RICHARD PINKHAM / WASHINGTON
When an aircraft - a carrier's most valuable asset- approaches the end of its useful life, optimising its value is a challenge. At US Airways, leasing has been established as a successful strategy.
Its birth, as is often the case, owed more to necessity than design. Now viewed as a financial success, US Airways Leasing and Sales (ALS) was founded in 1985 by the airline in response to its drastic need for fleet reduction and uniformity.
The carrier - then named USAir - was an amalgam of carriers: Piedmont, Allegheny and Mohawk Airlines, as well as various commuter affiliates. Even in an era before the benefits of fleet rationalisation had become gospel, it was apparent that the new USAir had more aircraft and more equipment types than it could hope to operate efficiently.
The carrier mandated industry veteran Dick Spalding to winnow the fleet, and he brought with him to the job the idea that more revenue could be generated by leasing the airline's surplus aircraft than by selling them outright. Insiders say only his access to the top echelons of the company's management enabled the group to take this novel approach to asset management.
Now, 16 years later, ALS has about 30 aircraft under active lease, a number that has been as high as 58. In the past year, the company has been among the world's most active lessors of Boeing 737-200s, leasing 17 of the type to various operators. Interestingly, US Airways is the only carrier pursuing this line of business.
Other airlines have explored opportunities in leasing, such as Swissair's link-up with GATX and Singapore Airlines' stake in Singapore Aircraft Leasing Enterprise. But these ventures are much more about investments and balance sheet manipulation. ALS is singular in being designed to maximise the value of the company's aircraft investments to the end of their useful life.
Stuart Peebles, a Scottish veteran of British Airways and Qantas who has headed the group since 1996, says the key to the outfit's success has been the managerial autonomy which USAir afforded it at inception. Its independence is now safeguarded by it being a separate entity with completely different management, even if a committee at the parent approves all new deals. This has meant, among other things, that there is less resistance within US Airways not only to risk keeping older aircraft on the balance sheet, but also to commit the funds necessary to put them in a leasable condition. This is no small commitment: in 2000, ALS put 16 aircraft through D-checks at a cost of $1-1.5 million each.
Its independence also means that the group can act quickly and decisively, reacting to market developments by moving in unplanned directions. Also, it gives customers a degree of comfort to know they are dealing with a company whose business is exclusively selling and leasing aircraft, not with an airline merely keen to offload its surplus stock.
Older aircraft, newer carriers
But ALS does benefit from its affiliation with its parent, the tenth largest airline in the world. This readily apparent link informs prospective customers that ALS is not a fly-by-night operation, but part of a company with over $1.2 billion cash on its balance sheet. More important still are the benefits of having access to the group's facilities.
Because of the type of equipment ALS is moving - Boeing 737-200s, and McDonnell Douglas DC-9s, MD-81 and -82s - it is in a different category than the larger leasing companies. Its customers will not be first-tier carriers, but smaller, newer entrants to the market. The fact that ALS's customers - past lessees have included Vanguard Airlines , Canjet and Mexico's Aerocaribe - typically have had more front-end intensive needs works to the company's advantage.
"We can do deals others would find difficult," says Peebles, during whose tenure ALS has sold and leased 150 aircraft. "For example, take a start-up operation that has no airline experience. A standard leasing company can help it in some ways, but not with the things we can do. We will help it with crew and staff training, and can offer simulator time, document assistance and initial spares provisioning; a real fly-away kit. A new airline will come in and see that we can solve a lot of its problems - the infrastructure really sells itself."
Also, he says, these resources help ALS to place equipment that would normally be less attractive in today's market. "The way we can walk in with a solution and not a problem makes airlines think of taking aircraft that wouldn't usually be their first choice."
That said, there are areas in which ALS is not equipped to compete effectively. Peebles lists packages that guarantee spare parts at 24 hours' notice and power-by-the-hour as examples of things the group cannot do. "Our value added is on the front end of the deal - getting set up and ready to go. We're less well equipped to provide after-market support services." But rather than concede the point, ALS has taken the tack of finding partners with complementary strengths.
For instance, the US Airways engineering team is strong in airframe maintenance and repair, but relatively inexperienced in engine overhaul. This has led to a joint venture with Pratt & Whitney revolving around the placement of 17 DC-9s which US Airways was retiring.
Peebles recalls: "These happened to be young DC-9s - they were 1982s - and we knew they still had life in them. However, we had one major problem: engine type. The engines - JT8D-7Bs - were suitable for East Coast flying and the market [we envisioned for them] required more power. So we approached P&W, who agreed to purchase the engines and replace them with JT8D-15s if US Airways would invest in fresh D-checks prior to lease."
The result of this collaboration has been an agreement for six leased DC-9s to Aerocaribe in Mexico. ALS also has synergistic arrangements in place and planned with other companies, including a consignment agreement for 727s with Unical.
Given its success, it is perhaps surprising that US Airways is virtually alone in pursuing such a leasing strategy. Peebles attributes this to the dangers inherent in expanding beyond the core business of flying.
"If you asked 10 airlines, nine of them would say you're better off selling the asset and not dealing with the risk," he says. "Most companies get emotional about their aircraft, and the second a customer stops paying its bills, they say 'let's get out of this business'."
However, Peebles believes that, when dealt with correctly, the risk is manageable. "You build the possibility that you will have to repossess an airplane into the business plan," he says, adding that there are ways to minimise exposure, citing such interventions as the P&W agreement. "If you team up with other companies, you not only create new synergies, but you spread the risk around. In any case, the justification is found in the results.
"Not to say that we always get it right, but if you look at the last four to five years and compare the options - lease versus sell - we're quite pleased with what we've done. You can always sell something if you drop the price enough, but we're happy feeling we haven't given away the store for 10 cents on the dollar."
Down-cycle strategies
Peebles hastens to add that ALS has been fortunate there hasn't been a major down-cycle, but he insists all is not necessarily lost when the economy turns. By diversifying his product offering - through such innovations as new joint ventures - he believes ALS can stay active in a marginal market. "The more lines you have out there, the better chance you have to land a deal."
Still, he admits, there are times when supply simply outstrips demand. In the mid-1980s, ALS had to park 18 BAe 146s in the desert for five years. "Sometimes you just have to wait for the sun to come out," says Peebles, adding that the key in these situations is to realise when the tide is about to rise. He remembers how USAirways speculated and spent $2 million on each of the BAe 146s to get them into leasable condition, allowing ALS to have aircraft available the moment there was a market for them.
With the parent company's merger with United Airlines scuttled, ALS' mission to place the carrier's retired equipment will continue at full speed. The current market for older aircraft - especially concerning regulations on hushkits - means that ALS must now look further afield for potential lease customers.
Last year's Aerocaribe deal - the first in recent years outside of North America or Europe - was quickly followed up with one for a DC-9 with Cebu Pacific in the Philippines. The company is now exploring options elsewhere in Latin America and Asia, as well as in the former Soviet Union.
Peebles is confident that ALS will be successful in its efforts further from home. "We've established our reputation," he says, "and now we're ready to expand our horizons."
Source: Airline Business
