Pulled between the opposing influences of prudency and risk, Boeing Capital (BCC) is tasked with the difficult role of responsibly bolstering new business for the manufacturer at a time when other financial institutions are clawing back.
BCC provides asset-backed loans and leases, most of which are to commercial operators of predominantly Boeing aircraft. It manages a portfolio of more than $11.8 billion, of which $9.1 billion is associated with aircraft financing. Commercial financial services, leases and loans to a broad range of commercial industrial concerns account for over $2.5 billion.
Boeing Capital owns 327 aircraft and has an interest, in the form of a loan or other investment, in a further 214. It is the fundamental strength of the portfolio that BCC president Jim Palmer believes will see the company through the dark times. "We have the underlying assets of the aircraft that we design, build and finance," he says. "They move from operator to operator and tend to have a long, useful life."
Near term, the airline crisis has taken its toll on aircraft values. "We have taken some write-downs against the portfolio since 9/11, but in 2001 we still had net earnings of $152 million," says Palmer. In 2002, earnings dropped to $49 million, and BCC is forecasting a "break-even profit" for 2003. But despite the problems, "net interest growth is expected and the cash generation of the portfolio remains relatively strong", he says.
Palmer is sanguine about the near-term challenges. "We've had bankruptcies and liquidations both domestically and in Europe," he says. "The real question is how many more, and will there be any consolidation, which many of us believe is important for the long-term health of the industry." Meanwhile, BCC must navigate to profitability, or at least break-even, through a minefield of depressed asset values, poor lease rates and increased risk.
"Values and lease rates are down today, but that's much more reflective of the spot market than the long term," says Palmer. "The key is to get through the near term by careful risk management and by managing the portfolio. We're making sure we are pricing transactions for risk in today's market." In BCC's case, this means more loans than leases, increasing aircraft-to-aircraft cross-collateralisation and dealing in money-making aircraft.
To compound BCC's challenges, in May Standard & Poors lowered its long-term corporate credit rating for Boeing. Credit ratings govern a company's access to capital at rates that allow for a reasonable return. S&P's decision to downgrade Boeing reflected both the weak commercial aircraft market and internal issues such as increased unfunded pension and retiree medical liabilities. "We are what is considered to be a captive finance company, so our credit rating is tied to the parent's credit rating," says Palmer.
BCC's focus is to manage risk more closely and, where appropriate, restructure transactions. It is working with troubled carriers to change payments, and has even launched legal action to change the management at Hawaiian Airlines, which defaulted on payments for 717s and 767s. Based on 2002 figures, Hawaiian represented 4% of the total portfolio, the fifth largest single customer after United Airlines with more than 10% ($1.2 billion), AirTran Airways with 9.1%, Boeing itself 7.5% and American Trans Air 5.2%.
For the long term, Palmer believes the sometimes urgent measures of today will produce a slimmer, leaner portfolio. "When the capital markets return, I think you'll see us selling some of our portfolio, which is what any finance company would do. Change is inevitable and bound to occur, and franklyit is essential for the long-term health of our industry."
Source: Flight International
