Air Transport World

Airlines lighten the load. (Cover Story)

Lord King, chairman of British Airways, once asked Boeing Chairman Frank Shrontz if he knew how many "buns" the airline's bakery turned out daily. The answer was 30,000. King then asked Shrontz if he knew how many buns the bakery turned out during the Gulf War, when traffic and bun-demand plunged. The answer, which doubled as a lesson in how airlines operate, was... 30,000.

A capital shortage, competition and recession have forced airlines to rethink these and many other previously sacrosanct functions. Standard & Poor's Creditweek said in June: "Although the investment-grade airlines--AMR, Delta, Southwest and UAL--will emerge with increased market shares, a continued wide gap between capital expenditures and internal cash flow will burden their balance sheets with debt and leases for many years." Small, start-up or niche airlines always had to find the most efficient ways of operating to stay in business. Now, major carriers, whose labor contracts inhibit efficiency, are farming out more functions, too. They are doing so quietly, to avoid unrest among employees but the direction is clear. Former USAir Executive VP Randall Malin declares: "Airline organizations are bigger than they have to be."

If the trend is not scuttled, if and when profits reappear, airlines could evolve into very different organizations. They, like successful tour operators, could become simply recognizable marketing names staffed by managers who spend their days hiring third parties to perform former in-house tasks.

Historically, the most sacred feature of an airline's profile has been its aircraft ownership. That has gone far down the third-party path already. Big U.S. airlines, including the ones that are supposed to survive, lease major portions of their fleets. Leasing affords more planning flexibility for carriers, relieves the capitali shortage problem and can provide cash for expansion.

GPA, which has its own capital-shortage problems, estimates that since 1985, North American airlines have bought only one third of their equipment outright. Finance leases, under which airlines eventually become owners, made up 55% of their financing. An increasing number of leases, 20-25% and rising, are structured as short-term instruments, albeit for accounting purposes.

Delta, which historically earned significant profits from aircraft sales, lists almost half of its 560-unit fleet as long-term operating leases. All big U.S. carriers are in the same position.

Japan Airlines, which traditionally has bought its aircraft, is leasing six Boeing 747|100/200s from Evergreen for cargo operations. The 22-month leases began in May, 1991 and an extension is under discussion, to plug the gap between too much business and too few aircraft and crews. But JAL has no plans to buy freighters, which means the "extension" could become a permanent fixture.

Air India has told Evergreen International Airlines Chairman Ron Lane that, "as a matter of internal policy, it will not invest in cargo aircraft" but lease instead.

Lane's company capitalizes on these circumstances. He says: "A contracted service can be produced at a lesser cost than by the operator himself," especially if capacity must be provided out of phase with demand. …

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