Customer Financing

9 Months Ended

Sep. 30, 2019

Customer financing primarily relates to the Boeing Capital (BCC) segment and consisted of the following:



	September 30 2019			December 31 2018
Financing receivables:
Investment in sales-type/finance leases		$1,016			$1,125
Notes	446			730
Total financing receivables	1,462			1,855
Operating lease equipment, at cost, less accumulated depreciation of $245 and $203	789			782
Operative lease incentive				250
Gross customer financing	2,251			2,887
Less allowance for losses on receivables	(8		)	(9		)
Total		$2,243			$2,878

We acquire aircraft to be leased to customers through trades, lease returns, purchases in the secondary market, and new aircraft transferred from our Commercial Airplanes segment. Leasing arrangements typically range in terms from 1 to 12 years and may include options to extend or terminate the lease. Certain leases include provisions to allow the lessee to purchase the underlying aircraft at a specified price. A minority of leases contain variable lease payments based on actual aircraft usage and are paid in arrears.

We determine a receivable is impaired when, based on current information and events, it is probable that we will be unable to collect amounts due according to the original contractual terms. At September 30, 2019 and December 31, 2018, we individually evaluated for impairment customer financing receivables of $401 and $409, of which $388 and $398 were determined to be impaired. We recorded no allowance for losses on these impaired receivables as the collateral values exceeded the carrying values of the receivables.

The adequacy of the allowance for losses is assessed quarterly. Three primary factors influencing the level of our allowance for losses on customer financing receivables are customer credit ratings, default rates and collateral values. We assign internal credit ratings for all customers and determine the creditworthiness of each customer based upon publicly available information and information obtained directly from our customers. Our rating categories are comparable to those used by the major credit rating agencies.

Our financing receivable balances by internal credit rating category are shown below:



Rating categories	September 30 2019		December 31 2018
BBB		$594		$883
BB	348		430
B	125		135
CCC	395		407
Total carrying value of financing receivables		$1,462		$1,855

At September 30, 2019, our allowance related to receivables with ratings of B, BB and BBB. We applied default rates that averaged 22.1%, 5.8% and 0.6%, respectively, to the exposure associated with those receivables.

Customer Financing Exposure

Customer financing is collateralized by security in the related asset. The value of the collateral is closely tied to commercial airline performance and overall market conditions and may be subject to reduced valuation with market decline. Declines in collateral values could result in asset impairments, reduced finance lease income, and an increase in the allowance for losses. Our customer financing collateral is concentrated in out-of-production aircraft and 747-8 aircraft. Generally, out-of-production aircraft have experienced greater collateral value declines than in-production aircraft.

The majority of customer financing carrying values are concentrated in the following aircraft models:



	September 30 2019		December 31 2018
717 Aircraft ($184 and $204 accounted for as operating leases)		$778		$918
747-8 Aircraft ($130 and $132 accounted for as operating leases)	474		477
737 Aircraft ($243 and $263 accounted for as operating leases)	266		290
757 Aircraft ($22 and $24 accounted for as operating leases)	186		200
MD-80 Aircraft (accounted for as sales-type finance leases)	184		204
777 Aircraft ($126 and $60 accounted for as operating leases)	131		68
747-400 Aircraft ($33 and $45 accounted for as operating leases)	95		116

As part of selected lease transactions, Boeing may provide incentives to commercial customers. At December 31, 2018, Customer Financing included $250 of lease incentives with one customer experiencing liquidity issues. In the first quarter of 2019, we concluded that these lease incentives were impaired and recorded a charge of $250.

Lease income recorded in Revenue on the Condensed Consolidated Statements of Operations for the nine and three months ended September 30, 2019 included $47 and $15 from sales-type/finance leases and $105 and $34 from operating leases, of which $14 and $6 related to variable operating lease payments.

As of September 30, 2019, undiscounted cash flows for sales-type/finance and operating leases over the next five years and thereafter are as follows:



	Sales-type/finance leases			Operating leases
Year 1		$179			$118
Year 2	134			93
Year 3	97			83
Year 4	109			61
Year 5	121			46
Thereafter	140			57
Total lease receipts	780			458
Less imputed interest	(167		)
Estimated unguaranteed residual values	403
Total		$1,016			$458

At September 30, 2019 and December 31, 2018 unguaranteed residual values were $403 and $425. Guaranteed residual values at September 30, 2019 were not significant.