Boeing makes billion-dollar bet on the 747 hauling cargo, buying own planes
BOEING has a temporary plan to save the iconic but slow- selling 747 jumbo jetliner: Buying its own planes and leasing them to cargo haulers.
With the effective shutdown by Congress of the Export-Import Bank – which traditionally has helped overseas carriers purchase planes – Boeing lost a key sales tool. Making matters worse, leasing companies have been hesitant to finance a plane with a dwindling customer base.
So Boeing is now renting out the massive, hump-backed 747s to cargo carriers in countries such as Russia and Azerbaijan, which increases the company’s exposure to potential defaults on payments.
Through the end of last year, Boeing had provided financing valued at US$ 1.26 billion to 747 customers through Boeing Capital Corp., regulatory filings show. That’s about a fivefold increase from the close of 2012. In fact, 747-related loans and operating leases now account for about one- quarter of the portfolio managed by Boeing’s lending arm.
As the air- cargo market recovers, the strategy may pay off for Boeing. The manufacturer recently landed a crucial 747 order from United Parcel Service Inc. that could serve as a bridge to the future for the wide-body plane. But tomorrow’s 747 – a symbol of luxury travel when it made its debut with Pan-American World Airways in 1970 – most likely won’t be flying globe-trotting tourists. It will instead haul oversize cargo like oil- drilling equipment as demand fades for bulky fourengine passenger carriers.
“We believe in the longterm need for this aircraft,” said George Dimitroff, head of valuations for Flight Ascend Consultancy. “As long as they don’t over-produce, which Boeing aren’t doing at the current rate, we believe there will be longterm demand.”
Boeing recorded more than US$ 2.1 billion in losses on the 747- 8, the latest version, in 2015 and 2016 as it slowed production to keep pace with dwindling sales. The company received a big boost last year when UPS ordered 14 of the jumbo freighters and took options that would double the original order size. The sale was the largest Boeing has landed for the redesigned 747 since November 2007, according to the manufacturer’s website.
It’s unusual – and risky – for a plane maker to buy and lease its own product on a large scale. If the cargo carriers default or don’t renew operating leases, it would be Boeing Capital’s responsibility to line up other customers, a challenge in a niche market. If the plane experiences a greater-than- expected decline in value, Boeing’s earnings or cash flow could be “materially adversely affected,” according to the filing.
Boeing’s shares were little changed at US$ 177.56 ( RM800) in New York last Wednesday. They have gained 14 per cent this year through last Tuesday’s close.
It’s also a shift for Boeing Capital, which has whittled down its loan portfolio by twothirds from US$ 12.2 billion at the start of 2004 as the unit shed its ambitions of becoming Boeing’s answer to GE Capital. Since selling the General Electric unit a US$ 2 billion commercial loan portfolio in 2004, Boeing Capital has focused on supporting the company’s aircraft sales and managing a portfolio of loans and operating leases aimed primarily at out- of-production aircraft.
The recent spate of 747-related operating leases isn’t a reversal of that strategy, Timothy Myers, president of Boeing Capital, said in an interview. His division stepped in to close the 747 deals after a financier had difficulty lining up equity, Myers said. With cargo traffic growing, he expects to find buyers for those aircraft.
“We are in the process of doing that right now: Offloading some of those transactions that we’ve done in the past,” Myers said. “This year most likely there will be multiple parties taking those assets.” — WP-Bloomberg