Flying the Line
Well-known member
- Joined
- Feb 17, 2004
- Posts
- 417
GE's Bailouts of Troubled CarriersAs North American airlines struggle through their fourth year of misery, a powerful, behind-the-scenes force in the industry -- General Electric Co. -- is getting blamed by some players for prolonging the woes.
Best known for making power turbines and refrigerators and for owning the NBC television network, GE has become a vital prop for the airline industry in recent years by rescuing some of the most-troubled carriers with loans and other financing. Through its fast-growing airline-leasing unit, the largest in the industry, GE owns more than 1,300 airplanes, the world's largest commercial fleet, and has new aircraft on order with a list price of $10.2 billion. Revenue at GE Capital Aviation Services, known as GECAS, was $3.2 billion last year, double that of 1999.
In all, GE does business with more than 200 airlines globally, and has about $33 billion of loans and leases to the industry. Adding to its industry clout, GE also is among the world's largest makers of aircraft engines and providers of engine-maintenance services.
Among other transactions, GE has provided bankruptcy financing to UAL Corp.'s United Airlines, helped bail out America West Airlines and provided a $700 million loan to Air Canada when it was in bankruptcy proceedings. GE also has thrown financial lifelines to Delta Air Lines, Independence Air and US Airways Group Inc., which next month is due to file a bankruptcy-reorganization plan that must satisfy GE's financial expectations.
Amid that activity, a growing number of critics accuse GE of blocking much-needed industry consolidation in North America by keeping laggards in business while profiting from the industry's troubles. Some critics work for healthier carriers that want to see a rival or two fail, thus reducing capacity and allowing remaining airlines to raise fares.
Earlier this month, Mike Ristow, a pilot who serves on the board of Northwest Airlines, told officials of the airline's pilots union that the industry may suffer from GE's actions. In a subsequent interview, Capt. Ristow, a director for six years, said, "There are a large number of aircraft that probably shouldn't be in this industry, but GE has allowed them to keep flying. It's capitalism, but is it realistic? This is a threat to our recovery."
Last week, Joe Leonard, chief executive at AirTran Airways, in a speech blamed the industry's collective problems on federal subsidies, overreliance on the U.S. Bankruptcy Code and "some key lessors and suppliers [who] are cutting deals to help keep their airline clients flying." In an interview, Mr. Leonard declined to criticize specific suppliers, but he said companies that are involved in rescuing weak airlines should step back from their deal making and ask whether they are hurting the broader industry.
"There are too many seats in the market," he said. "The question is, whose seats should come out? It should be the weaker carriers. By propping them up, you're hurting the balance sheets of the stronger carriers."
GE says it has received no direct complaints and is merely working for its shareholders, supporting customers and trying to make money in a volatile industry. "We're not the strategic arbiters of the airline industry," said Henry Hubschman, chief executive at GECAS. "We're mindful of the fact that, if one part of the world is crying out for aircraft and one part of the world has excess capacity, we look at that and that weighs on us."
Some industry figures decline to publicly single out GE by name, given its clout. A number of other suppliers and lenders also have come to the aid of struggling carriers, including big airplane manufacturers, hedge funds, governments and even individual bondholders holding junior debt in specific airplanes. Among big companies, Airbus SAS and American Express Co., have helped in industry restructurings, while Ranch Capital LLC, an investment firm backed by hedge funds, is providing the financing to take Hawaiian Airlines out of bankruptcycourt protection. But GE's size has turned it into a symbol of such aid.
For consumers, the current glut of seats is keeping prices low, because airlines are discounting heavily to win business. But healthier airlines argue that overcapacity is keeping ticket prices at unsustainable levels and thus putting more carriers in jeopardy.
Asked if GE is putting stronger airlines at a disadvantage, Laura Wright, chief financial officer of perennially profitable Southwest Airlines, says her company is being harmed by "the capital coming into the market to keep some of the weaker players afloat." That forces Southwest "to do a lot more discounting," she says, adding that GE isn't the sole source of that capital. In the industry's last down cycle, some airlines did go out of business and capacity was reduced, she says.
In the past, GE has backed a number of struggling carriers that have pulled out of tailspins, such as Continental Airlines, which it helped with financing a decade ago. And it has reclaimed planes it leased to carriers that failed to stay within GE's financial-risk parameters. "Business is business," Mr. Hubschman says. "The idea is to see if you can find a win-win."
GE hasn't been immune to the problems plaguing U.S. carriers. In 2001, in large part because of the Sept. 11 terrorist attacks, the conglomerate's aviation business saw its profit decline after years of growth. In 2004, GECAS earned $520 million, an increase of only 2.8% from the year before, after it took $300 million in writeoffs related to its exposure to two airlines in bankruptcy protection.
But instead of pulling back, GE has emerged as a leading commercial backer of airlines. While managing its exposure to old-line airline carriers in the U.S., the company has pursued new opportunities to serve low-cost carriers world-wide and moved aggressively in fast-growing countries such as China and India.
Some of GE's recent interventions have proved shrewd. As overseas demand for planes has grown and lease rates abroad continue to increase, GE has shifted some of its lease aircraft away from troubled U.S. carriers to those overseas with stronger credit. For instance, the bankruptcy-driven shrinkage of ATA Airlines gave GE the chance to take back 18 planes that now are being deployed in places such as China, Brazil and India.
Analyzing the risks of helping a troubled carrier can be like playing three-dimensional chess. For instance, GE is US Airways' largest creditor with $2.9 billion in aircraft leases, aircraft financing and engine-maintenance contracts. To help the airline avoid running out of money, GE in November deferred some lease payments, lowered its price for engine-maintenance work, provided interim financing and pledged to lease more regional jets to the company. In return, US Airways agreed to give back 25 larger planes, issue a convertible note to GE and meet stringent financial milestones until it emerges from bankruptcy.
GE also had to consider the fates of regional carriers who fly on behalf of US Airways with GE-provided planes. And it needed US Airways' other lenders, including the federal government, to grant continuing forbearance, as well as additional concessions from the carrier's unions. A spokesman for the airline says, "GE has been a strong business partner with high expectations for US Airways. They consistently make sound decisions that further our mutual interests."
To be sure, supplier bailouts of troubled airlines are rarely well-received by rivals. When America West was on the verge of a Chapter 11 filing in late 2001, GE helped provide financing, the government awarded loan guarantees and Airbus agreed to defer new airplanes on order. Doug Parker, America West's chief executive, says Mr. Hubschman told him, "We're going to hear from all our customers that this is a bad thing to do."
Mr. Parker says it is naive for airlines to hope that GE will do anything but look out for its own interests. And those interests aren't entirely aligned with those of the carriers, says Bill Warlick, an airline debt analyst at Fitch Ratings. GE's interest is "in keeping as much capacity in the air as possible because so much of their lease exposure is in the U.S.," Mr. Warlick says. A big airline liquidation would be bad for GE, he says, because it would flood the market with planes and drive down lease rates.
Mr. Hubschman says there may be some overcapacity in the U.S. industry, "but it's not clear to me that simply a liquidation is the answer." If 200 or 300 planes were grounded by an airline failure, stronger companies such as Southwest and JetBlue Airways would lease or buy more planes from willing manufacturers and expand, he says.
Best known for making power turbines and refrigerators and for owning the NBC television network, GE has become a vital prop for the airline industry in recent years by rescuing some of the most-troubled carriers with loans and other financing. Through its fast-growing airline-leasing unit, the largest in the industry, GE owns more than 1,300 airplanes, the world's largest commercial fleet, and has new aircraft on order with a list price of $10.2 billion. Revenue at GE Capital Aviation Services, known as GECAS, was $3.2 billion last year, double that of 1999.
In all, GE does business with more than 200 airlines globally, and has about $33 billion of loans and leases to the industry. Adding to its industry clout, GE also is among the world's largest makers of aircraft engines and providers of engine-maintenance services.
Among other transactions, GE has provided bankruptcy financing to UAL Corp.'s United Airlines, helped bail out America West Airlines and provided a $700 million loan to Air Canada when it was in bankruptcy proceedings. GE also has thrown financial lifelines to Delta Air Lines, Independence Air and US Airways Group Inc., which next month is due to file a bankruptcy-reorganization plan that must satisfy GE's financial expectations.
Amid that activity, a growing number of critics accuse GE of blocking much-needed industry consolidation in North America by keeping laggards in business while profiting from the industry's troubles. Some critics work for healthier carriers that want to see a rival or two fail, thus reducing capacity and allowing remaining airlines to raise fares.
Earlier this month, Mike Ristow, a pilot who serves on the board of Northwest Airlines, told officials of the airline's pilots union that the industry may suffer from GE's actions. In a subsequent interview, Capt. Ristow, a director for six years, said, "There are a large number of aircraft that probably shouldn't be in this industry, but GE has allowed them to keep flying. It's capitalism, but is it realistic? This is a threat to our recovery."
Last week, Joe Leonard, chief executive at AirTran Airways, in a speech blamed the industry's collective problems on federal subsidies, overreliance on the U.S. Bankruptcy Code and "some key lessors and suppliers [who] are cutting deals to help keep their airline clients flying." In an interview, Mr. Leonard declined to criticize specific suppliers, but he said companies that are involved in rescuing weak airlines should step back from their deal making and ask whether they are hurting the broader industry.
"There are too many seats in the market," he said. "The question is, whose seats should come out? It should be the weaker carriers. By propping them up, you're hurting the balance sheets of the stronger carriers."
GE says it has received no direct complaints and is merely working for its shareholders, supporting customers and trying to make money in a volatile industry. "We're not the strategic arbiters of the airline industry," said Henry Hubschman, chief executive at GECAS. "We're mindful of the fact that, if one part of the world is crying out for aircraft and one part of the world has excess capacity, we look at that and that weighs on us."
Some industry figures decline to publicly single out GE by name, given its clout. A number of other suppliers and lenders also have come to the aid of struggling carriers, including big airplane manufacturers, hedge funds, governments and even individual bondholders holding junior debt in specific airplanes. Among big companies, Airbus SAS and American Express Co., have helped in industry restructurings, while Ranch Capital LLC, an investment firm backed by hedge funds, is providing the financing to take Hawaiian Airlines out of bankruptcycourt protection. But GE's size has turned it into a symbol of such aid.
For consumers, the current glut of seats is keeping prices low, because airlines are discounting heavily to win business. But healthier airlines argue that overcapacity is keeping ticket prices at unsustainable levels and thus putting more carriers in jeopardy.
Asked if GE is putting stronger airlines at a disadvantage, Laura Wright, chief financial officer of perennially profitable Southwest Airlines, says her company is being harmed by "the capital coming into the market to keep some of the weaker players afloat." That forces Southwest "to do a lot more discounting," she says, adding that GE isn't the sole source of that capital. In the industry's last down cycle, some airlines did go out of business and capacity was reduced, she says.
In the past, GE has backed a number of struggling carriers that have pulled out of tailspins, such as Continental Airlines, which it helped with financing a decade ago. And it has reclaimed planes it leased to carriers that failed to stay within GE's financial-risk parameters. "Business is business," Mr. Hubschman says. "The idea is to see if you can find a win-win."
GE hasn't been immune to the problems plaguing U.S. carriers. In 2001, in large part because of the Sept. 11 terrorist attacks, the conglomerate's aviation business saw its profit decline after years of growth. In 2004, GECAS earned $520 million, an increase of only 2.8% from the year before, after it took $300 million in writeoffs related to its exposure to two airlines in bankruptcy protection.
But instead of pulling back, GE has emerged as a leading commercial backer of airlines. While managing its exposure to old-line airline carriers in the U.S., the company has pursued new opportunities to serve low-cost carriers world-wide and moved aggressively in fast-growing countries such as China and India.
Some of GE's recent interventions have proved shrewd. As overseas demand for planes has grown and lease rates abroad continue to increase, GE has shifted some of its lease aircraft away from troubled U.S. carriers to those overseas with stronger credit. For instance, the bankruptcy-driven shrinkage of ATA Airlines gave GE the chance to take back 18 planes that now are being deployed in places such as China, Brazil and India.
Analyzing the risks of helping a troubled carrier can be like playing three-dimensional chess. For instance, GE is US Airways' largest creditor with $2.9 billion in aircraft leases, aircraft financing and engine-maintenance contracts. To help the airline avoid running out of money, GE in November deferred some lease payments, lowered its price for engine-maintenance work, provided interim financing and pledged to lease more regional jets to the company. In return, US Airways agreed to give back 25 larger planes, issue a convertible note to GE and meet stringent financial milestones until it emerges from bankruptcy.
GE also had to consider the fates of regional carriers who fly on behalf of US Airways with GE-provided planes. And it needed US Airways' other lenders, including the federal government, to grant continuing forbearance, as well as additional concessions from the carrier's unions. A spokesman for the airline says, "GE has been a strong business partner with high expectations for US Airways. They consistently make sound decisions that further our mutual interests."
To be sure, supplier bailouts of troubled airlines are rarely well-received by rivals. When America West was on the verge of a Chapter 11 filing in late 2001, GE helped provide financing, the government awarded loan guarantees and Airbus agreed to defer new airplanes on order. Doug Parker, America West's chief executive, says Mr. Hubschman told him, "We're going to hear from all our customers that this is a bad thing to do."
Mr. Parker says it is naive for airlines to hope that GE will do anything but look out for its own interests. And those interests aren't entirely aligned with those of the carriers, says Bill Warlick, an airline debt analyst at Fitch Ratings. GE's interest is "in keeping as much capacity in the air as possible because so much of their lease exposure is in the U.S.," Mr. Warlick says. A big airline liquidation would be bad for GE, he says, because it would flood the market with planes and drive down lease rates.
Mr. Hubschman says there may be some overcapacity in the U.S. industry, "but it's not clear to me that simply a liquidation is the answer." If 200 or 300 planes were grounded by an airline failure, stronger companies such as Southwest and JetBlue Airways would lease or buy more planes from willing manufacturers and expand, he says.
