By Jeffrey Dastin
NEW YORK (Reuters) - United Airlines (N:UAL) expects to dip into its cash pile to help fund the purchase of new aircraft this year and rely less on debt financing, reflecting the U.S. airline industry's dramatic financial turnaround, the carrier's Chief Financial Officer John Rainey said in an interview.
United, which had about $4.4 billion cash on hand at the end of last year, may use some of that to pay for about half of the cost of individual planes, while borrowing the rest, he said.
There are 25 planes entering its fleet in 2015 that it has yet to finance. Another 22 already have financing in place.
While cash-rich companies have been under pressure from shareholders to increase dividends, United, the fourth-largest U.S. carrier by market capitalization, has said it is focused on finishing a $1 billion share buyback program and that there are no current plans to restore a dividend. It last made a payout to shareholders in 2008.
How to efficiently use excess cash is a relatively new issue for U.S. airlines. Major U.S. carriers grappled with losses and then bankruptcy after the Sept. 11, 2001 attacks. Mergers, new fees imposed on passengers, and caution about adding capacity have all helped to return the industry to profitability, and the picture has improved markedly in recent months because of tumbling oil prices.
"In my almost 18 years in this business, that would be the first time for me" to pay this much cash for aircraft, Rainey said, calling the move, "an indication of where this industry is."
Airlines often finance their purchases of planes, which can cost hundreds of millions of dollars each, by leasing them from a trust of investors, through what is known as enhanced equipment trust certificates.
While United will continue this practice, Rainey said the airline for the first time in recent history could rely solely on class-A certificates for future financing, with rates likely under 4 percent. The certificates require a borrower to put up more cash than other classes of certificate carrying higher rates.
"That's really affordable money," Rainey said, calling the focus on class-A "an effective way to de-lever" its balance sheet.
Other airlines are paying lower interest rates in part because they have a growing amount of cash as well: American Airlines Group (O:AAL) announced class-B certificates on Monday at 3.7 percent and class-A certificates at about 3.4 percent, down from about 4.4 percent and 3.7 percent respectively on similar certificates announced in September 2014.
United's use of cash for aircraft will benefit shareholders by curbing the company's debt and turning planes into assets against which United can borrow, said airline industry analyst Jim Corridore of S&P Capital IQ.
"The number one thing that airlines should be doing with their cash is repairing their balance sheets," Corridore said. "The industry has come a long way."