This article from NYTimes.com has been sent to you by psa188@juno.com. The Silver Lining in United's Clouds: Good Lease Deals December 24, 2002 By EDWARD WONG Travelers are spurning high-priced plane tickets. Jets are flitting through the sky half empty. Aircraft values have deflated with the speed of a punctured balloon. In a few significant ways, all that is actually working in favor of United Airlines as it struggles to reorganize under bankruptcy protection. The soft market in air travel, while hobbling United's ability to make money on fares, hands it a hefty cudgel as it walks into cost-cutting negotiations with its aircraft lessors and unions. Many workers, for instance, know that airlines have laid off tens of thousands of employees since the Sept. 11 attacks, and that they would be hard pressed to find similar jobs elsewhere. The same kind of calculus applies to many of United's backers, vendors and lessors. Under Section 1110 of the bankruptcy code, United has 60 days from the filing it made on Dec. 9 to meet payments on its leased aircraft, renegotiate the terms of those contracts or agree with lessors to extend the two-month negotiation period. Otherwise, lessors have the right to repossess the planes. They want them back about as much as a vampire craves garlic. More than 1,300 planes are already temporarily out of service from airlines around the world, most of them parked in the Arizona desert. Almost every domestic airline intends to cut capacity further next year. Two of the six largest carriers are in bankruptcy court. Simply put, lenders and lessors can talk all they want about repossessing United's planes, but what good is that if there is no market for them? "Potentially United has a great deal of leverage," said Morten Beyer, chief executive of Morten Beyer & Agnew, an airline consulting firm based in Arlington, Va. "It's primarily their ability to reject the leases and leave the lessors sitting there with fairly expensive airplanes and a fairly difficult prospect of releasing them in the near future." One analyst said the near-simultaneous bankruptcies of United and US Airways had led to a "tremendous, tremendous blood bath" for lessors. Walt Disney said yesterday that it expected to take an $83 million pretax charge this quarter, or 4 cents a share, because of a write-off of its $114 million investment in United aircraft leases. Disney still has $175 million in lease investments with Delta Air Lines and with FedEx. Pitney Bowes also said yesterday that it would take a $100 million charge this quarter, or 26 cents a share, to write down nine planes leased to United and US Airways. Industry experts say the losses during this severe downturn could lead many companies to re-evaluate whether they want to remain in the business of aircraft leasing and financing, and whether they would want to restructure financial instruments to minimize risk in this chaotic industry. What is more, the hardball negotiations at United and US Airways could lead their rivals to ask for the same generous terms on lease and loan payments, piling on more pain for companies on that side of the fence. In fact, the negotiations that US Airways has been engaged in since filing for Chapter 11 protection in August have already set a favorable precedent for United, industry experts say. "Anywhere where we saw United get a cost advantage on us, we would pursue that area," said Tim Doke, a spokesman for American Airlines. American is a unit of AMR. The financing arms of many companies, from Ford Motor to the Westinghouse Electric unit of CBS, own planes and lease them out because they get tax benefits based on depreciation. The complex leases are often leveraged, so dozens of investors could potentially lay claim to a fraction of the plane, even though one company is listed as the owner. Some companies that lease out planes to United include Philip Morris, which at the end of September had 24 Boeing 757's in the fleet, and General Electric, which had 10 Airbus A320's, 4 Boeing 767-300's and one Boeing 747-400, according to financial reports from those companies. United, the world's second-largest airline, after American, leases nearly 40 percent of its 633 planes, according to Back Aviation Solutions, an airline consulting company. So renegotiating better lease rates - as well as rejecting leases outright on the least useful aircraft - would mean tremendous cost savings. United, a unit of UAL, said that it had sent out 2,500 proposals to parties involved in the leasing, and that it had received some positive answers. People in the industry say United is asking to cut monthly lease payments on many decade-old aircraft by about 50 percent, with less than that on newer planes and more on older ones. One analyst said United was asking for a monthly payment rate of $100,000 on its 10-year-old leased Boeing 757-200's. It was probably paying twice that before filing for bankruptcy protection, he said. Russell Young, a spokesman for Boeing Capital, which has $1.3 billion of exposure to United through aircraft loans, leases and bonds, said that the street value of planes had fallen 15 to 40 percent since the Sept. 11 attacks, and that United would be using the new values as benchmarks in its talks. United can bargain hard to get better rates on its older or out-of-production aircraft, experts say. The airline could tell its lessors it will terminate leases on, say, all its Boeing 757's and sign new leasing agreements on only the first dozen handed to it under generous conditions. But that tactic might not work as well with United's younger Airbus fleet. The airline's 153 Airbus A320's are only four years old on average, and it is unlikely United would want to lose those planes. Furthermore, it would be tougher to bargain for a basement rate on the A320's since they are considered a hot commodity, especially because of their popularity among growing low-cost carriers. Those planes could be more easily redeployed by lessors if they were to take them back from United. The Boeing 737's in United's fleet have no such cachet. Its 737-500's have an average age of 10.8 years, while its 737-300's are on average 13.9 years old. Of the latter, United was leasing 91 of 101 as of early December, so it has an enormous incentive to renegotiate those lease terms. "We do know that United has come back to some lessors on the 737-300's and drawn a line in the sand," said Scott Daniels, director of asset management at Back Aviation Solutions. Analysts also expect United to trim its fleet of 44 wide-body 747-400's. Most long-range routes flown with those jets can be covered by the newer 777's. United has already parked a quarter of its 747's in the desert, Back Aviation says. The airline said it was working closely with fleet planners to determine what planes would be most useful on each route. "All our planes are desirable depending on what deals we can strike for them," one executive said. One consultant to the company said, "It's fair to say that the market is very weak, and given the US Air precedent, and the shakiness in the market over all, people understand that they don't really have a good aftermarket for a lot of aircraft." Many leaseholders who are now in an increasingly vulnerable position are reluctant to talk about the ongoing negotiations. "We're not going to venture to comment," said Dan Jarvis, a spokesman for Ford's financing arm, which has $40 to $45 million of exposure in 12 planes it is leasing to United. It leases a total of 69 aircraft to various airlines, including US Airways. With a total of $1.9 billion invested, G.E. has the largest exposure to United. As of the third quarter of this year, $1.3 billion was in secured aircraft loans, $300 million in 10 leased Airbus A320's, $100 million in four Boeing 767-300's and $20 million in one Boeing 747-400. While the A320's have a high market value, the latter two types of planes would be much harder to redeploy. "The market is challenging, but a lot of that depends on the aircraft type," said Eric Jones, a spokesman for GE Capital, the company's financing arm. GE Capital's airplane division has $30 billion of investments, with United and US Airways making up a combined 12 percent of that. Revenue from the airplane division accounts for 4 percent of GE Capital's overall revenue. G.E. has $2.2 billion in exposure to US Airways, through loans, leases and bonds. Of this investment, Mr. Jones would say only: "We're in discussions with them on finalizing the restructuring agreement." US Airways paved the way for United on what could be asked of financiers and leaseholders. People in the industry say US Airways negotiated good lease rates on many of its fleet types, including its Boeing 757's, 10 of which are from GE Capital. One analyst said the airline got a rate of about $175,000 a month on 757's from 1993. That is a worse rate than what United is demanding, but the 757's in the US Airways fleet have more expensive parts, like Rolls-Royce engines. Even in this market, a premium brand name still counts for something. http://www.nytimes.com/2002/12/24/business/24AIR.html?ex=1041737809&ei=1&en=10b00069762422a3 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2002 The New York Times Company