ANALYSIS: What is driving American's sale and leaseback financing spree?

Washington DC
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American Airlines has financed nearly all of its new aircraft with sale and leaseback (SLB) deals during the past two years, breaking from other US mainline carriers' preference for enhanced equipment trust certificate (EETC) debt.

Only one of the Fort Worth, Texas-based airline's 60 deliveries between 1 January 2011 and 2 May have been financed through SLBs, according to Flightglobal's Ascend Online database. The one outlier was a Boeing 777-300ER delivered this year and financed under its $663.4 million 2013-1 EETC deal.

*Does not include 20 Airbus A320 family aircraft deliveries


Lessors include AerCap, Avolon Aerospace Leasing, GE Capital Aviation Services (GECAS), Guggenheim Aviation Partners, International Lease Finance (ILFC) and ORIX Aviation.

By comparison, United Airlines financed 32 of its 33 deliveries with EETCs - it paid cash for the remaining one - and US Airways used SLBs for six of its 28 deliveries and EETCs or bank debt for the remaining 22 over the same period, according to Ascend. Delta Air Lines did not take delivery of any new aircraft during the period.

SLBs of new aircraft offer airlines benefits not available with debt financings. These include increased end-of-term flexibility, less upfront capital and gains that can be amortised over the term of the lease. Conversely, with a debt deal an airline owns the aircraft outright at the end of the term and can do with it as it chooses at the time. For example, United recently agreed to sell up to 30 of its ageing Boeing 757-200s to FedEx.

Of course every carrier has their preferred method for financing aircraft. Low EETC coupons for issues by investment grade airlines is at least partially driving the boom in the capital market aircraft debt among mainline carriers, while JetBlue Airways continues to prefer the private bank loan market and Spirit Airlines leases the entirety of its fleet.

Why leases for American, then?

Bankruptcy, for one, is not the reason. The airline closed 15 leases in 2011, the majority of which were before its filing for chapter 11 bankruptcy protection on 29 November of that year. Many it its 30 leases in 2012 were under contract prior to the filing as well.

"One of the most common reasons airline shift to more leased fleet, is to reduce the debt on their balance sheets," says George Dimitroff, vice-president of advisory for the Americas at Ascend.

American reduced its long-term debt by nearly a quarter to $6.65 billion at the end of March from $8.76 billion at the end of 2010. Long-term liabilities including capital lease obligations are down about the same percentage to $7.02 billion over the period.

The carrier says that it received "gains" that will be amortised over the life of the leases from its SLBs in 2012, in a S-4 stock exchange filing on 15 April.

American declines to comment for this story. SkyWorks Capital, its adviser on the SLBs since 2011, also declines to comment.

Aircraft leasing may be American's long-standing financing strategy. More than 40% of its 614 mainline aircraft were leased at the end of 2012, which is down negligibly from about 43% of 620 aircraft at the end of 2010, according to company documents.

This is higher than the 34.2% of western built aircraft that are leased out of the global in service fleet, according to Ascend data.

The airline could just prefer the low upfront capital cost and end-of-term flexibilities associated with leases.

American is still in the capital markets, despite its preference for leases. It financed four new 777-300ERs with the 2013-1 EETC, which achieved the market low coupon of 4% for the senior A tranche when it closed in March. The deal also included nine owned aircraft.

More capital markets debt could be on the way. An up to $1.5 billion 2012-1 EETC secured by 76 owned aircraft is pending appeal in the bankruptcy court and American has 18 aircraft without financing out of 45 remaining deliveries this year after 2 May, according to Ascend. The financed aircraft will be leased except for three remaining 777-300ERs that were included under the 2013-1 EETC.

American's 15 Airbus A319 and five Airbus A321 deliveries this year will be leased, according to recent stock exchange filings. However, the aircraft have yet to be added to either the OEM or Ascend's respective pending deliveries databases.