Avolon chief executive Domhnal Slattery's career to date features an impressive list of achievements over a relatively short period of time. "I've been extremely lucky in my aircraft financing career to have started and built two of the top five [aircraft leasing firms] from acorns," he tells FlightGlobal at the company's New York offices.
The journey, however, has not been without its difficulties.
The day Lehman Brothers filed for bankruptcy in September 2008 is a memorable one for most. It was arguably the start of the global financial crisis, which drove countries into recession worldwide.
For Slattery, that day was particularly personal and disappointing. A week earlier he had agreed a commitment with private equity firm Oak Hill to invest in his start-up leasing company. The deal was supposed to close the week after Lehman collapsed.
Nearly 10 years later, and with the acquisition of CIT Aerospace under his belt, Slattery has built Avolon into the third-largest aircraft leasing company in the world.
The $10 billion blockbuster acquisition of CIT's aircraft leasing platform in April 2017 further propelled Avolon into eyeshot of behemoths AerCap and GECAS.
With its purchase of CIT, Avolon added 334 owned and managed aircraft as well as 133 aircraft on order or committed, bringing the company's total fleet to more than 550 aircraft and its orderbook to in excess of 185.
"I don't think of numbers of airplanes as the metric; I think about dollars at work," says Slattery.
Since 2015, Avolon has grown from a $7 billion balance sheet to one of nearly $30 billion. Other numbers tell a similar story.
Like a rock star, where you see all the glamour and none of the blood, sweat and tears, Slattery makes it look effortless, just like when he is on stage singing Johnny B Goode at an ISTAT celebration.
But he is no stranger to hard work. Slattery is deliberate, persistent and confident – all attributes which helped him to build what is now the third-largest aircraft lessor in the world.
Despite Avolon's rapid rise to the top of the leaderboard, it has taken some grit to get the company there.
Before the financial crisis, Slattery was already out in the market raising equity for his latest venture. But the dislocation in the market in September 2008 forced Oak Hill to retreat. It would be almost two years before Slattery would finalise another equity commitment that would propel Avolon in the aircraft leasing space.
In May 2010, Slattery scored what he calls "the holy trinity".
"We had the money, the IP and the initial portfolio of aircraft," he says.
Slattery assembled seven former colleagues from Royal Bank of Scotland between January and April. Then, on 20 May 2010, Avolon had secured the capital – $750 million from private equity shops Cinven, CVC and Oak Hill, as well as $625 million of debt in the form of a warehouse facility from DVB – and acquired its initial aircraft with the purchase of six A320s from AerCap, while also agreeing a joint venture with the latter for three A330s on lease to Aeroflot.
"It was so convoluted and complicated that the stress only came afterwards, when we realised what we had pulled off," he recalls. In fact, Avolon was the largest funded start-up in the world in 2010. Seven years later, it is the third-largest lessor after AerCap and GECAS.
Slattery, like many senior aircraft lessors today, began his career at Guinness Peat Aviation. Having worked his way up from the mail room, the young boy from County Clare in Ireland left the company following its collapse in 1994. After learning the trade at GPA, Slattery set up International Aviation Management Group (IAMG), which focused on arranging finance. It was still a niche sector and he spent much of the 1990s building a book of business.
One day in December 2000, everything changed. During a roadshow to pitch business to Royal Bank of Scotland, the bank enquired about acquiring IAMG. What started as a casual conversation eventually resulted in RBS buying IAMG in April 2001. Slattery was 33.
"Getting that balance sheet was the enabler," he says about that pivotal moment when he had achieved his goal of becoming a principal. He never looked back.
Now, Avolon sits among the top aircraft lessors, with a commitment from shareholder HNA Capital to get to number one.
Since its inception, Avolon has gone through several iterations of ownership. Initially owned by private equity, the company listed on the New York Stock Exchange in 2015. It was then taken private to be acquired by Bohai Capital, its current owner, in January 2016.
"There is no one ownership model that delivers all," says Slattery, noting that the recipe for success consists of the top people, the lowest cost of debt and equity, and the lowest aircraft purchase price.
On the last point, Slattery believes he has a strategic advantage due to his affiliation with sister companies – HNA Group-owned airlines. HNA owns a stake in at least 20 domestic and international airlines, according to its website.
"That group sits at the table with one voice, one negotiation for very large quantities of airplanes," says Slattery, stressing that Avolon will become one of the largest purchasers of aircraft in the world. "There is no other stakeholder globally that has that characteristic. The combination of that buying power is very powerful."
Avolon did not always have such clout with the manufacturers, however. The company built up its portfolio primarily through sale-and-leasebacks. But as Avolon embarks on its next phase of growth, Slattery says to expect more direct orders with the OEMs.
"We have a very significant commitment to the manufacturers already, but you should expect to see us continue to grow."
In addition to about 130 aircraft already on order, Avolon inherited 133 additional orders through its acquisition of CIT. And, at the Paris air show in June 2017, Avolon announced an order with Boeing for up to 75 737 Max 8s, which it firmed in November, as well as options for an additional 50 of the same type.
As part of its strategy to becoming number one, Avolon will focus on growing its fleet. To do this, the company will rely on its access to Chinese equity through its listed parent Bohai Capital, as well as lowering the cost of its funds.
As of 30 September, Avolon had a net debt to equity ratio of 2.1. This is lower than investment-grade competitors such as AerCap and Air Lease.
"We are not investment grade – so I'm not quite at the cost of debt I'd like to be, but I'm tracking to that," says Slattery. "It's an inevitability in my mind."
Moody's raised its rating of Avolon to Ba2 in September, while S&P Global rates the lessor's corporate credit at BB+. In December, however, S&P Global said in a note that the company's rating could be at risk due to its relationship with its liquidity-stricken parent, HNA Capital.
But the company is rated on a standalone basis. "It doesn't matter who it's owned by," Slattery said in October.
"We try to get the best from our shareholder and insulate ourselves from the downside of our shareholder. As a management team we've seen the best and the worst of that," he says, referring to the sale of RBS Aerospace by Royal Bank of Scotland in the wake of the financial crisis. "The underlying aircraft operating business was fine."
Slattery remains optimistic not only about Avolon's future, but also for the industry, believing that there are no signs of growth ceasing any time soon.
"The thing I care about is global GDP because it drives the demand for aircraft – and the world is more bullish on GDP than it has been for the past eight years. So if you use GDP as your metric, it suggests that we're still some way away from the peak of the cycle."
Slattery notes headwinds for next-generation narrowbodies as the market transitions to Neo and Max aircraft on a scale the industry has never seen before. But there is also a tailwind. He believes the demand for used aircraft is the best he has seen in years. "The proxy for that is Air Berlin, where multiple airlines [were] looking at every individual aircraft. That's effectively 130 aircraft that went on the market overnight and it didn't move the needle."
And given his analysis that aviation will continue to grow along with global GDP, Slattery is confident that new money wanting exposure to the asset class will continue to find opportunities.
"In 2018 you'll see some big announcements of large asset management sidecars and joint ventures," he says. "There is huge opportunity for the guys who have global systems, global networks to take that machine and leverage it by providing asset management services and scale it."
Sidecars and joint ventures have become more popular among the top lessors over the past couple of years, given that the return on equity is often higher for asset management compared with that of a company's underlying business.
While new money may have no idea what to expect during a downturn, Slattery is not worried about this inevitability. In fact, this is why investors are linking up with reputable, experienced lessors.
Slattery points out that it is in the bad times when you earn your stripes with the airlines, whether in the form of restructuring a lease or providing incremental capital. "That is the only differentiator in today's market," says Slattery, who has weathered a few downturns during his tenure in aircraft leasing.
"Our primary job is to ensure that we're managing the risk we're taking and that we're avoiding or not taking risk we're not set up to manage," he says. "The thing we worry about most – and we were born in it – is a systemic breakdown in the financial markets. It happened, so it can happen again."
For now, Slattery is keen to remain at the helm of Avolon and watch the company transition to its next phase of growth.
"Our shareholder's desire is that Avolon becomes the number one player in the world," he says. "The aspiration is that we continue to grow this business. We want to be a key participant in any further M&A."
Whether Avolon has the capacity to acquire more businesses in the near future is anyone's guess. Yes, the integration of CIT has gone smoothly in Slattery's estimation, but whether the company's largest shareholder is on board for acquiring more businesses at this point is not clear.
HNA recently pledged almost all of its 34.6% stake in Avolon's parent company Bohai Capital to a series of Chinese securities companies, amid the HNA Group's push for additional liquidity.
It is extremely unlikely, however, that Avolon will lose HNA's support, given the company's commitment to aviation and Chinese government support for that initiative.
Avolon is more likely to grow through orders and portfolio sales, as well as entering the asset management business like many of its direct competitors.
In many ways Avolon is a reflection of Slattery himself. The company has been nimble and opportunistic, and like the young boy from Clare, has staked its spot in the aviation ecosystem in only a short period of time since coming online in 2010.
Slattery may have been only 33 when he sold his first company to Royal Bank of Scotland, but Avolon was only seven when it entered the big leagues with the purchase of CIT. As the company enters its eighth year, it will be punching with the heavyweights.
Source: Cirium Dashboard