General Electric Co.'s (GE) aircraft engines may power the country's major airlines, but it's GE's money that is keeping many of them aloft. Since September 11, 2001, GE Commercial Finance and its aircraft leasing arm, GE Commercial Aviation Services, have sunk more than $8 billion into global airlines, with a big chunk of that going to money-losers such as Delta Air Lines Inc. (DAL) and United Airlines Inc. (UALAQ). GE has also allowed feeble airlines to defer payments on leased aircraft, thus helping them keep more planes in the air and continue a price war on the ground. But while extending lifelines may be good for GE, it may be bad for the airline industry.
Airline executives roundly blame their losses on too much capacity, arguing that they can't boost airfares to cover their costs because there's always someone willing to offer bargain ticket prices. But lately, whenever an airline seems as if it may actually go out of business and give surviving carriers some pricing leverage, GE steps in. The company recently offered new money that helped rescue bankrupt US Airways Group Inc. (UAIR) and FLYi Inc. 's (FLYI) struggling low-fare unit, Independence Air. Meantime, it helped to keep Delta out of bankruptcy with a $630 million loan. Yet "leaving capacity in the hands of weak players is clearly detrimental to the industry," says one former airline CEO. With capacity now likely to grow rather than shrink, analysts predict airlines will lose some $4 billion in 2005.
Why is GE so eager to lend a hand? It makes money off the well-collateralized loans and wants to keep as wide a customer base as possible. The Fairfield (Conn.)-based giant owns about 1,300 aircraft, a massive aircraft-engine unit, and has more than $29 billion in loans and leases to airlines. It's more exposed than rivals like International Lease Finance Corp., a unit of American International Group, which has 88% of its 676-plane fleet leased to airlines outside the U.S. But GE also demands so much collateral and places so many conditions on assistance that analysts believe its downside is limited. The loans to Delta, for example, are backed by $3.5 billion in assets, ranging from spare parts to landing slots. "If GE were to take back a bunch of planes," says analyst Roger E. King of CreditSights Inc., "within a year they would have them all moved" to U.S. freight haulers or Asian carriers.
GE insists that it isn't getting in the way of industry dynamics. It has already taken back dozens of aircraft from its U.S. customers and has reduced its exposure to the large national carriers, says Henry A. Hubschman, president of GE Commercial Aviation Services (GECAS). "Each case is unique," he says. "We don't believe we are the ones who can strategically manipulate the market."
Even if one of the larger airlines were to fail, GE's hit would be minor. Hubschman says that the global market for aircraft is at its strongest since 2000. Only two of GE's planes are currently not on lease to customers. GECAS also saw its net earnings rise 13% in the fourth quarter, to $167 million, though overall earnings for the year rose only 3%. To play it safe, GE set aside $195 million in "aviation industry reserves" in the fourth quarter, primarily to offset anticipated losses related to US Airways. In his Jan. 21 teleconference with analysts and investors, GE Chief Executive Jeffrey R. Immelt said that with the move, "we are appropriately reflecting" where US Airways stands.
Of course, as US Airways executives point out, the death of any small or middling carrier may not be a panacea when the rest could just add new planes. Many can count on help from GE, after all. Airlines may be entering their fifth consecutive year of losses, but for GE, the good times keep on rolling.
By Diane Brady in New York, with Brian Grow in Atlanta, Lorraine Woellert in Washington and Wendy Zellner in Dallas