Unwanted Airplanes (01/16/03)
LEAD STORY-DATELINE: Fortune, 20 January 2003.
You may already know that many of the major airlines in the United States have been cutting flights and grounding aircraft in order to reduce costs in light of decreased demand, but do you know who owns those planes? In many cases, it is not the airlines. Many companies that you would not expect to own these aircraft do, in fact, own them and are suffering huge losses because of it. The list includes Disney, Morgan Stanley, and Whirlpool among others. Why do these companies own commercial airplanes? Well, back in the 1980s it seemed like a good idea to invest in airplanes to lease to the large airline carriers, with returns as high as 12 percent. Leases were often for 25 years, so the return was thought to be almost a certainty. Now, with some airlines in bankruptcy, the companies are forced to renegotiate leases for much lower amounts and in some cases are stuck with airplanes that no one wants. About 300 airplanes are parked in the desert in California, unwanted. Current prices for used jets are low right now, down about 40 percent from the year 2000. So, even if the companies take possession of the planes again and attempt to sell them, they may not be able to get a good price. In many cases, the planes are probably on the books at values that now exceed their worth. Write-downs have already begun to occur. For example, Disney has already written-down its airplane assets by $114 million so far, while Morgan Stanley has had write-downs of $74 million.
TALKING IT OVER AND THINKING IT THROUGH!
- If an airline leases planes from other companies, rather than owning the planes, would the airplanes appear on the airline's balance sheet? If so, at what amount would the asset be recorded?
- When a company like Disney leases an airplane to a carrier, such as American Airlines, when would it recognize revenue from the lease? For example, would it recognize the revenue when the lease is signed, or when the cash is received, or at some other point? Why?
- It appears that if these companies can sell any of these planes, they will be sold at a loss. How is a gain or loss on the sale of a fixed asset determined? What would happen if a company could not find a buyer and just had to scrap a plane?
THINKING ABOUT THE FUTURE!
We likely haven't seen the last of the write-offs for companies owning commercial airplanes. With the current state of the airline industry, the fleets will likely continue to be downsized. In addition to renegotiating leases at lower costs, the airlines will also likely be looking to replace older planes with newer, more fuel-efficient models as a way to reduce operating costs.
Kahn, Jeremy. "The Great Airline Leasing Disaster." Fortune, 20 January 2003.
- Jane Baird