Cash-poor U.S. airlines may face huge plane bill

As aircraft age, replacements may be hard to come by


United, with an average fleet age of 12 years, has no planes on order. Delta, with planes averaging 11 years old, has 55 planes on order, but doesn't want them and has lined up buyers to take them off its hands once they're delivered. But it will keep ten 777s it has ordered.

Big airlines blocked?

Based on their cyclical history of modest profits followed by huge losses, big airlines would seem boxed in by a need for new planes and an inability to pay for them.

But Roach, the industry consultant, says that it would be "idiotic" to think that all the USA's carriers will disappear as their current planes wear out. "There will always be an air transportation system. It is too vital to the country's interest for it to be otherwise," he says. The more apt question, he says, is "Where will the money come from" to acquire those planes?

Southwest, with the deepest financial resources in the industry and strong annual cash flows, expects to continue buying most of its planes with cash generated by its operations, says CFO Laura Wright.

For many U.S. carriers, that's not an option they can rely on. Now, they'll have to get by with a little help from their friends: leasing companies.

It used to be that when the big U.S. airlines leased planes -- typically via long-term deals that were nothing more than alternate ways of purchasing planes -- they did so mainly for tax savings. Today, they increasingly are turning to leasing because they lack the cash or the strong credit ratings to finance conventional plane purchases.

And thanks to the strong worldwide demand for popular models from Boeing and Airbus, there's no shortage of companies willing to finance them, even for carriers whose profits are unimpressive or non-existent. Aircraft lessors are confident that should a customer default on a lease, they'll have no trouble finding other carriers to lease their planes.

"There're plenty of people out there willing to finance airplanes," Baseler says. "Actually, at Boeing, we're amazed at just how easy it is to finance new planes.

American's Horton says, "Some people marvel that the airline industry has access to as much capital as it does, given its capacity to reduce value for investors."

But he disagrees with the notion that bottom-line profits don't matter much. "There's a whole lot of reasons you can finance planes today without being profitable. But, in the long run, I still think our industry is going to have to have profits if it's going to make its way." How much does an airplane cost?

List prices of popular passenger jets (in millions):

Boeing

737-800

$70.5 to $79.0

767-300ER

$141.0 to $157.5

787-8

$157.0 to $167.0

747-400

$228.0 to $260.0

777-300ER

$250.0 to $279.0

Airbus

A320

$69.3 to $76.5

A330-200

$167.7 to $176.7

A340-500

$222.9 to $230.8

A380

$304.4 to $334.0

A350-800XWB

$196.5 to $202.0

Sources: The companies

How the big airlines stack up in fleet orders

Big U.S. airlines face big expenditures for fleet expansion and renewal. The outlook for each:

Airline Fleet size Avg. age (in years) Where things stand

American 672 14 Recently said it will move forward the delivery dates on 47 previously ordered Boeing 737s with first deliveries now scheduled for early 2009.

Continental 367 9 Took deliveries of new planes even in the post-9/11 era, and has placed firm orders for 60 Boeing 737s and 25 787s.

Delta 440 11 Has ordered 55 Boeing 737s but plans to resell them. Has ordered 10 Boeing 777s.

Northwest 362 18 Took delivery of new planes during its Chapter 11 bankruptcy. This year, it will get its 32nd, and last Airbus A330 long-range wide-body. On order: 18 Boeing 787s, plus 72 76-seat regional jets that will be flown in mainline service as replacement for 100 DC 9s on some routes. Still must decide on replacement of 109 DC-9s used on more popular domestic routes. Those DC-9s average about 35 years in age.

United 460 12 Hasn't taken delivery of a new full-size jet since October 2002, and has no orders in place.

US Airways 358 12 Ordered 92 Airbus planes in June, most for delivery after 2010. Already had 57 planes scheduled for delivery before 2011. New planes are mostly replacements.

Southwest 494 9 Has orders and options to acquire 285 new Boeing 737s through 2014, and has commitments to buy two used 737s later this year. No current plans to retire older 737s, but is deferring 15 of 34 previously scheduled for delivery in 2008.

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