Conservative AerCap sees ILFC as too good to pass up
AerCap's decision to buy International Lease Finance Corp. (ILFC) was based on whether the benefit of netting hundreds of prime delivery slots for the most popular aircraft (and several hundred more already on lease) would outweigh taking on many older airframes and a big chunk of debt. The answer was a resounding “yes.”
“We saw an opportunity in the market that will probably never be there again, right at the time where the industry cycle is turning,” AerCap CEO Aengus Kelly says, citing ILFC's orderbook as the deal-maker. “If you go to the [manufacturers] today, it will be on average a decade later before you get this stuff. It's the jewel in the crown of the whole transaction.”
The buy, announced Dec. 16 and expected to close by mid-2014, would create the second-largest lessor by fleet size, including an in-service fleet of more than 1,300 owned and managed aircraft with about 200 operators, of which 80% are customers of both companies.unit Gecas has about 1,670 aircraft placed with 230 operators.
More important for AerCap, it would add 340 valuable units to its small new-order backlog. More than two-thirds of ILFC's backlog are, and slated for delivery in the next five years—precisely the kind of high-demand assets AerCap targets. The company's combined orderbook has 385 orders, including 155 , 77 787s and 29 A350s.
ILFC, arguably aircraft leasing's most iconic brand, built its business on the back of big orders that often put it near the front of the line when new aircraft deliveries start. It is a launch customer for the A320neo and, with 74 commitments, the top Boeing 787 customer. In July, it helped launch theE2 with a 50-unit order.
Such deals almost always come with favorable pricing. If the program delivers on its promises—meaning aircraft are efficient and sought-after—and the global economy cooperates, the combination of early delivery positions and cheap purchase prices makes lessors very popular among carriers that are both growing and modernizing.
But big, speculative orders also come with risks. Wrapped in ILFC's A320neo launch order was the cancellation of 10commitments, and the lessor still counts 30 in its fleet—airframes that few outside of Toulouse believe have much of a future.
Amsterdam-based AerCap's growth strategy has been more conservative. Kelly regularly emphasizes how much AerCap likes A320s, even though it has not ordered any since 2005. Instead, AerCap has grown through multi-aircraft sale-leasebacks, such as last May's 25-airplane deal with Latam Airlines Group for 787-8s, 787-9s,and A350s. Its last new-aircraft order, for , came three years ago.
Meanwhile, AerCap sheds less-desirable aircraft with surgical precision. It has sold about 270 aircraft in the last several years, including 59 in 2012 with an average age of 10 years. The result: an owned fleet of 231 aircraft with an average age of 5.4. All but eight are A320s, A330s and 737NGs—three of the four most popular current-generation aircraft in service.
ILFC's owned fleet of 931 aircraft as of Sept. 30 includes 691 more of the three gems, plus 71 Boeing, the fourth of the most sought-after models. Combined, 85% of the new company's fleet would comprise these four types.
For AerCap, that plus the orderbook is the good news. Less welcome is ILFC's exposure to the kinds of aircraft AerCap has worked so hard to shed. In addition to the A340s, ILFC's fleet includes 23 737 Classics, 36and three MD-11s. The entire fleet's average age is about 8.6 years. Kelly says the age of the combined fleet at closing would be about 7.6 years.
AerCap expects to write down the ILFC fleet by about $6 billion as part of the transaction, attaching “fair value” to each aircraft based on current market conditions. The combined fleet's book value is projected at $35 billion.
Kelly notes that “more than 100” ILFC aircraft out on lease are destined for part-out when their current deals expire. Their combined value is only about $1 billion based on the overall price AerCap is paying, which is about $5 billion in cash and stock plus the assumption of about $22 billion in debt.
This aggressive strategy of moving assets to keep its fleet young positions AerCap well to work with ILFC's aftermarket experts to “optimize” the combined asset base, Kelly says. He points to part-out and engine-leasing specialist AeroTurbine, which AerCap sold to ILFC in 2010, as a key cog in the soon-to-be created aircraft life-cycle management “platform.”
“We are very focused on opportunities to dispose of airplanes where it meets our asset objective,” Kelly says, noting that plans call for about $1 billion per year in disposals, presumably focusing on out-of-production aircraft at the outset.
AerCap's brisk portfolio management efforts see it buy, sell or place an aircraft every three days, while ILFC moves an airframe every two days. Kelly is confident the combined team will be able to keep its portfolio both lean and desirable.
The deal moves AerCap from the small-and-nimble lessor category and into behemoth territory, bringing both benefits and drawbacks. Combining with ILFC means growth “horizontally and vertically,” says Richard Aboulafia, an analyst for consultancy Teal Group.
For ILFC, the sale would put it back in familiar territory—solidly at the top of the independent aircraft leasing pyramid. After two decades spent turning ILFC into the world's largest lessor—while creating the aircraft leasing business along the way—founder Steven Udvar-Hazy sold the company to American International Group (AIG) in 1990. The move allowed Udvar-Hazy to leverage AIG's top-shelf bond ratings to access cheap funding, which helped ILFC grow even more.
The deal looked like a winner for nearly two decades, until the 2008 financial crisis pushed AIG to the brink of bankruptcy. U.S. government loans kept the company afloat, but also forced it to sell non-core assets to repay the debt. ILFC, one of the first assets put up for sale, would be the last to go.
A deal involving Udvar-Hazy fell apart in 2010, leading to his departure from ILFC. He immediately started Air Lease Corp., headquartered 5 min. from his former company in Los Angeles.
Meanwhile, ILFC's fleet aged and its orderbook size dwindled. As recently as early 2011, it had no narrowbodies on order.
Under CEO Henri Courpron, who took over in May 2011, the situation has improved—at least enough to attract serious offers. An agreement to sell 80% of the company to a group led by Hong Kong-based P3 Investments, announced late last year, fell through recently, opening the door for AerCap.
The ILFC purchase is subject to AerCap shareholder approval. Abu Dhabi-based Waha Capital, AerCap's largest shareholder at about 26%, indicated it's onboard. AIG would own 46% of the combined company, subject to diluted voting rights.
|Sources: Company filings to the U.S. Securities and Exchange Commission|