Renting Out the Friendly Skies

By Gordon M. Henry

Nobody has ever become a frequent flyer by booking a seat on GPA. For that matter, no passenger has ever eaten a meal served by a GPA flight attendant or checked a bag with the company. Yet Shannon, Ireland-based GPA, formerly known as Guinness Peat Aviation, owns one of the world's largest commercial passenger jet fleets. Instead of flying its planes, which will soon number 187, GPA leases them to some 25 airlines, including Pan American, Qantas and People Express. For cash-strapped carriers, renting a Boeing 737, even at $240,000 a month, is often more affordable than spending $28 million to buy one.

GPA is only one of a growing number of middlemen in the airline industry. Like GPA, which is privately held, most are obscure. International Lease Finance (1985 sales: $81.2 million), for example, was begun in 1973 by three Hungarian immigrants who now employ ten staffers in a Beverly Hills office suite. But these lessors have become familiar faces at Boeing, the giant Seattle aircraft manufacturer. In 1980 only four of Boeing's 316 orders were placed by leasing companies; during the first half of 1986, their share skyrocketed to 109 out of 247. Overall, more than $10 billion worth of aircraft will be out on lease this year, up from $8.4 billion in 1985. Says James Halstead, an airline expert at the London-based James Capel brokerage firm: "Leasing provides the most convenient form of financing new planes."

Indeed, leasing companies exist largely because airlines want to replace their aging fleets faster than their budgets will allow. Says Robert Joedicke, who follows the airlines for New York City's Shearson Lehman Bros.: "The price tag on new planes has become so expensive that leasing has become a necessity." But even airlines with a healthy cash flow would often rather lease than buy. Reason: they fear that after spending a fortune on today's state-of-the-art jets, they may be overtaken by tomorrow's technology.

The leasing industry has flourished in part because the deregulation of airlines in the U.S. spawned many fledgling carriers that could ill afford to buy new aircraft. Tempe, Ariz.-based America West got off the ground by leasing ten Boeing 737s -- its entire fleet. Says America West President Michael Conway: "Without leasing, we would have had to raise a lot more money."

Business has also been good in other parts of the globe. Several new Third World carriers, including Nigeria Airways and Air Lanka, have become GPA customers thanks to an enticing package offered by Tony Ryan, the company's innovative chairman. Ryan, 50, will supply neophyte airlines not only with planes but with flight and ground crews as well.

In some cases, airlines lease planes to other carriers, especially when encountering financial turbulence. Since it announced plans to reorganize last month, People Express has repainted and leased eight of its 737s. Last week Eastern Air Lines canceled its Miami-to-London route and said it may lease the DC-10 that has been idled.

Several leasing companies, like Miami's Aviation Sales, specialize in short-term agreements that allow customers to bail out in five years if necessary. In contrast, the granddaddy of the industry, a subsidiary of General Electric called GE Credit, has traditionally signed leases of up to 20 years. James Ozanne, a GE Credit senior vice president, warns that middlemen who peddle short-term leases could eventually become saddled with aging aircraft that cannot be resold. Nonetheless, Ozanne admits, the boom in short- term renting has spurred GE Credit (1985 revenues: $2.9 billion) to begin offering five-year leases of its own.

Leasing will play a growing role in the airline industry. Steven Udvar- Hazy, president of International Lease Finance, predicts that by 1990 about 25% of all planes will be leased, up from 10% today, a trend producing new alliances. GPA and McDonnell-Douglas have signed the first joint venture between a leasing company and an aircraft manufacturer, creating a firm called Irish Aerospace. It will have exclusive rights for leasing McDonnell-Douglas planes throughout the world.

With reporting by David Finegold/London and Charles Pelton/San Francisco