Note 4 – Portfolio Quality

Allowance for Losses on Receivables

The following table reconciles the activity in the allowance for losses on receivables at December 31:


	2011			2010			2009
Allowance for losses on receivables at beginning of year	$	87		$	71		$	59
Provision for (recovery of) losses		(23	)		16			23
Write-offs		(11	)		(1	)		(12	)
Recovery of write-offs		–			1			1
Allowance for losses on receivables at end of year	$	53		$	87		$	71

Allowance as a percentage of total receivables		2.2	%		3.8	%		2.5	%

Allowance for losses on receivables collectively evaluated for impairment	$	53		$	87		$	71

Credit Quality

We assign internal credit ratings for all customers and determine the creditworthiness of each customer based upon public information and information obtained directly from our customers. We utilize these credit ratings as one of the factors in assessing the adequacy of our allowance for losses on receivables. Our rating categories are comparable to those used by the major credit rating agencies.

The following table details our receivable balance by the internal rating category which was used as a factor in determining our allowance for losses on receivables at December 31:

2011

2010

Rating categories

Out-of-
Production
Aircraft

In-Production
Aircraft/
Other

Total

Out-of-
Production
Aircraft

In-Production
Aircraft/
Other

Total

BBB

1,316

–

1,316

–

103

–

103

135

207

CCC

194

318

512

1,658

417

2,075

182

180

362

–

Total carrying value

1,795

565

2,360

1,793

489

2,282

At December 31, 2011, our allowance primarily related to receivables with ratings of BBB and CCC in the preceding table, and we applied default rates that averaged 2% and 48% to exposure associated with those receivables. On May 2, 2011, Southwest Airlines Co. (Southwest) completed its acquisition of AirTran Holdings, Inc. and AirTran Holdings, Inc. became a wholly owned subsidiary of Southwest. AirTran Holdings, LLC (AirTran) became the successor to AirTran Holdings, Inc. As a result, we took into account Southwest's credit rating when we determined the allowance for losses on AirTran receivables during 2011. In the fourth quarter of 2011, we revised the contractual terms of our leases with AirTran in conjunction with receiving a full guarantee from Southwest which guaranteed AirTran's obligations to us. At December 31, 2011 and 2010, we assigned the internal rating categories of BBB and CCC to the receivables from AirTran for the purpose of assigning default rates discussed above. The improved rating in 2011 reduced the allowance for losses on receivables by $19 for the year ended December 31, 2011.

At December 31, 2011, receivables of $1,044 were related to customers we believe have less than investment-grade credit. At December 31, 2010, all of our receivables were related to customers we believe have less than investment-grade credit.

Impaired Receivables

At December 31, 2011, we had impaired receivables with a carrying value and unpaid principal balance of $194, all of which related to out-of-production aircraft. We recorded no allowance for losses on these impaired receivables. At December 31, 2010, we had no impaired receivables.

The following table details our average recorded investment and the related income recognized on the impaired receivables for the years ended December 31:


2011	Average Carrying Value⁽ ¹ ⁾		Income Recognized
Out-of-production aircraft	$	198	$	–

2010
Out-of-production aircraft	$	88	$	9	⁽ ² ⁾

2009
Out-of-production aircraft	$	162	$	9	⁽ ² ⁾

⁽¹⁾

Average carrying value is the average value during the year of receivables classified as impaired at any time during the year. The average is calculated on a quarterly basis.

⁽²⁾

For the years ended December 31, 2010 and 2009, of the income recognized we received in cash $9 and $9.

Past Due Receivables

As of December 31, 2011, amounts which were 31 to 60 days past due totaled $1 associated with receivables with a principal balance of $46 and related to in-production/other aircraft, and there were no receivables greater than 60 days past due. As of December 31, 2010, we had no receivables greater than 30 days past due.

At December 31, 2011 and 2010, we had no accrued income on receivables with amounts past due greater than 90 days.

In the fourth quarter of 2011, American Airlines, Inc. (American Airlines) filed for Chapter 11 bankruptcy protection. We believe that our receivables from American Airlines of $362 are sufficiently collateralized such that we do not expect to incur losses as a result of the bankruptcy.

Non-Performing Assets

Non-performing assets (assets not earning income on an accrual basis) consisted of the following at December 31:


	2011			2010
Assets placed on non-accrual status:
Receivables:
Out-of-production aircraft	$	182		$	–
Equipment under operating leases, net		14	⁽¹⁾		29
Assets held for sale or re-lease, net ⁽¹⁾		50			43	⁽²⁾
	$	246		$	72

Percent of total non-performing assets to total portfolio		5.7	%		1.5	%

⁽¹⁾

At December 31, 2011, equipment under operating leases of $23 are not included in non-performing assets due to intercompany guarantees provided by Boeing. At December 31, 2011 and 2010, assets held for sale or re-lease of $471 and $540 are not included in non-performing assets due to intercompany guarantees provided by Boeing.

⁽²⁾

At December 31, 2010, non-performing assets held for sale or re-lease of $28 had either a purchase or lease commitment.