The next plane you board may be a rental job
Airlines are getting out of the business of owning airplanes. Strange as it may sound, most airlines, even those that have traditionally owned their aircraft, are selling chunks of their fleet - and leasing commercial jets from giant finance companies instead.
New tax laws, heavy airline debt loads, increased competition, and fast moving aerospace technology have made it risky and much less profitable for airlines to buy their own aircraft.
``Without investment tax credits, the incentive for airlines to own their equipment is less than it was,'' says Robert Joedicke, airline analyst with Shearson Lehman Brothers in New York. ``Airlines are following the path of the hotel industry that long ago decided they would be operators and not owners of real estate.''
Aviation finance experts say that 30 to 40 percent of major airlines' fleets is leased right now, and that the proportion is growing rapidly. The US Department of Transportation says 29.6 percent (750) of 3,282 planes operated by major airline fleets were leased as of last September. In 1978, just 19.6 percent (435) planes were leased. Of the 270 new jets to be delivered this year, roughly 200 will join the ranks of leased aircraft, observers say.
``There has been an order of magnitude leap in leasing in recent years,'' says Ted Koch, a senior marketing analyst with Boeing. ``With tax credits gone, it's not as attractive for an airline to buy an airplane as it used to be.''
Congress has lengthened depreciation schedules, adding another disincentive to ownership. Some airlines also have gone deep into debt during the past few years to acquire competitors. The expensive spate of mergers has produced poorer credit ratings and steeper finance costs to buy new-generation planes. This is despite the fact that airlines must operate new fuel-efficient aircraft like the Boeing 747-400 (about $136 million each) in order to stay competitive.
Part of the appeal of leasing is that aircraft can be turned back to the owner a few years down the road for planes that better fit new routes and schedules. Leases keep airlines from being caught holding a large inventory of technologically outmoded, uncompetitive planes.
An ``operating lease'' of five to seven years is likely to cost more per month than a bank loan. But airline analysts say the multi-year obligation has the dubious ``advantage'' of not showing up on company books as debt. It can be a bit deceptive, since it only shows up as a much smaller fraction in the rental expense column.
``The advantage in leasing is that you get the aircraft, but you don't add to the debt structure,'' says Larry Gottardi, a spokesman for American Airlines, the nation's second-largest carrier. ``We get the new airplanes under a lease situation, and that allows us to continue with our growth plan.''
At the end of the 1986, Mr. Gottardi says American had 330 aircraft in its fleet and that 110 were leased. Even conservative United Airlines, Delta Air Lines, and Northwest Airlines are beginning to lease more aircraft. At the end of last year, United was leasing 51 of its 364 aircraft and Delta 55 of its 253 planes.
With mergers, heavy debt loads, fare battles, and scrambles to capture gates in crowded airports, it can be difficult to focus attention on getting full value from a lot of expensive airplanes. Cash flow, too, is so important in this highly leveraged industry that even airlines with strong balance sheets are now resisting tying up cash in a fleet of aircraft.
These factors have opened the doors for cash-flush finance subsidiaries of huge corporations like General Electric, Xerox, Chrysler, International Business Machines, and General Motors. They see aircraft leasing as a high flying business.
Though it might not get much attention, General Electric Credit Corporation has some 160 aircraft in its fleet - putting it about on par with Trans World Airlines, the nation's sixth largest airline.
Even Greyhound, the company best known for its national network of bus routes, seems to have left the driving to someone else and has acquired 75 aircraft to lease - including 23 commercial jets, 43 commuter aircraft, and nine helicopters.
Why does an aircraft leasing company or finance company want to own aircraft when tax changes make the business less profitable?
Because even though it's less profitable than it was, the business is still very lucrative. Finance companies concerned primarily with getting high rates of return are fairly satisfied with leasing's 20 percent range. Planes also tend to retain their value, and after being leased they can sometimes be sold for more than the purchase price.
``They [leasing companies] are looking at it from an income point of view,'' says Chris Kjelgaard, editor of Airfinance Journal. ``They make a lot of money buying aircraft, leasing them to people for fairly short periods, then taking the planes back and placing them somewhere else.''
Finance companies and leasing companies also tend to be more efficient than airlines at extracting the value from owning an aircraft, mainly because they don't have to deal with day-to-day operations, unions, and the logistical nightmare of filling planes with passengers then bumping some off the flight.
``The financial responsibility is changing,'' Joedicke says. ``The airline industry is becoming an industry of operating companies rather than operating and financial companies, because the exposure of ownership is being taken by other people.''
One such person is Tony Ryan, founder of a leasing company called Guinness Peat Aviation (GPA Group), a company based in Ireland. Mr. Ryan, who started with just $50,000 in 1973, oversees an operation that today has 86 airplanes worth $600 million. GPA has another 200 planes on order that will cost it about $6 billion.
Leasing companies have grown up alongside finance companies since airlines were deregulated in 1978. For GPA and others, buying aircraft in big blocks lowers the initial cost of ownership but poses new challenges to an already hotly competitive aerospace industry that has Boeing, McDonnell Douglas, and Airbus locked in battle.
``The leasing companies are competing with us to sell airplanes,'' says Boeing's Mr. Koch. ``We're glad to have them as a customer. But it's a big issue for us, because they are taking their new airplanes and trying to place them with the same companies we're trying to sell to.''