"Airlines may decide they are good at operating aircraft, but less good than financial institutions at managing aircraft as assets,' said the president of Citicorp Industrial Credit, John Dewey. Not only Latin American airlines, but domestic US supplemental carriers have a history of taking old equipment on short-term leases, from, for example, International Air Leases of Miami, which is only now making the transition from four-engined 707s to Boeing 727s.
To what extent can stronger airlines and new equipment become drawn into this way of doing business?
The world's two leading aircraft operating lease companies are International Lease Finance Company (Beverly Hills) and Guinness Peat Aviation (Shannon, Ireland), which once leased mainly older aircraft to less wellknown carriers. Both have made great strides in the past two years.
ILFC ordered 12 new-technology 737-300s early in 1984. GPA followed with an order for 12 of the comparable McDonnell Douglas MD-83, to be partly financed by the manufacturer. Early in 1985 ILFC placed an order for up to 21 Boeing 757s, 767s and 737-300s, and GPA has more recently signed up for 12 737-300s. Both are headed for well over $500 million in assets, and are acquiring impressive financial backing: ILFC is no longer heavily dependent on Continental Illinois loans, and GPA is now part-owned by General Electric Credit.
Tax benefits are important to GPA's pricing, but not to ILFC's, since most ILFC lessees have not been eligible for US tax benefits. Many of GPA and ILFC's new aircraft are going to charter, start-up or Third World carriers, but some have gone to US majors, including Pan Am and TWA.
The big airlines are slowly but steadily becoming more willing to play the role of operating lessee. This implies a willingness to take in aircraft previously used by other carriers, because only when the big airlines are taking used equipment will there be a large after-market. They should also be prepared to accept standardized cockpits.
The use of second-hand aircraft has advanced rapidly. Every single US major has taken in, and in most cases leased in, a widebody aircraft in the past few years. United, Western, American, Eastern and Continental have leased in DC 10-30s, Pan Am and TWA have done it on 747s. British Airways is now leasing in two 747s from MEA (Lebanon).
These moves reflect the pressures of deregulation. The airlines are viewing commitments to aircraft much more as financial decisions that should be kept as flexible as possible, and much less as long-term technological commitments.
Cockpit standardization, however, is not coming rapidly. A $2 to 4 million modification cost will continue to be normal when aircraft change hands. Boeing has not persuaded the airlines to take the same type of cokpit on its new 747-400s. American Airlines negotiated with McDonnell Douglas and other parties two years ago to create a pool of standardized MD-80s, but the upshot was American's order for 20, increased to 33 and eventually 200 MD-80s (including options) standardized to its own configuration. American could itself become an operating lessor, as United has already done.
When American Airlines first ordered MD-80s, all 20 aircraft were to be leased directly from the manufacturer for five years. American's degree of commitment to the aircraft has since substantially increased, but the idea of vendor-driven operating pools, that is aircraft which the manufacturer may find himself transferring to another lessee after a few years, has taken root.
When Airbus leased 12 A-300s to Pan Am last year for two years, at a rental alleged to be zero, as part of a broader Pan Am-Airbus deal, it knew that it was probably creating a de facto pool. Airbus will be hoping for better results than Shorts Brothers USA, which has been accumulating Shorts 360 commuter aircraft returned by bankrupt lessees faster than it can place them with new operators. Eximbank may soon become involved in an operating lease scheme to Third World carriers.
Airbus has received an order for 10 A-320s from GATX Leasing of San Francisco; financial details are secret.
Delta, Swissair and KLM DC9-30s have all obtained prices in the vicinity of the original purchase price (not inflation adjusted) 15 to 18 years ago. The lessors making these offers are assuming values will still be high in a few years.
However, resale prices are only somewhat predictable. The older widebodies, such as 747-100s and L-1011-1s, in 1982 and 1983 commanded much lower prices than seemed justified by their performance limitations, such as range. Citicorp went into the 747-100 operating lease business; Ryder System (Miami) speculatively bought four L-1011s from Eastern for about $6-7 million each as part of its bid to diversify out of truck leasing. Both Citicorp and Ryder (which has just sold one of its L-1011s to LTU, the German charter airline) look like coming out on top, but not by a huge margin.
Those investing now in DC9-30s and 737-200s may have another problem. If manufacturers' predictions are correct, a technological revolution will replace jet engines with propfans from about 1992, on 100 to 150 seat aircraft. Words not heard among aircraft lessors for two decades, "technological obsolescence', are coming back. Propfans don't make a plane fly faster or farther, but they have one overwhelming advantage over jets. They use less fuel.
Photo: How many planes at Kennedy Airport are second-hand?