Hazy leaves ILFC

Steven Udvar-Hazy, co-founder of International Lease Finance Corp. and one of the most powerful voices in commercial aviation, retired on 5 February after more than 27 years in the leasing business.

His departure from ILFC was expected since the mega-lessor was plunged into a financial morass because of the massive scandal at its parent, AIG, which acquired ILFC in 1990 in what was then considered a masterful piece of timing. Only a year later, Iraq invaded Kuwait and aircraft, airline and lessor valuations plunged on the global economic crisis created by the subsequent Iraq War of 1991.

Hazy and his team, which includes his successor John Plueger on an interim basis, built ILFC from a single airplane to the world’s largest lessor by asset value and second only the behemoth GECAS by unit number. ILFC owned nearly 1,000 airplanes at 31 December.

The sale to AIG permitted ILFC to grow dramatically, eventually becoming the single largest customer for Airbus and Boeing. Such was the weight that Hazy carried in the industry that when, in 2006, Hazy criticized Version 4 of the proposed Airbus A350, with Airbus COO-Customers John Leahy in an audience of 1,000 at a major aerospace conference in the USA (in response to a question we asked), Airbus went back to the drawing board to recast the A350 as a composite aircraft. The A350 had to go through one more iteration to use a composite skeleton vs the traditional metal frame before Hazy was satisfied.

But by this time, AIG’s woes were emerging. ILFC upped its A350 order to 20 and this was the last order the lessor placed. As AIG’s troubles multiplied, ILFC’s access to capital—cheap or otherwise—dried up. When the US government bailed out AIG and assumed control of 80% of the stock, ILFC effectively became a ward of the state, relying on federal funds to meet debt obligations. Financing airplanes fell to reliance on the ECA for Airbus and ExIm for Boeing airplanes. The ECA imposed humiliating conditions that segregated lease payments and maintenance reserves into restricted accounts.

Through it all, Hazy tried to put together a deal that would enable him to purchase about 10% of the ILFC portfolio. In the long, multi-year effort came to naught late last year when his bid was rejected.

Market sources say the offer was at a discount too steep to book value for AIG (or the US government, as the case may be) to accept.

“On behalf of AIG, I would like to thank Steve for his tireless service to ILFC,” said Robert H. Benmosche, AIG President and Chief Executive Officer. “We are grateful for the work he has done to continue ILFC’s leadership in the industry.”

ILFC President John Plueger will succeed Mr. Udvar-Hazy as acting CEO. The ILFC Board is considering what to do on a long-term basis.

In a press release, IFLC said Douglas M. Steenland, former president and chief executive officer of Northwest Airlines, who became ILFC’s non-executive chairman in December, will continue as non-executive chairman. Steenland joined the ILFC board in September and is a member of the AIG board.

ILFC’s A380 order

One of the early decisions this year will be what to do about ILFC’s order for 10 Airbus A380s. The lessor has the right through June to cancel this order, the result of the repeated delays in the program.

The conventional wisdom is that ILFC will cancel, given the global economic conditions and the slow recovery; and the need to finance the airplanes, which have a list price well north of $300m.

But as a launch customer for the airplane and the largest single customer of Airbus, ILFC is believed to have a contract price as low as $125m (plus escalation costs, perhaps), according to one industry aircraft appraiser. Business Week reported many years ago that launch customers received prices of $130m-$140m.

In the world of aircraft financing, it is not beyond the realm that ILFC could finance the airplanes in the $225m-$250m range, thus booking the excess cash into the bank account for either operations, cap-ex or debt pay-down.

Or ILFC could swap out the A380 positions for other Airbus products–if the US Government allowed its tax dollars to buy French airplanes, with all the political fallout that could come with it. (It’s one thing to fulfill ILFC’s contract for Airbus products; it’s quite another to order new, non-Boeing airplanes even if this is the correct business decision.)

The next few months will be interesting–including the anticipation of what Hazy is going to do next. The market talk is that he will take the money he had lined up to buy ILFC and start a new leasing company. He is a scheduled speaker next month at the same conference venue where he dumped on the A350. Perhaps an announcement will be coming from there.

6 Comments on “Hazy leaves ILFC

  1. I recall reading that the A380 cancellation deadline was Jan 2010. So it’s June 2010?

  2. If the price is $125 million Airbus will do everything it can to encourage ILFC to cancel its order. List price is now $345 million. The loss on each aircraft will be staggering at a time when the company is already bleeding cash.

  3. Royce, given that A380s are available on the market for about $210 million (non-negotiated prices) and given the possible escalation costs (as written here), I wouldn’t be surprised to see ILFC indeed cancel. It would be too bad as the A380 project needs every order it can get.

  4. “ILFC could finance the airplanes in the $225m-$250m range, thus booking the excess cash into the bank”

    This assumes finance companies project the market value is held up by demand. As we’ve seen, airlines and ILFC have pushed out deliveries. These finance companies see that and wonder. Even Hazy himself said last year, there is “a fundamental structural shift in how the airlines are thinking about the aircraft,” and Airbus should be very concerned about the A380 program. This is confirmed last month by Airbus CEO Enders, calling 2009’s ten deliveries a “big disappointment.” It strengthened Hazy’s exclamation, “At these production rates, Airbus will never make money on the program.”

    This and AIG’s condition may require ILFC to look more short than long term. We’ll see if they cancel, the odds are good.

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