AerCap Holdings rocked the aviation world last week with a $30 billion deal for General Electric’s aircraft leasing arm, General Electric Commercial Aviation Services, or Gecas. For GE, it marks CEO Larry Culp’s latest move to slim down the conglomerate, raise cash and pay down debt. After the deal closes the remnants of GE Capital will be folded into the main business. GE would have a 46% stake in the combined company.
For aviation, the deal would combine the world’s two largest aircraft lessors into a behemoth with even more power to negotiate prices with manufacturers like Airbus and Boeing. Together, the two companies would own or manage some 2,000 aircraft, roughly doubling AerCap’s fleet. They would also have about 5% of aircraft manufacturers’ backlog, Cowen & Co. analysts said. They have more than 200 customers combined and just around 70 of them overlapping, they said.
Analysts say the deal could also spur more consolidation among aircraft lessors.
AerCap’s 47-year-old CEO Aengus Kelly, who has more than two decades of experience in the leasing business, is no stranger to deal-making. He oversaw AerCap’s 2014 acquisition of ILFC from AIG in 2014. He told investors after the agreement was announced that the GE deal was the fourth aircraft leasing business AerCap agreed to buy at a discount to book value.
“Buying the right assets is important, but doing so at the right price, even more so,” he said.
Dublin-based AerCap has a market capitalization of about $7.9 billion and shares have more than doubled over the past 12 months, and more than 24% in the past one week, amid the deal announcement Wednesday.
Kelly spoke with CNBC about his outlook for aircraft lessors which own about half of the world’s narrow-body and wide-body fleets, the coronavirus pandemic and AerCap’s strategy.
Here’s the Q&A:
(This interview has been lightly edited for length and clarity.)
Where do you see your fleet needs going in the coming years?
The growth in the fleet will come from new technology assets and to a lesser extent probably freight assets. In the new technology assets it’ll be dominated by the A320neo family of assets, the Boeing 737 Max family and then the 787 on the widebodies. We have some Airbus widebodies too.
For the last eight years, our view on the acquisition of airplanes is you want to buy the next generation of technology or if you have the existing generation, you want to have older types of it. The real risk in this business when you’re buying airplanes is if you’re going to buy the end-of-line aircraft, just like buying a car. Buying a car tomorrow you know that if you’re buying one that’s the end-of-line and the new one is out there … you know the value is going to fall. It’s no different here.
So one of the things we’ve been doing, and Gecas was the same strategically, they’d avoided buying any of the end-of-line [Boeing] 777s or [Airbus] 330s for the last six or seven years. And so we definitely see for the next decade or so that there will be good demand for the existing technology assets.
What is your average age of fleet?
The average age is 6.9 years but that’s a dangerous thing to look at with fleets. If I told you I had a brand-new fleet that’s 2 years old but it was all 777s and 330s that’s not a good thing. What you want to say: “What’s the average age of your existing fleet?” You want that to be reasonably old and then the rest of your fleet in new technology, so you have this barbell approach. That’s key to managing aircraft exposure. You want to have assets where you know there’s enough demand to consume their remaining economic life.
If there’s going to be demand for your particular asset for 10 years, you want it to be around 15 years old. If there’s demand for 25 years ahead of it, it can be brand new.
The Covid-19 pandemic has been devastating for the aviation industry. Travel restrictions, quarantine requirements and worries over the virus have all hurt demand. Where do things stand?
It’s different in different geographies. They’re not all the same. If you go to the one that recovered the quickest, China we saw demand bounce back. Europe recovered really quickly over the summer … but then Europe was hit by the second and third wave of the virus in the fall and then at Christmas.
The U.S. market has been a steady recovery story. That’s definitely trending the right way and speaking to a number of airline CEOs today they all feel the same way. I’d say Europe would be the slowest [recovery] given the slow vaccine rollout but it’s coming.
The big long-haul market that needs to open, the most important one in the world is the North Atlantic, I think that will start between the U.K. and the U.S. Those are the two countries that are leading on the vaccine rollout. I think we’ll see some movement there in the not-so-distant future.
Do you have clients who are trying to renegotiate their lease terms with you?
You’re always in negotiations with the customers. That’s part and parcel of the daily cut and thrust of the business.
What’s clear to us is that the vast majority of the world’s airlines are going to make it through.
However, they will also have greater leverage on their balance sheets, greater government support on their balance sheets, either directly or indirectly, and their priority … will be to reduce that. They will not be spending billions of dollars on buying airplanes from Boeing and Airbus. What they’ll be doing, though, is coming to the lessors because they will be using their own resources to pay down leverage.
Do you expect to get new planes in the coming years through sale-leasebacks from airlines or directly from manufacturers?
At the moment, we already have a large commitment in place with Boeing and Airbus. That will be our focus for the next couple of years.
What’s your view of the wide-body market? It’s been struggling as of late because international travel is so weak.
It’s all about the ones you have. I think the wide-body market will come back, of course. One of the things that was complementary for us about the Gecas portfolio was that it was a heavy narrow-body content, more so than us, so that was a positive.
Otherwise, when Norwegian [Air Shuttle] went into bankruptcy, we had to take back a number of 787s and we’ve already re-leased some of them. Every one of them almost is under a letter of intent already. When you have a quality asset, you’re going to move it.
That goes back to the portfolio strategy question. On the wide-body side, AerCap is the biggest player. In the last five years we have leased 1,000 airplanes. We have infrastructure, knowledge and that gives us a significant competitive advantage.
Do you know how long will it take for international long haul to come back?
The biggest market in the world for long haul is the North Atlantic. I think you’re going to see that open up in the reasonably near future between the U.K. and U.S. and then the rest of Europe will follow. That’s what I think will be phase 1 and that will be the market people will look to and I think replicate elsewhere in the world.
The world has changed. This used to be an East-West market when it was an Atlantic world. The world has changed. North-South traffic is very important now: China to Southeast Asia, I think we will see that as well because they’ve had reasonable control [over the pandemic]. It’s not all about East-West.
GE also has a massive engine manufacturing and service unit. What benefits will you get from GE Aviation?
We have a long relationship with GE Aviation. Now with the engine-leasing business that GE has, that’s a very attractive business. We are a separate business from them. Yes, GE will have two seats on the board. We will do business with all the engine manufacturers. There’s no doubt that the relationship with GE Aviation will be very important to us and we’ll look to nurture that.
Airbus is launching a long-range narrow-body plane, the Airbus A321 XLR. Do you think there’s room for Boeing to come out with a new midsize plane in this market?
Ten years maybe. The focus has to be on reigniting the demand for the Max and getting through the 787 [inspection] issues. So I think it’s a ways down the track.