Leasing Giants Fed Up With U.S. Airlines, Bankruptcies
By Steven Lott/Aviation Daily
03/30/2006 09:00:10 AM
Three of the world's largest aircraft leasing companies issued a stern warning this week to U.S. legacy airlines that they shouldn't expect any more discounts, deals or bailouts in the future as the leasing giants have lost confidence in the U.S. carriers and would rather deal with customers in other parts of the world.
"During the last five years, we had a situation where the large U.S. legacy carriers were very arrogant," said ILFC CEO Steven Udvar-Hazy. He told the International Society of Transport Aircraft Trading in Orlando that U.S. carriers don't want to pay security deposits or overhaul reserves, and return conditions are minimal or non-existent. Shortly after many airlines went into Chapter 11 protection, they threatened lessors to agree to concessions or be stuck with a lot of aircraft.
"History has proven that those were not fundamentally good transactions for most of the financial community," Hazy said. The whole experience "has given the financial and leasing community a much better understanding of how to deal with the legacy carriers." He warned airlines in attendance that he sees more balanced lease agreements in the future where the financiers and lessors "will have a much bigger say in the way transactions are structured."
GE Commercial Aviation Services (GECAS) CEO Henry Hubschman agreed with Hazy, noting that operating leasing deals in the U.S. "will be on different terms" in the future. While ILFC avoided the headaches related to Northwest, Delta, US Airways, Independence Air bankruptcies, GECAS had a lot of aircraft tied up in the reorganizations. Hubschman admitted that one of his biggest mistakes was not to diversify its customer base enough around the world and dealing too much with U.S. carriers.
"If you have a market that is exclusive to the U.S., you are looking for trouble even if the U.S. is doing well," he said. "We are now expanding our horizons." Hazy said only 10% of ILFC's leasing business is from U.S. airlines, and Aviation Capital Group co-founder Stephen Hannahs said about 11% of his portfolio is in North America.
"The U.S. domestic industry will have to demonstrate consistent profitability to regain the confidence of the investment community," Hazy said. "We've gotten an advanced degree in the last three or four years of all the things we're not supposed to be doing." He is now focusing a lot of his attention in Asia and Europe because of the headaches dealing with U.S. airlines.
He went as far as to suggest that he would rather deal with Chinese carriers than those in the U.S., as the Chinese airlines "have been more loyal and faithful in making their lease payments than U.S. carriers." ILFC has placed more than 150 aircraft in China, Hong Kong and Macao, and Hazy said Chinese airlines have come a long way and have actually been "a tremendous blessing for the operating lessors."
GECAS, more than other lessors in recent years, placed a large number of 50-seat regional jets with U.S. carriers, which have since gone through the bankruptcy process and tried to return many of those planes. Hubschman reflected on the changes of the 50-seat market at the ISTAT conference noting that the boom of 50-seat jets was the result of "artificialities" of the scope clause and subsidized financing by the Brazilians and Canadians.
Hubschman found that U.S. airlines "love to use bankruptcy as an excuse to drive down the lease rates on something they just took within the past year." In one case, he said an airline was looking for more 50-seaters at the same time they told GECAS that the lease rates were too high. "When all is said and done at the end of the bankruptcies, we'll probably end with a very modest number of 50-seaters loose on the marketplace but it was an artificial market and it should have been recognized as such."
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