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 The $5 billion takeover of U.S. leasing giant ILFC by AerCap, a firm
that emerged from the ruins of Ryan's pioneering Guinness Peat
Aviation (GPA), is set to send ownership of its fleet of 1,000 jets
to Shannon, a small town in the west of Ireland where GPA pioneered
the plane leasing industry in the 1980s.
A disastrous bet on an airline boom that was cut short by the Gulf
War led to GPA's effective collapse in 1993 and an exodus from
Shannon.
Ryan bounced back to found Ryanair, now Europe's largest carrier by
passenger numbers, and firms set up by the jet-setting Irishmen he
trained have brought ownership of about one in four of the world's
commercial fleet back to Ireland.
"What goes around comes around is an expression I could use," said
Patrick Blaney, one of the GPA executives who helped restructure the
firm after a failed initial flotation in 1992 and who still lives
nearby.
"It leaves me with a warm feeling, for certain."
Like other executives from the firm who remember how the exuberance
of the late 1980s gave way to the airline failures of the early
1990s, Blaney sees some warning signs that not all of the world's
aviation firms will survive the current boom intact.
Yet Ireland's rebirth looks set to whet the appetite of aircraft
financiers holding their own mini-Davos gathering in Dublin this
week.
Their industry is basking in greater market recognition in the wake
of the purchase of ILFC and is at last supported by robust profits
at many airlines after years of restructuring and adjustment to high
oil prices.
"This transaction will drive a lot of people to look at the IPO
market," said Aengus Kelly, Chief Executive of AerCap. "It may
encourage people to get involved in this business soon, before the
values start to move on further.
From shaky roots in the 1970s, leasing has become a dominant force
in aviation, with aircraft portfolios at leading firms worth an
estimated $200 billion.
The industry is credited with making air travel cheaper and safer.
Operating leases allow airlines to avoid huge capital costs and rent
a modern jetliner, potentially worth $40-50 million at market
prices, with all the latest equipment.
A mid-level executive from Ireland's national airline Aer Lingus in
the mid-1970s, Ryan, who died in 2007, spotted the same opportunity
as his great rival ILFC founder Steven Udvar-Hazy in California.
When Ryan was tasked with finding a home for a mothballed Aer Lingus
Boeing 747 during the winter months, he flew around the world until
Thailand's Air Siam agreed to take it. He quickly realized serious
money could be made by financing and operating planes for other
airlines.
After founding GPA in 1975, he surrounded himself with a team of
ambitious young executives who travelled hundreds of thousands of
miles a year — occasionally dipping behind the Iron curtain — to
match parked planes and expanding airlines.
At weekends they would retire to their country piles near the
Shannon estuary, a key refueling spot for transatlantic planes from
the 1930s to 1960s, where locals suffering from the 1980s recession
looked on in awe.
"They had more money than anyone in the town had ever seen," said
the manager of the nearby Dromoland Castle Hotel, Mark Nolan, who
remembers struggling to meet the demands of his "spoiled, opulent"
clientele.
"But it all dried up pretty quickly," he said.
THE FALL
The good times ended when the first Gulf War hit the industry and
torpedoed Ryan's attempted IPO, leaving him with $17 billion in
orders and not enough capital to fund them.
"He over-reached himself," said Christopher Brown, author of "Crash
Landing", an inside account of how GPA crumbled. "He bought too many
aircraft and didn't realize the cycle was turning until it was far
too late to get out of the hole."
Just before turbulence hit, ILFC managed to sell itself to insurance
giant AIG, guaranteeing it a steady flow of cheap funding, until it
was laid low by the 2008 financial crisis, which froze its access to
unsecured market financing.
While Ryan was ruined, until Ryanair rebuilt his fortune, some
executives joined the two entities that split from GPA, and others
set up by themselves.
GECAS, built by General Electric on about 60 percent of GPA's fleet
and 75 percent of its people, went on to become the world's largest
lessor, with most of its 1,700 planes owned and still managed from
its Shannon office.
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Other executives played a key role in the rise of several of the top
10 lessors, including SMBC Aviation Capital, Babcock & Brown
Aircraft Management and AerCap, now the industry number two.
"Ireland is the centre of air leasing in the world, and that came
from GPA. The seeds were sown," said Kelly, whose company AerCap
acquired what was left of GPA after its carve-up.
ILFC DEAL
As AIG desperately searched for an owner for its leasing unit last
year, Kelly stepped up again, orchestrating a merger with AerCap and
bringing ILFC under what is left of GPA.
While AerCap's corporate headquarters is in the Netherlands, it
manages its fleet in Ireland, which remains the industry hub, thanks
to what many say is an unrivalled web of international tax
agreements, a low corporate tax rate and world-leading aviation
financing expertise.
The deal, which is due to close in May, will create a listed company
with a market cap likely around $8 billion, hugely expanding the
volume of publicly traded shares in the sector.
"This is a transformative transaction. It shows for the first time
that large-scale consolidation is possible, and it should make the
public market more attractive," said Domhnal Slattery, who started
his career in GPA and now manages 182 planes at privately owned
Dublin-based lessor Avolon.
However, another wave of record aircraft orders and the bulging
backlogs of leading planemakers Airbus and Boeing, have renewed
fears that the industry is over-extending itself, just as it did in
the late 1980s.
RISKS
Airbus and Boeing have announced record combined orders for more
than 3,000 passenger jets in 2013, and the waiting list for new jets
is as long as nine years on average, a headache for buyers unable to
finance commitments so far in the future.
At the same time, manufacturers are vying to increase output,
raising fears of overproduction, a double headache for lessors who
are chasing the same airlines and also depend on healthy second-hand
prices in order to preserve the underlying value of their assets.
Still, most forecasters in the industry say the economic picture has
changed for the better. China and emerging markets have spurred
demand that did not exist in Ryan's day, and air travel is expanding
to serve a new Asian middle class.
The bruises and knocks still felt by GPA veterans may, in theory,
have led to a more mature, less gung-ho industry. Executives say
many of the checks and balances were brought to the industry by
GECAS, which married financial portfolio skills with the
international reach and customer focus of the old GPA.
"What GPA did not have, which is an integral part of most leasing
companies today, is a deep-rooted system of risk management," said
Slattery, who started at GPA and then GECAS. "It was an
entrepreneurial, opportunistic, go-go style culture. Let's do the
deal and think about the risk later."
Even with those checks, "the margin for error is slim", said a
senior leasing industry executive, asking not to be named.
An accelerated slowdown in China or an economic or currency mishap
elsewhere could upset the fine-tuned calculations in an industry
that produces a thinner average return on equity than its financial
peers and depends heavily on access to the cheapest possible
financing.
The temptation that both GPA and ILFC succumbed to in varying
degrees remains — to maximize margins by borrowing short and laying
themselves open to a liquidity crunch.
"I don't think anything has changed that makes it more or less
likely that someone will fail," said GPA veteran Colm Barrington,
chief executive of FLY Leasing. "It's liquidity that drives lessors
to the wall."
(Editing by Will Waterman)
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