some 40% of U.S. airline capacity would be operating under bankruptcy protection. And if Delta goes, others likely would follow.
Part of the problem is that competitors like UAL Corp.'s United Airlines and US Airways Group Inc. have been propped up by bankruptcy-court reorganizations, including generous deals from aircraft-leasing firms negotiated during the travel downturn. Since leasing companies like GE couldn't find new homes for the $3 billion worth of airplanes it had at US Airways all at once, for example, it helped US Airways.
That hurts other airlines, particularly Delta, which competes heavily with US Airways on the East Coast.
In recent years, U.S. airlines have demonstrated remarkable staying power, considering that they have had $30 billion in losses over the past four years. Losses this year may tally $3 billion to $5 billion.
There are some small signs of improvement for airlines, however. A few small price increases have stuck -- not enough to pay for higher jet-fuel costs, but a sign of some strengthening in airline fares. In total, revenue may be up for airlines during the first quarter.
But there is a bigger problem out there. For the past few years, their strategy has been, in effect, to stay afloat long enough to see if a rival carrier or two will be forced to shut down. If this were to happen to even one major airline, the remaining carriers would be substantially better off.
Without a big liquidation, the industry has had to slash prices to fill empty seats. "The only reason seats are full is because we're pricing our product below our cost," says W. Douglas Parker, chief executive of America West Airlines.
Continued......
Able to Drive a Hard Bargain
Demand for Planes Is Up
As Overseas Markets Open;
Pushing U.S. Costs Higher
March 15, 2005
The market for used airplanes has heated up recently, and the new opportunities for leasing companies to rent their jets may shift the survival equation for struggling airlines.
After the 2001 terrorist attacks, airlines had such an oversupply of planes that hundreds were simply parked in the desert and put in storage. Today, the glut is gone. Demand for planes is rising quickly, pushing the cost of buying or leasing planes higher.
For consumers, this could lead to higher ticket prices, and possibly also fewer flights as carriers lose aircraft or are forced to pay more to lease them. Most carriers lease a significant portion of their fleets. In addition, continued high fuel prices, riding on top of a tighter squeeze from leasing companies, could rekindle bankruptcy worries.
Eighteen ATA Airlines 737s are headed to airlines in China, India and Brazil this year.
Until recently, some U.S. carriers benefited from generous leasing deals that were negotiated when times were tougher. Today, however, the giant aircraft-leasing companies are able to drive a harder bargain partly because they are able to get higher prices overseas, particularly in Asia where carriers are growing rapidly.
Some planes are already heading abroad. General Electric Co. -- which is the biggest creditor at several airlines operating under bankruptcy protection -- will take eighteen 737-800 jets from ATA Airlines send them to airlines in China, India and Brazil. GE also is taking 25 planes from US Airways, sending some overseas and some to cargo companies. And GE is taking 10 planes back from Independence Air, a unit of FLYi Inc.
"There's more demand than we have product for," Michael Platt, senior vice president at International Lease Finance Corp., a unit of American International Group Inc. with more than 760 airplanes leased to carriers, told the International Society of Transport Aircraft Trading last week.
While at a conference in Phoenix, he got an e-mail from another new startup looking for planes in India, where government restrictions are being loosened. People in the U.S. worry about jobs going to India. Airplanes are headed that way, too.
The squeeze will likely come next fall when airlines spend the money they make during the summer travel season and start watching cash reserves deplete. Last week, Delta Air Lines, with one of the weaker cash positions among airlines, said it expects to end this year with less cash in the till than it had at the end of 2004 unless it sells some assets. Delta said it expects a "substantial" loss this year for the fifth consecutive year. Last year, Delta had a $5.2 billion loss.
Delta was on the brink of a bankruptcy filing last fall before securing cost savings from its pilots' union and added financing from American Express Co. and General Electric. But now, Delta says that if oil prices stay at current prices over $50 a barrel, it will pay $750 million more for jet fuel than it had planned for this year, and it may have to seek protection from creditors in bankruptcy court.
If it did that, some 40% of U.S. airline capacity would be operating under bankruptcy protection. And if Delta goes, others likely would follow.
Part of the problem is that competitors like UAL Corp.'s United Airlines and US Airways Group Inc. have been propped up by bankruptcy-court reorganizations, including generous deals from aircraft-leasing firms negotiated during the travel downturn. Since leasing companies like GE couldn't find new homes for the $3 billion worth of airplanes it had at US Airways all at once, for example, it helped US Airways.
That hurts other airlines, particularly Delta, which competes heavily with US Airways on the East Coast.
In recent years, U.S. airlines have demonstrated remarkable staying power, considering that they have had $30 billion in losses over the past four years. Losses this year may tally $3 billion to $5 billion.
There are some small signs of improvement for airlines, however. A few small price increases have stuck -- not enough to pay for higher jet-fuel costs, but a sign of some strengthening in airline fares. In total, revenue may be up for airlines during the first quarter.
But there is a bigger problem out there. For the past few years, their strategy has been, in effect, to stay afloat long enough to see if a rival carrier or two will be forced to shut down. If this were to happen to even one major airline, the remaining carriers would be substantially better off.
Without a big liquidation, the industry has had to slash prices to fill empty seats. "The only reason seats are full is because we're pricing our product below our cost," says W. Douglas Parker, chief executive of America West Airlines.
Continued......
