Analysis: Leasing deal push evokes past glories to shape aviation's future

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PARIS (Reuters) – A tie-up between leasing giants AerCap and General Electric (NYSE:GE) unit GECAS would reshape global air finance and carve out a new chapter in one of Ireland’s greatest corporate adventures.

AerCap shares soared on Monday after news the company is close to acquiring GECAS to unite the leasing industry’s two largest aircraft portfolios.

“It creates a leasing colossus with 2,000 aircraft under one brand,” said independent industry adviser Bertrand Grabowski.

A deal would reunite estranged pillars of the collapsed leasing empire of the late Irish leasing baron Tony Ryan, which rose to dizzying heights in the 1980s only to be laid low by overexpansion in the wake of the 1991 Gulf War.

In a schism whose reverberations rumbled through the sector for decades, Ryan’s empire was split between U.S.-based GE Capital, which took over prime assets worth $1.3 billion to form GECAS, and a rump eventually acquired by Dutch-based AerCap.

Now, the separation is set to be reversed with AerCap, now based in Dublin and already the world’s largest lessor, ready to regain the pedestal once occupied by Ryan’s Guinness Peat Aviation.

During those decades, leasing evolved from the freewheeling risk-taking of Ryan – who later made a second fortune on Ryanair – into a new asset class, basking in recognition from investors looking for solid returns backed by air travel.

It is not the first time AerCap has effectively taken control of a major competitor under Aengus Kelly, the candid and tenacious CEO who started as an accountant at the former GPA.

In 2013, he negotiated a deal to buy International Lease Finance Corp, founded by Ryan’s archrival and fellow leasing pioneer Steven Udvar-Hazy.

Much of today’s leasing industry is run by GPA veterans. Many lost small fortunes during the company’s downfall and promise a rigorous approach to running the industry.

But experts say risks remain in aircraft leasing, which depends on constant access to competitive funding and staying on the right side of a sometimes brutal industry cycle.

Shares of AerCap plunged to $15 when lockdowns hit last March, compared with the current price of around $57.

TIMING CONCERN

“AerCap are doubling down here; it’s a gutsy move and I sense them thinking ‘we’re too big to fail,’ but a few banks have thought the same,” said a senior industry executive.

Another said the new group, representing one-fifth of the world’s leased fleet, would be tough to manage.

For AerCap, the crisis delivers a chance to bulk up in an industry that rewards scale, though much will depend on the price it is paying for the assets and any resulting synergies.

For GE, any deal completes an exit from direct involvement in aircraft finance and leaves it focusing on jet engines.

GE has been pondering a sale for years. In 2019, Apollo Global Management (NYSE:APO) Inc worked on an offer worth up to $40 billion.

The Wall Street Journal, which first reported talks with AerCap, pegged the new deal’s value closer to $30 billion.

“In terms of asset value, it’s probably not the best moment for the seller, but it does take advantage of the fact there’s a lot of liquidity,” Grabowski said.

Questions remain over reactions of airlines and planemakers.

Airbus SE (OTC:EADSY) and Boeing (NYSE:BA) Co have relied on a strong leasing industry to keep deliveries flowing during the pandemic, but now face a more powerful buyer.

Regulators could also take a chunk out of the new venture by forcing it to sell planes in a weak market.

Merging the industry’s leaders could speed consolidation at the next tier down, with HNA-controlled Avolon sitting in a distant second place and already said to be itching for a move.

The deal may also send a chill through smaller players who flocked to the industry in the past few years looking for promising yields but are ill-equipped to deal with a downturn.

AerCap’s Kelly has dismissed them as “tourist capital.”