Airplanes, faced with today’s less-than-friendly skies, are a lawyer’s dream. With all of their recent financing activity, they are a big banker’s dream, too, touching companies from Boeing and Delta to AIG and Citigroup. For some, it’s a particularly white-knuckled ride, calling for the U.S. government to step in with a helping wallet. The reasons for the challenges are that the airplane industry is both capital intensive and contract heavy, with complex financing galore. Astute legal piloting is called for in all manner of airplane-related companies, from design through dismemberment, all around the world.

Try to think of an industry hit hard by the plexus-punch of the downturn and you'd be hard pressed to beat air travel. It's almost an airborne version of financial services, with its dependence on credit markets, strong economic health...and heavy doses of legal structuring and contracts. Aircraft cost money, lots of money, so companies like Delta, International Lease Finance Corporation, and Dubai's Emirates Airline are all raising cash and securing credit. The arsenal of financing options used includes mundane bonds and credit facilities and more exotic options like funding from the U.S. government, securitizations, and sale-leasebacks.

Risk pervades airplanes – and by this we don’t mean the kind that leads to passenger prayers. Rather, throughout a lifecycle that extends from design to destruction, aircraft issues range from credit markets to supply chain management to whim-ridden buyers bearing option-filled sales contracts…all built around assets that regularly fly from one legal jurisdiction to the next. Billion dollar contracts are not unheard of in the industry, among them supply agreements, airplane sales, loans, and leases. All are locked down, often years in advance of delivery, and can run for many years. This presents a sticky wicket of legal issues ranging from amendments and options to deliveries or financing failures.

Credit markets are the jet fuel of airplane purchases. In fact, with airplane sticker prices as high as they are, this equipment represents large capital expenditures that beg for financing. As a result, many buyers tap the capital markets to finance deliveries and operations. Quite a few airliners have decided to fly the friendly high-yield skies. Delta Airlines borrowed a total of $2.1-billion under three new financings during September 2009, but $1.35-billion came in the form of high-yield notes: $600-million in 12.25% senior second lien notes due 2015 and $750-million in 9.5% senior secured notes due 2014.

Also in September, American Airlines issued $400 million in 6.25% convertible senior notes due 2014 and $450-million in 10.5% senior secured notes due 2012. Reportedly, Dubai's Emirates Airline has issued a $413.7 million U.S. bond, guaranteed by the Export Import Bank of the United States, to finance the delivery of three Boeing 777-300ER aircraft. Airliners seem to be in perpetual need of financing.

“Seller finance” is an alternative to the capital markets. Sometimes airplane manufactures are willing to help their customers finance their acquisitions or upkeep. Boeing’s finance arm, Boeing Capital Corporation, sold $1 billion of debt split between $500-million in 3.25% senior notes due 2014 and 4.70% senior notes due 2019. Boeing plans to use proceeds for general corporate purposes, including repaying indebtedness, purchasing equipment for leases, making loans or funding other investments.

Airbus Financial Services has a similar program, recently funding a $50 million commitment to US Airways in January and March 2009. While other financing may be thought of as restricting such financing, that’s not always the case. In the US Airways deal, the loan was offered under US Airways’ right to obtain new loan commitments and incur additional loans under a spare parts loan agreement with General Electric Capital Corporation, as administrative agent and collateral agent. These contracts point to just how high the cost of keeping a fleet of airplanes in the sky can be.

Taking a page from the playbooks of financial players, sale-leasebacks are used as another creative financing arrangement. In an aircraft-based sale-leaseback, the aircraft owner sells the aircraft to the lessor, who then immediately turns around and leases the aircraft back to the operator. Aircraft operations aren’t disrupted, but the company now has a little extra cash in its kitty.

International Lease Finance Corporation (ILFC), an AIG unit that had been rumored for sale this past summer, is a major player in aircraft sale-leaseback. ILFC has agreements with Airbus and Boeing to buy 168 new aircraft for delivery through 2019, which comes with a hefty estimated purchase price of $16.7 billion. ILFC has been directly hit by the worst of its parent company. Not only has the AIG name recently lost its luster, but more importantly, it has lost its AAA credit rating, the asset that had allowed ILFC to borrow cheaply in commercial paper and unsecured debt markets.

ILFC has managed to float debt instruments since the financial crisis, but AIG recently had to extend a $3.7-billion life-line to its subsidiary. AIG got the funds from its revolving credit facility with the New York Federal Reserve Bank. The lifeline indicates that credit markets aren’t fully healed and that aircraft lessors, at least those whose name includes AIG, and their clients might still be in for a bumpy ride. Airtran, for example, is a discount carrier that has recently disclosed that a lack of sale-leaseback financing has increased the uncertainty surrounding their commitments to airplane manufactures.

Though frozen elsewhere, securitization is alive and well in the aircraft market, and remains a quite viable path to financing for aircraft. In July 2009, Continental Airlines issued $390 million in pass through certificates to be secured 17 aircraft. The notes are secured by 12 Boeing aircraft currently owned by Continental and five new Boeing aircraft that were scheduled for delivery from July to September, 2009. Continental is now planning to return to the securitization-well and recently filed a prospectus for $650-million offering of two classes of pass through certificates. The notes will be secured by secured by eight Boeing aircraft currently owned by Continental and nine new Boeing aircraft scheduled for delivery from January to June 2010. The general structure of the Continental’s pass through certificates is that offerings proceeds will be placed into trusts, escrowed, and then used to equipment notes from issued by Continental Airlines. Payments on the equipment notes held in each trust will be passed through to the holders of certificates of the trust.

Financing-hungry airlines are using all the assets at their disposal, leading them to some unusual places. One innovative way airliners attempt to raise capital is to pre-sell frequent flier miles. The miles are pre-sold at a discount to financial services companies that have partnered with airlines on credit card rewards programs. Recently, American Airlines sold $1 billion in frequent flier miles to Citigroup. Citi partners with American on the airlines’ AAdvantage loyalty program and normally would purchase the miles annually.

With so much money at stake and subject to lengthy production cycles, much of the financing is keyed off of delivery milestones. This may be a handy device for lenders, but a device that, in recent times, presents a real quandary to the aircraft manufacturers themselves. With a distributed supply chain that often circles multiple locales, it turns out, perhaps counter-intuitively, that big airline manufacturers are at the mercy of small suppliers. But airplane manufacturers like Boeing, Airbus, Bombardier, and Embraer can’t afford to have major programs at the risk of problems with smaller links in the supply chain – leading them at times to M&A as their best (or only) option.

Airbus and Boeing have cited supply chain issues as reasons for multibillion dollar delays. As a result, Boeing has taken its Dreamliner matters into its own hands, by buying a key supplier’s manufacturing facility. In a deal structured as an asset purchase, Boeing has acquired from Vought Aircraft Industries a manufacturing facility that makes part of the fuselage of its long-delayed 787 Dreamliner. The plant in North Charleston, South Carolina was owned by Vought Aircraft, and was acquired for over $1 billion. The consideration broken down between a $592 million cash component and debt relief on Vought’s obligation to repay $416 million previously advanced by Boeing.

Even with more tightly run supply chains, aircraft manufacturers are still subject to the whims and fancies of their contractually-protected purchasers. The high ticket prices let airplane orders quickly reach the billion dollar mark leaving both buyer and seller with a lot of skin in the game. US Airways, for example, has definitive purchase agreements with Airbus for the acquisition of 134 aircraft. Furthermore, these agreements are of unusually long duration: as one example, under all of US Airways’ aircraft and engine purchase agreements, its total future commitments are expected to last through 2018, and are expected to amount to approximately $6 billion in value.

With such long lived contracts it may come as no surprise that U.S. Airways and JetBlue Airways have recently amended airplane purchase agreements. Many of the amendments center on rolling back the delivery dates for Boeing and Airbus planes. Delta Airlines is discussions with Boeing regarding its in ability to meet the contractual delivery schedule for 18 B-787-8 aircraft.

Contract terms can also save a manufacturer from delivering hundreds of millions of dollars worth of planes to customers that are unlikely to live up to their commitments. Jet Republic had placed an order for up to 110 Bombardier aircraft. Deliveries were slated to start in October 2009. The fractional jet ownership company, however, is “technically insolvent” and has ceased operations. Bombardier canceled the $1.5-billion order.

The financial value of these assets, once sold, transfers quite richly to their proud new owners. Having multibillion dollar assets (i.e. aircraft) gives owners a degree of financial flexibility. United Airlines has recently taken numerous actions to bolster its liquidity position and in July 2008 it completed a $241 million credit agreement secured by 26 of its currently owned and mortgaged A319 and A320 aircraft. The credit facility matures in June 2019 and carries a variable interest rate based on LIBOR plus a margin. The agreement did not affect another group of aircraft that United preserved as unencumbered. United used available equity in certain previously owned and mortgaged aircraft as collateral for this financing.

Risk pervades the aircraft life-cycle. The industry is capital intensive and contract heavy with complex financings galore. This presents real legal issues ranging from M&A to bolster supply chains amendments to amended purchase agreements to financing failures. Even getting rid of aircraft can be a complex legal and financial transaction. Continental Airlines, for example, has announced the removal of 67 Boeing model 737-300 and 737-500 aircraft, which is designed to remove a majority of the least fuel-efficient aircraft from our mainline fleet by the end of 2009. The retirement of 20 of these 737-500 aircraft may be delayed, however, if the parties that agreed to purchase those aircraft continue to be unable to obtain financing in the troubled global credit markets. Clearly, aircraft are a lawyer’s dream.