US Airways' recent decision to continue flying all but 36 of its 282-plane mainline fleet is good news for investors in pooled lease aircraft ABS.
The legacy carrier is currently enmeshed in its second Chapter 11 bankruptcy filing in as many years, and investors in pooled lease bonds had been concerned about the potential impact of the restructuring on overall lease rates in the market. However, those fears have been temporarily allayed by the relatively small number of planes being renegotiaited. The planes in question include 19 Boeing 737s, three 757s and three Boeing 767s. Alternative arrangements are in place for the remaining planes.
While there was no direct exposure to these US Airway's jets in any of the outstanding pooled lease transactions, market sources had been worried about a contagion risk. "The initial concern when [US Airways] filed for bankruptcy was that they would kick a lot of planes out of their fleet, and that this would have a negative impact on secondary values," said a source familiar with the situation. "But they are keeping the fleet largely intact, and it seems that any major shock has been avoided, at least for now."
The specter of liquidation still looms as US Airways heads into the lean winter months, historically a slow season for airlines.
The fate of the 36 planes is still uncertain, as lessors can either accept the terms set forth by US Airways, or reject them in search of a better price. Creditors were expected to come back with their decisions early this week. Many of these planes were already renegotiated during the first bankruptcy, leaving the airline with little room to maneuver. "They have already come down on leases as much as possible, so there is very little left to squeeze out of lessors," a source said.
Furthermore, lease rates on Boeing 737 300s - which account for the bulk of the planes being renegotiated - had experienced a 22% year-over-year recovery as of September, the source added. Monthly lease rates for 737s were pushed down to roughly $90,000 in the last US Airways restructuring, and some industry insiders believe the lease rates on these planes could exceed $140,000 should the lessors reject the airline's new terms.
While the preceding statistics do not bode well for US Airways' chances of being able to successfully renegotiate the leases on the planes in question, the numbers are a good sign for aircraft lease rates in general, and by extension, the holders of pooled lease bonds.
As of October, the number of parked commercial aircraft in the U.S. was 556, or roughly 3% of active aircraft, according to published reports. That figure would have to climb to5% - or by about 300 planes - to have an adverse impact on lease rates, sources said. In that context, lease rates should have little problem weathering the storm at US Airways. Should another of the distressed majors decide to ground a significant portion of their fleet, the consequences could be more severe. However, traffic has been increasing, and the planes would likely be needed elsewhere. "As long as traffic is there and growing, the market will need airplanes," said an official at an aircraft valuation firm.
Bankers have been talking up the rise in lease rates - as well as the steady growth in airline traffic - for several months (see ASR 10/18/04). According to several firms, hedge funds have been showing a healthy appetite for these bonds in the secondary market. However, some are not yet convinced. "From a hedge fund perspective, the level of risk has still been unjustified given returns," one investor said.
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