Clear Skies Ahead!
from Trust the Leaders Issue 25, Winter 2009/2010
One of the most pivotal decisions that New York-based Fortress Investment Group made when it entered the aircraft leasing industry in 2004 was to build a brand new company. Although attracted to the sector by its track record of long-term growth and the prospect of increased enplanement percentages, particularly among the BRIC countries, the private equity firm didn’t want to inherit the problem assets or organizational issues of an existing business, and therefore decided to start with a totally clean slate by opting for the “build” versus “buy” decision.
Aircastle is piloted by CEO Ron Wainshal, who prior to joining Aircastle ran Capital Markets at GE Commercial Aviation Services (GECAS), where his responsibilities included asset sales, securitizations, funding initiatives and heading up U.S. workout efforts. Aircastle was conceived in 2004 and went public in 2006 — the first company inits sector to do so. Today, the company, which acquires, leases and sells high-utility jet aircraft to airlines, has three international offices and a portfolio that as of the end of September, 2009 25consists of 128 aircraft with 60 lessees located in 34 countries.
No one at Aircastle will tell you that the past three years have been a smooth ride. The global economic downturn, volatile oil prices, unpredictable currency-exchange rates and a dysfunctional credit market created multiple business challenges. But at a time when many of its competitors are experiencing disruptive changes in ownership and significant financial strain, Aircastle’s accomplished team, disciplined investment strategy and conservative capital structure have enabled it to emerge from the economic turbulence of the past 18 months in a good position to capitalize on what Wainshal believes will be significant opportunities in the sector.
LOCKING IN LONG-TERM FUNDING
Several years ago, a large forward order book and easy access to low-cost short-term capital were regarded as two keys to success in the industry. Today, a large forward order book is considered a financial burden, while rolling over short-term debt in a cash-starved market is problematic. Aircastle’s conservative capital structure and its decision to lock in longer-term funding and a relatively small forward order book have been important operational factors during the past two years.
“For the first time in almost two years — after the worst quarter in memory — I’m pleased to be able to talk about the “g” word again — growth.”
— Aircastle CEO Ron Wainshal
Another critical factor has been the company’s diligence in managing its assets. The current economy has not been kind to the airline industry and, inevitably, there have been casualties. Flagging demand and the recent volatility of the dollar have placed a strain on the finances of many airlines, especially those in India, Mexico and the emerging economies of Eastern Europe.
One of the key lessons that Wainshal learned during his tenure at GECAS was the need to be the first party in a troubled transaction to take action. Rather than hoping that a potentially negative situation with a customer will improve, Aircastle has been a highly proactive asset manager, moving quickly to recover aircraft in troubled situations and redeploy them elsewhere. It was this philosophy that saw Aircastle recently take back an aircraft from a Mexican airline struggling with the impact of a weakened economy and swine flu, and from a Ukrainian airline crippled by the devaluation of its currency and increased competition from western European airlines. In both instances, Aircastle was able to quickly re-lease the aircraft to a new customer.
Aircastle’s flexibility has enabled it to take advantage of opportunities in more stable emerging economies, such as Brazil, where the number of airline passengers has increased some 50 percent since 2000. The company recently completed a second sale leaseback of a new A330-200 with a major South American air carrier. Wainshal hopes that these transactions, with financings guaranteed by French export credit agency Coface, will provide a platform for more government-backed initiatives in the future.
GROWTH ON THE HORIZON
Looking ahead, Aircastle sees Asia and, in particular, the Chinese domestic market, as sectors with the greatest potential in the next few years. The global freight market has seen a steady improvement since spring, and many airlines appear to be preparing for recovery mode. The International Air Transport Authority (IATA) is predicting a gradual increase in air traffic volumes in 2010, with air cargo initially expected to lead passenger volume.
With the fleets of many major European and North American airlines aging and the current credit crisis further enhancing the balance sheet and fleet-configuration flexibility that leasing affords an airline, Wainshal believes there will be many unique opportunities for Aircastle and that the sector will continue to perform well in comparison with other asset classes.
And the recovery signs are good. Through the third quarter of 2009 Aircastle had 98 percent utilization of its aircraft portfolio, with nearly 100 percent utilization during the second quarter of 2009. “For the first time in almost two years — after the worst quarter in memory — I’m pleased to be able to talk about the “g” word again — growth,” says Wainshal.
For more information, go to aircastle.com.
