Reversing its recent conservative lending strategy, Boeing Co. is providing financing for 18 Boeing 787 aircraft ordered by Northwest Airlines, which is operating under bankruptcy protection.
The loan provided by Boeing and Rolls-Royce PLC to Northwest could top $2.8 billion if the Minnesota-based carrier pays list price for the jets, aviation experts say.
The firms’ decision could give Northwest a leg up on cash-strapped U.S. carriers like United Airlines, which hasn’t added new aircraft to its fleet in years.
This is the first major aircraft loan provided by Boeing to a distressed U.S. airline since 2003, when the Chicago-based aerospace company ratcheted down lending after suffering heavy loan losses as customers like United Airlines and Hawaiian Airlines slogged through bankruptcies.
“It’s something they have to be very careful with, but if done judiciously, it presents an opportunity,” said Richard Aboulafia, aviation analyst with the Teal Group, a Virginia-based aerospace consulting firm.
Northwest is slated to receive the first of the new 787s in August 2008; it will be Boeing’s first delivery to a North American carrier. Northwest also has an option to purchase an additional 50 jets.
The 787, known as the Dreamliner, is expected to replace Northwest’s fleet of aging DC-10s, reputed to be gas-guzzlers, with the most fuel-efficient jet of its kind. It also is expected to cost 15 percent to 20 percent less to operate than conventional commercial jets, Aboulafia said.
“It’s the best fuel-hedging policy you could possibly buy,” said Robert Mann, principal with R.W. Mann & Co., a Port Washington, N.Y.-based aviation consultancy.
United Airlines, the nation’s second-largest carrier, hasn’t disclosed whether it intends to expand its fleet to keep pace with Northwest and Continental Airlines, Boeing’s other U.S. customer for the 787.
“Our business plan calls for us to maintain our current fleet size of 460 aircraft, and our focus right now is on meeting and exceeding the financial targets in our business plan,” said Brandon Borrman, a United spokesman.
But Northwest wouldn’t have gained that leg up on its competitors without financing from Boeing and Rolls-Royce, maker of the jet’s engines, according to documents filed with a U.S. Bankruptcy Court in New York City.
The airline turned to the new aircraft’s manufacturers for financing after it couldn’t find other lenders, according to an Oct. 19 filing.
A Northwest spokesman, Kurt Ebenhoch, declined to comment on terms of the financing.
A loan from Rolls-Royce will cover Northwest’s costs until it exits bankruptcy protection, something Northwest CEO Doug Steenland hopes to accomplish during the first half of 2007, according to the bankruptcy court filing.
Boeing, meanwhile, will provide financing to Northwest after it emerges from Chapter 11, the filing stated. The amount lent by the two companies and the interest rates they will charge were not revealed.
Northwest typically seeks and receives financing that covers 100 percent of its aircraft loans, and that appears to be the case with this agreement. Other airlines are known to be less aggressive, obtaining loans totaling 50 percent to 80 percent of aircraft costs, said Glen Langdon, president of Langdon Asset Management Inc., a San Francisco-based firm that provides aircraft valuations.
“You certainly can’t fault Northwest for not having nerve,” he said.
Donna Mikov, a spokeswoman for Boeing Capital Corp., said the Northwest deal does not signal a shift in strategy. Running Boeing’s $9 billion loan portfolio, not underwriting new loans, “still is the emphasis.”
However, Boeing Capital does act as a lender of last resort to Boeing customers who can’t find other financing, she added.
Despite Northwest’s risky credit profile, the loan is not seen as much of a gamble for Boeing. Airlines are clamoring for the 787, and Airbus has yet to finalize plans for a counterpart.
If Northwest were to default on the agreement, “there’s not much question that Boeing is going to be able to resell the airplanes,” Langdon said.
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jjohnsson@tribune.com
