The last year has been a time of change for the aircraft lessor landscape, with the arrival of several new players and the return of some very familiar faces, writes Scott Hamilton in Seattle
The lessor market shifted in 2010 with the merger of two companies, the creation of three more and an absence of sales that had at one time been widely anticipated. Lessors also seemed to be the leading indicator of aviation's recovery.
Firstly, the shifting sands. During the year AerCap acquired Genesis Leasing. This lifted it up the Airline Business rankings, jumping from eighth place by fleet value and size in 2009 to third by value and fourth by fleet this time around. The move has also made AerCap the largest independent lessor in the world. But in terms of portfolio size, mega-lessors GECAS and International Lease Finance continue to top the tables.
ILFC retains its number two ranking by aircraft count, behind GECAS, but impairment charges and aircraft sales saw ILFC fall to second in asset value - also behind GECAS - for the first time in recent memory. ILFC's asset value declined by nearly 20%, while GECAS saw a miniscule gain.
Babcock & Brown Aircraft Management is the third-largest lessor by fleet size, but BBAM is largely a manager and not an owner - giving AerCap the number three spot if owned aircraft count was the main criterion. AerCap is third by asset value, regardless of ownership.
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Boeing Capital, the in-house lessor and financier for Boeing, disposed of 43 aircraft in 2010, reducing its ranking in the Airline Business unit and asset count. This is in keeping with Boeing's desire to minimise its customer-financing exposure, but the company still had more than 250 aircraft at year-end, valued at more than $2.7 billion.
During 2010 Genesis Leasing and AerCap merged, but this was a holdover from the deal that was reached in 2009. It was also anti-climatic: several sales of much larger lessors were expected in 2009 or 2010.
Babcock & Brown Air, or BBAir, and BBAM were restructured. BBAir became Fly Leasing, named after its US stock-trading symbol. It shifted its ownership, logos and colours, but otherwise remained the same company. BBAM also shifted ownership, but kept its identity. But none of the big lessors on the market throughout 2009 changed hands in 2010. ILFC remained with parent AIG, and now is a source of profits rather than being cast off as a "non-core" business. RBS Aviation Capital, like ILFC, was a victim of its parent's excesses but in the end remained with RBS - and the UK government. Likewise, CIT Aerospace - once on the block - stuck with troubled parent CIT Group, another of the USA's financial disasters following the global financial meltdown of 2008.
In the end, what did not happen in 2010 is almost as important as what did: the legacy lessors remained remarkably status quo. Instead, the real change rested with the new entrants. Three newcomers of consequence emerged in 2010, the most widely being the return of leasing godfather Steven Udvar-Hazy from government-imposed purgatory.
AIR LEASE IS BORN
Udvar-Hazy's Air Lease made a splash in both fund-raising and orders, exercising his cheque book at Farnborough, at a time when it was not clear if aviation was in real recovery mode. In fact, many analysts thought the orders from Air Lease and other lessors were less-than-indicative of recovery. But, true to his legacy, Udvar-Hazy seemed to portend the trend; airlines finished the year with hundreds of orders and Air Lease led the way.
Udvar-Hazy, of course, was co-founder of ILFC. When the financial troubles of ILFC parent, insurance giant AIG, triggered a global economic crisis and the US government effectively took over AIG in a multi-billion dollar bail-out, UdvarHazy's ILFC entered an indefinite stagnation. For a time, ILFC was offered for sale as one way to help AIG repay the government loans. But the economic crisis, capital markets squeeze, depressed aircraft values and unacceptable prices offered combined to leave the future of the mega-lessor circling like an aircraft over Chicago, waiting for the weather to clear in New York.
Unable to place new orders and reduced to relying on money from AIG to service its debt, shut out of the capital markets and simply running its business instead of growing, ILFC essentially became a management company of a huge portfolio. Udvar-Hazy, frustrated and at odds with AIG's board of directors, left after his bid to buy ILFC was rejected. Old enough and rich enough to retire, his constitution simply would not allow him to fade off into the sunset. Thus, Air Lease was born.
Staffed with key people from ILFC, including president and chief operating officer John Plueger who grabbed the same slot at Air Lease. The team raised $3.3 billion on the private equity and debt markets. Operations began with a handful of sale and leasebacks, but in true Udvar-Hazy style, his coming-out party was a splash at Farnborough, with orders for more than 100 aircraft from Airbus, Boeing, ATR and Embraer. Key to these orders were early delivery positions; Bombardier did not make the cut because its first positions were not until 2013-14.
AVOLON ARRIVES
Avolon was another new face in 2010. While not as ambitious as Air Lease in terms of initial fund-raising or orders, Avolon nonetheless got off to a strong start. The company was created by Domhnal Slattery as a way for private equity firm Oak Hill to get out of an order for Boeing 777 Freighters. Avolon then pirated a core group of key people from RBS Aviation Capital, which, like ILFC, became somewhat stagnant as its parent company came under government ownership. While RBS remained reasonably active in sale and leasebacks, its new Airbus and Boeing orders announced at Farnborough had distant delivery dates, and it was RBS that cancelled an unidentified order for 25 787s. New opportunities with Avolon were more exciting than effectively being another management company.
Avolon launched in May after raising $1.4 billion in equity and debt from the private equity firms of Cinven, CVC Capital Partners, Oak Hill Capital Partners DVB and UBS. At the time, Avolon announced commitments and letters of intent to acquire 26 then unidentified aircraft and management contracts for two more. Since then, it has disclosed acquisitions of six A320s from AerCap and a joint venture with the lessor to acquire three A330-200s; two purchases/leasebacks of Boeing 737s with Air Berlin; an order for 12 737s, and the purchase and leaseback of four 737s with Flydubai. Avolon ordered eight A320s in December. It ended the year with commitments for 60 aircraft and Avolon is expected to have more deals in the pipeline.
The management team includes Slattery as chief executive, Denis Nayden of GE fame as chairman, John Higgins as chief operating officer and many RBS alumni.
JACKSON SQUARE'S DEBUT
Jackson Square Aviation was founded and is run by Richard Wiley, Scott Weiss and the old Pegasus Aviation team that was put out of work when AWAS purchased Pegasus in 2008. This did not last for long. Wiley got the Pegasus-managed portfolios back for his Sky Holdings and later founded Jackson Square as a separate company.
Wiley tapped private equity fund Oaktree Capital - a financial partner from his Pegasus days - to provide $500 million in funding for Jackson in December 2009. This was intended to leverage Jackson to acquire $2 billion worth of aircraft "annually" with the first purchase and leasebacks launched in the first quarter of 2010. The company officially launched operations in March 2010 with commitments for the purchase and leaseback of 10 Boeing 737s and Airbus A320s. In December, the company raised another $400 million in the form of a secured credit facility.
Although Jackson began operations in March, Wiley prefers to view it not as a start-up but as a continuity of management from the Pegasus days. The relationship with Oaktree spans 15 years. Jackson is buying only new aircraft in purchase and leasebacks for airlines and offers scarce pre-delivery payment financings wrapped in long-term leases. It has commitments for 50 aircraft through mid-2012, all new, and has 15 on its books.
HAPPY NEW YEAR?
Lessors see better prospects for 2011, with fewer aircraft on the ground, firming lease rates and higher demand. Some lessors are seeking longer lease terms - up to 10 years instead of six - for their A320s following the Airbus New Engine Option announcement to give longer-term protection on lease rates. Six years would be right at the time the A320neo would enter service, if it is on time.
The market is already buzzing with the expectation that Air Lease will launch an initial public offering for an April or May issuance. If true, this means the registration statement has to be filed with the US Securities and Exchange Commission in January or February. Air Lease declined to be interviewed and maybe the IPO and its timing is why.
Avolon is another IPO possibility, according to market buzz, but this is less certain. Avolon also clammed up for this article.
Udvar Hazy's former baby, ILFC, is another attracting talk of a potential IPO in the offing this year. It is unclear whether this would be a total or partial spin-off from AIG, but the parent still has billions of dollars to repay the government. ILFC is likely to have more impairment charges that will affect its balance sheet and push up against financial covenants as it continues to repair itself from the near-brush with bankruptcy that would have happened had AIG failed completely.
Source: Airline Business
