Aengus Kelly knows a bargain when he sees one.
The CEO of aircraft leasing company AerCap made his most audacious move yet in a career spanning more than two decades, when Kelly agreed on March 10 to buy General Electric’s jet-leasing business.
The deal doubles the size of Kelly’s company — already the world’s largest aircraft lessor — by relying on a familiar playbook: Pry a valuable financial asset from an owner with little use for it anymore or a desire to minimise financial risk.
It is a move Kelly already pulled off back in 2014 when he bought AIG’s aircraft leasing subsidiary, as the giant insurance company emerged from a bruising brush with collapse after the financial crisis and needed to slim down.
Kelly’s appetite for another splashy deal is grounded in his optimism that after a year of haemorrhaging, the aviation industry is ready for a rebound — and AerCap has the planes to get people moving again.
“Now is the time we should be looking for opportunity because the signs are there that the inevitable upturn in aviation is coming,” said Kelly in an interview, after announcing the transaction that is valued at US$24 billion ($32.1 billion) in cash plus 111.5 million shares.
In a twist of corporate fate, the deal reunites assets that existed under a single roof three decades ago.
AerCap and Gecas — as GE’s aircraft finance business is known — both emerged from the wreckage of Ireland’s Guinness Peat Aviation. Once the world’s biggest lessor, it effectively collapsed after a downturn in aviation and the first Gulf War in the early 1990s sank its proposed IPO.
Aside from a shared history, Kelly said Gecas had the same discipline in assembling its aircraft portfolio, helping insulate them from the pandemic slump hitting hardest in the wide-body segment.
By value, the combined fleet will be composed of almost 60% single-aisle aircraft that are easier to market with airlines, as well as 56% newer, fuel efficient models.
The aircraft leasing industry as it exists today was pioneered by Steve Udvar-Hazy, who built International Lease Finance Corp (ILFC) in the 1970s and sold it to AIG in 1990.
Hazy, a billionaire and self-proclaimed godfather of the industry, left ILFC in 2010 and went on to found Air Lease Corp, where he remains chairman.
The pandemic has put lessors like AerCap in the spotlight as airlines increasingly seek a partner to finance their aircraft.
It is a win-win proposition when business is booming, but it can also saddle an airline with steep leasing costs when activity dries up and planes go into storage, as has been the case in the past year.
While Kelly said he is optimistic about a rebound, he is in no rush to place new orders, focusing instead on delivering the existing portfolio to airline customers. Over time, AerCap may consider adding more of Boeing’s 737 Max, he said.
Making such a bold bet as Kelly has done with GE does not come without risk. The US traded shares sank 4.7% on March 10 after the deal was announced, while Fitch placed AerCap’s credit rating -- already just one notch above junk -- on review for a possible downgrade. It cited the debt required to replace the bridge financing, as well as the ongoing impact of the pandemic given that one-third of the combined company’s fleet is currently grounded.
AerCap may not have locked in interest rates on the US$25 billion of debt that it will raise to complete the acquisition, analysts at JP Morgan wrote in a note to clients. On an investor call, AerCap’s chief financial officer Peter Juhas said that the transaction would be funded primarily by unsecured debt.
For now, Kelly remains bullish on the outlook, promising that “when summer comes, you’ll see a lot of those back in the air”. — Bloomberg
