PS Group’s Jet Leasing Unit No Longer High Flier : Aviation: Economic doldrums and stronger competitors have resulted in the group doing business with weaker airlines.

Commercial passenger airlines aren’t the only companies seeking shelter as the airline industry tries to weather an increasingly turbulent business environment.

Also caught in the economic downdraft are some aircraft leasing companies, including PS Group, the San Diego-based former parent company of now-defunct Pacific Southwest Airlines.

PS Group sold its majority interest in PSA to USAir in 1988, but the San Diego-based company retained strong ties to the airline industry through a commercial aircraft leasing business that generated $49.4 million, or 17%, of the company’s $288.5 million revenue in 1990.

PS Group’s historically profitable aircraft leasing business is being buffeted by rough financial weather that already has forced three airlines--Pan American, Continental and America West--to seek Chapter 11 bankruptcy protection.

Unfortunately for PS Group, those three bankrupt airlines generated about 40% of the company’s 1990 aircraft lease revenue. Its remaining aircraft lease revenue is generated by financially ailing USAir, which, some observers believe, probably will be absorbed by a healthier competitor.

Earlier this year in a cost-cutting move, USAir dramatically cut back its intrastate flight schedule in California. The cuts, which forced layoffs of former PSA employees in the state, effectively eliminated PSA’s legacy in California.

USAir last week announced a marketing and scheduling agreement with Air Canada that is designed to help the two carriers compete with larger and healthier airlines.

“This has been the most gut-wrenching and tumultuous period in the airline industry,” said George Shortley, president and chief executive of PS Group, said in a recent interview. “The last 12 to 14 months have been the toughest that I’ve ever seen. . . . It’s a very tough world out there.”

Shortley declined to discuss PS Group’s specific leases, but he acknowledged that PS Group’s aircraft leasing business will shrink dramatically.

“The (PS Group) leasing portfolio as it exists today is a self-liquidating line of business,” Shortley said. “We do not foresee leasing any additional aircraft or taking on any additional aircraft.”

Recent company filings with the Securities and Exchange Commission paint a bleak picture for the company’s leasing business.

* According to the filings, Continental Airlines, which declared bankruptcy in December, 1990, leases an MD-80 and a 737-300 from PS Group. PS Group also owns a 33% interest in seven additional leased 737-200s. Continental last week announced that it would lay off employees and ground airplanes that are not cost-effective.

It was uncertain last week if planes leased from PS Group would be among those grounded. However, the 737 leases are set to expire in 1992, according to SEC filings, which might mean that the company would have to take possession of the aircraft and absorb the cost of maintaining them until new lessees are found.

* Pan American World Airways, which declared bankruptcy in January, leases two 747-100 aircraft from PS Group. No lease payments have been made since December, 1990, and PS Group has reason to expect that “the aircraft will be returned to PS Group,” according to the company’s annual report.

* America West Airline, which declared bankruptcy in late June, leases a 737-300 and two 747-200s from PS Group. America West, which reported a substantial loss in 1990, has announced layoffs and domestic flight cuts that are designed to return the highly leveraged airline to profitability. Airline industry analysts have suggested that America West might be forced to eliminate longer international flights that would cancel the need for the 747s.

* Struggling USAir, which reported a 1990 net loss of $454 million, leases 16 aircraft from PS Group. USAir has grounded the 10 BAe-146 aircraft that it leases from USAir. The airline is still flying six MD-80 aircraft on lease from PS Group.

According to SEC filings, PS Group is encountering “intense competition” from aircraft lessors with greater resources and lower capital costs. Competitors are using their financial clout to win business with “larger, more credit-worthy airlines.”

PS Group is left with the airlines that are “not as credit-worthy as some of the larger, more financially sound airlines,” according to a filing. Consequently, the company’s aircraft leases “carry greater financial risk.”

Shortley declined to comment on the status of specific leases, or on the economic hit that PS Group would absorb if it were forced to take possession of aircraft now leased by the three bankrupt airlines.

However, in SEC filings, PS Group executives maintain that “the aggregate underlying asset values of our aircraft exceed the carrying value.” PS Group also suggests that, “for the past few years (PS Group has) focused on acquiring for lease aircraft models that . . . will remain highly marketable into the future.”

However, PS Group will be marketing its airplanes at the same time that the nation’s airlines and other leasing companies are retiring hundreds of other leased aircraft. Most of the airplanes to be retired are older 737s and 727s, along with aging DC-9s and DC-8s, industry observers say.

The retirement of older aircraft is a normal but painful phase in the cyclical airline industry.

“You saw the prop-driven jobs retired when jets came along, and you saw the first generation of jets, the 707s and the like, retired when they were older,” said Dave Fowler, an executive at Evergreen Air Center, which operates a “parking lot” outside of Tucson, Ariz., where leasing companies and airlines store aircraft that have been grounded.

But the current round of retirements is being exacerbated by economic realities that have forced airlines to prematurely ground inefficient aircraft that are too expensive to operate.

“There’s a real downturn in the aviation industry,” Fowler said. “During the coming years you’re going to see lots of older aircraft being parked out here or scrapped in favor of newer, more efficient aircraft.”

In the past, many airlines and leasing companies sold older, but still air-worthy aircraft to third-world operators, who used them despite the fact that they were fuel-gobblers or expensive to operate. However, some analysts question whether third-world nations will buy the current generation of older jet aircraft they are relatively expensive to maintain.

Although the leases on PS Group’s BAe-146 jets won’t expire until the year 2000, USAir evidently has the option of declaring the aircraft “obsolete” in 1992 and selling them. But airline industry analysts doubt that USAir would find many buyers for the BAe-146 aircraft because no major domestic airlines continue to operate them.

The BAe-146 jets are small, quiet and relatively efficient, but “it’s an airplane that is not sought out, really, by any airlines,” said Scott Hamilton, with Commercial Aviation Report, a Dallas-based company that monitors the airline industry. “If homes aren’t found for them, PS Group is going to have to start eating the ownership costs on them.”

“If the economy were robust and the airline industry were healthy, it would be one thing,” Hamilton said. “But the industry worldwide is in terrible shape. It’s being decimated by fare wars, fuel costs and the fact that people just are not traveling.”

Publicly traded shares of PS Group, which reported a $10 million net loss in 1990 on $288 million in revenue, closed up $.75 at $43 Friday in New York Stock Exchange trading.

PS Group’s stock moved as high as $72.25 in recent months after it became known that Berkshire Hathaway, the Omaha-based company that is run by savvy investor Warren Buffett, had acquired 22% of PS Group’s outstanding shares.

Buffett, who recently became chairman of the troubled Salomon Brothers investment banking firm, subsequently asked the SEC for permission to acquire more of the company’s stock. His interest in PS Group evidently was sparked by Recontek, a metallic waste recycling operation that has won permits to open its first commercial plant.

PS Group Leased Aircraft

Aircraft Model Number BAe-146 10 MD-80 7 737-200 2.3* 737-300 2 747-100 2 747-200 2 Total: 25.3

*PS Group ownsa 33% share in seven individual 737-200 aircraft. Source: 1990 PS Group annual report