Posted on: Tuesday, May 27, 2003
Desert filling fast with grounded planes
By Terence Flanagan
Bloomberg News Service
Looking for a read on the troubled U.S. airline industry? Cast an eye over the Arizona desert.
The Southwest is a vast, open-air dry dock for idle aircraft — and the planes have piled up lately.
Since the 9-11 terrorist attacks sent the travel industry into a tailspin, the number of commercial aircraft in U.S. desert storage has more than tripled to 586, according to Lehman Brothers Inc. About one of every 10 passenger seats in service before the attacks is now baking under the desert sun.
The value of the inactive aircraft has deteriorated rapidly. The price of a 1995 Boeing 757-200, for instance, slid to $20 million in February from $38 million two years earlier, says Philip Baggaley, an airline analyst at Standard & Poor's. "It's a reflection of very weak demand," he says.
All of this is bad news for investors. Most airlines lease some of their planes rather than buy all of them outright. Investment banks then repackage the leases into securities and sell them to investors.
Money managers generally consider an airline's asset-backed securities as safer than the company's unsecured debt. That's because buyers of asset-backed securities get first dibs on the airline's planes in the event of bankruptcy.
Now, with the value of airline fleets sliding and the number of idled planes growing, asset-backeds have hit turbulence. Notes backed by aircraft leased to AMR Corp.'s American Airlines plummeted to 30 cents on the dollar on May 9 from $1.09 in September 2001, according to Merrill Lynch & Co. Those securities have tumbled even faster than the unsecured debt of AMR, which fell to 58 cents from $1.02.
Investors may want to tighten their seat belts. The 10 largest U.S. carriers lost a record $11.3 billion in 2002. Now, the entire industry is struggling to cope with the outbreak of severe acute respiratory syndrome. Unless business turns around soon, more aircraft may end up grounded beneath the desert sky.
