When the sticker price for a new Boeing or Airbus jet can top $300 million, rarely does one expect a buyer to fork over the total in cash. Yet that’s what has been happening in recent years at Boeing (BA), the largest seller of widebody airplanes, where a quarter of all deliveries this year are forecast to be paid for in cash.
Most buyers in the market for a 777-300ER—list price: $320.2 million—or a $212 million 787 Dreamliner pay Boeing cash they have borrowed elsewhere, typically from a bank or a commercial bond issue to support the acquisition. In many cases, the airline has already sold its new jet to a leasing company and plans to rent it for the next decade or more, a common arrangement in the industry.
Cash payments peaked at one-third of deliveries (PDF) in 2012, according to Boeing Capital, which helps to finance the company’s airplanes and analyzes the market for future financing availability to help the company plan production and ensure adequate liquidity to fund the sales of the new aircraft. Boeing Capital predicts that bank loans and capital markets, often bond issues, will each account for 24 percent of delivery financing. Boeing’s commercial airplanes unit reported $53 billion in sales last year due to a record output of 648 aircraft. (Boeing and Airbus receive the bulk of payment for a new plane when a customer takes it.) Airbus (AIR:FP) says cash and commercial debt accounted for 57.5 percent of its delivery financing last year. The company does not specify cash alone.
The level of cash payment reflects an airline industry that has dramatically slashed its debt load, provoked into a more conservative management by shocks to its business, from the terror attacks to oil prices to pandemic scares, says Kostya Zolutsky, a managing director at Boeing Capital in suburban Seattle. “The biggest impetus was 2001 and they saw how big the shocks can be,” Zolutsky says. “Between 2000 and 2010, airlines globally, in essence, halved their leverage. The industry as a whole de-levered. When you look at cash (payments), that’s a reflection of that.”
Zolutsky says in a given year “you can count on one hand, maybe two” the number of airlines that buy a new plane directly from their cash flow. Those that do typically want to reduce the amount of cash on the books, driven by the airline’s balance sheet goals. Spending it on a new airplane can make more sense than parking it in a low-yielding investment or using the money elsewhere. Southwest (LUV), for example, has paid cash for some of its 737s, and many of the older, inexpensive McDonnell Douglas aircraft in Delta’s (DAL) fleet were bought with cash in the used market. That airline also leases less of its fleet than do rivals, giving Delta the flexibility to park some planes if there’s a sharp economic downturn. Airlines that lease face regular payments, requiring them to fly the planes to generate revenue even if a flight isn’t making money. If Delta orders new widebody airplanes this year, there has been speculation in the industry that some of those big jets may be purchased with cash, given Delta’s goal of becoming a “high-quality industrial transportation” company with low debt, an investment-grade credit rating, and rising dividends.
“Cash is fungible,” says Henri Courpron, chief executive officer of International Lease Finance Corp., one of the world’s largest airplane lessors. “There’s no airline in the world that doesn’t have borrowings.” But at times there are also a few that see wisdom in writing fantastically large checks.