KAREN WALKER / WASHINGTON DC

Leasing giant says it is secure, although analysts are shocked by size of commitments

General Electric's revelation that it has more than $4.4 billion exposure to struggling US Airways and United Airlines has highlighted the vulnerability of leasing and financing arms of aerospace manufacturers.

GE revealed the extent of its exposure last week, saying it has been in talks with US Airways, which is in Chapter 11 bankruptcy protection, and United Airlines, which is threatening to follow suit. The exposures include loans, leases and other financing commitments, the majority of them through financing arm GE Commercial Finance and lessor GE Capital Aviation Services (GECAS).

GE, which posted a $4.1 billion net profit for the 2002 third quarter, says it has made provision for "probable losses", but stresses that exposure is secured against individual aircraft or pools of engines.

The extent of the exposure has shocked some observers. "That's a lot of money, even for a company of their size," says one analyst. "Even if they are secured, it will take time, effort and cost to move aircraft in the current market."

Boeing's financing arm revealed in a second-quarter report that its exposure to United is $1.2 billion, or about 10% of its total aircraft portfolio. Boeing Capital says its exposure to US Airways is "a very small fraction" and adds that it is "comfortable" with the United exposure, all of which is secured against aircraft.

Bombardier Capital says it has no exposure to either airline, although Bombardier Aerospace has limited exposure secured against regional jets operated by United and US Airways Express. Bombardier Capital is working to liquidate its portfolio and hopes to raise $5 billion, primarily through the sale and wind down of business aircraft financing.

Defaults on United Airlines debt, or a bankruptcy, are likely to make the capital markets even more difficult for its competitors. United faces $900 million in debt payments between now and year-end, including a $600 million public bond issue called the Enhanced Equipment Trust Certificate (EETC). An EETC finances aircraft and guarantees interest payments by a bank in the event of a default. Phillip Baggaley, airline analyst at Standard & Poor's, worries that companies that insure portions of EETC debt might withdraw if United defaults.

Source: Flight International