Leasing companies own the keys to the airplanes.

And they will continue to dole out permission to use the equipment for some time to come, industry experts say.For highly capitalized, strong carriers such as American Airlines, Delta Air Lines and United Airlines, leasing is an alternative method of financing aircraft acquisition. As Dan Garton, American's vice president and treasurer pointed out, when these carriers lease, it's their decision and they usually do it for tax and balance sheet reasons.

Boom or Bust

For other carriers, however, leasing can mean the difference between flying or going out of business.

Smaller and weaker companies must lease because their balance sheets won't

allow them to use traditional debt financing.

Airlines are voracious consumers of capital. Even smallish McDonnell Douglas Corp.'s MD-80s and Boeing Co.'s 737s sell for upwards of $25 million each, and the jumbo Boeing 747-400 goes at a whopping $135 million a copy.

The ability to acquire aircraft by lease that could not otherwise be financed, particularly for short terms, arguably enables smaller airlines to expand.

Air traffic has exploded in the last decade, but profits haven't kept up with growth. The airline industry is in the bind of having to finance the new aircraft to handle expanding business at the same time that it must finance the replacement of aging aircraft.

Where's the Tourniquet?

The industry is grappling with finding a way to pay for hundreds of planes on order, while it has been hemorrhaging red ink because of the general downturn in business during the last two years. Even the Big Three have not seen black ink since the first half of 1990.

The loss-weakened balance sheets and high debt-equity ratios of many airlines make conventional debt financing of equipment difficult. Earnings aren't likely to grow fast enough to allow increased debt financing.

L. John Eichner, chairman of industry consultants SH&E Inc., pointed out that "the number of aircraft on order is too many over the next few years. Airlines can't handle it, so they're turning to lessors to finance aircraft acquisition."

Sometimes the lessors even turn out to be buyers. And manufacturers are not always happy to sell directly to them. When industry leaders GPA Group PLC and International Lease Finance Corp. placed large orders for aircraft without having firm leases negotiated, they in effect became competitors of the plane builders.

Aircraft orders really are purchases of positions on assembly lines, and leasing company orders were seen as blocking the builders' traditional and valued customers.

Boeing was concerned also that lessors would not buy spare parts or consumption items known as rotables. That's no longer a problem, as the spares are sold directly to the carriers that lease the aircraft.

Better Credit Risks

Also, as the airline industry has flown into choppy financial skies, the leasing companies are viewed as better credit risks. For those airlines that have a choice, tax laws play a big part in carrier decisions to lease or buy, Mr. Eichner said. Low earnings limit airlines' ability to use the tax benefits they might gain from high depreciation.

"Leasing companies take the tax break (of accelerated depreciation) and the alternative minimum tax drives airlines into leasing," Mr. Eichner said. He said the 1986 elimination of the investment tax credit also has helped tip the balance toward leasing.

Airlines are in the same financial position the railroads faced before their renaissance; only profitable, tax-paying companies can take full advantage of tax credits and rapid depreciation.

Leading Lessors

GPA and ILFC are considered the leaders in the leasing game. GPA, Shannon, Ireland, has $3.9 billion in assets and generated $1.9 billion revenue in its fiscal year that ended March 31, 1991.

Its principal competitor, ILFC of Los Angeles, is a subsidiary of insurance giant American International Group Inc. While the companies use different fiscal years, ILFC had $3.5 billion in assets at the end of 1990 and earned $61.1 million on $334.1 million revenue in the fiscal year that ended Nov. 30, 1990. It has been growing rapidly: By Sept. 30, 1991, assets increased to $4.4 billion.

They are followed closely by General Electric Capital Corp. This company is extremely close-mouthed and figures were unavailable.

The big three have the resources to buy aircraft directly from manufacturers, often on speculation that they will have a lessee by the time the airplane is delivered.

Others in the business specialize in financing used aircraft, frequently providing lease financing at delivery for new aircraft ordered by airlines.

GPA and ILFC appear to have sharply different operating philosophies. Mr. Eichner said GPA is a much larger organization, while ILFC is very tightly run, with only 31 employees at the end of 1990.

GPA Group had 307 aircraft as of March 31, 1991, compared with 106 in the ILFC fleet at the end of 1990. ILFC had commitments to acquire 200 planes as of the end of 1991, with a value of about $9 billion. From 1992 through 2000, GPA has orders and options for 480 jet aircraft and 77 new turboprops worth $21 billion.

These lessors face considerable risk. When America West Airlines filed for protection from creditors under Chapter 11, GPA made $35 million in post- bankruptcy debtor-in-possession financing available to the carrier.

With a contract to provide 26 Airbus Industrie A320s worth $1 billion, it was in GPA's interest to see that America West Airlines remained in operation. On the other hand, Mr. Eichner said ILFC moved quickly to repossess five of its aircraft from America West, placing them with secondary carriers outside the United States.

Good Credit Rating

American Airlines, which doesn't present a significant credit risk, is doing significantly less leasing this year than in the past, Mr. Garton reports. The Fort Worth, Texas-based carrier's credit is so good, it can count on getting the lowest-cost financing when it leases. Mr. Garton said American, which tends to enter operating leases with a life of 20 years, treats its leases much like debt.

Mr. Garton said long-term leases generally are tax driven and the trade-off of tax benefits against debt financing are not as attractive now for American as they have been in the past. That's a recognition of low interest rates and the fact that American raised a fair amount of capital last year.

In recognition of its financial strength, American's leases, some of which have been with GPA, are frequently negotiated through banking syndicates.

Weaker carriers, however, tend to use five- and seven-year leases, occasionally seeking a cosmetic benefit for the balance sheet by entering short-term operating leases.

Because lease rates still reflect supply-demand realities, lessors are demanding higher and higher returns.

Japanese banks, which previously provided tremendous amounts of capital for the leasing market, largely have withdrawn in the last year, raising the price of money.

Another factor driving up lease finance rates is concern over carrier bankruptcy and the possibility of regaining aircraft prematurely at a difficult time to remarket used equipment, sources say.

Smaller carriers are between the proverbial rock and hard place. Leasing is the only way they can obtain the aircraft they need. But, because leasing for short terms is more expensive than ownership, they remain high-cost carriers that ultimately cannot compete with the Americans, Deltas or Uniteds of the world.