Tuesday 16 October 2018

GPA soared before crash-landing

Gerald Flynn recalls how high-flying Guinness Peat Aviation couldn't maintain the lofty altitudes that it reached OVER the course of about 15 years, Tony Ryan, a former Aer Lingus manager, had built the country's biggest business from scratch.It was an amazing rise for an aircraft leasing business in which he received a 10pc stake after persuading the state airline and Guinness Peat financiers to fund its take-off back in 1975.

By 1991, with turnover exceeding $2bn, it was a bigger business than the rapidly expanding Smurfit and CRH, and was enjoying pre-tax margins of about 14pc in an area few understood.

Guinness Peat Aviation leased aircraft a rather strange business with few buyers and even fewer suppliers. It was like car rental for a very exclusive group. The trick perfected by Mr Ryan and his management group at Shannon, Co Clare, was to know their aircraft individually and know their customers' requirements. Then it was a case of match-making and taking a nice cut after preparing complicated financial leasing packages.

In the depressed Ireland of the late 1980s, the company was a beacon of hope. Fairly ordinary Irish managers, with few airs and graces at that time, were able to become the best in the world in a niche international services sector.

Tony Ryan developed the skills learned in Aer Lingus wet-leasing aircraft which were surplus to the airline's needs during the post-OPEC oil crisis. By the late 1970s, Guinness Peat Aviation had purchased its first aircraft, a second-hand Boeing 737-200.

Air Canada then took a one-third stake and another aviation manager, Maurice Foley, joined the company, which was beginning to expand its operations at Shannon Airport.

By the late 1980s, GPA had become the leading European aircraft financier specialising in leasing deals, often to second-line airlines or those lacking the capital to buy the increasingly expensive aircraft manufactured by Boeing, Airbus and McDonell-Douglas.

Tony Ryan assembled a team of hard-working accountants, lawyers, marketeers and bankers, whom he ordered to roam the globe in search of aircraft leasing deals. Their job was to know those who mattered in airline managements and be fully au fait with each airline's stock of aircraft and future requirements.

GPA was head-to-head with the American International Lease Finance Corporation (ILFC) offering finance packages to airlines. In addition, it was competing with the big-ticket leasing arms of major banks.

By 1990, with a couple of honorary doctorates under his arm, Dr Ryan was leading the world's biggest aircraft leasing operation. A tough taskmaster, he rejoiced in the reputation for calling all senior executives, whether they were in Seattle, Tokyo or Sydney, to return for an early Monday morning meeting in Shannon.

The group set its sights on a major stock market flotation. This would ensure continued growth and a more reliable and less costly source of funds. GPA was highly borrowed and made its profits from higher margins on its leases than it had to pay to borrow funds. Gross margins in the business ranged from 30pc to 40pc.

An impressive pre-flotation board was put in place, with Sir John Harvey Jones, Nigel Lawson, Garrett FitzGerald and Peter Sutherland. The senior executive team became household names, with people like James King, Colm Barrington, Patrick Blayney and John Tierney believed to have a Midas touch.

By the early 1990s, Tony Ryan held 8pc of the company, roughly similar to the combined holdings of his executives and staff. Aer Lingus had diluted its stake to 10pc and new sources of finance came with the arrival of Mitsubishi Trust & Banking, Irish Life, Prudential Insurance and General Electric on the shareholder register.

By 1989, the company was consistently growing faster and making larger profits than it projected. It seemed like there was nowhere to go but upwards.

But the company remained primarily Dr Ryan's creation and he made many of the rules. He had imaginative ambitions to develop a world-class aerospace technology centre beside Shannon. Dr Ryan's stake was worth an estimated £200m in 1990. He and other senior staff borrowed heavily to purchase more shares and prevent serious dilution of their stakes.

It looked like a sure bet. The company was preparing for a major stock market launch and any borrowing could easily be repaid from the expected premium. The world's top stockbroking firms seemed delighted. Here was a company, expected to grow at 25pc a year, at the forefront of financial engineering.

In Ireland, it was to be a super stock, with GPA expected to account for one-fifth of the entire market value of the Irish Exchange. The shares were due for a simultaneous mid-summer launch in London, New York, Tokyo and Dublin.

At issue was the flotation price, with those holding a large number of share options anxious for a high price. The risk was that the flotation was not underwritten, so there was no safety net of bankers and brokers who would buy the stock in the event of lower than expected demand.

International stock markets were jittery in the early 1990s and lacked the exuberant confidence of the past few years. There was great pride and confidence in Irish investor and media circles at GPA's rise and prospects. These were not shared in bigger money markets, where concerns were growing about the cyclical nature of demand for aircraft.

There were disagreements over whether the shares should be offered at $10 or $12.50. Some of the GPA top management adopted a siege mentality and thought the world was against them. Lack of media enthusiasm for the flotation was often interpreted as downright aggression.

The lack of investor enthusiasm and disagreement over the appropriate launch price ultimately led to the failure of the flotation. GPA had clipped the trees and bankers began to take a closer look at its financial underbelly.

Within a year, Guinness Peat Aviation was in serious trouble and experiencing difficulties meeting repayments. The staggering costs of the failed flotation ate into resources. GE Capital was waiting in the wings and picked up the pieces.

The restructured GPA was a pale imitation of the dynamic business Dr Ryan had formed in the 1980s. Over one-third of the staff, including Tony Ryan, were soon off the payroll. Its lasting contribution may be that it showed that many young Irish people, inspired by ambitious managers, were well capable of competing with the best, using imagination and flair.

* A detailed financial analysis of GPA was published in 1997 as part of Corporate Financial Crisis in Ireland by Edward Cahill. Gill & Macmillan, £35 hardback.

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