Once seen as wise investment, Disney jets burden bottom line. (Up Front).

When Walt Disney Co. wrote down $114 million in aircraft leases to UAL Corp. last month, investors had to wonder: What was Mickey Mouse doing in the aircraft leasing business?

The answer: tax breaks. Since the 1980s, Disney and other large corporations have been leasing planes to take advantage of tax rules that allow for accelerated depreciation of large equipment.

Using a structure known as a leveraged lease, cash-rich investors such as Burbank-based Disney purchased airplanes, individually or in a pool, and leased them out to air carriers. Investors gained title to the planes and the accompanying tax breaks that boosted returns on their investment, while the carriers got a less expensive way to add to their fleets.

The deals, with iron-clad terms written in, were seen as safe.

"Back in '91, '92, '93, this looked kind of like a no-brainer, lease something to UAL, the biggest airline in the world," said John Deane, managing principal of the Alta Group, an equipment leasing and financing company. "Today it might look risky but back then it didn't."

Fortune 500 staple

In fact, several smaller airline bankruptcies in the early 1990s soured a previous round of lease investments, and some aircraft leasing firms went out of business. But those failures didn't stop Disney or dozens of other companies seeking to minimize their tax bills. The temptation of leveraged leases was too good to pass up.

John Pincavage, president of Pincavage & Associates, an aviation advisory firm in Westport, Conn., noted that most Fortune 500 companies have aircraft lease investment of some sort. Besides Disney, others that have written off leases to UAL include Pitney Bowes Inc., which will write off $100 million, and locally based GBC Bancorp, parent of General Bank, which wrote off $8.2 million.

Under a typical leveraged lease, investors put up 20 percent of the purchase price, which could run to $100 million or more. The rest is borrowed under a loan using the plane as collateral. None of the investor's other assets are put at risk.

What no one anticipated were the 2001 terrorist attacks, which crippled air travel and airline cash flows. Globally, airlines lost $10 billion in 2002, said Carl Chrappa, president of Independent Equipment Co., an appraisal firm in Clearwater, Fla.

The number of aircraft that have been retired--simply parked in the desert--rose by 20 percent in 2002, and now stands at about 2,000 planes, or 13 percent of the entire U.S. fleet.

The bankruptcy of UAL, parent of United Airlines, exposed investors such as Disney to this weak secondary market for aircraft.

Under bankruptcy protection, UAL gets to break any leases it doesn't want, giving the airline powerful leverage to renegotiate a lower lease payment at lower market rates. If no deal is reached, United can walk away from the leases. Either way, the $114 million book value Disney assigned to its investment in two Boeing 747s and two 767s leased to United had to be written down entirely.

Other leases exposed?

Disney says it has additional investments in commercial aircraft leases with two other carriers: Delta Air Lines Inc. (five aircraft, $119 million) and FedEx Corp. (two aircraft, $56 million).

Aircraft leasing experts are divided on whether leases to other airlines are in danger. While leases are virtually impossible to break, outside of bankruptcy court, industry fundamentals have deteriorated so much that United and US Airways Group Inc., also operating under Chapter 11, are likely to wring significant cost concessions from their unions and from their lease agreements.

Delta and AMR Corp., parent of American Airlines, are aggressively cost-cutting, and will try to match their bankrupt competitors' emergent cost structures. (FedEx is in a different market; no one expects problems with those leases.)

While Delta and American aren't in any financial danger right now, one more blow to the industry--a significant rise in fuel costs, a weakening economy, a new terrorist attack that further reduces air traffic--could bring them close to the. brink, Pincavage said.

"None of those older carriers are so sound that they couldn't be pushed in," Pincavage said. The threat of bankruptcy could give those airlines some leverage to seek a financial restructuring--and possibly lowered lease terms--outside of bankruptcy court, he said.

Disney has said in filings with the Securities and Exchange Commission that it continues to monitor its investment in commercial aircraft leases. The company declined to comment beyond those disclosures.