=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SF Gate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2002/02/12/f= inancial1057EST0066.DTL ---------------------------------------------------------------------- Tuesday, February 12, 2002 (AP) Fleet Trader: With airlines in a dive, secretive leasing firm plays a cruci= al role J. LYNN LUNSFORD, The Wall Street Journal (02-12) 07:57 PST (AP) -- LOS ANGELES (The Wall Street Journal) -- One night late last October, mo= re than 30 pilots were roused by phone calls from an opulent office near Beverly Hills and told to spirit away 19 empty jetliners from Zurich to remote airports in the Bordeaux region of France. A high-stakes theft? No, just the repo men. The planes, although painted in the red-and-white colors of Swissair, we= re owned by Los Angeles-based International Lease Finance Corp., one of the world's largest aircraft-leasing companies. The repossession order came from the company's co-founder and top executive, Steven Udvar-Hazy, who took the drastic step when it became apparent that Switzerland's flag carrier had run out of money and was about to be pounced on by its creditors. At the time, most people thought that Mr. Udvar-Hazy had pulled the airplanes away from ILFC's second-largest European customer because he simply wanted to protect hundreds of millions of dollars in assets. But Mr. Udvar-Hazy had another motive: He wanted to send the message that ILFC would find other homes for the planes if the Swiss government and bankers didn't get serious about saving what had once been one of the premier airlines in the world. "It got attention at the highest levels," Mr. Udvar-Hazy says of the overnight migration. A few days later, Mr. Udvar-Hazy allowed the planes to be returned to Switzerland after he was assured that another flag carrier would be resurrected from the financial wreckage of Swissair. The incident, which drew headlines, cast a rare light on the vast, secret world of the airplane-leasing industry. Since the terrorist attacks of Sept. 11 sent the airline industry into a dive, ILFC and other leasing firms have been playing a critical, behind-the-scenes role in helping to keep the industry afloat -- and making crucial decisions about which airlines survive and which go under. Once a peripheral player mainly dealing with smaller carriers and startups, ILFC is drawing on the financial might of its parent, insurance giant American International Group, to prop up ailing airlines with loans, lower rents, and even purchases of underutilized planes. It uses its unmatched buying power aggressively in negotiations with Boeing Co. and Airbus, the two big plane manufacturers. Another critical element: its chief's encyclopedic knowledge of who needs what around the world as he choreographs a dizzying array of deals. With planes on rent to 120 different airlines, ILFC is the single-largest customer of both Boeing and Airbus. If parked wing to wing, its fleet of more than 500 airliners would cover an airport the size of New York La Guardia with aluminum. It has pending orders and options for another 600 planes. The 55-year-old Mr. Udvar-Hazy, one of the only billionaires in the aviation business, has for decades defied the odds in one of the world's most volatile industries. The past few months have been especially treacherous. Mr. Udvar-Hazy describes the period as a "rolling crisis." In the first weeks after Sept. 11, ILFC's offices became an emergency ro= om for airlines as the economic downturn roiled the United States, Canada and parts of Europe. "We didn't know who would be next, but every day we had customers coming in on stretchers," Mr. Udvar-Hazy says. "The one thing they all had in common was that they needed very high levels of financial medication." Since Sept. 11, ILFC and its competitors have helped to heal many of the world's airlines. The effort has been necessary, Mr. Udvar-Hazy says, because "you can't lease an airplane to an airline down the road if it is out of business." In all, the leading leasing companies have made more than $2 billion of unplanned aircraft purchases from their customers since Sept. 11 while continuing to take deliveries of new jets from manufacturers, according to people familiar with the transactions. "The leasing companies have been really solid," says Toby Bright, Boeing= 's new chief aircraft salesman. "They have stepped up and taken their airplanes, even when some of their lessees are going bankrupt." ILFC, the most creative and fastest-growing player in the leasing industry, makes the bulk of its money by renting out airplanes for the first five to seven years of their life at rates of between 9 percent and 12 percent of their value annually. At around five to seven years, the companies either re-lease the airplanes or sell them on the secondary market. Meantime, the value of the airplanes can be written down quickly, reaping big tax benefits for the leasing company. In good times, a company can sell a used aircraft for as much as 85 percent of its original sticker price. Using a $100 million airplane as an example, a leasing company can bring in as much as $84 million over the life of a seven-year lease. If the airplane is sold used for $85 million, the total cash generated would be $169 million, leaving the company with a $69 million profit on the aircraft before accounting for the cost of capital over time. Still, the business is riskier than it appears. ILFC places orders as far as 10 years in advance, betting that when the time comes for delivery, airlines will want the planes. During boom times, the early ordering pays off, giving ILFC the ability to charge premium rates. During downturns, though, it runs the risk that its planes will be among the first ones airlines try to get rid of as they slash schedules and conserve cash. That's been the case since Sept. 11. Though ILFC won't provide details, industry executives say that leasing companies in general have been forced to cut their rental rates by as much as 30 percent on some models. They are having to "bend over fiercely in terms of what they charge if they want to keep their planes flying through this downturn," says Barbara Beyer, president of Avmark Inc., an Arlington, Va., aviation-consulting firm. Simultaneously, the leasing companies have postponed selling hundreds of airplanes that were scheduled to be recycled out of their fleets. That's because a sudden glut of used airplanes on the market has sent resale values to their lowest levels since the early 1990s. Still, people familiar with the business say the leasing industry is in better shape now than it was back in 1993, when the aggressive Irish leasing company Guiness Peat Aviation collapsed. Lacking a big backer, Guiness Peat was undercapitalized, highly leveraged and operated on the assumption that it could always sell a used airplane for more money than it paid. When the Gulf War came, lease rates suddenly tanked, and the company crashed. Its assets were acquired by General Electric Co.'s GE Capital Aviation Services, which, with a fleet of 1,000 airliners, is the biggest leasing firm in the business. =20 ---------------------------------------------------------------------- Copyright 2002 AP