Business World

Thursday 24 January 2019

'We may be seeing a golden era of aviation growth'

Intense competition and the chance to be the world’s biggest lessor doesn’t faze the GE Aviation Capital Services chief as he oversees a fleet of 2,000 aircraft, writes John Mulligan

‘We don’t want to be a dinosaur in this industry.’ Alec Burger, the CEO of GE Aviation Capital
‘We don’t want to be a dinosaur in this industry.’ Alec Burger, the CEO of GE Aviation Capital Services

It's a bustling Shelbourne Hotel in Dublin on Monday morning, where hundreds of global executives are rubbing shoulders at the Airline Economic conference - one of two major annual aviation gatherings being held in the capital this week.

Alec Burger, the CEO of Gecas (GE Aviation Capital Services) - one of the world's top two global aircraft lessors - is among the key attractions for many filing though the doors. His thoughts on the sector matter to competitors, banks, lawyers, accountants, ratings agencies and other financial institutions who have a stake in the industry.

But as he settles in later that afternoon for an interview amid the calm of an old Georgian house on St Stephen's Green, Burger is just as interested in Ireland's resurgent property market.

"What's happened to property prices in the last 30 years?" he asks, surprised at the fact that residential prices are still way below the 2007 peak given what's been happening since the country emerged from the recession. A discussion ensues about home prices in the United States and Ireland.

The affable Burger (54), who's been with GE since 1991, has an understandable interest in bricks and mortar - he was chief executive and president of GE Capital Real Estate from 2014 to 2016 before heading up the aircraft-leasing unit. And prior to that, he ran GE Capital Real Estate's North America unit.

The avid sports fan is now in charge of a division whose portfolio includes about 2,000 aircraft, including about 1,673 fixed-wing and 324 helicopters, with a total asset value of around $43bn (€35bn).

Gecas expects to deploy capital of about $6bn this year and Burger expects it to have assets of about $45bn at the end of 2018.

The core Gecas portfolio includes Boeing and Airbus jets. Burger has also recently been made president of GE Capital, reporting directly to GE's chief financial officer, Jamie Miller.

Gecas, which employs close to 300 people in Ireland between offices in Shannon and Dublin, vies with Dublin-based Aercap for the accolade of the world's biggest aircraft lessor. Pick a metric - asset value or number of aircraft, and the podium finish can change.

Either way, Gecas is a beast on the plains.

Dublin-based Avolon, co-founded in 2010 by Clare native Domhnal Slattery and now part of China's HNA conglomerate, has also set out its stall to become the world's largest lessor - it's currently number three. All of them claim that being number one doesn't matter.

But Burger acknowledges that scale does make a difference. He describes Avolon's growth as "extraordinary".

"We have no interest in being the biggest," says Burger. "Some degree of scale is a requirement. You've got to have enough scale and I don't know if that number is $5bn or $10bn (of assets), but it's a huge advantage. Beyond that, it's really just a question of the risk-return part of the equation.

"I think, truly, that anyone whose strategy is to be the biggest, you've got to be careful. We want to be a leader; that's very different. It's about being innovative. We don't want to be a dinosaur in this industry."

Lessors and the airline industry have enjoyed the guts of eight years of growth - almost unprecedented in a cyclical industry where the next shock wave is never really on the radar. It just arrives.

In the past 17 years, the 9/11 terror attacks, the global financial meltdown and high oil prices from 2011 to 2014 all played havoc with the airline sector.

The argument goes that the airlines which survived are now more resilient and better equipped to survive if things go sour.

The growth in global air passenger traffic - both real and anticipated - has also spurred the launch of new carriers and new models all over the globe - think Iceland's WOW Air using Reykjavik as a hub for transatlantic travel, or Norwegian Air using new 737 Max jets to fly direct between Europe and the United States.

The International Air Transport Association (IATA) reckons global air passenger numbers will rise 6pc to 4.3 billion this year.

Lessors have been keen to play their part in feeding demand (about 40pc of the world's commercial jet fleet is leased) and aircraft orders at the two main jet makers - Boeing and Airbus - are at record levels.

The stable returns that aircraft leasing offers (and, historically, sales and leasebacks), have been a magnet for debt trying to find a home, especially in a low-interest environment, and with investors willing to stump up equity to get involved.

Some analysts have been cautioning that the leasing sector is floating along in a bubble. If it is, nobody knows when it might pop.

Burger agrees that there's "no question" that the sector will hit a plateau, but doesn't think it has over-extended itself (the Gecas fleet includes an order book of more than 400 aircraft, while other lessors and airlines also have huge orders placed).

"Right now, I don't think it's misplaced optimism," he insists.

"I spent 17 years in the real estate industry and with cyclical businesses in general, things are great until they're not," he says, alluding to how rapid a downturn can be. He concedes that the downturn in the cycle won't be seen coming, but that for now at least, things are rosy.

"We're leasing into a sector that is experiencing extraordinary growth. I think when you look at the growth in China, India and other parts of Asia, it could almost be the golden era of aviation growth.

"You have these huge chunks of the world, where the number of first-time flyers is extraordinary - that underpins it," adds Burger. "Then, the question is, are there reasonable returns to be made for the risk in our sector? I think people look back 10 years ago and wish the returns were still as good now as they were then, but they're not."

So, how do they compare?

On a return on assets basis - a typical industry measurement that shows how effective a company is at generating a return from its assets - Burger says what used to be a 3pc on a particular deal might now be between 2pc and 2.5pc. That's between 33pc and 17pc lower than what they might have been a few years ago, and affords less headroom for toying with margins.

"It's a big change. There was a world 10 or 15 years ago where there just weren't a lot of players in the industry," says Burger.

He also thinks that the end is nigh - returns can't go much lower, he insists, before a flood of capital into the leasing sector would get scared off.

"We're close," he says. "I don't think that all of a sudden you pull the plug and liquidity goes out, but… when you look at some yields now [in the sector] that are barely covering a realistic view of depreciation plus money cost, that says something about where returns are.

"Just look at straight, commodity-type sale and leasebacks: there are deals that are getting done that we just won't look at. They're hard to make sense of.

"Our discipline has been pretty good. In a cyclical business, you've never really going to know when the end is near. The only thing you can really do to prepare yourself is to maintain your underlying discipline and make sure you are in a position to take advantage when the tide turns."

He adds that "modestly higher" benchmark interest rates around the world might help a little, but that what really matters is airline profitability.

"You don't want interest rates running away, that's for absolutely sure. There are some components where we'd be marginally better off, assuming you could pass through those rates."

The current lower returns also mean that "it's everything" to be able to differentiate by offering alternative financial solutions, according to Burger.

"The ability to find solutions that move away from just financing is the whole game for us," he says.

"If you're selling assets, it's a great time. The number of people showing up for any kind of an auction is just off the charts.

"The world is divided between the money providers and the solution providers. If you were showing up for a sale and leaseback with a decent credit, with new technology, good luck. It's going to be absolutely ferocious.

"Where Gecas is still able to find value is, you show up with a solution for a more complicated deal."

Cheap capital has forced down returns, and all eyes turn to China, where a wall of money has originated and flooded the leasing market.

Last year - just two years after HNA's Bohai Leasing unit bought Avolon in 2015 for an enterprise value of $7.6bn - Avolon forked out $10bn to buy the aircraft leasing assets of US-based CIT Group.

That deal doubled the size of Avolon, catapulting it to being the world's third biggest aircraft lessor, with a current fleet of more than 900 owned, managed and on-order jets.

Burger reckons the Chinese interest in the leasing sector is twofold: a state interest in having a hand in a strategic regional and global sector, as well as the returns the asset class offers.

But some in the industry say the Chinese involvement generally in aircraft leasing has had an artificial impact on the sector, and claim that there's a lack of transparency about the origin of that capital.

The capital flow has impacted returns, but conversely provides liquidity in the sector - a plus for airlines and lessors.

Still, has it distorted the market?

Burger says he'd love to see a breakdown of to what extent Chinese money has influenced the sector. But he points out that the biggest lessors - at least most of them - are not Chinese, or Chinese-backed, and that maybe the influence from Beijing and Shanghai isn't as strong as perceived.

At least not yet.

"There's a lot of noise in terms of the Chinese competitors. There's no question they've had an impact, but the reality is that it's an attractive sector. Whether it's the Chinese or pension funds looking forward to getting into this space, it's just one other source of capital that was intrigued by pretty attractive returns."

With airlines, at least generally, making big profits, Burger is also certain that there'll be fallout when the next downturn comes.

"The model is working today, but there's going to be some natural fallout," he says.

Meanwhile, he says that lessors - and management at Gecas - need a degree of "healthy paranoia" to ensure the business continues to thrive.

"How do you stay relevant? How to you remain a leader? It's a big commitment to do that."

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