Leeham News and Analysis
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Leeham News and Analysis
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Boeing Capital Corp. to be “realigned” within airplane division
By Scott Hamilton
Feb. 16, 2023, © Leeham News: Boeing Capital Corp. (BCC) will be absorbed by Boeing Commercial Airplanes (BCA) as Boeing continues to restructure following the 2019 grounding of the 737 MAX, a 20-month suspension of 787 deliveries, the COVID pandemic and challenges in certifying the 737-7, 737-10 and 777X. Airfinance Journal (AFJ) first reported this latest move.
BCC is Boeing’s aircraft leasing arm. About 181 airplanes are owned, managed, and ordered by BCC.
BCC’s future has been the subject of internal discussion for at least a year. LNA first learned of the discussions last year. Several scenarios were considered, ranging from a spin-off, total sale, partial sale, or a structure that could see Boeing rearranging assets within Boeing Commercial Airplanes (BCA). A partial portfolio sale and retaining certain airplanes appears to be the solution most favored. In recent weeks, multiple market sources indicated some decision was imminent.
Realigning BCC
“We plan to realign the Boeing Capital organization to operate within Boeing Commercial Airplanes, while maintaining strong coordination with Boeing Treasury,” said Brian West, CFO of The Boeing Co., in a memo to BCC employees, AFJ reported. “With the vast majority of BCC’s work focused on our commercial business, this alignment will help ensure consistency of support to our commercial customers. And as we realign, we will look for ways to simplify the organization and focus resources on our core work of supporting our customers and their financing needs.”
AFJ notes that BCC is Boeing’s aircraft leasing arm that was inherited in the 1997 merger with McDonnell Douglas Corp. (MDC) Then called McDonnell Douglas Finance Corp, MDFC served as a financier of last resort for poor-credit companies, aircraft trade-ins, and remarketing, and occasionally providing what’s called backstop financing for more creditworthy airlines, the trade publication wrote.
BCC historically has been a small part of The Boeing Co’s business model. It’s not considered core to its business. Following the prolonged 737 MAX grounding, the suspension of deliveries of the 787 from October 2020 to August 2021, the long-delayed certification of the 777X, and the impacts of the COVID pandemic, Boeing began considering alternatives for BCC. These included closing it, spinning it off, or selling its assets.
Liabilities and value impairments
Valuation of the assets was fluid, complicating any sale or spinoff, LNA learned. “BCC’s gross customer financing and investment portfolio on December 31, 2022, totaled $1.549bn,” Boeing reported in its 2022 10K. “A substantial portion of BCC’s portfolio is composed of customers that have less than investment-grade credit. BCC’s portfolio is also concentrated by varying degrees across Boeing aircraft product types, most notably 717 and 747-8 aircraft.”
Not all airplanes are readily identifiable as part of the BCC portfolio. Some of the assets are in special purpose companies and some are managed by other lessors. Backstop financing and contingent liabilities are understood to be in the billions of dollars, complicating the sale of aircraft. Accordingly, the valuation of all assets and liabilities is understood to be substantially more than the BCC stated value in the 10K if a transaction or realignment is undertaken.
Another wrinkle: The Boeing Co. could have to take an impairment charge of several hundred million dollars against declining aircraft values vs the book value if the deal isn’t structured carefully, said a person familiar with the situation. This is a common challenge when lessors consider portfolio sales.
BCC portfolio
The owned and managed portfolio includes just under 100 Boeing 717s, a legacy of the McDonnell Douglas Finance Corp. (MDFC) financing for ValuJet Airlines, the launch customer of what was then called the MD-95. ValuJet suffered a fatal crash of a Douglas DC-9-30 that killed all aboard and which led to the temporary grounding by the Federal Aviation Administration. The airline resumed service and merged with the smaller AirTran, adopting this name because the ValuJet name was irreversibly tainted. ValuJet was unfinanceable, and the MD-95 was an orphan airplane, so MDFC ultimately financed 88 aircraft. BCC retains ownership to this day.
The BCC portfolio includes a few 747-400Fs, 757-300s, a handful of 777-200ERs, -200LRFs, and even stored McDonnell Douglas MD-80s and MD-90s. BCC also had up to 22 787-8s and -9s that were ordered by American Airlines (a few have been delivered). Some were offloaded to BOC Aviation.
Likely outcome
Discussions on the disposition of BCC gained momentum in the last two months. With BCC CEO Tim Myers’ his retirement, which was known in aviation circles but not announced until today, speculation increased that BCC’s future was winding down. Other signs within the industry also emerged in recent days, further fueling the speculation the end was beginning.
Given Boeing’s concerns over potential substantial write-offs due to impairment charges and contingent liabilities, it seems likely that a portion of the portfolio will be offered for sale and the financially dicey aircraft will be retained—most likely the 717s. This way, write-downs, and losses can be minimized and managed over time. How much Boeing receives from a sale depends entirely on how many and which aircraft are sold. Proceeds are probably in the upper nine-figure range under this scenario.
Minimizing financing in 2023
Boeing reported in its 2022 10K that financing was minimal in 2022 and may be less this year.
“BCC provided customer financing of $96m during 2022 and none during 2021. While we may be required to fund a number of new aircraft deliveries in 2023 and/or provide refinancing for existing bridge debt, we expect alternative financing will be available at reasonable prices from broad and globally diverse sources,” Boeing reported in the 10K.
BCC reported revenues of $199m and earnings of $29m in 2022. Both figures are down from 2021: $272m and $106m, respectively. Financial results in 2022 were affected by lower lease rates and the Ukraine-Russia war.
Boeing’s SEC filing listed BCC’s asset value at $1.494bn, with cash and marketable securities of $460m. Debt, including inter-company loans, was $1.425bn. Other liabilities, primarily income taxes, were $239m. Boeing listed equity in BCC at $290m.
I’m surprised they are keeping this business unit, especially since it’s not core to their business.
Scott, does Airbus have a similar leasing unit, as I don’t know?
Declining asset values vs book values. Who didn’t see this coming?
Airbus had a similar unit for many, many years. I think it was shuttered quite a while ago. Unlike MDFC/BCC, Airbus kept the airplanes only as long as they had to before selling them off.
“Impairment” is a big deal. I was doing consulting for a lessor at a time when MD-80s were falling out of favor. I suggested the lessor donate one to an aviation mechanics training school and they said No, because they’d have to revalue their remaining MD-80s in a mark-to-market process and take a big charge.
The donation should have been at asset price and if it was a 147 school that was publicly owned ( many are as community colleges or state universities ) could have got a nice tax deduction ?
https://av-info.faa.gov/MaintenanceSchool.asp
“.. revalue ..”
What I got from your postings over the years on the leasing environment that industry has invested much energy in pimping values during the aging process.
( US centric and aided by the GAAP framework innovations.)
Airbus has a unit called Airbus Financial Services that essentially has the same mission.
Placeholder.
Translation: this thing is a dog with lots of skeletons in its closet. Somebody might take on the “good” leases but at some point in the future there will be yet another Boeing impairment charge – actually likely two charges – one to write off the value of the dog aircraft in the portfolio and two to cover the cost of the various backstops Boeing offered when some of the dodgy customers go belly up.
1) It would be hard to find any takers (without paying them!!) of BCC’s portfolio of orphan planes like 717. (How many of them were once flown by DAL??) No wonder BA insisted to kill off the little C-series at ALL COST.
2) I see an Emperor in his “new clothes”:
“it seems likely that a portion of the portfolio will be offered for sale and the financially dicey aircraft will be retained—most likely the 717s. This way, write-downs, and losses can be minimized and managed over time.”
I see a replay of a mini GE Capital/GECAS.
Delta had over 90 of which 60+ are still flying.
Hawaiian (18) still uses some and in Australia National Jet systems -Qantas uses them for fly in-fly out for mining sites and regional routes ( 20)
As the earliest ones were built late 90s till 2005, I would say any asset value for those flying ( or not) has well and truly written down by now
Some of the earlier comments dont make sense. Even the last 717s built are almost 20 years old now ( earlier ones are over 25 yrs) and almost all written down under standard accounting rules, and this was from an era when it was cheap to build and buy.
The silly claims have just ‘fallen off ‘the baggage conveyor
You are an expert in aircraft leasing/accounting?? 🙄
Or are you questioning @Scott??
DAL is going to retire its remaining 717, so does Qantas. The End is Nigh.
I was going thru DAL’s 10K, a number of 717s had moved from operating leases to finance leases.
*Furthermore, DAL recorded a charge of $950m in 2020 because of the early retirement of its 717s.
“Delta has decided to retire the company’s Boeing 717-200 aircraft and the remainder of its 767-300ER aircraft by December 2025 and its CRJ-200 aircraft by December 2023, earlier than previously scheduled,”
There fixed your misleading quote for you. They also retired the last of the other MD airliners and 18 777 widebodies
Funny that it’s the start of 2023 but a reliable fleet listing site says 60 717 seem to be flying on, just as well as passenger numbers bounced back quickly
I am 65 now. (And I notice that some stuff from 3 decades back is better present than more recent things.)
Going by the stories offered some of the posters are well beyond that.
So what do you expect?
Leases expire in 2025, per DAL. BCC is left holding a bunch of “stranded assets” with (highly) questionable
incoming-generating capability. Period.
Hey look at how many are flying now!! 🙃
Where is my “misleading” quote? I quoted directly from the article above!! Baffling reading skill.
DAL is said to halt heavy maintenance of 717s late this year or early next. A handful of its owned aircraft are parted out.
Pedro , you left out that BCC had many other types in its portfolio.
Happy to update you if you were completely unaware of the full facts
@DoU
Lol. Can you list them all, eh, how about just the major ones? Did you read the article?? 🙄
Or you are much better informed than @Scott? Spill the beans!
What’s the rationale of the existence of BCC? 🤔
-> “A substantial portion of BCC’s portfolio is related to customers that we believe have less than investment-grade credit. BCC’s portfolio is also concentrated by varying degrees across Boeing aircraft product types, most notably 717 and 747-8 aircraft.”
Airlines …investment grade ! Thats a real funny one . There maybe a handful that are .
“Qantas joins only six other airlines in the world currently with an investment grade rating from S&P – Air New Zealand, Lufthansa, Southwest Airlines, Alaska Airlines, Ryanair, and WestJet.”
That was 2015 , so it maybe even less today , but gives an idea for previous decade.
The rest are definitely not bonds investment grade, but some people like higher returns from businesses that have a product that customers want .
@Pedro
Outstanding comment! You’re calling it correctly. Dukes comment below is spot on about the 717’s.
Boeing made a deal with SWA for DAL to sublease the AirTran 717’s in order to make a big 737NG sale to SWA.
I must admit, the 717 is a true reliable workhorse….. or use to be.
The web they weave.
Financing customers can be quite profitable, well run Ex-Im banks around the world show good numbers. The 717 became quite good but are old by now and as the A220-300 are being delivered slowly in bigger numbers it is a modern replacement aircraft of a new generation for the old MD customers liking light aircraft with 3+2 seating.
Those EX-Im banks arent well run at all, they just hide their losses by extending loans, capitalising unpaid interest etc. Eventually they require taxpayer bailouts
Its just another taxpayer trough for big and profitable companies to feed from. US EXIM biggest borrower is the Mexican State owned oil business Pemex
Technically, the A220-100s are replacing the B717. The seating is within one chair. Some -300s, but mostly the smaller.
The Valujet/Airtrans B717 ended up at Delta which still has 60 or so in service.
Hardly likely to be a credit risk if they are with a mainline airline that needs them
Delta also picked up B717 from others like Bangkok Air
Delta does *not* have an investment grade credit rating (i.e. only rated speculative grade or plainly speaking junk status) AFAIK
What I can see is: BA is using its higher credit rating to help subsidize those with lower credit rating like DAL.
Than was one of the breaking chainlinks in the GFC.
( presenting financial trash under the AAA standing of the repackager.)
Hardly any airlines have bonds that are investment grade !
Boeing ( and Airbus) have a far greater inside information on its customers financial ability to buy or lease planes.
Delta was a pretty sure bet on those 717s. I reckon some will still be flying by 2028-9. Delta likes to run them out into their golden years
Planes are an earning asset not a passive investment.
Im sure they are paying their way every day on flights around US- mostly full as.
Delta got them not because of some sweetheart deal from Boeing but because they already had MD80 series ( and others) with around 110 seats that needed replacing
Deltas 2022 FY was cash flow of $6.4 bill and revenue of $50 bill ( more than Airbus)
The non investment grade ( just below) is only because of high debt levels.
Almost half of the 717 are in storage, so do a majority of the 777-200ER/LR, all of the 777-300ER, MD-80/90 etc. What is an “earning asset”? NFT?? Smoke and mirror?
Assets under finance lease are “earning assets” to the lessee, not the lessor. 🤣
Funny story about the so-called 717’s in BCC’s portfolio.
There are three types of aircraft model designations: those of the airframe maker’s engineering organization, those of the sales folks, and on the defense side there are customer designations.
Boeing model numbers are somewhat sequential going back to the B&W, but somehow several models after that (Boeing model 6 to be exact), an early floatplane used in the mail service was designated as the B-1. This probably came from the Army Air Corps, even though it was never sold.
In 1935 as a part of the battle against the depression and the many federal programs to get the economy going again, Boeing Plant II was built, which was really Army Air Corps Plant II, and heavily subsidized. The excuse was to build a heavy bomber for the Army, the first of which was the 294, better known by its customer designation of XB-15, and based on the wing from the 314. The sequencing issue stems from when the design study leading to the planes were begun. The model number was actually the top level engineering drawing number. This also shows up in the internal manufacturing control records. Dash numbers were added to show variants by customer.
The most famous plane of that early era was the 299, better known by the Army’s designation as the B-17. Note, that the Navy had a completely different numbering system, so some models ended up with three designations.
The 707 was a secret project with a common proto-type for both a civilian and military variant. So it was called the 377-80, or just dash 80 to make it sound like it was just another derivative in the 345/377 family (B-29, B-50, and 377 Stratocruiser). The use of supplemental wordy names went way back to the early days of the model 221 “Monomail.” But really, there never was a 377-80 because it was a 707-80 from the start, meaning that it would have jet engines. Why 707 instead of 700? Well the story I heard was that engineering went looking for an excuse to call it that because someone was fond of the notion that the sine and cosine of a 45 degree angle is .707, and all they could come up with was that fully loaded the plane should be able to climb out at that angle of attack. Whatever, that was the prototype, but the production planes got different designations, and things got confusing in a hurry. The tanker variant became the 717 (customer designation KC-135). Some of the commercial variants got dash numbers after the 707, and some were called 720’s due to a marketing issue with one of the airline CEOs who had said he wouldn’t buy a 707 and then changed his mind.
At the time of the merger we already had a 717, but the folks in marketing didn’t know that, or basically have a clue as to how the numbering system worked. They tried to rebrand the DC-9-95 (aka MD-95) as a 717 because they assumed without knowing that the number had gone unused. When the mistake was pointed out to them, instead of giving up and sticking with the Douglas or MD designations, they decided to call it a 717-200 for marketing purposes. It didn’t matter, since there wasn’t any market for it. BCC had to make deals to practically give them away (an exaggeration, but not much).
Fumy story, a gate agent got all incensed when I called the aircraft waiting for us a 707.
“It is not, its a 720”.
Yea right, looks like a 707, flies like one, same engines, call it what you want, its a 707.
720 had turbofan engines and 707 turbojet engines.
From a passengers perspective it made no difference.
B720 was designed for US domestic airlines model for cities with shorter runways . It had wing and flap changes . Later sold more widely to non US carriers
The 720B model like the 707B &C was the turbofan powered
There was the first Boeing jet airliner concept, the model 473 and its variants. Essentially developments of the B-47 bomber with the 473-60 being most 707 like but with 4 engines in pairs each side
https://www.secretprojects.co.uk/threads/boeing-b-47-prototypes-projects.567/
The 367-80 did use the same upper fuselage bubble diameter as the model 367 or the KC-97 Stratotanker
people have gone back to the aviation magazines of the day (1950) to find the graphics and details
@RTF
Wow, that’s an interesting story. I’ve always had a good understanding of the Boeing model number strategy but not the 717 story.
Marketing 🤷♂️
-> The “blank check” investment firm founded by former Boeing CEO Dennis Muilenburg has failed and will liquidate without ever making an investment
https://mobile.twitter.com/dominicgates/status/1626397451195387904
I believe BCC also has Air Canada’s retired E190s, taken on as “payment” for their 737 Max 8 order. Which they tried to pawn off to Delta when they eliminated the 737-700 from consideration in favor of the A220 (nee BBD CS100+300).
That is if they haven’t found another buyer for them.
anybody in the know?
In those new for old sales:
How is the old airframe valued ( low, fair, high )
and what bookkeeping gyrations can be done with moving
those on to a leasing branch under the same umbrella?
If I remember correctly, those E190 that went to BCC were retired from AC around 2015/16, *NOT* the same as those NAC E190 that were retired from AC in 2020.
https://news.delta.com/delta-orders-state-art-fuel-efficient-bombardier-c-series
-> With the order of the C Series, Delta will no longer induct the E190 into its fleet as planned.
https://www.google.com/amp/s/www.ainonline.com/aviation-news/air-transport/2015-12-17/delta-revisits-e190-plan-new-boeing-order%3famp
Air Canadas E190s , half seem to be scrapped or sold to a CF34 parts business and the other half flying with Breeze or a mix of other airlines
Boeings annual report doesnt list any E-190 planes in their portfolio
Was going thru BA 2022 & 2020 10k for BCC, noticed the R&D of BCA was still far below 2018’s level:
2022 $1.5 b
2021 1.1
2020 1.4 (-36% from 2018)
2018 2.2
Once again you go into a strange fantasy.
What do you have to prove but you breathe Boeing, eat Boeing, drink Boeing, and breathe Boeing?
Is it great love?
This proves and supports what I was saying. It’s time for BCA to put cash flow on the table.
No clean sheet design before 2030…
Checklist:
Should that not be put cash flow BACK on the table and don’t invest in R&D and your future?
Customer financing (leasing) aircraft portfolio: 2022 $1.6 b 2021 $1.75 b
2022
717 35%
747-8 25%
Sales/finance leases and op. leases rec’ble 2022 $1.2b
Due in 1 yr 24%
1 – 2 yr 18%
2 – 3 yr 14%
Put cash “on the table”?? That’s a rather peculiar way to say reward shareholders 🤣
Pedro,
This is how Boeing works in 2023. Where is the problem? Shareholders need to regain confidence and D. Calhoun ticked the boxes for that and proved he was a good fit, no offense.
At a pinch I even want to say that what they do with their money concerns neither you, nor me, nor anyone.
You are just repeating the words of D. Gates and consoling people who are disappointed that Boeing is not launching new aircraft for their enjoyment.
This is how American business generally works. (Wall Street)
What do you say for example of Apple Ford, Microsoft or Mc Donald’s, which generate a lot of money and also have shareholders.
Just like Airbus who also have shareholders and who are not launching new aircraft either…
@Checklist
You know, I started to write a reply to your points here, but you know what?
You’re right.
As someone who prefers Airbus, I hope that Calhoun begins dividends and buybacks ASAP. Don’t worry about the debt load – it’ll be fine. Who needs R&D?
Product line up? Just fine. I love the way the market share is turning out. Don’t bother with anything new. 2035 is a great time to launch another aircraft.
Whatever Wall Street suggests, Boeing should do. Boeing is exactly like those companies you mentioned. Making aircraft is just like making cars, burgers, phones or software. I’m sure that those companies will get hauled onto the carpet and get their products grounded – having to take on $50 billion in debt, anytime soon.
The financials look great. Don’t worry about how the other horse in the duopoly is doing, it’s all about BA. Don’t worry about profits or debt – send that money back up the line.
Squeeze those suppliers! If they’re in business, they’re making too much money!!! Boeing money!
I applaud your honesty about how you feel about the industry. So does Airbus. (The Chinese as well – most likely…)
With experienced engineers now gone, perhaps it’s right for BA to take a nap while AB look into more new-built freighters. 🤭
Boeing is also currently developing a new cargo aircraft, the 777-XF,
You know this aircraft which is already selling better than the A350F…? 😉
Yeah with the certification of the 777X up in the air 😒
Everyones certification is delayed
Remember this new version announced in 2019 and into service this year ?
Its not
https://www.airbus.com/en/newsroom/press-releases/2019-06-airbus-launches-longest-range-single-aisle-airliner-the-a321xlr
Duckeofurl,
Good point !
His credibility has been questioned for a long time and he continues to prove it, The message is :
1. Boeing has no shortage of engineers.
2. The 777-X has its Freighter development.
3. The 777-X delay is not an isolated case.
So you admit you were wrong since Boeing is currently developing the 777-XF, and therefore is not napping as you claimed…
Remember the derivative that was launched back in 2013, EIS by *2019*?? How much compensation are Boeing doling out ? How many 777F have been given away to EK/LH?? Why look at a speck of sawdust in other’s eye and pay no attention to the plank in your own eye? 🤣
Don’t get me wrong Pedro,
The 777X is not a derivative.
I’m not going to explain why because it’s pointless. Only those who have a minimum of knowledge can understand it. You, you can’t (once again), hear it…
(!) Reminder for others. The 777X is all new wings, empennages, center box in CFRP. Larger windows and thinner cabin structure. It is literally a brand new aircraft.
The 777X cannot be grandfathered
Thks
“center box in CFRP”
Back when the announcement was that the Al center wing box would be retained ( obviously quite a bit of strengthening applied.)
Uwe,
You are correct on this point. Good memory.
Indeed after checking on Google, it seems true that the central boxes manufactured by Subaru (ex Fuji heavy Industrie) are the same for the 777/777-X.
Thks
777
https://www.subaru.co.jp/en/news/archives/press/2011/11_12_01e.html
https://www.webcg.net/articles/amp/35609
777X
https://www.subaru.co.jp/press/news-en/2018_02_09_5450/
Dont forget the all new GE9x engines , which have been causing problems and maybe part of the reason the certification ‘process’ is delayed
And Boeing can use LOA to fly FAA certification flights
Also the complete new cockpit and advanced flight computer software has the FAA ‘anxious’. And fair enough.
Pedro
…”How much compensation are Boeing doling out ? How many 777F have been given away to EK/LH??…”
——
Lol! Where is your evidence?? The 777Fs are given for not admitting that the A350F is not selling well?… Don’t worry, it’s not the first A350 derivative that is selling badly…😏
Why U.S. airlines have lower credit ratings? Wise use of their FCF!
-> “But despite a history of rough patches during unforeseen events, such as the Sept. 11, 2001, attacks and the volcanic eruption in Iceland in 2010 that disrupted air travel, large U.S. airline companies *spent most of their free cash flow over the past 10 years on share buybacks, propping up their quarterly earnings-per-share results*. So did aerospace giant Boeing BA , but to a lesser extent.
-> As a group, *the six airlines spent 96% of their free cash flow on stock buybacks over the past 10 full years through 2019*. Boeing’s free cash flow for 10 years totaled $58.37 billion, while the company spent $43.44 billion, or 74% of free cash flow, on stock repurchases.
https://www.google.com/amp/s/www.marketwatch.com/amp/story/airlines-and-boeing-want-a-bailout-but-look-how-much-theyve-spent-on-stock-buybacks-2020-03-18
https://mobile.twitter.com/_jack280/status/1627369401346400256
-> @dominicgates are you aware of any issues regarding the 787? Last delivery was the 26th of Jan. Certain airframes for Lufthansa, UAL..etc were supposed to be delivered already but very little seems to be happening, including the last 787 test flight on the 10th of Feb.
-> The “slowdown” I wrote about in December and said would continue through January is extending. There were zero deliveries off the 787 assembly line in January