Boeing Capital Hits Cruising Speed

But the finance arm may be pitted against prime Boeing clients

Boeing Co. (BA ) may not admit it, but its new finance unit aspires to be a GE Capital lookalike. Boeing Capital Corp. is moving aggressively to help its parent not only sell more airplanes and expand into aerospace but also move into financing such big-ticket items as oil rigs, barges, and cargo ships.

Boeing Capital was created nine months ago as part of Boeing's diversification strategy--one that closely mirrors the formula of General Electric Capital Services Inc.'s for combining manufacturing with financial services. Formerly a finance arm inherited from the merger with McDonnell Douglas Corp. in 1996, the new Boeing Capital is on a roll. Net income jumped 37%, to $107 million, in 2000. Revenues soared 57%, to $447 million; return on equity was a healthy 19.7%. The commercial-equipment (nonaircraft) financing division had its best year, generating $710 million in new business, compared with about $1 billion in new business for aircraft financial services. This year looks even stronger for both: Through June, net income climbed to $81.3 million, up 107% from $38.9 million last year. Add it all up, and Boeing Capital now provides about 5% of Boeing's net profits.

DILEMMA. But to grow from here won't be so easy. For one thing, the weakening economy threatens to reduce margins and pinch profits. More fundamentally, Boeing Capital faces a dilemma: To keep growing it must build up its fleet by buying new aircraft. That will put it in direct competition with other aircraft-leasing companies, who are already Boeing customers. "It would make it very tough for us to buy Boeing aircraft," says Robert J. Genise, CEO of Boullioun Aviation Services Inc., a leasing company. "It would put us at a big competitive disadvantage."

While Boeing Capital is modeled on GE Capital, it's a fraction of the size: Boeing's $7.5 billion portfolio pales in comparison with GE's $370 billion, which was amassed by financing not only the jet engines that GE Aircraft builds, but also with expansions into consumer finance, reinsurance, commercial real estate lending, and aircraft leasing. "Clearly, we believe in the concept of a financial-service company," says Boeing Capital President James F. Palmer. "One doesn't have to look any further than GE to see what they have been able to do. The key question is: `How do you grow at a profitable rate?"' The crux of its growth plan is to stick to financing airplanes and heavy equipment. Palmer also sees new opportunities in commercial satellite financing--especially now that Boeing owns Hughes Satellite Co.

Boeing Capital officials say they are open to future acquisitions to grow. In fact, says First Union Securities analyst Sam Pearlstein, "if they want to be a serious player, they [must] make an acquisition." But there's still room for creative financing: Last year, Boeing Capital agreed to buy back British Airways PLC's (BAB ) 757 fleet for conversion into freighters and leased them to DHL Worldwide Express. With Hawaiian Airlines Inc. (HA ) this year, Boeing Capital worked with leasing outfit Ansett Worldwide to help it finance the purchase of nine new 767 jetliners, worth about $1 billion. Boeing Capital also helped Boeing Commercial Airplanes win a $2.9 billion order from AmTran Inc.'s (AMTR ) commercial air division, American Trans Air, for 47 Boeing jets in 2000. To close the deal, Boeing Capital agreed to help remarket the carrier's 24 aging 727s, got International Lease Finance Corp. and GE Capital to supply cash for 17 of the new jets, and purchased $50 million in AmTran preferred stock. "Boeing appears to have changed their modus operandi 180 degrees," says J. George Mikelsons, founder and chairman of AmTran. "It used to be that Boeing's answer to small carriers like ourselves was: `Look, fellas, our job is to build airplanes, and it's up to you to figure out how to finance them."'

So far, these deals share common themes: They are riskier transactions that include equity stakes in the airlines and involve rival leasing outfits as partners. While Palmer has no plans to buy new aircraft and move onto customers' leasing turf, concerns remain that he may alienate Boeing aircraft customers. Goldman, Sachs & Co. analyst Howard A. Rubel says Palmer can pull it off. "He is very deliberate, and he is very capable of balancing risk with opportunity." That may be so. But as he tries to expand, Palmer will have to face off with GE Capital and other leasing firms, such as International Lease and CIT, a unit of Tyco International Ltd. (TYC ) That could mean turbulence up ahead.

By Stanley Holmes in Seattle, with Michael Arndt in Chicago

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