December 1, 2023

AerCap Holdings rocked the aviation world last week with a $ 30 billion deal for the aircraft leasing arm of General Electric, General Electric Commercial Aviation Services or Gecas. For GE, this is CEO Larry Culp’s latest move to downsize the conglomerate, raise cash, and pay off debt. Upon completion of the transaction, what remains of GE Capital will be incorporated into the main business. GE would have a 46% interest in the combined company.

For aviation, the deal would bring the world’s two largest aircraft rental companies together into one giant with even more power to negotiate prices with manufacturers like Airbus and Boeing. Together, the two companies would own or manage around 2,000 aircraft, roughly doubling AerCap’s fleet. They also had about 5% of the backlog of the aircraft manufacturers, analysts at Cowen & Co. They have more than 200 customers combined and only about 70 of them overlap, they said.

Analysts say the deal could also lead to greater consolidation among aircraft rental companies.

AerCap’s 47-year-old CEO, Aengus Kelly, who has more than two decades of experience in the leasing business, is no stranger. In 2014, he oversaw AerCap’s acquisition of ILFC from AIG in 2014. After the deal was announced, he announced to investors that the GE deal was the fourth aircraft leasing business AerCap was looking to buy at a discount to book value.

“Buying the right assets is important, but even more so at the right price,” he said.

AerCap, based in Dublin, has a market capitalization of approximately $ 7.9 billion. Shares have more than doubled in the past 12 months and more than 24% in the past week, as announced on Wednesday.

Kelly spoke to CNBC about his outlook for aircraft rental companies, who own roughly half of the world’s narrow and large body fleets, the coronavirus pandemic, and AerCap’s strategy.

Here are the questions and answers:

(This interview has been edited slightly for length and clarity.)

Where do you see your fleet’s needs in the coming years?

Fleet growth will be driven by new technology assets and, to a lesser extent, likely cargo assets. In terms of new technology assets, it is dominated by the A320neo assets family, the Boeing 737 Max family and the 787 on the widebodies. We also have some Airbus wide-body aircraft.

For the past eight years, when we purchase airplanes, we have wanted to buy the next generation of technology, or if you have the generation that is there, you want to have older types of it. The real risk in this aircraft purchase business is that you are buying the end-of-line aircraft, just like buying a car. If you buy a car tomorrow, you know that if you buy one that is the end of the line and the new one is out there, its value will go down. It is no different here.

One of the things we did and Gecas was strategically the same, they had avoided buying the end of the line [Boeing] 777s or [Airbus] 330s for the past six or seven years. And so, we definitely see for the next decade or so that there will be good demand for the existing technology assets.

What’s your fleet average?

The average age is 6.9 years, but that’s a dangerous thing to do with fleets. If I told you I have a brand new fleet that is 2 years old but it was all 777 and 330, that’s not a good thing. What you would like to say: “How old is your existing fleet on average?” You want that to be reasonably old and then the rest of your fleet in new tech, so you have this barbell approach. This is key to managing aircraft exposure. You want to have assets that you know there is enough demand to use up the remaining economic life.

If your particular asset has been in demand for 10 years, you want it to be around 15 years old. If there is demand 25 years beforehand, it can be brand new.

The Covid-19 pandemic was devastating for the aviation industry. Travel restrictions, quarantine requirements and concerns about the virus have weighed on demand. Where are things?

It is different in different regions. They are not all the same. If you go to the one that has recovered the fastest, we’ve seen demand recover in China. Europe recovered very quickly in the summer … but then Europe was hit by the second and third waves of the virus in the fall and then at Christmas.

The US market has steadily recovered. This is definitely the way to go, and when you talk to a number of airline CEOs today, they all feel the same. I would say Europe is the slowest [recovery] In view of the slow vaccine rollout, it is coming.

The major long haul market that needs to be opened, the most important in the world, is the North Atlantic. I think this will start between the UK and the US. These are the two countries that are leading the way in adopting vaccines. I think we’ll see some movement there in the not too distant future.

Do you have customers trying to renegotiate their rental terms with you?

You are always in negotiations with customers. This is an essential part of the daily course of business.

We know that the vast majority of the world’s airlines will make it. However, they will also have greater leverage on their balance sheets, either directly or indirectly, with greater government support on their balance sheets, and their priority is to reduce that billions of dollars are not spent buying aircraft from Boeing and Airbus. What they will do, however, is get to the lessors because they will be using their own resources to reduce leverage.

Do you expect new aircraft in the coming years through sale leasebacks from airlines or directly from manufacturers?

At the moment we already have a large commitment with Boeing and Airbus. That will be our focus for the next few years.

How do you rate the widebody market? It’s been struggling lately because international travel is so weak.

It’s all about the one you have. I think the widebody market will of course come back. One of the things that complemented each other for us about the Gecas portfolio was that it was strong, slim body content, more so than us, which was positive.

Otherwise if Norwegian [Air Shuttle] When we went bankrupt we had to take back some 787s and we have already re-let some of them. Each of them is almost under a declaration of intent. When you have a quality object, you will move it.

That goes back to the question of the portfolio strategy. On the widebody side, AerCap is the biggest player. We have leased 1,000 aircraft over the past five years. We have infrastructure, knowledge and that gives us a significant competitive advantage.

Do you know how long it will be before long international haul comes back?

The largest long-haul market in the world is the North Atlantic. I think you will see this open up between the UK and the US in the relatively near future, and then the rest of Europe will follow suit. I think this will be phase 1 and that will be the market that people will look to and I think it will repeat itself elsewhere in the world.

The world has changed. This used to be an east-west market than it was an Atlantic world. The world has changed. North-south traffic is very important now: China to Southeast Asia, I think we’ll see that too because they had adequate control [over the pandemic]. It’s not just about east-west.

GE also has a massive engine manufacturing and service unit. What are the benefits of GE Aviation?

We have had a long relationship with GE Aviation. With GE’s engine leasing business, that’s a very attractive business. We are a separate business from them. Yes, GE will have two seats on the board. We will do business with all engine manufacturers. There is no doubt that the relationship with GE Aviation will be very important to us and we will try to promote it.

With the Airbus A321 XLR, Airbus is launching a long-haul aircraft with a narrow body. Do you think Boeing has room for a new mid-size aircraft in this market?

10 years maybe. The focus has to be on re-stimulating demand for the Max and getting through the 787 [inspection] Problems. I think there is a way on the way.