International Lease Finance Corporation (ILFC), the world’s largest aircraft equipment lessor by value, has recorded a $1.3bn operating loss for Q3 2011 according to its parent American International Group (AIG).

AIG attributes the loss to impairment charges of $1.5bn that has come about as a result of ILFC's annual review of its aircraft fleet.

The news follows earlier predictions that there was likely to be around $300m worth of annual impairments earlier this year. The operating loss compares to a loss of $218m in Q3 2010.

The ILFC fleet review considered developments that were identified in the third quarter of 2011 including:

● the growing impact of new technology aircraft on current and future demand for mid-generation aircraft;

● the impact of fuel price volatility and higher average fuel prices; high production rates sustained by manufacturers for new generation, more fuel-efficient aircraft;

● the unfavorable impact of low rates of inflation on aircraft values;

● current market conditions and future industry outlook for marketing of older mid-generation and out-of-production aircraft; and

● the decreasing number of operators and lessees for older generation aircraft.

 For Q3 2011, ILFC recorded rental revenues of $1.1bn - essentially flat over last year. For the three-month period ended September 30, 2011, ILFC had an average of 934 aircraft in its fleet, compared to 943 in Q3 2010.

Right to purchase

During 2011, ILFC entered into a contract for the purchase of 100 A320neo family narrowbody aircraft from Airbus, with deliveries beginning in 2015. ILFC also has the right to purchase an additional 50 Airbus A320neo family narrowbody aircraft.

In addition, ILFC signed a purchase agreement for some 33 737-800 aircraft from Boeing, with deliveries beginning in 2012. In October, ILFC completed the previously announced acquisition of AeroTurbine, Inc.(AeroTurbine). AeroTurbine is one of the aircraft industry’s largest suppliers of certified aircraft engines, parts, and supply chain solutions. The acquisition of AeroTurbine enables ILFC to maximize value across the complete life cycle of an aircraft.

AIG itself reported a net loss of $4.1bn and an after-tax operating loss of $3.0bn for Q3 2011, compared with a net loss of $2.5bn and an after-tax operating loss of $114m for Q3 2010.

On Nov. 1, 2011 AIG paid the US Department of the Treasury $972m to reduce the liquidation preference on one of the special purpose vehicles created as part of the government's assistance to AIG. The money paid today is the sixth major payment to the government in 2011 and brings the total repaid in 2011 to approximately $45bn.

Robert H. Benmosche, AIG president and chief executive officer stressed: “AIG continues to navigate a challenging global economic environment, and our results for the quarter were adversely affected by equity market declines, widening credit spreads, and declining interest rates, as well as property catastrophe losses. We also took significant impairments at ILFC, reflecting management's decision on certain aircraft that would be disposed of prior to the end of their previously estimated life in light of technological developments in the aircraft industry, fleet management announcements by certain airlines, and our newly acquired part-out company."

Underlying strength

Benmosche added:  "Despite the difficult external environment, we are encouraged by the progress we've made and the underlying strength of our core insurance businesses. Across AIG, we are seeing strong sales momentum as our employees continue to act as trusted partners to our customers, providing them with real value by consistently delivering quality insurance and investment products and services."

Meanwhile, Fitch Ratings affirmed its junk-level rating for ILFC. Fitch kept ILFC's issuer default rating at "BB." The outlook is stable.

The rating covers about $22bn of debt. Fitch noted the impairment represents the largest such quarterly charge the company has taken in its history, representing about 4% of book value.

The impairment will cause another annual loss for the full fiscal year. Fitch said it kept the rating and stable outlook because "the company remains committed to its long-term strategy of reducing the overall age of its fleet and creating a strong stand-alone funding and liquidity profile." It noted the non-cash charge had no impact on the company's liquidity and results in a modest increase in ILFC's debt load.

The low rating reflects continued strains caused "by inconsistent operating results and a lack of clarity regarding ownership," the ratings agency said.

The loss delays any potential improvement for ILFC's ratings.

That said, Fitch noted that it appears the company has reassessed the values for most of its older aircraft, having taken "outsized charges" over the past two years. The agency said it does not expect any further large impairment charges in coming quarters.

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