Dubai Aerospace Enterprise (DAE) is a very different entity to the brash brand that launched itself on the industry a decade ago with intent to create a series of blue-chip businesses in the Gulf and beyond. The dream was bold: in early 2006 – with its skyline full of construction cranes, rapidly expanding flag-carrier Emirates, and its international airport becoming a crossroads of the world – it seemed everything Dubai touched turned to gold.
By 2007, DAE had acquired one of North America’s foremost maintenance, repair and overhaul companies as well as a flight-planning software business. In addition it had established the Gulf’s first aviation university, set up a division to build and manage airports around the world, and – as part of a strategy of becoming one of the big hitters in aircraft leasing – announced deals for more than 200 Airbus and Boeing types.
But when the global financial crisis hit Dubai and its money-makers hard, DAE’s ambitions began to unravel; by 2010, most of the start-ups had been quietly shelved, leaving just North American MRO Standard Aero and a much more modest leasing operation, based largely on a sale and leaseback model. Now, following the divestment of $2 billion-turnover Standard Aero in July 2015, the new DAE is focused on its core activity as a leasing house with a fleet of 66 aircraft.
Competing as a niche player with lessors backed by international banks and industrial corporations may seem a strange outcome for a company that once vowed to take on the world. But chief executive Firoz Tarapore says DAE is poised to grow again, albeit as a more scaled-back enterprise to the one seen nine years ago. “That era is a distant memory,” he admits of DAE’s early years. “The world changed. We had to readjust. We over-extended ourselves.”
Speaking at his office in Dubai’s new financial district, Tarapore says DAE is comfortable as a specialist lessor, albeit one with aspirations to be larger. The sale of Standard Aero to a US private-equity concern – terms were not disclosed – has created options. “It gives us a very large pool of capital which we are now looking what to do with,” he says. “We want to invest in a growing leasing sector to get to two times the size we are today. We think we can get there in three or four years.”
Tarapore says DAE does not rule out investing in “a new set of aerospace businesses that can bring a strategic connection to Dubai” – although any acquisitions would be in services rather than manufacturing. However, the focus is likely to be on organic growth of the leasing operation. This comprises ATRs through to Boeing 777 freighters and, according to DAE’s annual results for 2014, had a net book value for its aircraft portfolio of $3.6 billion – a 50% increase over three years.
“Not long ago, our portfolio was $2 billion and we said we needed to get to $4 billion to have scale,” says Tarapore. “We are now at $4 billion, and If we can get to $8 billion, that takes us to a slightly different scale.” Most of DAE’s latter deals have been sale and leasebacks with airlines. However, at the Singapore Airshow 2014, it placed an order for 20 ATR 72-600s with 20 options, for delivery by 2018. It remains DAE’s only speculative deal since the heady early days, and its first for regional aircraft.
The ATRs are an interesting choice for a lessor that until now has stuck to heavier metal. Tarapore says DAE will soon announce customers for this latest batch of ATRs, although it has invested elsewhere in the French-built product, recently completing leasing deals with Brazil’s Azul Airlines, Airlines PNG of Papua New Guinea, and Myanmar National Airlines for a total of 17 ATR 72-600s, to be delivered this year and next.
DAE has just delivered the final aircraft of its other flagship contract, an exclusive sale and leaseback with Emirates for 13 Boeing 777 freighters, won in 2008. Tarapore insists the lessor got no favours from its sibling, with which it shares a chairman in Sheikh Ahmed Bin Saeed Al Maktoum. “In fact, back in 2008 when we won this agreement, not many lessors saw the enormous value we saw in the 777 freighter. We committed to provide their entire freighter fleet requirement and we won it in a competitive process,” he says. “We don’t get any special access. We are a commercial operation, as they are, and we have a common ownership with Emirates, but that’s where it stops.”
Tarapore is relaxed about competing with giant rivals, although he concedes “you have an in-built advantage if you are owned by a bank, with access to zero-interest cost of funds, or an entity that can use its parent’s high credit ratings to borrow inexpensively, or lessors with access to low-cost capital and with low ROE [return on equity] requirements”. Instead, he says, DAE concentrates on “clients who value the capital we bring to the table and also the full-service package we provide – which can be useful when things go wrong and as they grow their business”.
DAE, he maintains, attempts to “understand the story of your airline and what you are trying to do”. Once comfortable with the carrier’s business model, he says, “we feel we can take a larger credit risk, as we can predict how that story is likely to play out”. The firm, he says, “cannot chase business that views what we provide as a commodity”.
DAE last year had revenues of $2.11 billion, although most of that was accounted for by Standard Aero. Tarapore says the MRO was sold not because it was a poor performer but because it was trading strongly, and this gave DAE the opportunity to refocus the business while making a good return on its initial investment. “As its market began to rebound in the past 24 months, we started to see favourable valuation metrics, and that is why we took the decision to exit,” he says.
Standard Aero had been bought to “bring the nexus of MRO activities to Dubai”, says Tarapore. However, because most of the company’s activities were in the business jet, regional jet and military engine market – rather than the widebody segment that dominates in the Gulf – the hoped-for synergies never materialised, and the US company “became more of a financial investment than a strategic investment”, he says.
Tarapore says DAE’s biggest markets are now Africa and Latin America, with many start-up airlines that need help to get established. Iran too has huge potential, he believes. The nation has a fleet of ageing and obsolete aircraft ripe for replacement as Western economic sanctions are eased. “This isn’t lost on any of the players. Everyone has a plan consistent with what is allowed,” Tarapore concedes. However, he adds wryly: “We just happen to be the entity that is closest.”
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Source: Flight International