Sunday, September 30, 2007

Some Airplane REITS To Spice Up Your Portfolio

We start with some of the bits of pending regulations focused on the airline industry. I live on airplanes, probably logging more miles than most US pilots. I understand all too well the troubles facing the airline industry.
I’ve sat on the tarmac at JFK, and I know what it’s like to try to get off the ground from O’Hare. I often pray, “Please, just let number 17 go this time.”
And I never know when or if my American Airlines shuttle between Reagan National and LaGuardia will ever leave.
I'm not alone. Passengers around the country are fed up and are asking for help. And politicos are starting to pay attention.
New regulations are in the works, meaning we may soon see some fixes--but not ones that will help the industry and the market. Pending revisions include the reduction of landing and takeoff slots at airports--among them O’Hare and JFK--with airlines negotiating to cut back flights.
This sounds like a win-win for all--on the surface. But it's not. It's merely a band-aid that makes for nice headlines, but similar moves have been made before, with no real impact.
We've had voluntary flight cutbacks before. What happens is that the big carriers agree to cut flights, only to have the local airport reassign those slots to some discount carrier. American Airlines and its peers get the shaft, passengers still suffer delays, and the whole mess continues.
We need a market approach to the airline business. Airlines should bid for landing and takeoff slots by number and time. The carriers will then be able to accomplish a few major, free-market fixes.

First, the carriers will price flights appropriately. Smaller carriers giving away seats won't be able to compete with business-focused carriers for key times that serve regular travelers. Fares will reflect this. Leisure travelers with flexible schedules will choose flights in the lower-stressed mid-morning and mid-afternoon time frames; early morning and late-afternoon peak periods will be reserved for full-price flights of major carriers.
Second, regional jets--the bane of frequent fliers--will become uneconomic for major airports. They'll still be fine for serving smaller airports. Competition and bidding for landing slots at secondary airports will be cheaper. Carriers will use larger planes, making each flight count, especially during peak periods.
Each airport will have an approved number of slots determined under modest weather conditions. And we'll have planes focused on key markets, with larger planes fitting into major markets.
Smaller airports that feed larger ones in the hub-and-spoke system will find that they can compete for leisure travelers and for those traveling to connect. They'll either choose off-peak landing times at the big airports or pay up to travel during peak periods.
Airlines will then have the economic power to work with prices under true supply and demand conditions. And to those of you muttering that air travel is part of the public service, it isn't. It's private. Only the airspace and airports are in the public purview.
Think of it as a gasoline tax for controlling road traffic. Raise gasoline taxes enough and we'll be able to fully fund a better road system. Drivers and shippers would then make free-market decisions, which should ease congestion because price will become a more significant factor. Let’s kill the sprawl and focus on less driving and more efficient use of land and transportation resources.
But neither of these policies will play out, not amid the already heady 2008 election season. We have the airline market we're stuck with, so we might as well make some cash from it.
I’ve been on the hunt for the best means to profit from air traffic, not just in the US but around the world. And the way to wealth isn’t through airlines, as the Iceland-based private equity group FL GROEP is learning.
Own the planes themselves.
We know airlines need more planes, and new aircraft need to be more fuel efficient. If rational approaches to limiting landing and takeoff slots emerge, bigger planes will be even more in vogue.
But if you walked into a showroom in Seattle or Amsterdam and asked about delivery times for new passenger or cargo fleets, the answer would be termed in years.
If you own planes, you own the market.
There are three leaders in this market, and each is structured as a publicly traded partnership (PTP). They’re all headquartered or registered (for tax reasons) in Ireland. Think of them as REITs for airplanes.
They own planes that get leased out on long-term contracts. All they have to do is service their debt, pay management and the rest is profit--with the bulk going to us in the form of nice, fat dividend checks.
Two have been in the market for almost a year now, AIRCASTLE (NYSE: AYG) and GENESIS LEASE (NYSE: GLS). As of this week, BABCOCK & BROWN AIR (NYSE: FLY) has joined them.
Babcock & Brown Air is the offspring of Australia-based BABCOCK & BROWN (OTC: BBNLF, Australia: BNB), the same bank in Sydney that, like it's crosstown peer MACQUARIE BANK (Australia: MBL, OTC: MQBKY), is getting on board great businesses and packaging them up to trade on their own. And all the spinoffs pay piles of cash to investors.
For some strange reason, market observers don’t take the time to look at these airplane REITs. The result: They're trading as cheap as the tarmac they land on. But we've already been collecting huge cash flows from the first two, and Babcock & Brown Air shouldn't be any different. The dividend yield should fall somewhere in the mid- to upper 8 percent range. (Yahoo Finance won't show a dividend yield because the company just went public.)
Read the filings, then come fly with me. The cash will flow faster than the $2 bottles of water rolling down the aisle in coach.
Perhaps more of us will soon be able to afford to fly first class.

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