PARIS, Sept 19 (Reuters) - The aircraft leasing industry has
hit back at criticism from its lenders over the way it values hundreds
of billions of dollars of passenger jets in an obscure dispute that
could hit the pockets of air travellers and the world's leading
planemakers.
Irish leasing firm Avolon defended the
industry's accounting practices in a detailed study issued on Wednesday
as a major industry gathering got under way in Rome, hoping to put to
rest a debate that has been troubling the industry for some months.
For
years the aircraft leasing industry, which rents jetliners to airlines
and owns about two airliners in five in the global fleet, operated on a
rule of thumb that passenger jets fly on average for 25 years. It wrote
down the value of its assets and built up its business models
accordingly.
But the practice came under fire after a few jets
became unprofitable and were broken up for their parts with just a few
years on the clock, due in part to soaring fuel costs.
Critics
including some of the industry's top bankers say the industry should
make its accounting system more conservative by shortening the
depreciation period and thus driving up annual charges, a move that
could directly threaten lessors' profits.
But Dublin-based Avolon,
after analysing data on every passenger jet ever placed in service,
said that there was no reason to alter the widely used accounting
practice.
"We are not seeing seismic shifts in the way the
industry is behaving or the way fleets are being retired compared to 10
or 20 years ago," said Dick Forsberg, author of the report which is
likely to be discussed at the ISTAT finance conference in Rome.
On
average jets have been retired after about 26 years and 60 percent of
all jets ever built have still been flying at 25 years, he said. Of all
the passenger jets ever built in a half-century of mass air travel, two
out of three are still flying.
Analysts say a change in accounting
methods could have far-reaching consequences on the economics of
airlines and suppliers, starting with higher aircraft lease rates for
airlines that would most likely be passed on to passengers.
The
leasing industry occupies a powerful position in a food chain stretching
from assembly plants to airlines and the giant-clawed machines that
eventually tear up old jets for scrap.
Many airlines find it more
efficient to lease aircraft than own them, spawning a specialist rental
industry that now controls about 40 percent of the global fleet.
Experts say when lease rates for new planes go up, airlines tend to hold older aircraft for longer, depressing demand for newer aircraft built by Airbus and Boeing.
"The
increase in costs that would have to be passed on to the airline would
be significant enough that it could affect ownership patterns," Forsberg
said in an interview.
BABY BOOM
But some
lenders to the leasing business remain convinced of a problem. Bertrand
Grabowski, managing director of aviation finance at DVB Bank, said book
values had fallen out of step with real markets, potentially distorting
industry finances.
"If depreciation rates do not reflect the
reality of values, clearly some P+L are overstated and in the long run
this is not good for the industry," he said of the risk that profit and
loss accounts reflected lower depreciation costs than they should.
Under
current practice, accountants write down the purchase cost of aircraft
over 25 years, down to a residual value of 15 percent. This equals an
annual depreciation rate of 3.4 percent.
Grabowski said a
depreciation policy of 20 years down to zero would better reflect real
aircraft values, a suggestion which implies annual depreciation closer
to 5 percent.
The debate simmers just as the aircraft industry is
recovering from fears over the availability of finance after European
banks pulled back due to the region's debt crisis.
Large sums ride
on the discussions, but it is still relatively unexplored territory - a
reminder that the jet age began in earnest barely 50 years ago with the
Boeing 707.
As with the baby-boom generation whose love affair
with the jet shaped the industry, aircraft retirements are likely to
soar in the next decade when Avolon estimates 8,000 will stop flying -
about as many as went off to scrap since the jet age began.
When
jetliners stop making money they can be sold, stored in deserts, where
dry air prevents corrosion, or get converted to freighters. Eventually
they retire and get broken up for parts.
Some say one of the
reasons some airlines have been willing to scrap small and less
sought-after jetliners after just a few years in use is to cash in on
prices for second-hand engines.
These have been rising sharply as
manufacturers like General Electric divert most of their resources to
supporting record production for new Airbus and Boeing jets, Forsberg
said, rather than keeping a supply of engines available as spares.
Source: http://in.reuters.com
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