Shores Up Reserves To Help Airlines Continuing Buying Planes

Hoping to hold onto existing record aircraft orders, Boeing plans to ramp up its aircraft financing program in the face of frozen investment markets and a slumping global economy.

The Chicago Tribune reports Boeing CEO Jim McNerney told analysts Wednesday the planemaker has moved $9.5 billion in funds to its Boeing Capital Corp. operation, to shore up so-called "backstop" financing typically used until airlines can secure primary loans from banks or aircraft lessors.

Reflecting the current economic crisis, Boeing Capital is also taking steps towards once-again expanding into a full-fledged aircraft financing operation, to be used as a last resort for customers that can't secure primary funding from the credit market.

Boeing had devoted its efforts over the past several years towards ramping down that operation, due to the relative strength of outside capital markets.

"It's very likely that Boeing Capital will do some new financing in 2009," said Boeing CFO James Bell in a conference call announcing the company's third quarter financial results. As ANN reported Wednesday, Boeing posted Q3 2008 income of $695 million, with earnings falling 38 percent over Q3 2007.

Most of that plunge came from the effects of the ongoing strike by the International Association of Machinists, which has halted deliveries of (and customers' final payments for) Boeing airliners. But Boeing also sees a probable dropoff in its future business due to the economic crisis, as well as possible mass cancellations of existing orders.

Establishing a dedicated credit arm carries significant risks for Boeing, should the airlines receiving financing go out of business. The airline also runs the risk of losing money should airlines return their planes beforehand, or push for more favorable financing terms; Midwest Airlines recently did both, as ANN reported.

Though Boeing retains ownership of the aircraft financed through Boeing Capital until the airlines' chits are paid off, even carriers in default hold significant influence when the aircraft lender is also the manufacturer... and doesn't want the hassle of reselling those airplanes.

That's why analysts expect Boeing to be very selective in choosing which airlines will be allowed credit. "It will be for their best customers," said Michael Derchin, airline and aerospace analyst for FTN Midwest Securities. "It's not for everybody."

US customers account for 71 percent of Boeing Capital's current portfolio. AirTran Airways is the lender's largest customer, with $1.46 billion in secured debt against its fleet of Boeing 717s and 737s.

FMI: www.boeing.com