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What a merger between GECAS and AerCap could mean



Leasing juggernauts GE Capital Aviation Services (GECAS) and AerCap are by far the two biggest aircraft leasing companies in the world by fleet size, with a combined 2,098 aircraft between them.


Despite being slightly smaller, AerCap’s portfolio is considerably more valuable than GECAS’s – $29.8 billion versus $19.7 billion – which places the Dublin-based lessor at the top of Cirium’s Portfolio Tracker: Q4 2020.


In addition, US-based GECAS has 253 aircraft on order, while AerCap has 286.


On 7 March, The Wall Street Journal reported that GECAS’s parent General Electric was nearing a $30 billion deal to combine GECAS with AerCap. Cirium has not independently verified that report, which cited unnamed people familiar with the matter.


“We don’t comment on rumour or speculation,” GECAS tells Cirium, which has also contacted AerCap for comment.


Should the two companies fully merge their fleets, the combined entity would control about 18% of the current global leased fleet of Western-manufactured narrowbodies and widebodies, Cirium fleets data show. By comparison, the next biggest lessor, Avolon, would control about 5%.


“It’s going to be a 2,000-aircraft lessor,” notes a Singapore-based leasing executive who works for neither GECAS nor AerCap. “GECAS has been on sale for a few years now and if there is anyone who could take on such a big size company there are very few who can do that – and clearly AerCap would be one of them.”


In December 2013, AerCap agreed to acquire 100% of the common stock of ILFC, a wholly owned subsidiary of AIG, in a $26 billion deal funded by UBS and Citibank.


A sale of GECAS to AerCap, if completed, would follow several other divestments by GE, including its aviation lending business.


In December 2019, Apollo Global Management and retirement services company Athene closed the acquisition of GECAS’s PK AirFinance. The company, now called Apollo PK AirFinance, has a total managed portfolio of over 290 aircraft and over 60 engines, according to its website.


GECAS also has Milestone Aviation – a helicopter lessor with over 300 rotorcraft, according to its website – as well as an engine leasing arm under the GECAS business.


SYNERGIES


A combined business could achieve significant synergies, from negotiating with the OEMs to accessing even cheaper financing in the debt market. Following the successful integration of ILFC since 2014, AerCap chief executive Aengus Kelly has focused on streamlining the business and acquiring new-generation aircraft.


In comments during Airline Economics Virtual Growth Frontiers Dublin event in January, Kelly said that the current crisis had revealed the importance of having a global operating platform and would likely lead to a “thinning of the herd” of investors entering the market.


“The days of having one man and his dog running a business, in Miami or here in Stephen’s Green, in Dublin, I think they are over,” he added. Investing significant amounts into companies where there was no platform or a de minimis platform was “not the way to go”, Kelly warned.


Thomas Kaplan, valuations consultant at Ascend by Cirium, says: “I think a buyer like AerCap would see the most value out of the GECAS fleet and platform, particularly under the weak aviation demand environment which other parties would now consider highly risky.”


He adds: “In terms of potential buyers for GECAS, I think AerCap is the natural match. Both their leasing business models are already based on economies of scale, so this is a matter of scaling up big-time. AerCap also already have the experience of integrating GECAS-sized giant ILFC.”


The question as to how the merger will be achieved and what price is unclear at this point. Could GE end up becoming a major shareholder in a combined business?


Ascend by Cirium global head of consultancy Rob Morris points out that a joint AerCap-GECAS business would have 2,052 installed aircraft today plus 531 on order.


Leading lessors’ fleet portfolios




“The portfolio value is our indicative market value and is significantly lower than the reported deal value since it considers only the half-life value of the asset in today’s market which of course is significantly depressed at present.


“The attached leases will significantly enhance the value of the GECAS portfolio, albeit the $30 billion being reported is still much lower than the $40 billion Bloomberg reported last year when Apollo Global Management was exploring buying GECAS for up to $40 billion.


“By merging (or AerCap acquiring GECAS), it will create a mega-lessor with a global portfolio which is 16% of the entire passenger jet leasing portfolio (or 15% by value). AerCap presently has 159 airline customers, GECAS 176,” says Morris, adding: “Only 69 are common so the combined entity would have 266 airline customers.”


Morris says Cirium data currently lists more than 970 airlines meaning that a combined lessor would be providing aircraft to more than 25% of the world’s airlines.


He describes the two lessors’ portfolios and backlogs as being “virtually identical”, although GECAS is “very active in the Boeing 737-800SF programme so gives AerCap some access to that market which might be attractive as its own -800 portfolio rolls off lease”.


GECAS is quite heavily focused on regional jets and Morris says he expects that AerCap could seek to divest those once the portfolios are merged, which would be an opportunity for growing regional aircraft lessors like Falko or TrueNoord.


“GECAS actually have fewer widebodies and again have a plan for the 777-300ER with passenger to freighter so that might be attractive to AerCap,” he says.


A Hong Kong-based aircraft finance executive tells Cirium that one challenge of the acquisition could be how the two companies reconcile differences in negotiating style. The person notes how the two lessors have distinct negotiating styles and corporate cultures.


It had long been rumoured that GECAS was up for sale, and in September 2018 Goldman Sachs was retained to carry out a strategic review of the lessor.


“More generally, I wonder at what point a company is going to be considered too big to perhaps become less efficient because of its size?” asks one banking source. “Of course there are always opportunities if they can definitely get a uncontested market power (GECAS has been known before not to shy away from doing certain deals at ridiculous terms because they could afford to do it!) but is there not a systemic risk at the same extent?”


A key question will be what is included in the sale of GECAS. The inclusion of the US lessor’s helicopter business and its freighter segment would suggest that AerCap is looking to develop a wider suite of products for the market, and diversifying into new areas.


COMPETITION ISSUES


A merger of the world’s two largest lessors seems likely to attract the attention of competition authorities in both the EU and USA.


“They are already by far the largest players in the market and we have not really seen the competition authorities (especially in Europe) allowing two global behemoth to merge, or without significant concessions,” says once source. “And I wonder what the concessions could be in that respect, sale of portfolio/exposure.”


Morris suggests that the competition authorities would “naturally” want to consider this merger, but given that even the combined entity would be leasing to only 25% of the world’s airlines and there are still more than 100 other operating lessors globally managing more than 80% of the global portfolio, he believes that the conclusion should be that competition would remain “alive and well even in the face of this merger of the largest two lessors”.


CONSOLIDATION


The potential for a merger between AerCap and GECAS to prompt further consolidation in the market is one theme discussed by some industry commentators.


“If it goes ahead, it may force further consolidation as a number of other lessors may have to consider their future if they want to have a chance to compete with it,” says a source.


The current restructuring HNA Group and the impact of this on Avolon, and rumours that other leasing companies are on the market, present some possibilities for further consolidation.


The commanding position that a combined AerCap and GECAS could command in terms of aircraft price, lease bidding rate and market reach could force other lessors into a combination in order to remain competitive.


For an industry that is rarely the subject of consolidation the coming weeks and months could prove very interesting.


This analysis is written by Michael Allen with additional reporting by Oliver Clark, both part of Cirium’s reporting team


S: Flight Global



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