After talking to U.S. investment back and ratings agencies, International Bureau of Aviation Commercial Director Owen Geach expects the majority, if not all, aircraft deliveries scheduled for this year to be funded. Indeed, U.S. airlines have been hard at work over the last several months raising capital with over $6.5 billion recounted during recent financial reporting calls.

“I think there is a potential for airlines to turn a profit, at least in the U.S.,” said Gatwick-based Geach, who represents a 20-year-old consultancy and who is wrapping up tours of Ireland and the U.S. He is trying to answer the question as to whether or not industry deliveries scheduled for this year will meet a shortfall and what kind of opportunity there may be in aircraft financing. “The bigger world picture, especially in certain countries, are far from profitable including Russia, India, and Mexico which is why they are on our cautionary watch list.”
Also on that list are airlines such as Jet, Kingfisher and Deccan in India, Sky Europe, Blue Wings in Germany, CAI (emerging out of the Alitalia mess) and Garuda.

In response to a question about Embraer’s assertion that Mexico is becoming a good market for its aircraft, Geach indicated that the transition from mainline to regional jets will take longer there since there were a number of bankruptcies in that country last year, including regionals which put Bombardier regional jets on the market, compounding the number of CRJs grounded by the U.S. carriers with the run up in fuel.
“The bottom line is, that the majority, if not all aircraft scheduled for delivery this year will be funded,” he said, “especially with participants outside the normal lenders including the ExIm bank to support Boeing deliveries. I think I have more confidence that all of Boeing’s orders will be fulfilled and financed than I do of Airbus, despite the $5 billion pledged by the government.” He noted that Embraer would continue to enjoy support for Brazil’s export bank BNDES.

Interestingly, his projections comes in the face of massive fourth quarter losses, but Geach pointed out that the U.S. carriers since 2001, have restructured through bankruptcies and mergers as well as massive cuts in capacity and workforce. He also pointed out that airlines in the rest of the world, have yet to experience such restructuring. He summed up all the excruciating work airlines did last year in one simply sentence. “It only took them seven years to cut capacity,” he said, adding as far as the passenger is concerned, high fares and bad service is now compounded by financial uncertainty. However, he expects passenger levels to be less impacted than in 2001.

Echoing others who point to the poor financial performance of the airline industry, Geach pointed out there has been only one profitable year since 2001. In June 2008 airline analyst Gary Chase said: “The industry hasn’t seen a real up cycle. 2006-2007 in retrospect now looks more like a brief reprieve from a down cycle rather than an up cycle. The industry has not been profitable enough to justify investment.”

Air Transport Association Economist John Heimlich, in a recent article on the organization’s web site, has been hammering on this theme for some time. As hard as the industry works to go beyond losses and break even to profitability, events – more often than not, government actions – conspire to force more costs on it. For that reason, it has become increasingly important to forge a sensible aviation policy, he said. Not that such a policy is going to be forthcoming any time soon. But airlines face the 2009 with a great deal of trepidation, not only because it has found that its cuts were not enough, but because of a “regulatory climate that too often imposes new costs on a financially fragile industry central to job creation,” he said. “More than 10 million U.S. jobs are depending on it.”

In the face of all this, it is little wonder that a labor-intensive, capital-intensive industry has a hard time conducting multi-year planning amid such economic, not to mention regulatory, uncertainty, said Heimlich. Indeed it is a testament that the industry has done so much to pare costs and raise revenue, “boldly [tapping] new sources of revenue, [identifying] new opportunities for fuel conservation, [streamlining] operations and [expanding] global market presence.”

“Now, the industry is one of few consumer sectors characterized by improved earnings potential,” he said. “On Dec. 9, Fitch Ratings Senior Director William Warlick wrote, ‘Following a year of operating weakness characterized by extreme volatility in jet fuel costs and a steady erosion of air travel demand in a deepening recession, U.S. airlines face another year of intense cash flow uncertainty in 2009. Although the dramatic pull-back in energy prices since July has improved the cost outlook for all carriers, attention has now shifted to the management of an increasingly precarious supply-demand relationship that will force airlines to once again monitor scheduled capacity plans closely… Indeed, the airline industry outlook (in terms of both operating fundamentals and credit ratings) remains negative.’”

Perhaps the stiffest barrier it faces, he said, is access to capital. “As the industry continues its quest for sustained profitability, it is important to consider the value of airlines not only posting accounting profits but also achieving a return on invested capital that exceeds the cost of that capital,” said Heimlich. “Doing so generates shareholder wealth. The consequence of wealth destruction, too often the case for the airlines, is the shrinking of the industry’s potential investor pool.

“Why should we care,” he asked. “Because reduced access to affordable capital directly hinders the airlines’ ability to acquire new aircraft or ground equipment, to capitalize on new air traffic management systems and procedures, to deploy and upgrade in-flight entertainment systems and passenger amenities, to attract and retain top-caliber customer service representatives and other frontline employees, and ultimately to compete effectively in the increasingly global aviation market place. If the United States is to regain its leadership role in global aviation, it must leverage, rather than curtail, its unmatched domestic air travel market. In the realm of international affairs, it is often said that a country cannot be strong abroad if it is weak at home. That is certainly true in commercial aviation. A sensible aviation policy – sorely needed – is one that engenders economic growth and enhances U.S. competitiveness.”

And, in-the-things-could-be-worse category, Heimlich added: “Just think for a moment how much more severe the job cuts, service cuts and airline failures might have been if 2007 had not been profitable, if airlines had not tapped new sources of ancillary revenue – no matter how negative the press coverage – or taken painstaking efforts in the years prior to bolster liquidity and keep cash on their balance sheets.”
Geach agrees. He thinks Boeing benefited from its long strike since it allowed the manufacturer to retain the money it would have used last year to finance third and fourth quarter deliveries.

“Few deals are in the pipeline,” he said of bank financing. “Confidence is shaken. Some have pulled out, some have merged and some of completely disappeared. Lessors, meanwhile, are keeping their heads down and waiting for good deals to emerge.”
Still the picture for airlines is far from bleak. As this reporting season got underway, they crowed about their successes chasing liquidity trying to assure airline analysts that they have deep enough pockets not only to weather the storm but be worthy of investment. The industry collectively raised over $6.5 billion in the last several months including:

• Delta raised $1 billion from the pre-purchase of SkyMiles in connection with the multi-year extension of its exclusive co-brand credit card partnership with American Express; and another $196 million from the sale of 18 million common shares. At Dec. 31, 2008, Delta had $6.1 billion in total liquidity and net cash collateral posted with hedge counterparties. Total liquidity includes $4.5 billion in cash, cash equivalents and short-term investments and $500 million available under an undrawn line of credit. Net cash collateral posted with hedge counterparties was $1.1 billion at Dec. 31, 2008. It also held $120 million in auction rate securities classified as long-term assets.

• AMR raised nearly $2 billion from a variety of sources, including: the sale of American Beacon Advisors, an equity sale of common stock; a draw on its revolving line of credit; and aircraft-related financings, including approximately $200 million from an aircraft sale-leaseback transaction that closed in the fourth quarter of 2008. The company also arranged financing, subject to certain conditions, for the majority of the 76 Boeing 737-800s it has scheduled for delivery. It ended the fourth quarter with $3.6 billion in cash and short-term investments, including a restricted balance of $459 million, compared to a balance of $5.0 billion in cash and short-term investments, including a restricted balance of $428 million, at the end of the fourth quarter of 2007.

• Continental raised approximately $1.2 billion through an amended Bankcard Agreement (including the advance sale of mileage credits), the issuance of common stock, the sale of Continental's remaining equity interest in Copa, a new pre-delivery payment facility and other new secured borrowings.

• United raised approximately $1.2 billion through an amended Bankcard Agreement (including the advance sale of mileage credits), the issuance of common stock, a new pre-delivery payment facility and other new secured borrowings. In addition, it raised nearly $390 million in cash in the fourth quarter through various activities including aircraft financings, asset sales and equity issuances. The company also received net proceeds of $107 million through equity issuances during the quarter. The company ended the quarter with an unrestricted cash balance of $2.0 billion, a restricted cash balance of $272 million and $965 million in cash deposits held by its fuel hedge counterparties. Early in the first quarter United closed an additional aircraft financing transaction, which raised $95 million, and expects to raise approximately $160 million from a cargo facility relocation agreement with Chicago's O'Hare. In January, the company received net proceeds of $62 million from equity issuances, and anticipates receiving an additional $27 million of net proceeds in the first quarter by completing the equity issuances that were announced in December. Altogether, the company expects to raise about $350 million from these transactions by the end of the first quarter.

• Southwest raised approximately $1.1 billion in cash through financing activities. The company accessed $400 million under its available $600 million revolving credit facility in October 2008. In addition, the company borrowed $400 million under a new term loan secured by 17 aircraft and borrowed $91 million under a new line of credit secured by a portion of its auction rate securities in December 2008. The company also entered into a two tranche sale and leaseback transaction for ten of the company's Boeing 737-700 aircraft. The first five aircraft tranche closed in December 2008 and the second tranche closed in January 2009, each for a total of $173 million. The company repaid $55 million in debt during 2008 and currently has minimal contractual debt payment obligations in 2009. After posting $240 million in cash collateral at December 31, 2008, the company ended the year with $1.8 billion in unrestricted cash and short-term investments. In addition, the company had its remaining fully available unsecured revolving credit line of $200 million.

• AirTran raised over $375 million in financing/credit transactions resulting in the company's highest year-ending balance of unrestricted cash and investments since 2005.

• On October 20, 2008, US Airways completed a series of financial transactions which raised approximately $810 million in gross proceeds and included a $400 million pay-down at par of the company’s bank loan. As a result, the company’s minimum unrestricted cash covenant was reduced to $850 million from $1.25 billion. The net proceeds to the company after transaction fees were approximately $370 million. On December 5, 2008, the company prepaid $100 million from the above-referenced transactions related to a loan secured by certain spare parts. On January 16, 2009, the company exercised its right to obtain new loan commitments under the same agreement and raised $50 million. US Airways had $2.0 billion in total cash and investments, of which $0.7 billion was restricted on Dec. 31, 2008.

• JetBlue generated $300 million in cash from the sale of excess aircraft.

Consequently, it seems clear the U.S. airlines have prepared for 2009 deliveries but Geach offered a cautionary note. “There is a still a backlog of more than 7000 so there will be a lot of new deals to finance,” he said, adding he expect more deferrals than cancellations because airlines want to avoid losing deposits. “But there will be cancellations and there will be more airline failures. The economic situation is not air transport specific as in 2001. The growth reduction in China, India and the Middle East should ease the backlog. Orders will shrink and fuel prices could liberate some parked aircraft.”

Geach noted that orders dropped sharply last year but outstripped deliveries. He expects lower orders this year because of the massive orders in recent years from the growth in China, India and the Middle East, legacy airlines preparing for expansion and replacement, and low cost carriers having already rolled out expansion plans and then scaled them back.

Geach recounted warning signs International Bureau of Aviation is seeing as it works with airlines around the world. “We are seeing staffing and maintenance cutbacks as well as the capacity cuts,” he said. “We are also seeing late lease or finance payments, more requests for deferrals as well as late air traffic management charges. Supplier payments terms are being extended and airlines are negotiating over lease returns. Staff salaries are being paid late and maintenance is being deferred even with Airworthiness Directives.”