Pontifications: AerCap and GECAS to combine — assessing the impact

By Scott Hamilton

March 15, 2021, © Leeham News: GE Corp.’s decision to sell its mega-leasing unit, GECAS, to AerCap represents a huge shift in commercial aviation.

For decades, GECAS was the largest lessor in the world. One of GE’s best profit centers, GECAS was a major source of financing to airlines. The lessor purchases and leases back airliners, as do most lessors, as well as initiating leases with orders received directly from the OEMs. GECAS’ scale was a magnitude or two larger than most competitors.

The closest competitor was International Lease Finance Corp., a unit of insurance giant AIG. ILFC’s leadership liked to boast the asset value of ILFC’s smaller fleet was greater than GECAS, which while larger had more older airplanes in its portfolio.

Financing source to airlines

GECAS often served as a financier for distressed airlines. Throughout the 1970s, 1980, 1990s and early 2000s, struggling airlines across the globe often turned to GECAS for sale/leasebacks. After the Great Recession, beginning in late 2008, GECAS flexibility was inhibited by the growing financial problems of GE Corp. Just as GECAS was dragged down by GE Corp., ILFC was dragged down by financial pressure on AIG. AIG sold ILFC to the smaller lessor, AerCap, which became the second largest lessor after GECAS.

Now, with GE selling GECAS to AerCap, the latter now has a portfolio of more than 2,000 airplanes. GE Corp. will have a 46% ownership in AerCap and get two board seats.

The power and heft of the new entity will be enormous. The deal requires regulatory and shareholder approvals. The target for closing is 9-12 months.

GECAS Powerhouse

Source: GECAS.

Before the Great Recession impacted GE Corp. and with it GECAS, the lessor wielded a great deal of weight in the airline and lessor industries. In the 1986, GECAS acquired Polaris Aircraft Leasing, adding size to its own portfolio. Polaris specialized in what was called Aircraft Income Funds. Doctors, dentists and other high-wealth individuals looking for income and tax deductions invested in funds created by Polaris.

The airplanes purchased by Polaris were Boeing 727s and 737s and McDonnell Douglas DC-9s. The airlines selling the planes to Polaris were mostly distressed carriers of the day needing to raise money: Continental, TWA, Pan Am, Northwest and the first Midway, etc. ILFC Chairman Steven Udvar-Hazy famously called the Polaris portfolio the Wheel-Chair fleet, reflecting its age.

A wave of bankruptcies through the 1980s included these Polaris lessees.

In addition to ILFC, GECAS’ other main competitor during this period was GPA Group of Ireland. Over-ordering and over-expansion put GPA on a downward slide. GECAS purchased GPA in 1993, fully merging the lessor into GECAS the following year.

In 1996, GECAS placed its first speculative airplane order. At the time, it ordered only aircraft equipped with GE engines. Aside from the preference for its sibling, officials didn’t want any hint that GECAS would obtain proprietary information about competing Rolls-Royce and Pratt & Whitney engines. The policy didn’t apply to acquiring airplanes equipped with these engines through purchase/leasebacks direct from the airlines.

Since that first speculative deal in 1996, GECAS ordered 738 airplanes from Boeing and 633 from Airbus. GECAS also ordered airplanes from Bombardier, Embraer and ATR.

In 2000, GECAS acquired PK Finance, a small lessor and lender. In 2006, GECAS acquired the Memphis Group, a supplier of aviation parts for Airbus and Boeing airplanes.

Becoming a powerhouse

Source: AerCap.

Irish-based AerCap was founded in 1995 in the USA.

It is the successor to debis Airfinance. AerCap was acquired by the private equity firm Cerberus Capital Management in June 2005. The following year, AerCap entered into a joint venture with a Kuwaiti company.

Throughout its history, AerCap took advantage of times of distress. The lessor grew with the acquisition of aircraft portfolios from lessors or banks that wanted to monetize assets during downturns. The lessor also seized an opportunity in 2006 to buy AeroTurbine, an aftermarket engine parts company. AerCap went public in 2006. In 2009, AerCap acquired Genesis Lease.

Growth continued with speculative orders placed with Airbus and Boeing.

Following the long decline of AIG rooted in the Great Recession, AerCap purchased AIG’s ILFC in 2014. This deal thrust AerCap into the Top Two position, by unit count, with GECAS.

Including ILFC, AerCap ordered 964 Boeing and 997 Airbus airplanes over the decades.

Influence on Airbus and Boeing

The two lessors individually were already important customer of Airbus and Boeing. Each were consulted by the Big Two OEMs when it came to new aircraft designs or major upgrades, such as re-engining existing airplanes. Airbus actively sought lessors to launch new airplane programs, whether a new design or a new subtype. Boeing was less interested in relying on lessors as launch customers.

Nevertheless, orders by GECAS, ILFC and AerCap were considered endorsements. The absence of launch customer orders by GECAS for the 787 and 777X have been glaring. ILFC ordered the A380, but later canceled in a blow to the program.

Some believe the merger gives AerCap an outsized influence on the Big Two OEMs.

There’s no question AerCap will have an important voice. But it now is one voice instead of two. Ultimately, Airbus and Boeing will be persuaded more by the end-users of airplanes than by intermediaries.

Impact on GE Aviation

GECAS’ relationship with sibling GE Aviation clearly was a family matter. GE will own 46% of AerCap and have two Board seats. Engine purchase and MRO services aren’t likely to change much.

The more obvious question is whether the $24bn in cash GE Corp. will receive from AerCap will help fund research and development of GE Aviation’s next generation of engines.

The answer is No. The proceeds will be used to pay down GE Corp. debt.

John Slattery, president of GE Aviation, said during GE’s investor’s call detailing the deal that GEA will continue to spend about $1.8bn this year in R&D, about the same as in 2020.

“Partnering with GE Research, we plan to also demonstrate our hybrid electric capabilities on a regional airliner by the middle of this decade,” Slattery said. “As for the next narrow-body aircraft, we will develop and mature technologies to deliver greater than 20% fuel efficiency compared to the LEAP. Looking even further into the future, we’re positioning ourselves to lead the technology revolution, with innovations like liquid hydrogen where we can draw today from our experiences and the learnings from our colleagues over at GE Power.”

 

 

34 Comments on “Pontifications: AerCap and GECAS to combine — assessing the impact

  1. Surely there will be quite a significant shake up if this proceeds (without major divestments). Outside, the fleet size gap between “new Aercap” and the rest would be more of a chasm which, coupled with the dynamics of post Covid life, ought to lead to substantial M&A near term. Inside, the business models of AerCap and GECAS appear quite different (for a start, Aercap’s fleet simplified onto a handful of types, GECAS’ all over the place). I wonder if this is simply the wrong bite for AerCap to take, no matter the size of opportunity it offers.

    • Can you say Regulatory action?

      Its not the same banana splattered ops that was in place before.

  2. “GECAS’ relationship with sibling GE Aviation clearly was a family matter. GE will own 46% of AerCap and have two Board seats. Engine purchase and MRO services aren’t likely to change much.”.

    It sounds like the distortion in the engine marketplace caused by GECAS only buying GE-engined new airplanes just got worse, to the advantage of GE and the disadvantage of P&W and R-R.

    • @Sploddox: I don’t think so. GE will be a minority owner in AerCap. AerCap calls the shots.

  3. What are the odds of regulators scotching this merger?

    Seems like a good deal for Aercap and GE but probably less good for airframers, airlines and competing lessors (other than those from China where market forces are less important).

    • I was thinking the same thing…particularly as regards EU regulators.

    • Could not agree more! This will result in “restraint of trade”. As a former finance officer with two OEM’s and a major US airline, I think this is a bad thing. I hope The anti-trust regulators reject the merger.

      • I agree with you, but can’t recall the last time anti-trust regulators in the US did anything that was more than window-dressing. This deal would put the proposed entity into a near-monopoly position: good for them, but bad for the Citizenry.

        • Industry consolidation and monopoly has been a signature issue of Senator Elizabeth Warren. In the Biden administration, Warren has been highly influential in setting policy and more importantly recommending appointments to regulatory agencies. It should therefore be anticipated that this merger will be scrutinized by the Biden administration. I would expect it to be opposed to send a message that the covid pandemic will not be permitted as a excuse for further consolidation. Of note, Warren and Representative Alexandra Ocasio-Cortez have previously submitted legislation in 2020 that would have frozen mergers and acquisitions of distressed small cap companies.

          • Also, merger could be OK’d, but with a divesturement…

          • @Jeff Berner

            Ask the DoD about monopolies and the damage caused to the US industrial base– industry consolidation when it is not offshoring is the work of Wall Street

            Exhibit A – Boeing

            Boeing in general but as far as DoD is concerned in particular the dead duck plane they call KC-46

            Now how many years overdue, 4 or 5 ?, no solution in sight, and War with China looming tomorrow (or maybe Russia, or both perhaps)

            DoD is complaining there are too few suppliers, no innovation, and no choice

            At least part of the DoD represented by Kathleen Hicks, nominated for the second most important job at the Pentagon, the Deputy Secretary of Defense

            She mentions the monopoly situation of many suppliers, which causes internal problems and arguments when they produce low level product, i.e. the KC-46, which DoD is stuck with, that and the outrageous prices they have to pay (KC-46)

            Same problem with Northrop Grunman

            All this leads to insecurity – if the rest of the world can outbuild US, planes ships rockets, then WS has won, sucked the life out of BA as well as the rest of the military industrial complex

            This puts the decline of Boeing into the wider context of the decline of industry in the US – in particular with regard to financialisation of BA ‘s practices and the failure of the KC 46 program, and with regard to BA prospects in China

            This brings into the open the conflict between WS and the Pentagon

            DoD expresses increasingly loudly many and multiplying concerns about the destruction of the US industrial base, lack of homeland suppliers of critical and crucial products, reliance on overseas suppliers, and is increasingly critical of the nefarious effects of the financialisation of US industry on US capacity and capability to fight war

            https://www.armed-services.senate.gov/imo/media/doc/Hicks_02-02-21.pdf

            https://www.armed-services.senate.gov/imo/media/doc/Hicks_APQs_02-02-21.pdf

            https://www.businessdefense.gov/Portals/51/USA002573-20%20ICR_2020_Web.pdf?

            https://mattstoller.substack.com/p/the-pentagon-turns-on-wall-street

            « In 2018, the Defense Department released a study lamenting the loss of over 20,000 suppliers since 2000, and observing that “a surprising level of foreign dependence on competitor nations exists” for a whole host of critical products. Just a few months ago, the Pentagon sent Congress a groundbreaking report on how Wall Street is destroying the defense base. “A U.S. business climate,” it read, “that has favored short-term shareholder earnings, deindustrialization, and an abstract, radical vision of ‘free trade,’ without fair trade enforcement, have severely damaged America’s ability to arm itself today and in the future.”

            This monopoly economy is the same penny that abandons infrastructure

          • @Jeff Berner

            Update on Monopoly & Lack of Infrastructure

            NB Offshoring is the equivalent of Monopoly concentration, only worser

            https://oilprice.com/Alternative-Energy/Solar-Energy/How-China-Became-The-Saudi-Arabia-Of-Renewables.html

            « The notion that the country could become self-sufficient by producing enough energy to sustain the entirety of its population and industries was first floated by Nixon when he declared war on foreign oil during the oil crisis of the 1970s. But with the ongoing shift to low-carbon energy, America might not be any closer to achieving this energy utopia than it was four decades ago.

            In fact, the energy transition might simply mean that America’s energy dependence now shifts from the OPEC powerhouse, Saudi Arabia, to the biggest manufacturer of renewable energy equipment and the biggest importer of Saudi oil: China.

            And that’s because China has, in the space of a decade, become the most dominant manufacturer of the equipment that produces renewable energy, particularly solar power.

            In fact, 7 of the top 10 solar manufacturers globally are Chinese companies, with just First Solar Inc. (NASDAQ:FSLR) and SunPower Inc. (NASDAQ:SPWR) representing the United States.

            The Biden Administration has pledged to have at least 500 million solar panels installed nationwide and spend $1.7 trillion in federal spending on renewable energy infrastructure in a bid to make the United States a net-zero emitter of carbon pollution by 2050.

            But it’s very likely that the vast majority of those investment dollars will end up in the coffers of the Middle Kingdom–and with it, our dreams of energy independence.
            «

    • Yes, like letting Toyota and VW merge. Regulators would stop it pretty quick.

  4. I still have not understand how GE gets 24 bn out of this deal and afterwards still OWNs almost half of the new company.

      • Yeah, got that but if I calculate that correctly, it means that GECAS is now worth 30 bn, whereas the COMBINED company only bit more than 12 bn, right (46% of the shares is worth 6, so the entire about 12).

        That means that little AerCap takes over the big company … somehow like a mouse taking over an elephant and issuing 24 bn in debt – well, OK.

        It also means that basically the entire combined GECAS-AerCap fleet is “owned” by 12 bn US$ and the rest is an ocean of debt.

        So the main news is actually that GECAS divests airplanes completely and leasing rates in coming years are either so high that they can finance all this debt while interest rates remain low or we will soon see an ENRON like bankruptcy.

        • I think that GECAS owns GE x billion and now the combined firm will own GE x billion. Not that AerCap will give GE so much cash.

      • > As such they don’t need to include any of Aercap’s debt on their balance sheet but do get to add their 46% share of Aercap’s future annual earnings. <

        Nice!

        So when comes total collapse from this absurd, can't-last, last-legs, financialization? (Shhh, don't say that word..)

        It'll be fine- but we won't

      • According to Bloomberg, GECAS has been in run off mode for awhile:

        2011.3 ~1,800 planes

        And it seems to have accelerated between 2016.5 to present, the portfolio fell from ~1,500 to around 1,000.

        Furthermore, GE has to record a charge of $3 billion in Q1.

        There were analysts saying GECAS should not be regarded as GE’s crown jewel, 1) aging fleet + run off mode; 2) book value higher than market. Proven to be right.

        Warning from JPMorgan: GE’s leverage will increase to about seven times its assets after it consolidates GE Capital’s remaining debt onto its balance sheet.

        In future, the two directors appointed by GE cares more about dividend than investment.

        • GE gearing or debt ratio is SEVEN times its assets.
          Boeing is 40% and used to be 15% the previous year, even RR debt ratio is 130%.
          By guess is that Bloomberg isnt putting a 700% gearing ratio in its headlines about GE.
          The selldowns are very closely related to the difficulty refinancing of its colossal debt
          “In 2019, GE agreed to sell an aircraft-financing business for $3.6 billion to Apollo Global Management and Athene Holding Ltd”
          Down… down… down.
          At this rate they will as ‘slimmed down’ as Bombardier now its only its executive jets business

  5. How Monopolies Bleed America Dry – Crumbling US Infrastructure Report

    China leaves US eating dust – BA is a disaster the country is dustbowling

    « According to ASCE, “The nation’s economy could see the loss of $10 trillion in GDP [gross domestic product] and a decline of more than $23 trillion in business productivity cumulatively over the next two decades if current investment trends continue.” Whatever a post-pandemic economy looks like, our country is already starved for policies that offer safe, reliable, efficient, and sustainable future infrastructure systems. Such a down payment on our future is crucial not just for us, but for generations to come. »

    « airport construction. It seems that just about everyone has lost sight of the fact that one of pluses of a domestic airport versus an international one is relatively short distance from curb to gate. Another issue is whether the airport really needs to be razed and rebuilt or just needs a makeover plus selective upgrading. Billionaire real estate developer Steve Ross pioneered that approach in New York City with what became the Revlon Building, where Ross reskinned and improved some of the systems on a tired Class A office building on Madison at 59th. It took a fraction of the cost and was enormously less approval delay and hassle than the usual teardown and new construction, and was enormously profitable as a result.

    The new Terminal B (American) at Laguardia is a horrorshow, and taxi drivers tell me everyone hates it. All it has going for it is looks. It’s as sprawling as an international terminal and takes at least ten minutes longer to get to and from the gates. A facelift was all that was needed. The new gates at D terminal are just as misguided. Not only are they insanely far from the TSA checkpoint, the distance between each gate is enormous. I understand a similarly terrible new airport is under way in St. Louis, which had one of the best designed terminals I had ever encountered. The redos of the Birmingham and Portland, Maine airports were net negatives, but not as extreme as Laguardia.

    « When it comes to infrastructure and sustainable development efforts, the U.S. is being left in the dust by its primary economic rivals. Following his first phone call with Chinese President Xi Jinping, President Biden noted to a group of senators on the Environment and Public Works Committee that, “if we don’t get moving, they are going to eat our lunch.” He went on to say, “They’re investing billions of dollars dealing with a whole range of issues that relate to transportation, the environment, and a whole range of other things. We just have to step up.”

    As this country, deep in partisan gridlock, stalls on infrastructure measures of any sort, its global competitors are proceeding full speed ahead. Having helped to jumpstart its economy with projects like high-speed railways and massive new bridges, China is now accelerating its efforts to further develop its technological infrastructure. As Bloomberg reported, the Chinese are focused on supporting the build-up of “everything from wireless networks to artificial intelligence. In the master plan backed by President Jinping himself, China will invest an estimated $1.4 trillion over six years” in such projects.
    «
    https://tomdispatch.com/building-or-unbuilding-america/

    • Not an excuse for mortgaging taxpayers’ children.

      “How Monopolies Bleed America Dry ”

      Is a reason to get government out of life except for defense against initiation of force (military and police and courts).

      Monopolies require force, which in a society with defense against initiation of force is only possible with government force, as I explain with examples in http://www.moralindividualism.com.

      PS: Where did the ‘crumbling infrastructure’ come from? Massive government spending in some cases like Interstate freeways? Paid by user tolls in some cases, which is fine if private investment.

  6. @Scott Hamilton

    Commentors are being far too negative about the merger GECAS and AerCap

    We believe that there will be synergies savings and multiple client benefits – a better organised industry will result, with more intelligent collaboration between The OEM, The Airline, and The Lessor

    We point to the merger between McDonnell Douglas and Boeing as proof that a merger, well framed conducted and engineered, produces increased shareholder benefits which trickle down with superb manufacture of superbly engineered airplanes which enjoy worldwide success and…

    Which produce civilian planes which kill civilians, but adjust for this failure by making combat planes incapable of combat

  7. “….GECAS, which while larger had more older airplanes in its portfolio.”

    People in Calgary are rumoured to like old airplanes: https://www.facebook.com/coulsonflyingtankers/photos/a.724478191014159/1246662798795693/

    At least during dry summers.

    (It’s the Mighty Martin Mars fire suppression tanker.
    Now effectively retired, Coulson has moved onto C-130s and B737s, plus continuing its S61 operations. With a neat chase/birddog/lead aircraft – an S76, well equipped.
    The Mars had a long history with the US Navy and in BC fire fighting (a story of entrepreneurial effort in its own right).
    http://www.martinmars.com

    Gotta have a little fun. 😉

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