Steve Udvar-Hazy runs ILFC and, as the article showed, has always run it. In my analysis of AIG, I had believed Mr. Hazy to simply be another "corporate guy" who had climbed the long ladder of corporateness to success. Was I ever wrong. He is a billionaire who created the industry entrepreneurially and still dominates it.
The aircraft leasing industry, as the article states, "leases airplanes for the same reason that cash-short consumers lease cars - they can get new models for lower payments." Aircraft leasing works particularly well because the fuselage of an aircraft has significant longevity. Mr. Hazy's early love for aircraft helped him understand the relatively strong residual values of an airplane. As a car-man friend of mine said about car finance, "the car's got to outrun the note."
Mr. Hazy exploited this structure, turning $150,000 in 1973 into a multi-billion dollar business for himself, two partners and AIG. IFLC has 824 Boeing and Airbus aircraft with another 254 on order. IFLC has 35% more aircraft than American and more than Air France, Lufthansa and British Airways together.
The aircraft leasing model is used extensively for airlines who prefer the latest models and can precisely estimate its costs. But the following graph shows an interesting issue - an almost complete lack of participation by U.S. airline companies:
If there are any "cash-short consumers," it would seem to be U.S. airline companies. Their underrepresentation at ILFC would appear to be the result of two factors: cheaper money elsewhere and little concern that ILFC's deep pockets will be needed later. Mr. Hazy expressed some frustration at their unwillingness to buy ILFC's tougher terms, commenting that U.S. airlines "act almost like superior beings." Nevertheless, Mr. Hazy has been disciplined and not loosened ILFC's terms. The shareholders of AIG have a real gem in Mr. Hazy and ILFC.
AerCap (AER) purchased ILFC from AIG at the end of 2013 for $5.4 billion. As a result of this transaction, the market applauded and drove the stock from $21 to $41 in a short period of a couple months. Since that time (six years), AER stock has not moved much. In this sense, the lack of attractiveness has resumed. AER has a scale advantage, but the industry appears to be more competitive. Even the former CEO, Steven Udvar-Hazy, has been unable to repeat his early success with Aircraft Leasing Corporation (AL) - as the stock has flatlined since he took over in 2011.
ReplyDelete