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The operating lessors: Trying to find the ILFC formula November 2002 Download PDF

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The operating lease industry is dominated by two companies — ILFC and GECAS. Together they account for 49% of the operating lessor fleet (top 20 lessors) and some 83% of lessor orders. ILFC continues to be the industry benchmark, with an operating margin of 29%.

Below them there are a substantial number of lessors trying in one way or another to find niches. The key strategic aim for many of the secondary lessors is to establish themselves as the number three operator.

Industry consolidation is inevitable in the short–term as the smaller lessors search for economies of scale. Some of the smaller lessors have been put up for sale, their owners, usually banks, having discovered how difficult it is to make ILFC–type returns. Airbus has a much heavier exposure to the operating lessors than Boeing. But Boeing is increasingly being pulled into the operating leasing business through the Boeing Capital Corporation.

Currently, second–hand values are suicidally depressed and very few airlines can be considered good risks. So the immediate outlook for operating lessors is poor. However, it is possible that a combination of a rebound in demand from the very depressed post September 11 market and a one–off reduction in supply caused by the effective scrapping of half of the parked fleet could mean that aircraft market balance is stored more quickly than expected in late 2003/2004 (see Market balance forecast, Aviation Strategy, October 2002).

Also, leasing has long since ceased to be the associated with poor credit airlines; it may well become the standard means of ownership for the industry.

So there is a major potential upside for the lessors if they can find the magical combination of success factors.

Success factors

  • Access to sources of cheap funding; for example, ILFC is able to attract AA rated debt, with its own Single A rating and the AAA rating of its parent, AIG.
  • Size, which provides airlines with flexibility — ILFC and GECAS are able to offer their customers ability to trade up or down because of the range of their portfolios.
  • Purchasing power, which obtains discounts from manufacturers through placement of mega–orders and also builds in flexibility to those orders. For example, GECAS can change the type of aircraft nine months ahead of delivery.
  • Access to a range of diversified funding sources and products, such as securitisation and EETC market plus strong relationships with banking and financial communities.
  • Management skills:

— experience and contacts — independence — financial skills — credit analysis — market awareness — re–marketing experience An acid test of the quality of the lessor’s management is how quickly an aircraft can be re–leased after an airline default — within two months is a good standard.

General Electric Capital Aviation Services (GECAS

The wholly owned subsidiary of General Electric reported a net profit of $475m on revenues of $2.2bn in 2001 and expects a slightly reduced result, around $250m, this year. GECAS is the world’s largest lessor with 778 jets in its fleet and a further 287 on order. Its strongest asset is its parent’s AAA credit rating.

It has 139 airline operators, still mostly North American based. Possible problem operators include US Airways, United, America West and Varig. GE as a whole has recently estimated its potential liability with regard to US Airways and United at over $4bn.

GECAS attempts to differentiate itself from other lessors by offering a wide scope of support services such as arranging training, inventory management, securing maintenance support etc. It is seen as a big risk taker yet approval processes are very restrictive and response times recognised as slow compared to its great rival ILFC. Senior management continuity is not assured as managers may move on to other parts of the GECC organisation.

With a third of its aircraft portfolio placed on finance leases, GECAS makes aggressive use of tax–efficient structures and securitisations. It is, in effect, the sole provider of lease equity in the US market. And PK Air Finance, acquired from Credit Lyonnais, has strengthened financial expertise, particularly in the area of syndicated loans.

Despite its continued profitability GECAS may be under pressure from its parent to meet a financial target of a 25% return on equity. This may explain why GECAS has continued to be very aggressive in past twelve months, writing $3bn of business with United alone. Significantly, GECAS appears to believe that the commercial jet market is currently at or near bottom. A new megaorder from Airbus is rumoured for early 2003, including 75 A320s and probably A380s.

International Lease Finance Corporation (ILFC)

Generally regarded as the benchmark for the industry, ILFC reported operating income of $749m in 2001, a 29% margin on revenues of $2.6bn. ILFC has been owned by insurance giant American International Group since 1990. ILFC itself has a Single A credit rating but combined with its parent’s AAA credit rating, can normally obtain AA funding.

ILFC dominates the lessor order book with a backlog of 526, particularly with Airbus (347). Interestingly, the approximate value of ILFC orders — US$28bn — is more than double the current stock–market capitalisation of EADS, Airbus’s parent. It is now considering whether to enter the regional aircraft market. The main operators are relatively strong credits in today’s market — Air France, American, Iberia, SWISS and KLM, Dragonair, bmi British Midland and Asiana. ILFC is at core an aircraft trader, with aircraft assets usually only held for five years — an operating lessor in the purest sense.

Throughout the recession it has continued to place aircraft "almost uncannily", according to a rival. Aircraft are ideally pre–placed up to 18 months prior to delivery.

The management team, still centred around the founding Udvar–Hazy family, is regarded as tight–knit, entrepreneurial and highly empowered. They enjoy a high degree of autonomy from the parent company, and so the approval process is more liberal and rapid than that of GECAS. ILFC’s strategy is highly relationship–driven.

Nevertheless, neither ILFC nor AIG is immune to the state of the aviation and insurance markets. Increasing leverage may put into question ILFC’s credit rating.

Boeing Capital Corporation

Boeing’s subsidiary is by fleet number, 278 (173 Boeing, 10 Airbus and 95 others), the third largest lessor in the world. It also has 75 parked, ranging from Airbuses taken as part of Boeing replacement orders to 717 whitetails.

BCC is essentially a Boeing aircraft trader and provider of financing to client airlines. Boeing has stated that it does not want to become a major lessor, yet, by default it has to expand in this sector to keep assets flying.

It may be tempted to acquire specialist leasing management skills through buying out an operating lessor. It was rumoured earlier this year to be looking to acquire either debis or AWAS.

CIT Aerospace

CIT was successfully extricated from troubled conglomerate Tyco, (which had bought CIT in June 2001), through a flotation on the NYSE in July this year. CIT was capitalised at over $4bn, though its share price has slipped from $23 to $19 since then.

Following the IPO, Standard & Poor’s upgraded CIT’s credit rating to A/A–1. CIT’s aim has been to establish itself as the third operating lessor after GECAS and ILFC, and to achieve this has acquired 20- 30 aircraft per year from other lessors with leases attached. Consequently, the fleet of 182 jets contains just about every commercial type. The strategy now is to shift the portfolio away from older used jets and regional jets, and buy A320 and 737NG types. CIT has 62 operators in its fleet, but is heavily exposed to the US Majors (American, United Airlines, Delta, Northwest Airlines and America West Airlines).

CIT is seen as a possible takeover target.

GECAS considered buying the company in 2001, and other possible suitors include Berkshire Hathaway, Citicorp and Bank of America.

Ansett Worldwide Aviation Services (AWAS)

Morgan Stanley bought out AWAS, formerly regarded as the number three lessor, from TNT/News Corporation two years ago but the investment does not seem to have met the bank’s expectations. Morgan Stanley is not interested in making additional investments in the business and may be looking to offload AWAS, either in toto or in parts of the aircraft portfolio.

AWAS has 162 units in its fleet but no orders. The portfolio is biased towards 737- 300s and MD–80s, which have limited marketability. There are 66 operators of AWAS aircraft, the main ones being American, Air France, Rio Sul Linhas Aereas, Avianca and Qatar Airways.

debis AirFinance

The Dutch–based lessor is owned by DaimlerChrysler Aerospace (45%) and four German banks (55%). In 2000, debis acquired AerFi (the residual GPA which itself had bought out Indigo).

It achieved an operating margin of 16% on revenues of $359m in 2000. debis has 104 units in its fleet and 31 orders.

It is exposed on its Fokker portfolio, especially now that American and US Airways have grounded their fleets. It is now looking to dispose of this portfolio and concentrate on more mainstream aircraft, possibly placing an order for Airbus aircraft.

There are 40 operators of debis aircraft, including TAM, bmi, Air France and Thai. Its exposure to South American carriers may be a concern.The management at debis is aggressive with strong technical skills. They harbour ambitions to become the third largest lessor.

However, the lessor’s owners might well be willing sellers.

GATX Capital Corp.

San Francisco–based GATX Capital is a subsidiary of GATX Corp., which is quoted on the NYSE. It has a portfolio of 103, mostly modern jets leased to 40 airlines, notably SAA, TAM, Air France and Euralair.

Growth has been achieved largely through a number of joint ventures which spread risk and broaden the funding base, for example: GATX and Gulfstream joint venture (85%/15%) in Corporate Jets; a 50% stake in Rolls–Royce and Partners Finance; a 50% stake alongside Rolls- Royce in Pembroke.

The joint venture with Flightlease (part of the SAir Group) was aimed at combining GATX’s expertise in financing and Flightlease’s expertise in fleet management. The strategy, which was to build the core business around airlines in the QualiFlyer alliance, is now defunct following SAir’s bankruptcy.

Nevertheless, GATX has good structured finance expertise and solid connections with the banking community. It is continuing with an expansion policy, possibly through merger or acquisition of other lessors.

Babcock & Brown

Founded in 1977, Babcock & Brown is 80% owned by the employees and 20% by HVB Group. Its fleet of 83 jets is operated by 30 airlines including Braathens, BA, Iberia and SAS.

Three product areas are offered:

  • Trading and investment;
  • Management and re–marketing (for example, managing the ALPS securitisation of 120 aircraft)
  • Deal origination, structuring, syndication and advisory (in association with Nomura Babcock & Brown, 100 aircraft have been syndicated in the JOL market).

Boullioun Aviation Services

Boullioun was sold by Deutsche Bank to West LB in February 2001, maximising its return on its October 1999 purchase of the former Boeing in–house lessor from Sumitomo Trust & Banking.

It has 80 modern jets in its portfolio leased to 35 airlines including America West Airlines, Virgin Blue, and MyTravel. West LB has identified airlines/transport as one of seven key sectors in which it will specialise and expects Boullioun to exceed its internal 25% RoE target — the aim is to emulate ILFC performance — although the lessor has, as yet, to make decent returns.

The target is to increase its portfolio to between 125 and 150 aircraft by 2007.

Boullioun’s management is well regarded — quick acting when confronted with distress situations.


Founded in 1991, Orix is a wholly owned subsidiary of Orix Corporation, Japan’s largest non–banking financial institution. The parent bank is rated BBB by Standard & Poor’s.

Its portfolio consists of 60 jets (half of which are A320s) leased to 24 operators including Air Canada, Indian Airlines, ANA and America West. Orix also advises on aircraft equity providers on the Japanese operating lease market (JOL) although this market is now virtually dead.

BAE SYSTEMS Asset Management

Its role is to manage BAe’s leased–out fleet, which comprises 56 BAe146s operated by 18 airlines, the largest of which is Air Canada Jazz. It is increasingly difficult to place the 146.

Aviation Capital Group

The Pacific Life Group owns Californiabased ACG. It has a portfolio of 53 slightly elderly jets leased out to 33 operators.The parent is apparently encouraging faster growth (25% per year) in an attempt to create an ILFC rival. This may not sit well with the current conservative management team.


Established in Dublin in 1993 Pembroke is now 50% owned by Rolls Royce (since 1998) and GATX (since 2001). GATX is now likely to be a willing seller.

It has 48 jets (including 12 717s) in its fleet and 12 operators led by Qantas (taking over Impulse Airlines aircraft), Air France and Delta. Pembroke also provides technical advisory services that have been strengthened through its recent partnership with Lufthansa Technik. Expansion plans are believed to focus on the A320 family.

Singapore Aircraft Leasing Enterprise (SALE)

Founded in 1993 SALE is owned by Boullioun (35.5%), Singapore Airlines (35.5%), Temasek (14.5%) and the Government Investment Corporation of Singapore 14.5%. In the 2001/02 financial year its pre–tax profits were US$47m, a 30% margin on revenues.

Its fleet consists of 41 units, of which nine are widebodies. There are 23 operators, notably America West Airlines, Malaysia Airlines and Qatar Airways. It is likely to place an order for either A320/737NG or A330/777 aircraft.

SALE’s aim is to reach 100 aircraft by 2007. It now conducts own marketing, having previously depended on shareholder Boullioun. It needs to increase its capital base over the next two years, which raises the possibility of an IPO, or finding new shareholders.

Tombo Aviation

Owned by Mitsui, Tombo has a portfolio of 37 jets operated by 23 carriers, including ANA, Jet Airways and Varig. Tombo is considered to be stronger than Sunrock though both their parents are suffering due to the state of Japanese economy.


Formerly ING Lease, IEM was formed when Abbey National, the UK bank converted from a building society, acquired the business in 2001. Its fleet of 29 modern aircraft is operated by 13 airlines including Air Europa, Taca, TAM and easyJet.

IEM is up for sale but has not attracted much interest as yet.

Bavaria International Aircraft Leasing GmbH

The Munich–based lessor is owned by Schörghuber Stiftung & Co., which also has brewing and hotel interests. It has a fleet of 28 jets (including 20 737s) operated by 14 airlines including Varig and Qantas. It does not appear to be active in the current market.

Deutsche Structured Finance

Aereal Bank, which also has interests in wind power generation, real estate finance and public sector finance, owns DSF. Its fleet consists of 20 jets, split between 737s and CRJs. Principal operators are Deutsche BA and Air Littoral. It has no clear strategy at present.

Itochu Airlease

Owned by Itochu Corporation this lessor has a portfolio of 16 jets leased to eight operators including Air Europa, Air Canada and BA.

Itochu’s future depends on the financial state of its parent — it is probably for sale.

Sunrock Aircraft Corporation

This Dublin–based lessor is the wholly owned subsidiary of Nissho Iwai Corporation (Boeing’s sales consultant in Japan). It has 14 Boeing jets leased to 10 operators including Varig, Kibrish Turkish Airlines and National Airlines (US).

Its future is linked to the strength of its Japanese parent.

Company No. of jet aircraft Average age (years)
GECAS 778 8.5
ILFC 579 5.2
Boeing Capital 278 9.6
CIT Aerospace 182 11.5
Ansett Worldwide 162 10.4
debis AirFinance 104 8.4
GATX 103 6.9
Babcock & Brown 83 9.9
Boullioun 80 5.5
Orix 60 10.1
BAE SYSTEMS Asset Management 56 12.8
Aviation Capital Group 53 14.7
Pembroke 48 7.4
SALE 41 5.0
Tombo 37 8.4
IEM 29 5.9
Bavaria 28 8.2
Deutsche Structured Finance 20 5.0
Itochu 16 6.7
Sunrock 14 7.2
TOTAL 2,751  
  Order backlog Options
GECAS 287 334
ILFC 526 54
CIT Aerospace 88 5
debis AirFinance 31 0
Boullioun 39 30
SALE 31 0
Pembroke 12 15
Tombo 1 0
TOTAL 1,015 438

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