AIG Leasing Unit Mulls Split-Up

American International Group Inc.'s troubles are prompting one of the insurer's most-profitable units -- an airplane-leasing giant run by one of AIG's largest shareholders -- to consider seeking a split from the company, according to people familiar with the matter. Officials at powerhouse International Lease Finance Corp. have grown increasingly concerned that the company will be weakened by its parent's financial woes, these people say. The world's largest buyer of commercial aircraft, ILFC leases large numbers of planes to air carriers, and AIG's problems could make it more difficult for ILFC to compete in the increasingly crowded airplane-leasing industry. Last Thursday, AIG reported a $7.8 billion first-quarter loss, largely the result of a sharp decline in the value of financial instruments tied to subprime mortgages. In response, two major rating agencies downgraded ILFC's credit rating along with that of the parent company, even though ILFC reported a winning first quarter with a 41% increase in operating income to $272 million. The decline in the credit ratings is crucial to ILFC, as poorer ratings raise the rate of interest ILFC must pay to borrow money to finance airplane purchases. A divorce could also have consequences for the aviation business. ILFC is such a force that its fate will affect most everyone in the industry, particularly Boeing Co. and Airbus, which each count ILFC as their single-largest customer. It is possible that AIG and ILFC will be able to sort out the situation and stay together. Divesting ILFC would be complicated. Not only does ILFC generate profits for its parent, but AIG also takes advantage of billions of dollars in accelerated depreciation on jetliners, which helps hold down its taxes on other profits. ILFC was acquired by AIG in 1990 for $1.3 billion in stock. For years, ILFC benefited from AIG's strong credit rating and support when it borrowed money to finance plane purchases. "With the tremendous appetite for capital that we have, this is a very appropriate merger," said Mr. Udvar-Hazy in 1990. But there are potential threats to those advantages. Affected by a sharp decline in the value of credit derivatives the company sold as protection for a range of investments, including subprime mortgages, AIG logged $13.1 billion of losses in the past two quarters. Those losses are a key reason why two major rating agencies cut AIG's -- and ILFC's -- credit ratings last week.