Wednesday, November 19, 2008

Limited Market for Aging and Retired Aircraft

American Airlines, United Airlines and Continental Airlines Inc., stung by fuel costs and a drop in traffic, face a new challenge: what to do with planes valued at $2 billion now idled or set to be grounded through 2009.

With virtually no U.S. buyers for the 276 mostly older, less-efficient jets, the carriers are shopping the aircraft in emerging markets such as Russia while prices tumble and frozen debt markets damp sales, analysts and marketers say.

``People are sitting on the fence for three to six months waiting to see what happens with the price of fuel and the credit fallout,'' said Francis Otto, a manager at industry data firm OAGback Aviation Solutions in New Haven, Connecticut. ``You're going to have, at least in the short term, a hesitation on the part of any potential lessees or purchasers.'' The lack of buyers leaves three of the biggest U.S. airlines saddled with storage expenses and, at American and Continental, lease payments on jets they're no longer flying. Some models may fetch as little as half what they did in 2007, said Douglas Runte, a Piper Jaffray & Co. analyst in New York.

That adds to the strain on carriers with collective losses of $2.32 billion over the past four quarters, excluding special items. Writedowns for the values of some of the jets this year totaled almost $1.2 billion for Continental, American parent AMR Corp. and Chicago-based UAL Corp., owner of United.

``Many of the older aircraft now being grounded will never fly again,'' Ray Neidl, an analyst at Calyon Securities in New York, said in a note after a Calyon-sponsored conference today on aviation leasing. The planes likely will be used for parts ``regardless of where fuel prices go.'' Delays Over Financing Continental said last month that credit snags for 3 unnamed buyers delayed the sale of 20 Boeing Co. 737-500 jets. The fourth-largest U.S. airline said it's holding cash deposits and would be entitled to damages should the deals collapse. ``We have been actively selling our 737-500s to airlines predominantly based in Russia,'' said Julie King, a spokeswoman for Houston-based Continental, which is shedding 67 of its 737s by the end of 2009.

Other models being pulled from U.S. fleets include
Airbus SAS A300s; four-engine Boeing 747s, which predate the new generation of twin-engine jumbo jets; and Boeing MD-80s that American is replacing with new 737s burning 25 percent less fuel. `No Demand' ``There really is no demand for them here,'' Anders Hebrand, president of SkyWorks Leasing LLC in Greenwich, Connecticut, said in an interview.

Age and operating costs helped shape airlines' decisions on which aircraft to unload as jet fuel surged 53 percent this year through July. While fuel is down by more than half since then, traffic is now sliding, off as much as 7.6 percent at United. Any unsold aircraft will be parked. Those still under purchase agreements or on leases that can't be terminated early will continue to drain cash. ``The fact that you have an asset that you're paying for, that you're not using, is a cost,'' said Marc Wilson, director of safety, quality and asset management at MBA, a Washington- based aviation consulting group.

Preparing a plane for short-term storage costs as much as $20,000, and as much as $25,000 a year after that to keep it in marketable condition, said Jack Keating, president of Evergreen Maintenance Center Inc. in Marana, Arizona. Returning a jet to service may run as much as $1.2 million, which is almost a third of Runte's $4 million estimated value for American's MD-80s.

Likely Destinations

The likeliest markets for the planes include Africa, South America, Indonesia and Turkey, airlines and analysts said. United hired
AAR Corp., an aircraft and equipment marketer based in Wood Dale, Illinois, to find buyers for its 737s, focusing on non-U.S. operators. The third-biggest U.S. airline is grounding all 94 of its 737s, along with six 747s. Three 737s have been sold, Chief Financial Officer Kathryn Mikells said last month.

American may have to find overseas buyers for its A300- 600s, which aren't flown by other U.S. airlines. Future lease payments and termination charges will total $140 million once the last of the 34 planes is retired by the end of 2009, according to American, the second-biggest U.S. carrier. Those jets average almost 19 years of age, about the same as the MD-80s, and are among American's oldest, according to the Ascend Online Fleets database. The other Boeings at the Fort Worth, Texas-based airline are an average of 12 years old.

A spokesman, Andy Backover, declined to comment on possible buyers, saying American hasn't decided on the fate of the A300s or the 30 MD-80s being parked by next year. American's fleet of 287 MD-80s is the world's biggest. ``MD-80s are going to be extremely difficult to place,'' said Piper Jaffray's Runte. ``Their age and, more importantly, fuel consumption, just makes them very unattractive.''