Lease Gives Beverly Hills Firm Alaska Air Stake : Transportation: An aircraft deal with International Lease Finance allows the airline to expand its fleet and fight off takeover attempts.
Alaska Air Group on Tuesday announced a major fleet expansion and took steps to protect itself against an unwanted takeover by placing a large number of shares in friendly hands.
Alaska Air, based in Seattle, said it completed an unusual leasing arrangement with International Lease Finance, a major aircraft leasing firm based in Beverly Hills. Alaska said it agreed to lease for eight years 20 Boeing 737-400s from International Lease Finance, which in turn will acquire a 17% stake in Alaska Air.
In addition, Alaska Air said it ordered 20 McDonnell Douglas MD-90s, and placed options for 20 more.
Alaska said the lease deal with International Lease Finance was worth $750 million, but could be worth $900 million if the airline exercised options to lease the aircraft for 12 years, plus another option to lease an additional four aircraft.
The deal with McDonnell Douglas was worth $800 million, Alaska said, but could be worth up to $1.6 billion if all the options are exercised.
Analysts expected Alaska to use the Boeings to replace its older fleet of Boeing 727s, which have an average age of about 12 years. It was expected that the MD-90s, which will be delivered between 1994 and 1997, would be used to expand into new markets, perhaps in California. Alaska Air primarily serves the Pacific Northwest.
William B. Whitlow Jr., an analyst with Dain Bosworth Securities in Seattle, said he was surprised that Alaska acquired Boeing aircraft, because its more recent purchases had involved McDonnell Douglas MD-80s.
However, an Alaska spokesman said that the airline chose to lease the Boeing 737s because they have more cargo space than the MD-90s, a critical factor in the Alaskan market. He said another factor was that the fuel-efficient Boeing 737-400s were available two years earlier than MD-90s from McDonnell Douglas, and that, with fuel costs rising, Alaska needs to modernize its fleet as quickly as possible.
Though not a sweep for McDonnell Douglas, the order for the narrow-body MD-90s was considered significant because so far, Delta Air Lines is the only other airline that has announced plans to buy the MD-90.
But the deal with International Lease Finance attracted more attention because it was unusual, both for Alaska Air and International Lease.
Alan Lund, chief financial officer for International Lease, said this was the largest lease deal the firm has completed with any airline. Known in the investment community for its conservative practices, International Lease normally leases one to two aircraft to a single airline at a time.
Lund said the large aircraft lease with Alaska Air was attractive because International Lease would get a large block of income-producing, preferred stock with voting rights that allow International Lease to make sure that “current management stays in place.”
“When you place 20 airplanes, there is concern about maintaining the credit rating of the airline,” Lund said.
By placing a large amount of stock with International Lease, Alaska Air received some protection from an unwanted takeover. Though the airline explored a stock swap with foreign airlines, it concluded that it had more to gain with a strategic alliance with International Lease, a spokesman said.
Jon Kutler of Wasserstein Perella & Co., one of Alaska’s advisers, said the airline received “attractive” terms on the Boeing lease because of its relationship with International Lease. He said the deal didn’t obligate Alaska Air to acquire additional aircraft through International Lease, although future transactions between the two firms were likely.
Besides placing stock with International Lease, Alaska further protected itself Tuesday by creating an employee stock ownership plan, which will own about 5% of its shares. In addition, the 1,200 top managers of Alaska Air Lines and its sister company, Horizon Air, will be allowed to acquire $3.1 million worth of preferred shares that are convertible into common stock.
A spokesman for the airline said Alaska wasn’t responding to a specific takeover threat, although the airline had received an unwanted buyout overture last year.
The airline said it also planned to repurchase about 22% of its stock over the next month. Alaska Air stock closed at $21.625 Tuesday in trading on the New York Stock Exchange, up 87.50 cents.
Besides getting takeover protection, Alaska Air gets use of the Boeing 737-400s four years sooner than if it ordered the aircraft directly from the company. International Lease ordered the Boeings in May, 1988, for delivery between 1992 and 1994.
International Lease is acquiring its stake in Alaska buy paying $59.4 million for newly issued convertible preferred stock that carries a 10.2% dividend. Daniel A. Hersh, an airline industry analyst for Bateman Eichler, Hill Richards Inc., said the rate was favorable to International Lease, which borrows money to finance its operations at around 8.8%.
“The yield on the preferred, after tax, is comparable to a lease deal,” Hersh said.
This is the second large transaction under way at International Lease. The company is also reportedly considering a $4-billion order for various aircraft from Boeing, Airbus Industrie, and possibly, McDonnell Douglas.
