Boeing 2005 Annual Report Download - page 40

Management’s Discussion and Analysis
factors, values for the various aircraft types serving as collateral
in BCC’s portfolio generally have not increased. Aircraft valua-
tions could decline if significant numbers of aircraft, particularly
types with relatively few operators, are placed out of service. At
the same time, the credit ratings of many airlines, particularly in
the United States, have remained at low levels.
Aircraft values and lease rates are impacted by the number and
type of aircraft that are currently out of service. Approximately
1,900 commercial jet aircraft (10.2% of current world fleet) con-
tinue to be parked, including both in production and out-of-
production aircraft types of which over 50% are not expected
to return to service.
At December 31, 2005, $2.6 billion of BCC’s portfolio was col-
lateralized by 717 aircraft. During 2005, BCC and the Other
segment provided $25 million and $76 million in valuation
reserves due to a decrease in the collateral value of the 717
aircraft. Should the 717 aircraft suffer an additional decline in
value, such impacts could result in a potential material adverse
effect on the Other Segment’s earnings, cash flows and/or
financial position.
In October 2003, Commercial Airplanes announced the deci-
sion to end production of the 757 aircraft, and the final 757 air-
craft was produced in October 2004. At December 31, 2005,
$1.2 billion of BCC’s portfolio was collateralized by the 757 air-
craft. During the year ended December 31, 2005, the Other
segment provided $22 million in our valuation reserve due to a
decrease in the collateral value of the 757 aircraft. Should the
757 aircraft suffer a decline in value and market acceptance,
such impacts could result in a potential material adverse effect
on our earnings, cash flow and/or financial position.
Significant Customer Contingencies
A substantial portion of BCC’s portfolio is concentrated among
U.S. commercial airline customers. Certain customers have
filed for bankruptcy protection or requested lease or loan
restructurings; these negotiations were in various stages as of
December 31, 2005. BCC does not expect that the current
bankruptcies or reorganizations of ATA Holdings Corp (ATA),
Viacao Aerea Rio-Grandense (VARIG), Delta or Northwest
including a return of some or all of the aircraft financed will
have a material adverse effect on our earnings, cash flows
and/or financial position.
United Airlines, Inc. At December 31, 2005 and 2004, United
Airlines, Inc. (United) accounted for $1.1 billion (11.7%) of
BCC’s total portfolio. At December 31, 2005, United was
BCC’s second largest customer based on portfolio carrying
value. At December 31, 2005, the United portfolio was secured
by security interests in two 767 aircraft and 13 777 aircraft and
by an ownership and security interest in five 757 aircraft. At
December 31, 2005, United was current on all of its obligations
related to these 20 aircraft.
On February 1, 2006, United emerged from bankruptcy and
has assumed all our financing which were restructured in
September 2003 as part of the bankruptcy proceeding.
ATA Holdings Corp. At December 31, 2005 and 2004, ATA
accounted for $253 million and $705 million (2.7% and 7.3%)
of BCC’s total portfolio. At December 31, 2005, the ATA portfo-
lio consisted of six operating leases for 757 aircraft and a note
receivable.
On October 26, 2004, ATA filed for Chapter 11 bankruptcy pro-
tection. As a result, on December 29, 2004, BCC entered into
an agreement in principle with ATA whereby ATA agreed to
continue to lease 12 757 aircraft under restructured terms and
agreed to return eight of the 12 757 aircraft during the second
half of 2005 and early 2006. ATA is obligated to pay rent on all
aircraft until returned. BCC concurrently entered into an agree-
ment with Continental Airlines (Continental) to lease each of
these eight 757 aircraft as they are returned by ATA. In
February 2005, following completion of certain conditions, BCC
reclassified the 12 757 aircraft from finance leases to operating
leases. On July 14, 2005, the bankruptcy court approved the
assumption of 11 of the restructured 757 aircraft leases by
mutual agreement between BCC and ATA, one 757 aircraft
lease was rejected and the aircraft returned to accommodate
BCC’s timely re-leasing of the aircraft to Continental. The bank-
ruptcy court order also approved a settlement agreement set-
ting forth BCC’s deficiency claim for the four 757 aircraft to be
retained by ATA and a process for determining the amount of
our deficiency claims for the remaining eight 757 aircraft that
will be returned to BCC. During 2005, six of the eight aircraft
were returned and subsequently delivered to Continental. The
remaining two aircraft were returned to BCC and delivered to
Continental in January 2006.
Viacao Aerea Rio-Grandense. At December 31, 2005 and
2004, VARIG accounted for $270 million and $400 million
(2.9% and 4.1%) of BCC’s total portfolio. At December 31,
2005 the VARIG portfolio consisted of two 737 aircraft and six
MD-11 aircraft. We exercised early lease termination rights and
took possession of two MD-11 aircraft in the second quarter of
2005 with a carrying value of $73 million. The aircraft were sub-
sequently sold to another customer. On June 17, 2005, VARIG
filed a request for reorganization which was granted on June
22, 2005 by Brazilian Reorganization Courts. In October 2005,
VARIG returned one MD-11 aircraft which was immediately re-
leased to another customer. In December 2005, VARIG’s reor-
ganization plan was approved both by the creditors and the
Brazilian Reorganization Court. In recent years, VARIG has
repeatedly defaulted on its obligations under leases with BCC,
which has resulted in deferrals and restructurings, some of
which are ongoing.
Delta Air Lines, Inc. At December 31, 2005 and 2004, Delta
accounted for $118 million and $146 million (1.3% and 1.5%)
of BCC’s total portfolio. At December 31, 2005, the Delta port-
folio consisted of two EETCs secured by 17 767 aircraft, 18
737 aircraft and 13 757 aircraft. On September 14, 2005, Delta
filed for Chapter 11 bankruptcy protection. Delta retains certain
rights by operating under Chapter 11 bankruptcy protection,
including the right to reject the restructuring terms with its cred-
itors and return aircraft, including BCC aircraft. To date, none of
the aircraft securing BCC’s investments have been rejected or
returned. Although Delta has affirmed its obligations for the two
38 The Boeing Company and Subsidiaries