Financing Jets Sets Problem For Airlines

Press, Volume XCIX, Issue 29189, 27 April 1960, Page 8

Financing Jets Sets Problem For Airlines

[Specially written for the N.Z.P.A. Dy

FRANK OLIVER)

WASHINGTON, April 26. The suit by Vickers-Armstrong. Ltd., of Britain, against Capital Airlines, of Washington, for nearly 34 million dollars has served to focus a good deal of attention on the financial problems of all airlines in the United States. The jet age has brought American airlines more passengers, more revenue and more speed, but it has also produced the most serious financing problems the new industry has ever faced. Capital Airlines is the fifth largest airline in the country and early in May it must make answer to the suit and then a hearing will be held to determine whether the company should be put into receivership. It is not that Vickers-Armstrong wants to ruin Capital Airlines. It will in fact continue to co-operate with Capital Airlines’ officials in an effort to solve the airlines’ enormous financial crisis. Default On Instalment The suit was brought under a chattel mortgage issued originally on a fleet of 60 turbo-prop Viscount airliners sold to Capital for 70 million dollars in 1954 and 1955. The Vickers suit says no payment on the principal has been made since the end of 1958 and that Capital Airlines defaulted in April this year on an instalment due of nearly 12 million dollars. This default automatically made due immediately the total of 33.8 million dollars owing to Vickeres on the whole deal. Behind the suit is a story of desperate efforts to raise the vast sums to pay off the Vickers indebtedness and finance the purchase of more turbo-jet and jet airliners. The magazine “Business Week’’ says another noted airline, T.W.A., has for four years been casting about for a way to finance the 63 jet planes it has on order. This line is headed by Howard Hughes, who last summer had to sell six jets from his original order to another airline and then make arrangements with plane manufacturers to delay payments due for a whole year. Manufacturers of aircraft are demanding payment in full on delivery of aircraft and Mr Hughes is reported to have laid out a programme to raise 340 million dollars by tapping the resources of T.W.A., of his other businesses, his personal fortune and private lenders in order to meet the needs of his airline for new jet aircraft Enormous Expense The prospects are reported to be good and if a complicated programme of financing goes through,

T.W.A. will be able to complete a large fleet of all-jet aircraft. But the financial troubles of T.W.A. and of Capital underline the enormous expense that airlines have to go to in order to stay in business and give the traveller what he demands, ultramodern and ultra-speed service. “Business Week” reports that Capital Airlines lost 1.7 million dollars in 1959 and in the first two months of 1960 dropped another 4 million dollars. These reverses not only made it impossible to keep up the payments to Vickers, but also forced the line to forgo purchases of Electra turbo-props and Convair jets. It is reported that, last autumn, Capital arranged a tentative solution of its problems—a refinancing programme that would have included a new equity issue, short and long-teirn loans from big American banks and insurance companies and a “stretchout” of the debt to Vickers. But the proposed new lenders grew hesitant or backed away and that scheme fell through. The next thing attempted was to get Capital back into the Federal subsidy list. Decision Delayed

Capital Airlines had been off the subsidy list for nine years and it applied to the Civil Aeronautics Board for an immediate grant of 22.5 cents a mile or 12.9 million dollars a year. The C.A.B. refused to make the subsidy at once and ordered a full hearing, which automatically put the decision off for several months. “Business Week” says: “These two factors—the collapse of the proposed refinancing and C.A.B.s denial of an immediate subsidy—apparently were too much for Capital’s British note-holders to take quietly.’’ It adds that Capital became almost 12 million dollars behind in payments to Vickers. A few days ago, Lord Knollys, chairman of Vickers, made a formal demand for payment and this put the American company formally and legally in default. Foreclosure on the airline’s planes by Vickers is regarded here as the extreme step likely to be taken at this stage of affairs. Instead, the British company says it is willing to co-oper-ate “in a sound plan” to provide for its notes and for Capital’s financial plight. The company has already said that “disappointing” operating results this year prevented the airline from proceeding with plans to raise the 51 million dollars In new working capital it requires. The cost of keeping up with the jet age is considerable.