Boeing 2005 Annual Report Download - page 41

Management’s Discussion and Analysis
EETCs in the bankruptcy court, Delta still reserves the right to
reject or return the aircraft.
Northwest Airlines, Inc. At December 31, 2005 and 2004,
Northwest accounted for $494 million and $295 million (5.4%
and 3.0%) of BCC’s total portfolio. At December 31, 2005, the
Northwest portfolio consisted of notes receivable on three 747
aircraft, three 757 aircraft, and three additional notes receiv-
able, as well as an EETC secured by 11 A319 aircraft, three
A330 aircraft and six 757 aircraft and an ETC secured by one
747 aircraft. On September 14, 2005, Northwest filed for
Chapter 11 bankruptcy protection. Northwest 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. Northwest has
filed a motion to reject leases or return certain aircraft. Although
Northwest has identified one 747 aircraft financed by an ETC in
which BCC owns an interest as being subject to potential
rejection, this aircraft has not yet been rejected or returned. In
October 2005, Northwest requested a restructuring of certain
obligations and BCC is currently negotiating restructuring
terms. As a result of the current financial difficulties of
Northwest, BCC has deemed the EETC and ETC to be other
than temporarily impaired. During the third quarter of 2005, we
reduced the carrying values of these investments to their esti-
mated fair values of $26 million and recorded an asset impair-
ment charge of $24 million.
Summary Financial Information
(Dollars in millions) 2005 2004 2003
Revenues $966 $959 $991
% of Total Company Revenues 2% 2% 2%
Operating Earnings $232 $183 $91
Operating Margins 24% 19% 9%
Revenues BCC segment revenues consist principally of interest
from financing receivables and notes, lease income from equip-
ment under operating lease, investment income, and gains on
disposals of investments.
BCC’s revenues were essentially unchanged in 2005. The
decrease in revenue in 2004 compared with 2003 was primarily
attributable to lower new business volume.
Operating Earnings BCC’s operating earnings are presented
net of interest expense, provision for losses, asset impairment
expense, depreciation on leased equipment and other operat-
ing expenses. The increase in 2005 operating earnings was pri-
marily due to a lower asset impairment expense and the
absence of debt redemption costs partially offset by increased
depreciation expense.
As summarized in the following table, during the year ended
December 31, 2005, we recognized pre-tax expenses of $132
million, of which $34 million related to BCC, in response to the
deterioration in the credit worthiness of BCC’s airline cus-
tomers, airline bankruptcy filings and the continued decline in
the commercial aircraft and general equipment asset values.
For the same period in 2004, we recognized pre-tax expenses
of $165 million in response to the deterioration, of which $68
million related to BCC.
BCC Other
(Dollars in millions) Segment Segment* Consolidated
2005
Provision (recovery) for losses
Asset impairment expense
related to customer financing
Other charges
$(25)
33
26
$«34
$98
$98
$««73
33
26
$132
2004
Provision (recovery) for losses
Asset impairment expense
related to customer financing
Other charges
$(38)
27
79
$68
$82
2
13
$97
$««44
29
92
$165
*For further details, see discussion in Other Segment section.
During 2005, BCC recorded a net recovery through the provi-
sion for losses of $25 million. This amount consisted of a net
benefit of $26 million as a result of Hawaiian Airlines, Inc.’s
(Hawaiian) emergence from bankruptcy (including a partial off-
set by a decline in the collateral value of the 717 aircraft leased
to Hawaiian), a benefit of $16 million as a result of the repay-
ment of certain notes and a net provision of $17 million. During
2004, BCC also recorded a net recovery through the provision
for losses of $38 million. This amount consisted of the mitiga-
tion of collateral exposure with certain customers and a net
benefit due to refinements in the methodology for measuring
collateral values, offset by certain impaired receivables.
During the year ended December 31, 2005, BCC recorded
customer financing-related asset impairment charges of $13
million due to the reduction of estimated future cash flows. In
addition, BCC recorded an impairment charge of $20 million
related to a Commercial Financial Services (CFS) asset, which
was not subject to the purchase and sale agreement with
General Electric Capital Corporation (GECC). During the year
ended December 31, 2005, BCC reduced the carrying value of
certain of its EETCs and an ETC due to an other-than tempo-
rary impairment of $53 million, partially offset by the fair value of
other collateral available to BCC in the amount of $27 million.
During the year ended December 31, 2004, BCC recognized
customer financing-related charges totaling $27 million as a
result of declines in market values and projected future rents for
aircraft and equipment. During the year ended December 31,
2004, BCC also recognized a charge of $79 million which con-
sisted of $47 million related to an other-than-temporary impair-
ment of a held-to-maturity investment in ATA maturing in 2015,
and $32 million related to the impairment of a D tranche EETC
which finances aircraft with Delta. BCC carefully monitors the
relative value of aircraft equipment since we remain at substan-
tial economic risk to significant decreases in the value of air-
craft equipment and their associated lease rates.
The Boeing Company and Subsidiaries 39