Jet-Leasing Mega-Deal Could Herald Consolidation Wave in Sector
AerCap Holdings NV’s $30 billion deal to buy General Electric Co.’s plane-leasing arm is spurring talk of further consolidation in the sector just as air travel is poised to begin a slow recovery from the Covid-19 crisis.
The transaction could be followed by more mergers and acquisitions, according to analysts at JPMorgan Chase & Co. Cowen Inc.’s Helane Becker said its valuation should give investors comfort around book values, while a firm the size of the enlarged AerCap will be able to dictate jet design and purchase terms to manufacturers.
Fly Leasing Ltd., led by former Aer Lingus chairman Colm Barrington, has been exploring a sale, according to people familiar with the matter. Hong Kong’s billionaire Cheng family has also gauged buyer interest in Goshawk Aviation over the past year, the people said, asked not to be identified because deliberations are private.
Another potential target is Avolon Holdings Ltd., whose owner HNA Group Co. is still working to unwind an acquisition spree after being taken over by the Chinese government.
Fly Leasing declined to comment, as did Avolon and HNA.
A representative for Henry Cheng’s NWS Holdings Ltd., which owns 50% of Goshawk, said it isn’t seeking a buyer and declined to comment on past considerations. A spokesperson for the family’s private investment vehicle, which owns the remainder, didn’t respond to requests for comment.
The coronavirus pandemic has pushed airlines around the world to cancel jet orders, push back deliveries and defer rental payments. As middlemen, leasing firms have suffered themselves while also playing a critical financing role in keeping deliveries flowing, often with sale-leaseback deals that hand vital cash to carriers. The sector remains highly fragmented on a global basis, meaning more deals could take place without stirring antitrust concerns.
Richard Aboulafia, an aerospace consultant at Teal Group, said leasing firms are especially alluring given the relative lack of other tangible investments at a time when cash is relatively cheap. Some are also “beat up” from lease deferrals and write-downs, making valuations “pretty attractive,” he said.
The absence of obvious growth sectors elsewhere could draw non-traditional interests into jet leasing, including diversifying financial investors, pension funds and companies from the Asia-Pacific, said Philip Perrotta, a partner at law firm K&L Gates who oversees aviation finance.
JP Morgan analysts including Jamie Baker said in a note that they expect to see some read-across to other lessors from the AerCap-GE deal, encouraged by growing confidence that the acceleration of vaccination programs is set to trigger a return to flying, even if the timing remains uncertain.
“We think the M&A pipes are starting to flow again now that we can see a travel recovery light at the end of the pandemic tunnel,” they said. Bids for the Fly Leasing portfolio are due in any day so that a deal could be announced shortly, while “a different mix of owners” at Avolon remains likely.
HNA tried to sell Avolon in 2019 at an $8.5 billion valuation, Bloomberg reported at the time, reaching out to potential buyers including Japan’s Orix Corp., which controls 30% of the business with the Chinese conglomerate’s Bohai Leasing Co. arm owning the rest.
At the same time, AerCap’s biggest rivals, such as Air Lease Corp., are unlikely to respond with a knee-jerk reaction to quickly find deals of their own, JP Morgan said.
Ross Harvey at Davy Stockbrokers in Dublin said AerCap’s growth will at the very least sharpen the focus of lessors on positioning for an aviation up-cycle.
While the pandemic has impacted each differently based on their exposure to different aircraft and airlines, most investment-grade firms have been able to raise cash at quite reasonable prices, he said.
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