=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SFGate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/n/a/2005/07/07/financial/= f214910D62.DTL --------------------------------------------------------------------- Thursday, July 7, 2005 (AP) Want Aviation Exposure? Buy Jets (07-07) 21:49 PDT NEW YORK, (AP) -- Most aviation experts agree that more and more people will fly in airplanes. What's not clear is which airlines will survive to actually fly those airplanes. So investors are pouring money into the airplane market, even as airlines struggle to turn profits. Demand for new planes, particularly from Asian airlines, has given plane makers a crop of new orders. It's prompting hedge funds and private equity companies to hire aircraft experts or start funds which buy, then lease, both new and used planes. Returns can hit 20 percent. Established players warn that short-term investments in this market are risky; it's not transparent and leasing planes brings unique problems. So much money is flowing into planes, one analyst says, a bubble may form. "Cash is literally coming out of the vents, coming out of the woodwork," said Walt Skowronski, president of Boeing Capital Corp., the financing unit of Chicago based Boeing Co., "This has been the last six months. Somebody flipped a switch." Major plane makers have received more orders so far in 2005 than in all = of last year. Many are destined for U.S. airlines, but more will go to Asia, with a large chunk for new low-cost carriers in India. This boom was a key reason U.S. durable goods orders rose an unexpectedly strong 5.5 percent to $210.7 billion in May, according to the U.S. Commerce Department. Transportation equipment orders rose 21.2 percent. The International Air Transport Association, an airline trade group, said global passenger traffic rose 8.8 percent in May, though it still expects the global airline industry to lose $5.5 billion this year. Henri Coupron, president of Airbus North America, Herndon, Va., said tho= se industry losses and uncertainty over which airlines will survive is prompting some people to invest in the planes instead. "It's early to say who's going to win and who's going to lose. But there= 's no doubt in anybody's mind that airlines are going to fly, and there's a need for transportation," he said in an interview. "As long as you invest in good assets, and by good assets I mean modern, technologically advanced, fuel-efficient aircraft, it is a commodity you can move around and is rather immune to Chapter 11." Aircraft were cheap after Sept. 11, and investors slowly returned to the market. Jet prices have since risen, but some investors say the high returns justify the higher prices. Most industry insiders think aircraft prices will continue to rise. Experts reckon returns for aircraft investors can range from annual returns of 6.5 percent to one-time hits of 20 percent, depending on the investment vehicle. Given low interest rates, a seemingly shaky stock market and frothy real estate prices, such returns look great. Besides, some fund managers have more cash to invest as companies add money to their pension plans to shore up underfunding. "The moons are lining up," Boeing's Skowronski said. "It all goes back to pensions." There are myriad ways to invest in aircraft. Brand new aircraft are typically ordered by giant leasing companies or airlines themselves. Sometimes they finance the planes by issuing bonds called equipment trust certificates or enhanced equipment trust certificates. These have seen high interest lately and the investment grade paper is yielding around 6.5 percent to 7 percent, according to people in the market. There's a downside with these certificates. The certificates are backed = by a group of planes and owned by a group of investors. If the airline defaults, those investors must agree on what to do with the airplanes, and gaining consensus can be difficult. Aircraft dealers say the best returns come by managing the plane yoursel= f. Several private investment companies have hired airplane experts to do just that. Guggenheim Capital LLC, for example, hired airplane expert Steve Rimmer = to manage a new aircraft fund. The company earlier this year raised $278 million from wealthy individuals, pension fund managers, institutional investors and a utility company. Rimmer tells investors to expect a percentage return on their investment in the midteens, but says the actual return could be in the 20 percent to 30 percent range. "We'd never seen asset prices as low as they are, or have been, over the last couple of years," Rimmer said. Rimmer has purchased 20 used aircraft that he will lease to airlines or convert to freighters, and earlier this week he ordered six brand new Boeing 747 freighters. ---------------------------------------------------------------------- Copyright 2005 AP