Guess my surprise when I read that their biggest customer is AIG. I learned this reading an article by Justin Baer, Francesco Guerrera and Julie MacIntosh in London's Financial Times. I had known that International Lease Finance Corporation (ILFC) was the largest customer for the two companies' commercial aircraft. When they went to the Federal Reserve to ask for a line of credit, I discovered ILFC is a subsidiary of AIG, the insurance giant whose punting in credit default swaps led to its rescue last fall by the Federal Reserve.
The Financial Times writers tell us, "ILFC has ordered 168 new aircraft worth $16.7bn from Boeing and Airbus.
"The aeroplanes are scheduled to be bought during the next 10 years, with 49 of them - worth about $3bn - set to be delivered this year."
Understand that many airlines have credit ratings that are too fragile to allow their borrowing funds to buy planes on their own and consequently they lease them. Given airlines' propensity to lose money, a lessor can be more likely to benefit from the tax shields of depreciation and interest payments than they are. The biggest player in this market is ILFC.
AIG is trying to sell ILFC, presumably to raise capital. No one will buy it without a secure form of short term finance. According to AIG's 10K, the bulk of ILFC's debt is long term. As of the end of 2008, however, $1.7 billion of its $50 billion in assets were financed with commercial paper. In 2008, ILFC had to raise $4.7 billion to pay off maturing debt and repayments.
J. Lynn Lunsford and Daniel Michaels report in the Wall Street Journal, "ILFC's fleet is valued at roughly $50 billion. The company had outstanding debt of $32.5 billion and listed shareholder equity at $7.63 billion at the end of last year."
A particularly scary prospect is if ILFC were forced to dump some of its 955 planes onto the market. We certainly do not need discounted used planes competing with Boeing's and Spirit's backlog.
The Financial Times article:
AIG aircraft unit seeks $5bn Fed credit lineBy Justin Baer, Francesco Guerrera and Julie MacIntosh in,New York
Published: April 8 2009 03:00 | Last updated: April 8 2009 03:00
People close to the situation said discussions between International Lease Finance Corp, AIG and the New York Fed were still ongoing and no decision on whether the facility would be provided, and how big it would be, had yet been taken.
ILFC, a profitable company and a top customer to both Boeing and Airbus, is in advanced talks with three private equity consortia but it needs extra liquidity because AIG's collapse has choked off many of its traditional sources of funds. A bitter downturn in demand for air travel has made the task of raising extra funding even more daunting.
People close to the situation said the credit line from the Fed would come from the billions of dollars worth of loans the monetary authorities have already extended to AIG.
But even if ILFC's credit facility comes from existing resources, the Fed's involvement in the sale of an AIG subsidiary could deepen criticism of the authorities' role in the insurer's rescue. The New York Fed declined to comment.
AIG, with the Fed's blessing, has pledged to support ILFC until its separation from the insurer. But the company's efforts to raise several billion dollars through a new credit facility have met with tepid demand from European banks and other traditional sources of aviation finance, people familiar with the matter said.
AIG said ILFC's fundraising efforts were "making normal progress given the tough market conditions", and declined to comment further.
ILFC is in advanced talks with several consortia of potential buyers that include Carlyle Group, Thomas H. Lee Partners and Greenbriar Equity Group. But without reassurances that ILFC's short-term financing needs could be met, it may be unlikely any of the bidders would be willing to take on such a capital-intensive business.
ILFC has ordered 168 new aircraft worth $16.7bn from Boeing and Airbus.
The aeroplanes are scheduled to be bought during the next 10 years, with 49 of them - worth about $3bn - set to be delivered this year.