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It's boom time for aircraft leasing in Ireland


Domhnal Slattery. Photo: Bloomberg

Domhnal Slattery. Photo: Bloomberg

GROUNDBREAKER: The late Tony Ryan at the Goffs sales in Co Kildare. Photo: David Conachy

GROUNDBREAKER: The late Tony Ryan at the Goffs sales in Co Kildare. Photo: David Conachy


Domhnal Slattery. Photo: Bloomberg

IF you're reading this article and you're on a plane anywhere in the world, the chances are the plane is owned by an aviation firm based in Ireland.

Ireland is not only the leader in global commercial aviation leasing and finance, it dominates it. There are 20,000 large commercial jet aircraft flying in the world at this moment. Of that number, 8,000 are leased. And of those 8,000 leased aircraft, half are managed out of this country. Not bad for a small island nation on the periphery of Europe.

And if you're flying with a no-frills carrier, chances are you wouldn't be enjoying cheap air travel if it wasn't for Irish aviation leasing firms either. Why? Because without them most airlines probably couldn't afford the huge capital spend needed to fund a modern fleet of jetliners, as just one of the latest fuel-efficient commercial jets on the market comes with a dizzying price tag of $80m.

The reason why Ireland dominates this global sector is down to one man: Ryanair founder Tony Ryan. He is the inventor of modern-day aircraft leasing. In terms of aviation leasing, he put Ireland on the world map. Now Ireland has taken over the world.

Over two decades on from the spectacular collapse of the late tycoon's aircraft leasing empire, Guinness Peat Aviation, Ireland is the cockpit of the thriving industry. Nine of the world's 10 largest aircraft leasing companies are located here, employing over 2,000 people through direct and indirect jobs. And Dublin, in particular, is recognised as a world leader in the aviation finance industry.

But in recent weeks, the workaday image of the industry has been transformed into something a whole lot sexier, as Irish-based firms have landed billion-dollar merger deals and some of the biggest players in the industry are taxiing towards a fresh wave of IPOs.

Dublin-based aircraft leasing firm AWAS is the latest in the sector to explore a sale or stock market flotation in a move that could value it at up to $4bn (€2.9bn).

The company, which is majority-owned by private equity firm Terra Firma, has hired financial advisers to explore its options, AWAS chief executive Ray Sisson said last week.

The two banks hired by AWAS are thought to be Goldman Sachs and Deutsche Bank.

"There may be a move to exit by our shareholder in one form or another, it's in the analysis phase now," Sissons said. "You could sell the company, or you could IPO it. Or you could make two leasing companies out of it."

Based in the capital, AWAS has 280 aircraft on its books.

Terra Firma paid Morgan Stanley $2.5bn (€1.8bn) for AWAS in 2006. In 2007, it paid $5.2bn (€3.8bn) for another company, Pegasus, and merged it with AWAS.

Talk of a potential sale or flotation of AWAS comes amid significant activity in the sector and points to the industry's robust health after having survived a few near-misses in the last decade, following the economic downturn and a fuel prices spike.

And the deals keep on coming.

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Last week's takeover of US leasing giant ILFC by AerCap, a firm that emerged from the ruins of GPA, now makes it the world's second-biggest aircraft-leasing company.

The deal, which was announced last December and completed on May 15, saw AerCap paying AIG $3bn (€2.2bn) in cash and 98 million shares. The value of AerCap's stock has nearly doubled since that announcement, bringing the total deal size to about $7.6bn (€5.5bn).

The deal gives AerCap $41bn (€30bn) in total assets and a fleet of over 1,300 aircraft, compared to world number one GE Capital Aviation Services with a fleet of about 1,700 aircraft.

Although AerCap's headquarters is in the Netherlands, it manages its fleet in Ireland, which remains the industry hub – another residual effect from the GPA era whereby Ireland staked its aviation future on a web of international tax agreements, low corporate tax and world-class aviation financing expertise. Ownership of ILFC's fleet of 1,000 jets has therefore moved to Shannon, to add to AerCap's 377-strong fleet.

Sensing that something seismic is happening in the industry, Avolon, the Dublin-based aircraft leasing firm founded and headed by ex-GPA executive Domhnal Slattery, has hired JP Morgan Chase and Morgan Stanley to explore a possible market listing or sale.

The company, which manages 182 planes, is owned by private equity firms including Oak Hill Capital Partners, Cinven and CVC Capital Partners. The Government of Singapore Investment Corporation is also an investor in the lessor.

Avolon boss Slattery feels the timing is right to explore his firm's options for finance and investment, especially as his company has been valued at $2bn (€1.4bn).

Earlier this year he said he believed the AerCap takeover of ILFC was a "transformative transaction".

Most industry experts are predicting massive growth in the aviation industry over the next decade. The economic surge in China, with its growing middle class, as well as emerging markets elsewhere suggest there will be huge demand for air travel in the near future.

But the industry must set a flight path to avoid three storm clouds that loom large over the global industry, experts warn.

The first is the risk of another global cash crunch. Airlines buying large commercial aircraft will require $100bn (€73bn) in financing this year, according to some estimates. With such a reliance on external funding and capital markets, any financial blip on the radar screen could spell financial disaster and even bankruptcies.

The second is the risk of over-stretching. Asian-Pacific airlines are expected to spend a whopping $2 trillion (€1.4 trillion) on new commercial jets over the next 20 years as new regional airlines in China fight to capture bigger slices of the burgeoning air travel market there. But experts fear that this increase may far outstrip demand. At present, analysts are not speaking about over-ordering but warn of "aggressive ordering". But if the Asian market suffers a "demand shock" such as the West suffered post-9/11 or due to an oil-price spike, aviation firms in Asia will collapse and the rest of the world will feel the aftershocks – and lessors in particular will be hit hardest as they depend on second-hand prices to preserve the underlying value of their assets. A flood of second-hand aircraft from bankrupt Asia-Pacific airlines would skew the market disastrously for the major players.

And the third major risk is over-supply. Leading plane makers Boeing and Airbus are already trying to clear massive backlogs, with waiting lists for new jets as long as nine years in some cases, so predicting what will happen so far into the future is the stuff of crystal-ball gazing. This unpredictability is what worries experts the most.

However, for the moment, the industry is flying at cruising speed and canny investors want to be along for the ride, hoping for a share of the spoils.

The ride may get a little bumpy but it seems unlikely the Icarus-like story of GPA will ever be repeated as the industry has learned the lessons of that failure. It has put in place enough checks and balances to ensure that if there is an emergency, rather than having to assume crash positions, the industry can steer a course to a soft landing.

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