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March 2004

Welcome to the March 2004 edition of Business Leasing News.

From: David G. Mayer, a business transactions partner of the law firm of Patton Boggs LLP and author of the book, Business Leasing for Dummies (BLFD)®. The supply of books is nearly gone; so if you want to find a copy, please search the web today! Thanks for buying my book for two great years.

This e-newsletter will be offer timely, concise information and analysis backed by supporting research. Please contact Business Leasing News (BLN) to provide us with your feedback. Thanks for taking your valuable time to read BLN, which does more than just report the news. 

In this issue:

A Message From the Founder, David G. Mayer

1. Tax-Exempt Hospital Status, Financing Scrutinized as Governments Seek Tax Revenue 

Some tax-exempt hospitals feel anything but healthy these days. The headlines contain troubling news about allegedly abusive tax leases entered into by tax-exempt entities, as lessees, which could include tax-exempt hospitals. State and federal tax initiatives could potentially increase the hospitals’ tax burden, reduce their cash flow and raise their financing costs. The negative impact of the potential tax changes could even deter lessors and lenders from extending financing for sorely needed capital projects and equipment at various healthcare facilities. Joined by other tax-exempt entities such as charities, universities and foreign, state and local governmental entities, state and federal governments have begun to question tax-exempt status and tax-oriented financing as an indirect way to refill their tax coffers.

Healthcare Spending Soars 

Healthcare spending rose 9.3 percent in 2002, the largest increase in 11 years, to a total of $1.55 trillion. That spending represents an average of $5,440 for every person in the United States. Hospital spending alone totaled $486.5 billion in 2002, up by 9.5 percent from hospital spending in 2001. These costs accounted for 32 percent of the overall healthcare spending increase. See: Health Spending Rises to 15% of Economy, a Record Level, New York Times (online), January 9, 2004. Healthcare reform occupies a lofty place in the political priorities nationally as baby-boomers age and the nation seeks increasing healthcare services and protection for 43 million Americans who have no healthcare insurance. 

Healthcare Entity Needs Clash with Deficit Reduction Efforts

The importance of healthcare clashes with budget realities for state and federal governments. As one part of the budget solution, state and federal tax and budget authorities have begun to limit or cut off tax benefits previously afforded to tax-exempt entities, including charitable and other tax-exempt hospitals. These governments must cope with record-breaking deficits. States peg their aggregate deficit for 2004 at about $80 billion, which tops anything states have experienced for over 50 years. See: Stingers: The 2004 State Tax Survey, CFO Magazine (online). The federal deficit will hover around $500 billion in 2004 while the national debt will exceed $7 trillion this year. See: Treasury Direct for answers to questions on the federal deficit, debt and budget.

The Treasury Department’s Proposal Raises Tax Revenue

The Treasury Department has vowed to stop the flow of tax benefits to lessors in tax-oriented leases with tax-exempt entities. Although the Secretary of the Treasury has indicated that he is “sympathetic” to revenue needs of local governments, curbing what he believes is tax abuse is a “critical issue” for the federal government. The Treasury would address this issue by knocking out long-accepted leasing transactions to tax-exempt entities, which would include tax-exempt/charitable hospitals. Congress is also seeking to drastically limit the benefits of leasing to tax-exempt entities under the JOBS bill (S.B. 1637) (the Jumpstart Our Business Strength Act). See: New Treasury Proposal Would Crush Leasing to Tax-Exempt Entities, Business Leasing News (Feb. 2004).

*Comment: What the Treasury Department seems to be saying is that it intends to use tax-exempt entity financing as an opportunity to raise an estimated $33 billion in tax revenue over 10 years regardless of the value and importance of the source of capital to the so-called “tax-indifferent parties” (cities, states, universities, charitable tax-exempt entities and other tax-exempt entities).

State Tax Initiatives Impact on Tax-Exempt Entities 

Pursuing their own agenda to raise tax revenue, states have also begun to question tax-exempt status and associated tax relief. As stated by The Wall Street Journal recently:

“In an unusual move that is sending shock waves across the hospital industry, Illinois authorities have revoked the tax-exempt status of a prominent Catholic hospital. Their decision follows a determination by local tax authorities that the hospital wasn’t a charitable institution…As a result, Provena Covenant Medical Center, a hospital in Urbana with 270 licensed beds, will have to pay $1 million in property taxes….More worrisome to hospital-industry officials is the possibility that not-for-profit hospitals could find their tax-free status as charitable institutions challenged on similar grounds.” 

That kind of a challenge by state tax authorities could seriously damage the already tenuous financial condition of many hospitals. One-third of these hospitals are operating in the red. See: Hospital Found ‘Not Charitable’ Loses Its Status as Tax Exempt, The Wall Street Journal (S.W. Ed.), Page B:1, Col. 6 (Feb. 19, 2004).

*Warning: Illinois and other states have also begun to crack down on alleged tax dodgers by auditing tax returns and taking other actions to increase tax revenue. For example, numerous states have begun to increase audits, strengthen collection efforts, raise late fees, add use taxes to income tax returns and increase fines. In other words, tax initiatives to collect taxes have a broad appeal to many deficit-ridden states. See: State Audits Catch More Taxpayers, The Wall Street Journal (S.W. Ed.), Page D:1, Col. 5 (Feb. 17, 2004).

What Should Lessors, Lenders and Investors Do?

What, then, should lessors, lenders or investors do, if anything, to address potential or actual loss of tax-exempt status or tax benefits attributable to tax-exempt entities, including hospitals and other healthcare facilities? Should they ignore the actions of the tax authorities, change how they make credit decisions about healthcare transactions or even change their pricing for the tax risks of their lessees or borrowers? 

The answers to these questions seem obvious. Financing to hospitals will probably be affected, but the steps that lessors, lenders and investors should take may not seem so clear. Consider the following actions regarding tax-exempt hospitals or other healthcare facilities with tax-exempt status or involved in tax-oriented lease transactions:

• Evaluate the pricing of a transaction and creditworthiness of the lessee or borrower producing pricing runs that assume in one case that your customer maintains its tax exemption and in another case that your customer loses its exemption. In other words, ask whether your credit decision or pricing would be different without the tax exemption and the impact of your customer becoming obligated to pay property or other taxes.
  
  

• Restrict financing and leasing to high-value, easily remarketable (even fungible) and mission critical equipment. This strategy enables you to obtain value from the asset should your customer default under the weight of new taxes or other troubles that prevent the customer from paying rent or debt service. In any case, it is always a worthy goal to lease or finance mission critical equipment because the customer will generally pay for the items first as a high priority need to operate its business.
  
  

• Modify your documents and documentation process to contemplate the potential loss of the tax-exemption and increased tax risks. For example, do not close a deal without landlord and mortgagee waivers if at all feasible. Landlords and/or mortgagees could challenge your right to the leased or financed equipment after a default caused by an unexpected tax burden arising from a loss of an exemption. Confirm that filings under the Uniform Commercial Code correctly reflect your interests. Also, require periodic reporting on the tax-exempt status by the customer including a discussion of the basis on which it believes it will maintain the status. Require your customer to send you any notice from state or federal authorities regarding the customer’s tax exemption or other tax matter that may affect its financial condition or your property.
  
  

• Remain alert to the existence of any state or federal tax liens arising in your customer’s business. In certain cases state tax liens can prime a lessor’s or lender’s interest in leased or financed property and enable a state to force a sale of valuable property to collect taxes.

*Remember: As a lessor or lender, take a close look at state and federal tax issues as a whole because the revenue raising fever extends to sales, use, income and property taxes.

• Focus on state and federal tax audit, collection and legislative trends that may alter your credit standards or pricing to take into account the potential loss or limitation of tax-exempt status or pricing. This action may even affect lessors who typically entered into lease purchase arrangements with Section 501(c)(3) organizations because the tax treatment of the payments to the lessor may change and alter the fundamental economics of the transaction or credit of the customer.

*Comment: Increasing taxes may not be the stated objective of state and federal governments in challenging leases to, or tax-exempt status of, tax-exempt hospitals. However, depriving such entities of their exemptions effectively pays a portion of the tax bill. For the moment, it appears that raising tax revenue outweighs the national priority of improving the availability and quality of healthcare. This situation presents difficult choices for policy makers and may affect the financial service industry’s approach to providing healthcare financing to tax-exempt hospitals and other healthcare facilities.

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2. What Are the Top Five Issues in Cross-Border Transactions?

Lessor and lenders routinely close cross-border transactions in many countries worldwide. From the U.S. perspective, these transactions typically involve at least one U.S. party and other counter parties in one or more foreign countries. Assets types can range from business aircraft to ocean-going vessels and technology assets to power plants. Despite the diversity of property involved, the following five categories of issues tend to form a common thread through the process of closing these deals: 

1. Business Issues. Evaluate the financial condition of the lessee or borrower and ability to pay rent or debt service, taking into account varying foreign accounting standards and guidelines. Assess the property value, useful life and remaining useful life in the country of use. Check the risk profile of the countries involved to determine the risks of recovering the asset in a default scenario. Understand not only the track record of the lessee’s or borrower’s senior management, but also the skills of the specific property/collateral managers to assure the proper maintenance and care of your property/collateral. Obtain advice on rules affecting investment by a U.S. entity in a local asset. 

2. Legal Issues. Conduct thorough due diligence based on the type of property and local laws and regulations affecting its use and maintenance. Study the impact of local law on the enforcement of your rights and realization of your remedies. Review choice of law rules in the countries involved and be ready to accept any local policies that may prevent you from enforcing the governing law under the lease and loan documents as written. For example, certain self-help remedies under New York law may not be enforceable under foreign law without judicial process. Apply laws to your transaction that enable you to obtain title or a good security interest in the property, noting that U.S. - style security interests or leases do not exist at all or in the same form in other countries. Adjust corporate or entity structures to fit local law as needed. Identify all applicable international treaties, bilateral agreements and foreign rules that may impact your transaction. Complete as soon as possible all of the applicable permits, filings, approvals or notices to close and enforce your agreements. Seek competent local counsel and U.S. counsel accustomed to negotiating cross-border transactions to assist on all legal issues, process and strategy.

3. Tax Issues. Look closely at the impact of importation and other tax regulations on the cost and process of closing the transaction. Calculate all rent, income, withholding, franchise and exportation/importation taxes and deductions in your pricing runs. Write strong tax indemnity provisions to assure your after-tax return, cash flows and yield. 

4. Risk Management. After 9-11 risk management has expanded. Obtain proper insurance coverage for property and casualty events, plus country risk, including expropriation, confiscation or even repossession problems. Limit the use of mobile asset to countries where ample insurance is in effect and assets or asset values can be recovered even during internal strife in the countries. Take into account money laundering and terrorism regulations domestically, including The USA Patriot Act. Remember, the U.S. is not alone in increasing its vigilance for terrorist activity and creating laws that may affect your transaction.

5. Special Foreign Issues. Watch for special formalities in documentation, such as authentication or protocolization of documents, use of special paper and customs of signing documents on each page. Require payments to be made in U.S. dollars, if possible. Assure that you can exchange foreign currency for U.S. dollars and receive indemnification payments for differences in value of currencies so that you receive, or at least on paper have a chance to receive, full payments, free of taxes and currency restrictions or devaluation. Protect against your borrower or lender using sovereign immunity to impede your rights by drafting appropriate waivers and conducting due diligence on the lessee’s or borrower’s special powers under their local laws. Respect and observe cultural and language differences in how you negotiate each transaction and interact with your foreign counterparts.

Although cross-border transactions create potentially higher yielding returns, they also involve many complexities. The five categories above will give you a start in closing these deals, but don’t leave home without a helping hand from experienced professionals in your next cross-border transaction. 

This article was developed from a speech given by David G. Mayer titled: “Cross-Border Aircraft Transactions: Key Issues and Approaches to Closing the Real Deal,” delivered February 3, 2004, at the 11th Annual Current Issues in the Law of FAA Aircraft Registration, Lien & Security Interests, conference sponsored by Strategic Research Institute.

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3. Wind Power Imperiled as Production Tax Credit Expires

When the Energy Policy Act (H.R. 6) went down in legislative flames last November, the production tax credit (PTC) for renewable energy followed closely behind. On December 31, 2003, the PTC expired. The American Wind Energy Association (AWEA) viewed that day as setting in motion the “boom-bust” cycle of wind energy development—as other expirations of the PTC in the past had done. The PTC encouraged development of wind energy by providing a tax credit for a 10-year period to reduce the effective cost of producing the power. AWEA says that its expiration has lead to “layoffs, stalled projects, and a negative near-term market outlook.” See: Wind Credit Runs Out of Gas, by Ken Silverstein, IssueAlert, UtiliPoint International, Inc. (Dec. 3, 2003).

*Technical Point: Section 45(a) of the Internal Revenue Code of 1986 provides a formula to calculate the amount of the PTC. Before it expired, the PTC for any tax year was an amount equal to the product of 1.5 cents multiplied by the kilowatt-hours (kwh) of specified electricity produced by the taxpayer and sold to an unrelated person during the tax year. See also IRC Section 38.  The electricity had to be produced from qualified energy resources and at a qualified facility during the 10-year period beginning on the date the facility was originally placed in service. After inflation adjustments, the 1.5 cents tax credit had increased to 1.8 cents as of its expiration date on December 31, 2003. See: IRS Notice 2003-29 (page 917) for background on the PTC and 2003 adjustments. 

Federal Energy Legislation Offers Hope

Despite the loss of the PTC, a glimmer of hope for a new energy bill recently emerged from the office of Senate Energy and Natural Resources Chairman Pete V. Domenici’s (R-N.M.). He introduced a revised, less expensive, version of The Energy Policy Act of 2003 (S. 2095). If passed, the bill offers incentives for wind energy. See: Section 202 of the bill. The fate of the legislation remains uncertain.

States Encourage Wind Power

Apart from the legislative rankling at the federal level, many states have encouraged the development of wind energy. For example, Texas requires the installation of renewable energy. It has set a goal by 2009 of increasing its renewable energy resources by 2000 megawatts (MW), for a total of 2,880 MW of renewable energy resources. Wind will be a strong contributor to that total. See: Section 25.173 of the Texas Administrative Code and Section 39.904 of the Texas Utilities Code. Colorado may require its investor-owned utilities to produce 500 MW of its electricity from renewable resources by the end of 2006, 900 MW in 2010 and 1,800 MW by 2020. About 15 other states have similar types of standards, including California, which rates as the highest producer of wind power in the U.S. Texas is second and Minnesota is third. 

Near Record Year in 2003 for Installations

According to AWEA, developers installed 1,687 MW of new wind power in 2003, the best year ever in the U.S. since the installation of 1,696 MW in 2001. Current installed capacity in the U.S. totals over 6,370 MW, with utility-scale wind turbines installed in 30 states. Worldwide, wind turbines provide 31,000 MW of utility-scale wind turbines—about 0.4 percent of the world’s electricity demand. See: Wind Currents, by Ken Silverstein, IssueAlert, UtiliPoint International, Inc. (Feb. 12, 2004). Although wind power now represents about 1 percent of installed power generation in the U.S., it could double in ten years and, according to AWEA, increase to 6 percent of the nation’s electricity by 2020.

While the policy and business views differ about the merits of wind power, developers in the states continue to install and plan for more wind energy. AWEA has determined that Minnesota added the most new wind power (226 MW) of any state in 2003. Three other states topped the 200-MW mark in new installations in 2003. California installed 212 MW; New Mexico installed 205 MW; and Texas built 204 MW. California led the states in cumulative capacity at year's end with 2,043 MW, followed by Texas with 1,293 MW, Minnesota with 563 MW, Iowa with 472 MW, and Wyoming with 285 MW. 

According to the Global Power Report (Platts - Feb. 5, 2004), PacificCorp plans to issue a tender for 1,100 MW of wind and renewable energy supplies that it will put in service in Washington, Oregon and Northern California. Recognizing the potential loss of the PTC, PacificCorp’s tender asked for bids with and without the PTC. 

*Tip: The implication is that the wind projects can be done without the PTC. 

In another high-profile application of wind power, windmills will stand atop the proposed 1,776 foot Freedom Tower to be located on the site of the World Trade Center. The wind machines there might generate up to 20 percent of the building’s electricity. See: 1,776-Foot Design Unveiled for World Trade Center Tower, The New York Times online (Dec. 17, 2003)

Advantages and Challenges for Wind Energy

Wind power offers clear advantages. It does not emit green house gases, provides an inexhaustible supply of power, uses little or no water or hydrocarbons in its operations and produces power with increasing technological efficiency at declining costs per kilowatt hour. It enjoys political support from the likes of John Kerry who commented recently that it promotes and provides clean energy, helps electricity system problems, and protects consumers through fuel diversity. See: Most Presidential Candidate Strongly Support Wind Energy Development in the U.S., AWEA Press Release (Jan. 16, 2004). 

Wind energy has some powerful critics. The National Center For Policy Analysis (NCPA) recently wrote that “(w)ind power is expensive, doesn’t deliver environmental benefits it promises and imposes substantial environmental costs.” More specifically, NCPA argues that even with the PTC and accelerated depreciation, wind power often costs more to produce than coal or gas-fired electrical energy. In a prime wind farm, wind energy costs about 5 to 7 cents per kwh while spot market energy may cost 3.5 to 4 cents per kwh. NCPA observes that wind power is an unsightly, land-intensive blight on pristine environments. It kills thousands of birds and bats with it turbine blades. As an intermittent energy resource, it works only when the wind blows just right, and requires constant back up from other power plants. See: Wind Power: Red Not Green, Brief Analysis, No. 467 (Feb. 23, 2004). 

On balance, wind energy offers some very positive business and environmental attributes. It also faces some very real challenges. While the value of PTC cannot be understated in achieving economically viable projects, many states have stepped up to promote this increasingly useful source of clean energy. Perhaps, then, proponents of wind energy can now argue successfully that the tax incentives constitute only one reason that wind energy has all the power it needs to compete in our energy markets.

I would like to thank Martin Gibson, one of our partners in our energy group, for his assistance in editing this article.

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4. Case and Comment: Grafton Partners LP Case Knocks Out Jury Waiver

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5. Leasing 101: What Are Basic “Off-Balance Sheet” Criteria Under FAS 13?

Under Financial Accounting Standards No. 13, (FAS 13) first issued in 1976, the Financial Accounting Standards Board (FASB) created guidelines for whether a lease constitutes a capital lease or not. If a lease meets or satisfies any of the four criteria below, the lessee must treat the lease as a capital lease and record the lease on its financial statements as an asset and liability. On the other hand, if the lease does not meet or satisfy any of these tests, a lessee must make certain disclosures in its financial statements, but generally should achieve off-balance sheet lease treatment of the lease. The basic criteria appear in Paragraph 7 of FAS 13, summarized as follows:

• Under Paragraph 7a of FAS 13, if a lease transfers ownership of the leased property to the lessee at the end of the lease term, that lease constitutes a capital lease.
  
  

• Under Paragraph 7b of FAS 13, if a lease contains an option that allows the lessee to purchase the leased property at a bargain price, that lease constitutes a capital lease.
  
  

• Under Paragraph 7c of FAS 13, if the lease term in the lease equals or exceeds 75 percent of the estimated economic life of the leased property, that lease constitutes a capital lease. 
  
  

• Under Paragraph 7d of FAS 13, if the present value of the rentals or other minimum lease payments equals or exceeds 90 percent of the fair value of the leased property, that lease constitutes a capital lease.

*Warning: The terms in FAS 13 remain subject to wide interpretation despite FASB’s goal to make FAS 13 a “cookbook” approach to achieving consistent treatment and reporting of leases by lessors and lessees. FAS 13 may face substantial revision or change in the future. Off-balance sheet leases have become subject to enormous controversy in the last few years, and the criteria of FAS 13 have been amended and interpreted extensively. Though not directly impacting FAS 13, the recent issuance of FIN 46R relating to variable interest entities (VIE) must be considered when structuring off-balance sheet transactions with special purpose entities or other VIEs. See: FIN 46R Clarifies Off-Balance Sheet Issues, Business Leasing News (Feb. 2004). Consult knowledgeable consultants and lawyers when working with these concepts and making determinations about whether a lease will be treated as an off-balance sheet lease or not.

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6. BLN Briefs: FASB May Spoil Loan Participations; Jet Fuel Cost Threatens Airlines

New FASB Rule May Spoil Participations Market. As a lender, you probably value the use of participations to sell interests in loan transactions to reduce your exposure to a particular customer’s credit risk. You may even exceed your credit limits if you do not sell pieces of deals to third party lenders. Generally, such sales remove the sold portion from your books. The Financial Accounting Standards Board (FASB) begs to differ on this last point. If your transaction includes the right to set-off against the customer’s account, that right interferes with the principle of legal isolation required for a true sale of the participation in the loan. Consequently, FASB is leaning toward revising paragraphs 104 through 106 of FAS 140 to disallow sale treatment where a bank retains a set-off right. For more on legal isolation of transferred asset using qualified special purpose entities, see New FAS 140 Amendment (Feb. 23, 2004). 

*Warning: If FASB implements such a rule, FASB would potentially wipe out most of the participations market, and fundamentally alter how and when banks enter into syndicated transactions. See: FASB Asset Transfer Talks Threaten Participations, American Banker (online-Feb. 11, 2004).

Jet Fuel Costs Remain High, Threatening Airline Recovery. The second biggest expense behind labor in operating a commercial airline is fuel. With the cost of fuel increasing dramatically, the glimmer of recovery for airlines could be snuffed out. Last year, the average price of crude oil increased 19 percent to $31 per barrel and on February 24, 2004 the price hit $34 per barrel. For every $1.00 increase in the price of crude oil, the airline industry pays $425 million more for jet fuel.

*Tip: If you plan to lease, loan or invest in commercial airlines anytime soon, take a close look at the airline’s fuel hedging strategy to understand the potential impact of the airline experiencing a heavy cash drain to cover fuel costs. Most airlines have little or no such strategy over a long-term period. See: Jet-Fuel Bets Are Risky Business, The Wall Street Journal (S.W. Ed.), Page C:3, Col. 1 (Feb. 24, 2004).

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Training — Substance the Easy Way!

To help improve your business operations, deal processing and risk management, I offer private training seminars tailored to your specific needs at your designated location. My interactive and informative training includes topics I cover in BLN. I customize the format and content for your specific training needs—no canned programs. Feel free to call me at (214) 758-1545 to discuss the possibilities.

Recent Publications

Besides BLN, I write other articles on leasing and financing topics with a current emphasis on energy, tax and terrorism issues. Check out: Tax Lessors Get a Bonus From New Depreciation Regulations, Monitor (November/December 2004).

Upcoming Speeches

Please consider attending the Large Ticket Conference of the ELA in Dana Point, California from April 25-27, 2004. At this conference, I will offer a business approach to current insurance issues that alter the structure of financing transactions, including the new limited use of residual guarantee insurance, terrorism and war risk issues, and insurance risk management with respect to business aviation. 

For lawyers and contracts experts, please consider attending the ELA Legal Forum in New Orleans, Louisiana from May 2-4, 2004, 8:30 to 10:00 a.m. At this conference, I will help lead a panel titled: “True Leases Under Attack: Structuring a True Lease in the Face of New Challenges.” This session will clarify the confusing terminology of true leases and update the participants on serious court challenges that have overturned true lease structures as financings. The panel will evaluate true leases from a business and legal perspective, including concepts involving bankruptcy law, UCC rules, accounting statements and federal income tax laws and guidelines. The panel will: (1) clarify basic concepts affecting true leases; (2) present a “cheat sheet” of helpful terms in each discipline; (3) explain new case law developments on true lease issues; and (4) apply basic principles to fact scenarios and real cases involving terminal rental adjustment clause (“TRAC”) leases, synthetic leases, tax leases and conditional sales.

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8. Feedback; About Patton Boggs LLP and My Practice

Feedback 

Here are comments I received recently from readers of Business Leasing News. 

One reader e-mailed about the February edition of BLN: "Another great job David! Keep up the good work.” 

Another reader commented on the lead article in February: "Interesting article about the Treasury Department’s proposal on changing tax-exempt leasing. I was glad to learn that it doesn’t impact lease purchase transactions with 501(c)(3) entities….”

A third reader, whom I met at the recent FAA conference, e-mailed: “…As I mentioned, I’m a fan of yours, having a copy of Business Leasing For Dummies on my credenza. I’m also an avid reader of your monthly newsletter….”

About Patton Boggs LLP and My Practice

As you may be aware, I am a part of the Patton Boggs LLP Business Transactions Group in our Dallas office. Patton Boggs LLP is a law firm of about 400 lawyers located globally in six locations with extensive capabilities in over fifty areas of legal practice that include leasing, secured transactions, securitizations, syndications, project and mezzanine financing, bankruptcy, public policy, litigation, intellectual property and technology law and much more.

The leasing and secured transactions practices regularly involve the buying, selling, financing and leasing of real and personal property of all kinds, including business aircraft, energy, facility, production, power plant, technology and healthcare assets. We also structure, negotiate and close secured transactions of all kinds, tax-exempt, state and federal leasing arrangements and corporate and portfolio acquisitions, among a full range of financing and acquisition transactions. Even with the improving economy, we continue to assist our clients with troubled deals and bankruptcies, including repossessions, lift stay actions, deficiency litigation, workouts and forbearance arrangements. 

Please feel free to call me at (214) 758-1545 or e-mail me at dmayer@pattonboggs.com for information about any of these areas or the many others available at Patton Boggs LLP, or to discuss anything I have written in Business Leasing News. I welcome the opportunity to build a relationship with you!

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The Whimsical, But Competitive, New World of Commercial Airlines

This week I imagined jumping on AirTran to fly the Jet Blue skies of the Southwest to visit upstart, Ted, who is singing a Song about changes in the United’s Friendly Skies in the new Frontier. Could there be a strong American presence in the Delta or America West while the airlines reinvent themselves and their industry? (Did you find 10 airlines?)

For all the whimsicality and fun of new airline startups, like Ted, United’s February 2004 entrant to low cost airlines, or Delta’s new Song airline of last year’s fame, competition is intense and evolving in commercial airline business. Ted seems like an audacious last-ditch effort by United Airlines to create a zany new product even while trying to emerge from bankruptcy. Jet Blue, the darling of the airline analysts in 2002, has been taken hits on the chin. Its stock price has been halved since its mid-October $47 level and its margins cut from the promised 15 to 20 percent range to about 13.3 percent in the last quarter of 2003. Jet Blue still sports the lowest seat cost per mile at 6 cents per seat mile, while even dominant Southwest Airlines Co. is higher at 7.6 cents. American Airlines travel costs about 9.5 cents and Delta about 11 cents per seat mile. 

The competition is very real and costly for the network carriers. As of September, seven cut-rate airlines captured 22 percent of the airline market in the United States based on the Transportation Departments Bureau of Transportation Statistics. In 2000, these airlines had only 16 percent of the market. But this year will be the first year since 2000 that the older airlines will actually grow. They will turn more focus on their low-cost carrier services and trumpet their frequency and network capability to attract passengers from the cost-cutters. 

While airlines hope they make more money in the expanding economy, lessors and lenders won’t put more money to work for them on a wing and prayer. The story of this competition has a long way to go to play itself out. Leasing and lending into this market still remains the domain of the brave-hearted, but the trend toward low-cost service offers good reason for us to take heart and catch some more flights. 

Have a great March and call any time to say hello or to offer your feedback!

Thanks to the BLN Staff

I extend a special thank you to my editors at Patton Boggs LLP for their comments on this edition, Martin Gibson, Lauren Prince, Adrian Nicole McCoy, Steve Reagan and our primary web site review partner, Jeff Turner. The technical team, consisting in part of George Barber and Winston Jackson, provide you the easy-to-use e-mail navigation and artistic appearance of BLN.

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All the best, 

David G. Mayer 
Founder and Publisher
Patton Boggs LLP
2001 Ross Avenue
Suite 3000
Dallas, Texas 75201
(214) 758-1545 (phone)
(214) 758-1550 (fax)
E-Mail: dmayer@pattonboggs.com

© David G. Mayer 2004

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