In the 1980s, when most anything to do with airlines attracted investors like honey, it seemed as if the value of airplanes would just keep soaring. Strong passenger traffic kept demand for new jets high. And a shortage of aircraft meant that even older planes would be needed for a good, long time. Individual investors, hot to get in on the action, pumped almost $2 billion into a series of public limited partnerships that leased used aircraft (table). Besides a stake in a fleet of jets, the LPs promised regular distributions of cash.
But since the airline biz went into a tailspin, those investors have been bracing for trouble. Now, trouble has arrived. Polaris Aircraft Leasing Corp., a unit of GE Capital and the biggest syndicator of public aircraft income partnerships, has been lowering the payout to investors in some of its six funds. And a number of other income fund managers are looking at similar cuts. Says Richard Baudouin, vice-president of lessor Electra Aviation Inc.: "Across the board, leasing companies are suffering."
INTERRUPTION. The problem is that the funds invested heavily in old planes leased by airlines with weak balance sheets. Five carriers have tumbled into bankruptcy in recent years, and two of those--Eastern and Braniff--have stopped flying altogether. The resulting interruption in lease payments has slowed cash flow to the partnerships. What's more, a sudden glut of airplanes has eroded the value of older planes and the LPs that own them. The funds once trumpeted 12% to 13% returns, but now most investors will be lucky to get anything close to that.
Polaris, which has raised $1.12 billion from 80,000 investors for its six partnerships since 1985, acknowledges that it faces a new cash squeeze on two of its funds--Polaris Aircraft Income Funds II and III. Investors with nearly $500 million locked in the leasing ventures will see returns shrink for the quarter.
How much the payout will shrink is unknown. Various lease payments from Continental, Pan Am, and Midway have been interrupted by bankruptcy filings. Trans World Airlines Inc., its Atlantic business devastated by the gulf war, thus far has avoided bankruptcy court, but suspended some lease payments anyway. While officials at Polaris insist they have negotiated a deal to bring TWA current on its obligations, the payout level for the first quarter still hasn't been determined. Officials concede, however, that the combined distribution will be reduced from its recent quarterly level of $13.6 million.
Polaris has long maintained that it can fly through trouble. Its president, Marc P. Desautels, has argued that tough times make his older, cheaper planes attractive. In a recession, he reasons, many airlines can only pay to fly the equivalent of a used Dodge--not a Cadillac. Furthermore, Polaris has counted on its strong marketing skills to place at other airlines any jets that fall idle.
But that strategy didn't foresee today's harsh industry conditions. After losing as much as $4 billion in six months, U. S. airlines aren't buying much of anything. And airlines in bankruptcy or under serious financial strain account for 63 of the 68 leases held by Polaris' funds II and III.
'IRATE PEOPLE.' This isn't Polaris' first liquidity bind. Securities filings show that one fund, hurt by Braniff Inc.'s demise, cut its payout from about $50 a unit to $2.50 a unit for the nine months ended Sept. 30, 1990. In December, Continental's missed payments caused a decrease in the fourth-quarter distribution from two other funds by 30.8% and 10%, according to a filing. Anticipating more trouble with funds II and III, Polaris in mid-March notified Prudential Securities Inc., its chief sales agent for the funds, that the first-quarter payouts for those funds were in question, according to Prudential. Says one broker who sold the funds: "You're going to have some irate people."
Polaris partners may not be the only ones screaming. All the syndicators suffer from the same depressed conditions as Polaris. Airlease Ltd. says that on Mar. 6, it cut distributions 36% because of a cash squeeze. The manager of Shearson Lehman Brothers Inc.'s JetStream I and II partnerships, Charles Salazar, says his funds haven't made cuts yet. But he adds: "We are reviewing the situation."
This much can be counted on: Brokers won't be ringing up with a sales pitch on a new aircraft partnership. "We won't be able to float anything for a long time," says one fund manager. Some people think that may be a good thing. "I'm amazed how much money was raised for those partnerships," says banker Nils Hallerstrom of Credit Lyonnais/PK Airfinance. Investors in the `80s forgot the first principle of aviation: What goes up, must come down.
SO YOU WANT TO OWN A JET? Polaris Aircraft Leasing is merely the biggest syndicator of public aircraft limited partnerships. Since 1985, some $1.95 billion has been invested in the income funds Fund Manager Total invested Millions Polaris Aircraft Income Polaris Aircraft $1,120.0 Funds I-VI Leasing Pegasus Aircraft Pegasus Capital 225.1 Partners LP JetStream LP I and II Shearson Lehman 194.7 Two funds Brothers Inc. and CIS Aircraft Income Partners Integrated Resources 192.9 Airfund International LP AFG Aircraft 140.0 Two funds Management Airlease Ltd. Ford 73.9 DATA: ROBERT A. STANGER & CO., BW