Monday 15 October 2018

Airline crises to hasten mergers among plane lessors

Kathleen Barrington

A WAVE of consolidation is expected in the Irish aviation leasing sector as the crisis in the airline industry deepens in the wake of the terrorist attacks in the United States.

Sources in the industry are predicting the current crisis could have even more serious repercussions for some aircraft leasing companies than the 1991 Gulf War, which was a major contributing factor in the collapse of Irish aircraft leasing giant GPA.

"I would say the consequences of this could be exponentially worse," predicted one senior aircraft leasing source.

The collapse of GPA paved the way for GE Capital to buy Tony Ryan's aircraft leasing company for a song, and the fear is that history could repeat itself if the current downturn continues.

The terms on which GPA was taken over by GE Capital were famously described by GPA founder Tony Ryan as a rape.

But many former GPA executives went on to set up new aviation leasing companies in Ireland following the collapse of GPA.

In fact, the combination of available professionals and generous tax breaks means that Ireland now ranks as one of the top aircraft leasing centres in the world.

And though the numbers employed in the industry are small, the profits generated by some of the larger players have been huge in recent years.

For instance, Pembroke Capital, which counts a number of former GPA executives among its founders, reported pre-tax profits of $16m on turnover of $36.6m in 1999.

According to the Finance Directory of financial services firms, there are currently about 26 companies in the aircraft leasing sector at the International Financial Services Centre.

Aircraft leasing companies place planes with airlines either on their own behalf or on behalf of others. They earn a commission in the process.

But with many airlines facing the threat of bankruptcy due to a combination of falling passenger numbers and rising insurance and security costs in the wake of the Twin Towers attacks, demand for aircraft is falling while the prospect of airlines being unable to meet their lease commitments is now very real.

The problem for leasing companies is that there is now likely to be a glut of planes on the market at a time when demand for planes has fallen.

Ryanair boss Michael O'Leary told the Irish Independent that he has been offered over 600 aircraft in recent weeks as he is one of the few airlines with plans to expand capacity.

At the same time banks are known to be reducing their exposure to all forms of lending to the aviation sector.

The prospect of a downturn in the aviation sector was looming even before the recent US attacks prompting aviation experts to predict the current downturn will be particularly harsh.

It is known, however, that three of the leading Irish-owned leasing companies have sold out to foreign players over the last year.

With the benefit of hindsight, it now seems that those deals were very well-timed.

AerFi, which emerged from the ashes of the GPA group, was just last September sold to Debis for $750m in cash making multimillionaires of the shareholders and executives who had nursed the company back to life.

The sale earned GPA founder Tony Ryan about $47m in cash while chief executive Patrick Blaney made about $20m.

In 1998, Pembroke Capital, in which financier Dermot Desmond was a 50pc shareholder, merged with the aircraft leasing subsidiary of Rolls Royce in a move that was reported to value the group at up to £160m.

Others to have sold out include IAMG Group, now renamed Lombard, which was acquired by the Royal Bank of Scotland.

A spokeswoman for Debis AerFi said it was too early at this point to make any comment about the impact of the current crisis on the aircraft leasing business.

But others who spoke on condition of anonymity predicted a "wave of consolidation in the industry next year."

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