AerCap’s deal to buy International Lease Finance Corp. (ILFC) was motivated in large part by the chance to acquire an enticing order book at a great price, creating an efficient aircraft management “platform” that dovetails well with its own strategy, AerCap CEO Aengus Kelly says.
The deal, announced today and expected to close by mid-2014, would create the second-largest lessor by aircraft fleet size, including an in-service fleet of more than 1,300 owned and managed aircraft with about 200 operators, of which 80% are currently customers of both companies.unit GECAS has about 1,670 aircraft placed with 230 operators.
More significantly, it would give AerCap hundreds of prime delivery slots in the next five years for the most sought-after current and new-generation aircraft, including theand as well as the -800, and 787.
“We saw an opportunity in the market that will probably never be there again, right at the time where the industry cycle is turning,” Kelly said of ILFC’s order book in a call with analysts shortly after the deal was announced. “If you go to the [manufacturers] today, it’ll be on average a decade later before you get this stuff. It’s the jewel in the crown of the whole transaction.”
Kelly noted that the deal was finalized as the(IATA) was upping its 2014 global airline net profit projection to $19.7 billion—a positive sign for those peddling efficient but pricey new aircraft.
Grabbing large chunks of new delivery slots runs counter to AerCap’s core growth strategy. While the company has placed large orders in the past, it more often lands sale-leaseback opportunities, including a 25-plane deal with Latam Airlines Group struck earlier this year.
ILFC, by contrast, routinely places large orders to secure prime delivery slots and favorable pricing. As of Sept. 30, the company had 338 aircraft on order, including 150, 71 , and 20 A350s. Combined, the new entity will have 385 aircraft on order, with 286 of them slated for delivery by 2019.
AerCap’s owned-aircraft portfolio underscores its laser-like focus on maintaining a fleet of young, in-demand aircraft. All but eight of its 231 owned airframes are A320-family aircraft,, or 737NGs. The entire fleet’s average age is 5.4 years.
ILFC’s 931 owned-aircraft fleet includes more than 600 of these types plus 71, meaning 85% of the combined fleet is made up of these four highly desirable models.
ILFC’s fleet also includes more than 150 out-of-production aircraft, helping push the average fleet age to 8.6 years.
Kelly says the combined age of the fleet at closing would be about 7.6 years.
Kelly says AerCap expects to write down the combined fleet by about $6 billion as part of the transaction, attaching “fair value” to each aircraft based on current market conditions. The projected combined fleet value post-closing is $35 billion, he says.
He notes that “more than 100” ILFC aircraft out on lease are destined for part-out when their current deals expire, but these aircraft combined are only valued at about $1 billion based on the overall price AerCap is paying.
AerCap’s aggressive strategy of moving assets to keep its fleet young—it has sold 270 aircraft in the last “several” years, Kelly notes—positions it well to work with ILFC’s aftermarket experts to “optimize” the combined asset base. Kelly points to part-out and surplus parts specialist AeroTurbine, which AerCap sold to ILFC for $228 million in 2011, as a key cog in the newly created aircraft life-cycle management machine.
“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, with a focus on older or out-dated technology, such as, MD-80s, 737 Classics, , , and MD-11s in ILFC’s portfolio.
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 that the combined team be able to keep pace in the asset value maximization game.
“We’re extremely comfortable with the capabilities of this platform, along with the addition of AeroTurbine to deal with the older aircraft, to very efficiently deal with this number of airplanes,” Kelly says.
AerCap will pay $3 billion in cash plus 97.6 million shares—valued at about $2 billion—for ILFC and assume $21 billion in debt, placing the value of deal at about $26 billion.
ILFC parent AIG has had the company on the market for several years, and an apparent deal struck a year ago with a group led by a Hong Kong-based investment firm fell through when agreed-upon deadlines were missed. AerCap, which had been eyeing ILFC for some time, moved in, and—backed in part by a $1 billion unsecured revolving credit facility from AIG and a combined $2.75 billion in funding from UBS and Citibank—struck a deal.
The deal is subject to AerCap shareholder approval. Abu Dhabi-based Waha Capital, AerCap’s largest shareholder at about 26%, says it will back the deal.
AIG would own 46% of the combined entity.