California-based lessor Aviation Capital Group is looking to grow its narrowbody-focused portfolio with acquisitions, after 2009 proved to be one of its best years despite falling aircraft lease rates, according to its chief executive Steve Hannahs. He says the impact of recession has been "very minor", with a fall in borrowing costs ensuring stable yields despite rate declines of 15-25% over the 18-month period to September. Meanwhile, the capital base has "grown substantially".

In October, ACG and Emirates Airline completed a global note issuance, backed by US export credit agency Ex-Im Bank, to finance Boeing 737 aircraft. This innovative capital-markets transaction was the first in a series that "will fund as many as 24 airplanes over the next couple of years", says Hannahs.

ACG, owned by insurance company Pacific LifeCorp, pursued the issuance as "a way to bring competition to the banking market". With the banking crisis having narrowed the market for ECA paper, spreads had been widening, recalls Hannahs, and while they are now tightening again, banks are "still not competitive with the capital markets".


Nonetheless, ACG is in the happy position of having "excess capital" and has "looked at buying portfolios and/or companies", confirms Hannahs. "If we find the right opportunity and the right pricing, we will clearly act quite quickly."

By Hannahs' account, late payment was a minor problem in 2009, with "less than 1% of our total revenue" past due at any given time. "But we did have a couple of challenges, most prominently with Mexico," he adds, citing the H1N1 outbreak, which combined with recession to require "a couple of restructurings". Placing 2011 positions was not a priority last year because "everybody expected a good deal", says Hannahs. "We wanted to see if the market would improve, and it has," he adds. "All of our deliveries are placed through the first quarter of 2011."

As to the industry's future structure, Hannahs suggests the "old-tech" nature of leasing renders its practitioners unsuited to public ownership. He also questions the longevity of the "mega-lessor" model. To Hannahs, a portfolio of 325 to 425 aircraft - rather than 1,000-plus - represents a "sweet spot" in which scale benefits are balanced by relative ease of management. ACG plans to expand its portfolio by about 20 units, to 260, in 2010, and further to 360 in 2013-14. The sweet spot is on the horizon.

Source: Airline Business