Whose money is it anyway?

[WhiteCloud]

I had a non flying friend ask me why United was bothering to stay in business while losing millions each day. Since the stock was cancelled I didn't really have an answer who owned the company and who was actually experiencing the loss. Got any answers?

 

[L'il J.Seinfeld]

Tax payers and creditors.

 

[SWA/FO]

Employees, Creditors and Tax Payers' (in that order)

 

[AMRCostUnit]

Here is some more info. The analysis at the end is from someone much smarter than I.

Unit
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Why GE Keeps Loser Airlines Aloft
The bigger the giant's customer base, the better. But over time, the industry may suffer from GE's rescues of ailing carriers

General Electric's aircraft engines power the country's major airlines, but it's GE's money that is keeping many of them aloft. Since September 11, 2001, GE Commercial Finance and its aircraft-leasing arm, GE Commercial Aviation Services, have sunk more than $8 billion into global airlines, with a big chunk of that going to money-losers such as Delta Air Lines (DAL ) and United Airlines (UALAQ ). GE (GE ) has also allowed feeble airlines to defer payments on leased aircraft, thus helping them keep more planes in the air and continue a price war on the ground.

But while extending lifelines may be good for GE, it may be bad for the airline industry. Airline executives roundly blame their losses on too much capacity, arguing that they can't boost airfares to cover costs because there is always someone willing to offer bargain tickets.

"CLEARLY DETRIMENTAL." Lately, however, whenever an airline seems as if it may actually go out of business and give surviving carriers some pricing leverage, GE steps in. It recently offered new money that helped rescue bankrupt US Airways Group (UAIRQ ) and Flyi's (FLYI ) struggling low-fare unit, Independence Air.

Meanwhile, it helped to keep Delta out of bankruptcy with a $630 million loan. Yet "leaving capacity in the hands of weak players is clearly detrimental to the industry," says one former airline CEO.

With capacity now likely to grow rather than shrink, analysts predict airlines will lose some $4 billion in 2005. Why is GE so eager to lend a hand? It makes money off the well-collateralized loans and wants to keep as wide a customer base as possible.

LIMITED DOWNSIDE. The Fairfield (Conn.)-based giant owns about 1,300 aircraft and a massive aircraft-engine unit, and it has more than $29 billion in loans and leases to airlines. It's more exposed than rivals such as International Lease Finance Corp., a unit of American International Group (AIG ), which has 88% of its 676-plane fleet leased to airlines outside the U.S.

But GE also demands so much collateral and places so many conditions on assistance that analysts believe its downside is limited. The loans to Delta, for example, are backed by $3.5 billion in assets, ranging from spare parts to landing slots. "If GE were to take back a bunch of planes," says analyst Roger E. King of CreditSights, "within a year they would have them all moved" to U.S. freight haulers or Asian carriers.

GE insists that it isn't getting in the way of industry dynamics. It has already taken back dozens of aircraft from its U.S. customers and has reduced its exposure to the large national carriers, says Henry A. Hubschman, president of GE Commercial Aviation Services (GECAS). "Each case is unique," he says. "We don't believe we are the ones who can strategically manipulate the market."

Even if one of the larger airlines were to fail, GE's hit would be minor. Hubschman says that the global market for aircraft is at its strongest since 2000. Only two of GE's planes are currently not on lease to customers.

ABOVE THE TURBULENCE. GECAS also saw its net earnings rise 13% in fourth-quarter 2004, to $167 million, though overall earnings for the year rose only 3%. To play it safe, GE set aside $195 million in "aviation industry reserves" in the fourth quarter, primarily to offset anticipated losses related to US Airways.

In his Jan. 21 teleconference with analysts and investors, GE Chief Executive Jeffrey Immelt said that with the move, "we are appropriately reflecting" where US Airways stands. Of course, as US Airways executives point out, the death of any small or middling carrier may not be a panacea when the rest could just add new planes. Many can count on help from GE, after all. Airlines may be entering their fifth consecutive year of losses, but for GE, the good times keep on rolling.


"Same thing ichan/lorenzo/checki did; keep the host alive as long as possible to suck out the cash. The real genius is they appear to be a white knight. The day the finances go upside down the yardsale will start. Right now GE has absolutely no interest in pulling down capacity. They want the industry in distress. It is no different than the preditor banks that pay off all your debt through a new mortgage and the next thing you know they own the house, as long as you can make the now exorbitant payment you get to live there; the instant you can't they kick your butt out and flip it for the equity. Win/win for them; lose/lose for you. They are in effect pulling off a STEALTH hostile takeover of the entire industry. Pretty **CENSORED****CENSORED****CENSORED****CENSORED** smart if you think about it. They will OWN their customers AND are shielding themselves from monopoly laws. Wonder why they are one of the best run corporations in the world?"

 

[FlyBoeingJets]

Many good points by all.

My take--

GE Capitol basically "controls" the company. The executives will hang around and manage the company for GE as long as they get paid. GE is setting the conditions that the CEO has to meet to get more financing and deferred payments from GE. The government is almost done giving loans/grants.

The actual value of the big three is negative, as it is for some other majors. Nobody wants to own these debt ridden companies, but they do want to keep them hooked on loans/leases as long as the payments keep coming in. Kinda like a slum lord or drug dealer. I just heard a rumor this week that Leo Mullin's wife has a holding company that leases Delta 2 B777s. That Leo is smart! Totally corrupt, but smart.

AIG is the other big lease company. The current over capacity problem has been supported by them. Some overcapacity will go away in '05 and '06 as the planes slowly come back since it is not sustainable long-term.

GE and AIG will lease away aircraft to foreign carriers and freight operaters.

Off topic: I wonder if the freight industry will see an overcapacity problem like the passenger industry as DHL, UPS, and FedEx expand.

 

[GoABX]

The package carriers could experience the same over-capacity as the pax carriers, but it is at least one to two decades away. I addressed this topic two years ago, except the term I used then was "commoditization."

To clarify, we are talking about domestic express package integrators (point to point), not small fries and the airport to airport freight carriers . . .these guys are already over-saturated. The US express market is has been in decline for a while, caused by technology and more savvy trucking operations. The big guys UPS, FDX, ABX (now DHL) have been able to masque these declines by product diversification (i.e. linehaul), bundled pricing, vertical movement on the supply chain (logistics) and most importantly international growth.

If the box haulers were limited to the US borders, our 9/11 would have happened 18 months ahead of yours. We lead into the recession and we lead the way out. The pax carriers are not tagging along this time because your rules changed. Unfortunately, the situation will not get any better unless at least two major carriers go out. Airlines are ordering planes and expanding routes like their lives depended on it . . .and it does. Yes, it seems crazy, but the LCCs are crazy like foxes. If you were to look at the last 6 months of airline press releases, it would almost apprear as though JetBlue, AirTran, and Southwest had each other on speed dial. They are trying to put USAir out as quick as possible and when they are done, United or perhaps Delta will be next. If they allow a slow death, every carrier will be scarred, even the healthier LCCs. Right now NWA and CAL stand the most to gain. They don't have the strength to deliver a death blow, but they will have leverage to help fill any new voids. However, they will be next if the LCCs don't tame their expansion in 2-4 years. BUT I DIGRESS....

The freight immunity will continue until the Asian machine slows. Then the next focus will be the next low cost labor nation. South America, Africa. Eventually our day will come and perhaps sooner than later. The macro trend is decades away from over-saturation but and accelerant like $55 oil or open skies (7 Freedoms) could strangle the high cost legacy freight carriers in just 6-12 months.

We careful what you wish for. We are all being commoditized. Some industries see it, others just don't see it yet.