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International Lease Finance Corp. said Thursday it could face additional writedowns on its aircraft fleet after revealing the results of stress tests on a portfolio that has already suffered more than $3 billion in charges over the past two years.
Its the first time that ILFC has revealed the bank-style stress tests of a potential downturn in its business, and comes ahead of a planned initial public offering that parent American International Group Inc. (AIG) has said could take place in the next few months, having dropped plans to sell or all part of the world's second-largest aircraft leasing company by fleet value.
ILFC took $1.6 billion in charges last year against 100 aircraft from a fleet of almost 939 owned aircraft, and revealed the potential for more in a regulatory filing. However, new methodology employed since year-end would have reduced the number of planes affected last year to 95.
The Los Angeles-based company said changing cash flow assumptions used to calculate last year's charges could ensnare up to 114 more planes with a net book value of $2.1 billion, assuming cash flow estimates fall 20% short. Much of this could translate into a charge as impaired planes are generally only worth the sale price of their engines and spare parts.
However, ILFC said it can capture more value after last year's acquisition of AeroTurbine, which specializes in dismantling old planes and selling parts and scrap.
ILFC's writedowns over the past two years have rattled an industry that had prospered from the growing popularity of airlines renting rather than buying planes. The company attributed part of the charges to the depressing impact on existing plane values from new aircraft such as the Airbus A320neo and the 737 Max from Boeing Co. (BA).
Most rivals, including the market-leading Gecas unit of General Electric Co. (GE) did not take parallel writedowns, and have said it's too soon to determine the impact of new planes that won't come into service until late 2015 at the earliest.
ILFC's charges -- and the prospect of more -- come as the leasing sector deals with the fallout from a spate of airline collapses this year. The company said four customers had stopped flying or filed for court protection in 2012, returning 42 planes to ILFC's fleet of around 1,000 aircraft.
While more than half had been placed with other carriers, the plight of airlines this year is worse than in 2011 when ILFC had nine planes returned from seven distressed carriers. Last year's returns led to a charge of $40 million.
High jet fuel prices, sluggish demand and over-ambitious expansion strategies have taken their toll on the global airline industry, with high-profile collapses including Spain's Spanair -- an ILFC customer -- and Malev, the Hungarian flag carrier.
The uncertain outlook has weighed on publicly-traded aircraft lessors such as AerCap Holdings N.V. (AER), Fly Leasing Ltd. (FLY) and Aircastle Ltd. (AYR), most of which are trading below book value.
ILFC had a net book value of $7.5 billion as of Dec. 31, while its aircraft fleet had a book value of $35.6 billion.
The aircraft charges left ILFC with a net loss of $723.9 million last year, compared with $495.7 million a year earlier.
The planned offering of shares in a new company, ILFC Holdings Inc., on the New York Stock Exchange is being managed by Citigroup Inc. (C), J.P. Morgan Chase & Co. (JPM) and Morgan Stanley (MS), according to a regulatory filing.
-By Doug Cameron, Dow Jones Newswires; 312-750-4135; firstname.lastname@example.org