Pontifications: The light bulb goes on


By Scott Hamilton

July 27, 2020, © Leeham News: Airlines across the world are pledging aircraft, slots, airport facilities and real estate to raise money.

Some US airlines recently pledged frequent flyer programs to raise billions of dollars in debt to help carry them through the COVID-19 crisis.

Airfinance Journal last week had a podcast with United Airlines and Goldman Sachs to discuss UAL’s doing this and the larger picture.

The rush to pledge virtually everything to raise money is déjà vu all over again.

I’ve been in this business since 1979. I’ve been through the 1991 Persian Gulf War, SARS, downturns, 9/11 and the Great Recession. The impact to the airline and aerospace industry from the virus crisis is by far the worst.

The light bulb bonds

The fallout of the 1991 Persian Gulf War on airlines was up to then the most dramatic event for airlines. It surpassed even the oil price shocks of 1974.

The period from 1974 through the Gulf War was tough for US airlines. Deregulation began in 1979. Rapid route expansion and new airlines were spurred by deregulation.

Braniff International was the first airline to go bankrupt, in 1982. Continental Airlines followed the next year.

Over the course of the decade, Continental, TWA, Pan Am and others raised money by selling and leasing back the bulk of their fleets: Boeing 727s and 737s and McDonnell Douglas DC-9s. These were old aircraft. Polaris Aircraft Holdings created aircraft income funds aimed at doctors, lawyers and other high-income earners. Polaris later was acquired by GECAS.

Steven Udvar-Hazy, CEO of ILFC—which had new and newer aircraft in its portfolio—called the 727s, 737s and DC-9s “the wheelchair fleet,” a moniker that infuriated Polaris CEO Herb Depp.

As airlines ran out of assets to leverage, TWA—by then owned by corporate raider Carl Icahn—came up with a new asset to leverage.

It was called the “consumables” collateral. Rotable parts (those that cycle through an aircraft as wear and tear requires replacement) have real assets value. But the collateral included seat covers and, no kidding, light bulbs.

This led to the derisive term that the deal was the “light bulb bonds.”

Tapped out of other assets

TWA largely was tapped out of other assets to finance by 1989. Icahn had long before sold and leased back the TWA fleet, recovering his entire investment in TWA.

So spare parts, seat covers and the light bulbs became a new asset-backed bond issue. In fairness, the deal included 180 slots. But the inclusion of seat covers and light bulbs was unprecedented.

TWA hadn’t yet filed for bankruptcy. Creditors understandably were afraid the airline would. By mid-July, TWA defaulted on $18m in payments to the light bulb bond holders.

Fast forward to today

I can’t help but think about the past as airlines today finance everything they can to survive the virus crisis.

I’d say they next will finance the kitchen sink. But if they’ve financed their real estate, that probably already includes the kitchen sink.

8 Comments on “Pontifications: The light bulb goes on

  1. At some point, airlines need to right-size, this is not some global asset that needs protection, it is supposed to be a free market unless we go back to nationalized air carriers. It is not the government nor taxpayers problem to support bloated fleets that do not match demand. Business is business. Throughout history the business world has re-invented itself and moved on to the next new reality. Airlines spent their boom years buying back their stock and paying CEOs and their hundreds of Vice Presidents stupid money. Time to grow up everyone.

  2. How can airlines raise money off of frequent flyer programs? They are a liability, not an asset.

  3. “Creditors understandably were afraid the airline (TWA) would.” There can be a lot of “smoke and mirrors” when airlines file for bankruptcy. As pointed out, Icahn did not lose money. I’d bet he made money. The common stock is wiped out, but “who” holds the preferreds, bonds, leases, I guess seat covers and other collateral??? Remember, when airlines file for bankruptcy, the CEOs and majority big owners go to the Continental lawyer and bring him along (see Northwest Airlines.) At the end of the day the real hit may just be to employees, pensions and municipalities who gave money to these corporations…

  4. In our system compaines fail and the ones with most cash (or have friendly banks) survive and buy the failed ones on the cheap. Shareholders and emplyees has to bite the dust…

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