GECAS increased its fourth-quarter impairment charges to $270 million from $190 million in the previous quarter, due to certain older aircraft “that are more susceptible to changes in technology and operating preferences”.
“Coming out of the third quarter, the team took a deeper dive on some of our older aircraft, principally narrowbodies, as we are in a situation now where there is an enormous amount of technology being introduced over the next five to 10 years,” said Jeff Bornstein, chief financial officer of General Electric on a fourth-quarter earnings call.
The charges are “very specific” to older 50-seat regional jets, which have an average age of 15 years and resulted in charges of $32 million, as well as Airbus A318 and 737 aircraft.
“Some of the 737s were in cargo format, so it [the impairment charge] is very much about narrowbodies and aircraft that are deep into their lives,” he says.
Cargo aircraft contributed to $32 million in impairment charges.
Bornstein says the lessor lowered its expectations for these aircraft types and reduced the future cash flows estimate “to reflect a shorter useful life and lower residual values”.
“When you get this level of oil and jet-A price, the differences in efficiency economically are enormous versus what they might have been historically,” he adds.
The lessor “will be in the market” with the sale of some of these impaired aircraft this year.
Bornstein dismisses the idea that the impairment charges reflect the remaining portfolio.
“This [charge] reduces our exposure to these less desirable assets and creates additional portfolio flexibility. I don't think there is a broader implication across the fleet. We like the fleet…it is priced well.”
Earnings in the fourth quarter fell 79% to $71 million, driven by the impairment fees, which were up roughly $230 million from the prior year.
The lessor did not have any delinquencies at the end of the quarter
For the full year 2013, GECAS earned $900 million and expects earnings “to be up double digits” for the 12 months of 2014.