Business Irish

Friday 24 November 2017

Flying after biggest Irish takeover of €5.6bn

Hiring aircraft long-term is the way to go for the world's airlines, says the Irishman in charge of the third biggest operator in the sector which has become one of the country's major success stories. By John Mulligan

THERE'S a large bronze statue of a lurking bear outside the low-profile offices of SMBC Aviation Capital in Dublin's Irish Financial Services Centre. The symbol of investor fear couldn't be in a more inappropriate den.

This, after all, was the epicentre for what was Ireland's biggest corporate takeover. And it happened just months ago in the midst of festering global economic malaise.

At $7.3bn (€5.6bn), Japanese bank Sumitomo Mitsui emerged as the successful bidder for the aviation leasing and finance arm of RBS Aviation Capital last January.

The state-owned UK bank had been offloading non-core assets and the Dublin-based business -- then the fourth largest of its kind in the world -- was a prime divestment choice.

With the deal signed off during the summer, RBS Aviation Capital was promptly renamed SMBC Aviation Capital and the new name was officially unveiled last night in Dublin.

SMBC Aviation Capital chief executive Peter Barrett -- who previously headed the RBS arm -- has had plenty of time by now to contemplate the new regime. But it's not all that different from the old one, he says, despite the unique way Japanese business culture can operate compared with its western counterparts.

"Every culture is unique and it's something my colleagues and I discussed a lot during the sales process," he recalls.

"We came to the conclusion that every culture and every shareholder will bring its own opportunities and its own challenges. Our job is always to make sure we maximise the opportunities and minimise the challenges."

SMBC Aviation Capital employs about 70 people.

It and Sumitomo Corporation have been doing business around the world for a long time, Mr Barrett points out, and have been involved in the aircraft leasing business for years.

"I actually find the cultural differences really interesting," he says. "I've been going to Japan for over 20 years. But when you're much more immersed in it as we are now, you get a more nuanced and better understanding of the culture. It's very engaging."

But Mr Barrett also concedes that the whole sales process -- the RBS unit was effectively up for sale since 2009 -- made for a more difficult working environment, but that it was ultimately a valuable learning tool.

"Nobody likes uncertainty and nobody likes change," he says. "But in business and in life generally, the lessons you learn in tough times are very often the ones that you really learn from."

By snapping up RBS Aviation Capital, SMBC acquired a portfolio of just over 200 aircraft that are leased out to more than 100 airlines around the world.

Among its customers are Ryanair, easyJet, American Airlines, Aer Lingus and Qantas. By September this year, the fleet grew to about 240 aircraft valued at roughly $8bn.

Confidence

The operation is one of a number of global aircraft leasing firms based in Ireland, which has become one of the top international locations for the sector. Between 35pc and 40pc of all commercial aircraft around the world are leased.

Earlier this week, SMBC also announced that its other aviation interests -- two Amsterdam-based firms -- are being merged with the Dublin-headquartered division.

That will add about $2bn worth of aircraft to the Irish arm, bringing to $10bn the value of assets it manages and the total fleet managed by SMBC Aviation Capital to more than 330. It also confirms SMBC Aviation Capital's position as the third biggest player in its sector.

"It's good for us, in that it increases the size of our fleet by about 90 aircraft. It brings scale, it brings new customers, new skill sets and it's a good transaction," says Mr Barrett.

"It's a great vote of confidence in us by our shareholders (three Sumitomo Mitsui divisions jointly own the Dublin firm)."

For Mr Barrett, this is just the latest chapter in what's been a lengthy career in the industry. Fresh from studying at University College Cork, he quickly realised that using his civil engineering degree wasn't too appealing.

"I do remember doing a site visit in college and it was pouring rain and 10 degrees outside and I thought, this probably isn't for me," he says.

After a brief stint at what's now Accenture and was then Arthur Andersen from 1987 to 1989, he moved on.

"There was an ad in the paper for GPA (Guinness Peat Aviation). They were looking for analysts. Obviously at the time GPA was a big success. I did loads of interviews and was offered a job.

"It wasn't that at a young age I decided I wanted to lease airplanes or anything like that. It's just something you fall into, like a lot of things in life."

But GPA was destined for turmoil. Founded by the late Tony Ryan, who also launched Ryanair, the company had experienced stellar success. It had big revenue streams and big profits.

By the early 1990s it was on a flotation trajectory, with listings in New York, Tokyo and Dublin planned. But with the US economy in trouble in the early part of that decade and the memory of the first Gulf War still fresh, the flotation was pulled. GPA was later acquired at a knockdown price by GE Capital.

"I was 22 or 23 and it was almost unreal. You're flying around the world doing these deals buying, selling or financing airplanes and it was great," says Mr Barrett.

He recalls the planned flotation date -- June 16, 1992, without skipping a beat.

"It's one of those things. I just remember the day. There had been a great expectation and so there was a sense of disbelief," he says. "There was a meeting called on the floor and we were told about it. There was a realisation that something had fundamentally changed."

After working at KBC Bank where he was head of aviation finance, Mr Barrett joined RBS Aviation in 2001 as chief operating officer.

The business -- founded by Clare entrepreneur Domhnal Slattery as International Aviation Management -- was sold to RBS that year for about £30m (€45m at the time). Mr Slattery remained with the unit until 2004 when Mr Barrett was anointed CEO, and was a non-executive director until 2008.

In 2010, Mr Slattery founded Dublin-based leasing firm Avolon. US private equity giants CVC, Cinven and Oak Hill Capital are among the investors, and the group is currently valued at more than $5bn.

But Mr Slattery also poached seven key RBS Aviation Capital staff as he launched his rival business. That resulted in Avolon having to pay about $4m in compensation to RBS to buy those executives out of their contracts. Mr Barrett won't comment on specifics, but insists the episode didn't sour relations and appears fairly magnanimous about the whole affair.

"It was tough at the time, but I'm still in touch and I would meet the guys at the usual conferences or for lunch, so I don't think it's bitter," he says. "At the end of the day you need to get on with life and get on with business."

Fortunate

But whatever about Mr Barrett's personal feelings on the matter, RBS wasn't so forgiving -- it barred Avolon from the bidding process for its aviation arm.

Still, that's all in the past now, and Mr Barrett is confident that despite global economic uncertainty the aviation leasing sector remains on an upward trajectory.

"One of the attractions of the sector is that it's less cyclical than the underlying airline sector," he says.

"While incomes of airlines can be highly cyclical, income and profitability of leasing companies tends to be much more stable. Ultimately, this business is becoming much more of a fixed income type of area. These are long assets, they produce not spectacular but decent and pretty predictable returns. Leasing will probably become the dominant way that airlines acquire aircraft."

With the sector having become one of the major international Irish business success stories, does he think it's appreciated by the Government?

"It's not the Government's job to appreciate us, but to be fair to successive governments and departments over the years it's a sector they've handled and managed well in terms of public policy," he says.

"We can never be complacent. There are other places around the world that see the success of aircraft leasing in Ireland and want to replicate that."

As morning sunlight streams though the boardroom windows, Mr Barrett is reflective about his position.

"It is something I still enjoy doing," he says of the industry. "I'm very fortunate and I'm so conscious of that. In life there's a large element of luck and good fortune, and I've certainly enjoyed my fair share of it."

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