Management's Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Discussion and Analysis  Operating Results by Business Segment Financial Services Business Environment
During 2003, PMCC shifted its strategic focus from an emphasis on the growth of its portfolio of finance leases through new investments to one of maximizing investment gains and generating cash flows from its existing portfolio of leased assets. Accordingly, PMCC’s operating companies income will continue to decrease as lease investments mature or are sold. During 2003, PMCC received proceeds from asset sales and maturities of $507 million and recorded gains of $45 million in operating companies income. Among its leasing activities, PMCC leases a number of aircraft, predominantly to major U.S. carriers. At December 31, 2003, approximately 26%, or $2.3 billion of PMCC’s investment in finance lease assets related to aircraft. In recognition of the economic downturn in the airline industry, PMCC increased its allowance for losses by $290 million in the fourth quarter of 2002. Developments in the airline industry during 2003 and 2002 that affected aircraft leases held by PMCC included the following:
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PMCC leases a Boeing 747-400 freighter aircraft to Atlas Air, Inc. (“Atlas”) under a long-term leveraged lease. The aircraft represents an investment in a leveraged lease of $42 million, which equals 0.5% of PMCC’s portfolio of finance lease assets at December 31, 2003. In July 2003, Atlas defaulted on its lease payments to PMCC, and PMCC ceased recording income on the lease. On January 30, 2004, Atlas filed a Chapter 11 bankruptcy petition. Subsequently, PMCC, Atlas and the leveraged lease lenders have reached conditional agreements on the restructuring of PMCC’s lease. If ratified by all parties, the financial impact to PMCC will not be material.
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During May 2003, in connection with the efforts of American Airlines, Inc. (“American”) to avoid a bankruptcy filing, PMCC, American and the leveraged lease lenders entered into an agreement to restructure the leases on 14 of PMCC’s 28 MD-80 aircraft currently under long-term leveraged leases with American. This agreement resulted in a $28 million charge against PMCC’s allowance for losses during the second quarter of 2003 and a reduction of $30 million of lease income over the remaining terms of the leases. Leases on the remaining 14 aircraft were unchanged. As of December 31, 2003, PMCC’s aggregate exposure to American totaled $212 million, which equals 2.4% of PMCC’s portfolio of finance lease assets.
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On March 31, 2003, US Airways Group, Inc. (“US Airways”) emerged from Chapter 11 bankruptcy protection. PMCC currently leases 16 Airbus A319 aircraft to US Airways under long-term leveraged leases, which expire in 2018 and 2019. The leased aircraft represent an investment in finance lease assets of $142 million, or 1.6% of PMCC’s portfolio of finance lease assets at December 31, 2003. Pursuant to an agreement reached between US Airways and PMCC, US Airways affirmed these leases when it emerged from bankruptcy. This agreement resulted in a $13 million charge against PMCC’s allowance for losses during the first quarter of 2003 and a reduction of $7 million of lease income over the remaining terms of the leases. During January 2004, US Airways’ corporate credit rating was reduced to B-(Credit Watch negative) by Standard & Poor’s. A further downgrade would result in a covenant breach under its regional jet financing commitments from third parties other than PMCC. Successful implementation of US Airways’ turnaround plan is dependent upon this financing.
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On December 9, 2002, United Air Lines Inc. (“UAL”) filed for Chapter 11 bankruptcy protection. At that time, PMCC leased 24 Boeing 757 aircraft to UAL, 22 under long-term leveraged leases and two under long-term single investor leases. Subsequently, PMCC purchased $239 million of senior nonrecourse debt on 16 of the aircraft under leveraged leases, which were then treated as single investor leases for accounting purposes. The subordinated debt totaling $214 million was held by UAL and was recorded by PMCC in other liabilities. As of February 28, 2003, PMCC entered into an agreement with UAL to amend these 16 leases, as well as the two single investor leases. Among other modifications, the subordinated debt outstanding on these 16 leveraged leases was satisfied. As of December 31, 2003, PMCC’s aggregate exposure to UAL totaled $596 million, which equals 6.8% of PMCC’s portfolio of finance lease assets at December 31, 2003. PMCC continues to discuss its leases with UAL in its efforts to restructure and emerge from bankruptcy.
It is possible that further adverse developments in the airline industry may require PMCC to increase its allowance for losses in future periods.
Operating Results |  | |
