As the founder and former chairman of International Lease Finance Corp., L.A. billionaire Steven Udvar-Hazy helped create the aircraft leasing industry.
Now, the recently announced plans for an initial public offering by Air Lease Corp., Udvar-Hazy’s new venture, spell out a strategy to go after the emerging markets of Asia, Latin America, the Middle East and Eastern Europe.
But this time, he’s not all alone pioneering a business model; he’s jumping into a crowded market. And his strategy is not unique.
“It’s remarkably similar to the strategies employed by all the new lessors attacking ILFC. What makes the company unique is the people behind it,” said Richard Aboulafia, an analyst with Fairfax, Va.-based Teal Group aviation consultancy. “It comes down to reputation and Rolodex.”
Dubai-based DAE Capital; Bank of China Aviation; AerCap of Amsterdam, the Netherlands; and Stamford, Conn.-based AirCastle Ltd. were cited by Aboulafia as examples of lessors who are seeking business in those markets.
Industry leaders GE Commercial Aviation Services and ILFC also are heavily involved in those markets, but not as dominant.
In addition, the markets have attracted a slew of young competitors. Other startups that took off last year include Avolon, an Irish firm based in Dublin that has raised $2 billion in the last 12 months, and Jackson Square Aviation of San Francisco.
“ALC says it wants to have a portfolio of 100 airplanes by the end of the year,” said Scott Hamilton, managing director of Issaquah, Wash.-based aviation industry consulting firm Leeham Co. “But there’s a lot of competition to buy those planes out in the market right now.”
The Century City company already raised $3.3 billion in equity and debt financing last year. Some analysts believe that the $100 million IPO – relatively small given the financing requirements of the industry – is a way quickly to establish the company in the public markets for a series of larger secondary offerings, assuming the public offering is not a dud.
“It’s not typical,” said Rick Phillips, managing partner at Irvine-based Janes Capital Partners, an aerospace and defense investment banking firm. “I am a little surprised that he is able to go public so quickly.”
Industry takes wing
As a founder of ILFC in 1973, Udvar-Hazy helped create the aircraft leasing business in which lessors buy large numbers of planes at a discount and then rent them to airlines. He sold the company to insurance giant AIG for $1.3 billion in 1990. He stayed on, but left last year after a protracted dispute over ILFC’s operations in the wake of AIG’s government bailout.
The company did not return a call for comment. But its SEC filing states that what money is raised from the IPO will go toward acquiring aircraft and general corporate purposes.
According to the filing, the company plans to focus on narrow-body planes such as the Boeing 737, and Airbus 320 and 321, which are cheaper to buy and maintain, and also attractive to low-cost carriers popping up in emerging markets. It also notes that airlines in those emerging markets have fewer financing alternatives, enabling lessors to command higher lease rates.
Currently, 90 percent of the company’s revenue comes from airlines outside the United States, which is not out of line with other small competitors. One aviation consultant cited in the filing forecasts that by 2015, traffic in the Asia-Pacific region will surpass the North American region, and that there will be a 25 percent increase in the number of aircraft in service globally.
“That’s where the action is going to be,” said George Hamlin, president of Fairfax, Va.-based Hamlin Transportation Consulting. “The remaining U.S. carriers have very large fleets and can go directly to the manufacturer and get a great deal.”
The company has grown its fleet to 40 aircraft as of Dec. 31, and has placed orders for 148 more planes through 2017 at an aggregate purchase price of $6.2 billion.
Despite the early success finding investors, it doesn’t have the deep pockets of industry behemoths G.E. Commercial Aviation and ILFC. Access to capital at a lower cost than both airlines and other competitors is a key to success in the jet leasing business. The two industry giants have historically piggybacked on the rock-solid finances of respective parents General Electric Co. and AIG (at least until the latter’s bailout).
However, if Air Lease can have 100 planes by the end of the year, that would place it in the second tier of aircraft lessors. Analysts say that could set it up to someday be a legitimate challenger to the biggest players, which have fleets of up to 1,800 planes.
“They can become a viable competitor, without a doubt,” said Phillips of Janes Capital. “(Udvar-Hazy) understands the business better than anybody.”
