Avation (AVAP)

[Carcosa]

Hi nr98

Thanks for the post/questions.

Options
A few years ago, I posted my views about how the options are accounted for. If the lessor does not place an order then they expire worthless; so to some extent the lessor has a liability of placing an order or else they expire worthless. In practice though they do have practical value and GAAP/IFRS require them to be accounted for but of course that reflects the perceived value as of today.

Nearly all aircraft lessors are private equity and they would almost certainly view Avation's options as having significant value.

Because Avation have so many options they do become something that investors need to be aware off because their values can swing by millions of dollars year to year. For short term change in valuation using the change in the US treasury one year (USTSY01) rate tells you if those options should increase or decrease in value accordingly depending on how it changes at Avations's HY/FY reporting dates. An acquirer may value those options assets based on what they believe they will be at the end of each option period rather than what they are worth today and then discount that further.

If we all agree interest rates will be lower in years to come then those options are worth considerably less than stated.

ATR's
Unfortunately, when Avation were disposing of non-lease producing ATR assets to which you refer it was in the middle of a pandemic and the need of having cashflow/better balance sheet trumped any above book profit concerns. There were significant cashflows that Avation had to pay; insurance, parking, maintenance, interest etc., The fact they could actually sell them at all is to be congratulated!

The problem is that smaller airlines do not like ordering aircraft for delivery dates 2-3 years in the future and larger airlines tend to want aircraft in bulk. Hence this is why ATR are trying to ramp up production along with a new variant. There are no practical new aircraft available in that turboprop, short/rough field landing segment other than the ATR.


Source Material
In terms of source material there is a lot out there, but two sources I regularly use are iba.aero (e.g. https://www.iba.aero/insight/narrowbody ... ough-2023/ or https://www.iba.aero/webinars/iba-webin ... ets-worth/) and airfinance.com (use https://12ft.io to access). Investment banks/Rating agencies/auditors/Boeing/Airbus often issue large documents on the subject of leasing e.g. the KPMG report I linked to last week.

[nr98]

Thanks Carcosa for the excellent response.

If accounting for the rights are required, why was it only instituted post 2020 and why do the US peers not account for this option on their balance sheet.

The discrepancy re ATR is as follows - yes they were selling some during the pandemic but even in the latest June to Dec 2022 6 month period, they were disposed at losses. On the other hand, prior to COVID, those planes were disposed at gains. On one hand, I could imagine AVAP having less nego power given they had obligations to meet as per your response but again, every lessor is saying there is capacity shortage + inflation pricing in so I don't get the sale losses vs pre COVID.

Regards,
Nic

[Carcosa]

Financial Reporting
Aircraft options are considered contingent liabilities because they depend on future events or circumstances for their existence and measurement. Contingent liabilities are typically not recognised on the balance sheet in the US unless they meet certain criteria. Options are usually excluded because their exercise is uncertain, and there is no obligation for the lessor to exercise them. However they might still be disclosed in the notes to the financial statements.

I believe the situation regarding reporting requirements for lease liabilities and options in the UK were changed with the implementation of the International Financial Reporting Standard (IFRS) 16, which became effective for reporting periods beginning on or after January 1, 2019. This new accounting standard replaced the previous lease accounting standard, IAS 17.

Under IFRS 16, lessees are required to recognise most leases on their balance sheets as right-of-use assets and lease liabilities. This change eliminated the distinction between operating leases and finance leases for lessees, resulting in a significant impact on the financial statements of companies that lease assets.

Prior to the implementation of IFRS 16, operating leases were generally treated as off-balance-sheet arrangements, with lease payments being recognized as an expense over the lease term. However, under the new standard, lessees are required to recognise a lease liability representing their obligation to make lease payments and a corresponding right-of-use asset representing their right to use the leased asset.

ATR Sales
The June-December 2022 aircraft you refer to are I believe the two ex-Flybe then Ex LoganAir aircraft MSN 1260 & MSN 1277 which completed in December 2022. The actual LOI was signed on or before March 2022 (typically Avation do not report LOI signings). So not unreasonable to assume the deal was underway some 12 months earlier. Given the pandemic situation at that time is perhaps why the aircraft were sold below book. Compared to the rest of Avation's ATR fleet they were relatively old at Sept/Oct 2015 vintage.

Oh, BTW if you want to get into the weeds then take a look at this The 4th edition of Guidance Material and Best Practices for Aircraft Leases from IATA

[Carcosa]

Following on to our earlier messages...

Don't know if you caught the Bloomberg hosted presentation (links will be available on Avation site soon) but in answer to your earlier question Jeff said they sold that last ATR for 15% above book value.

I would recommend watching that presentation because not only is it the best investor presentation in the history of the company (IMO) but it confirms many assumptions I have stated here; even repeating a table I provided a few days ago.

Also, in relation to the Options we discussed it should be noted that Avation as with any other potential buyer, cannot sell on the options to a third party. Hence you may take that downside risk into your risk assessment. However, what has happened in the past is that the option rights holder procures the aircraft for the airline and then transfers ownership at point of delivery thereby, effectively, selling the option.

There is a wealth of other interesting nuggets of info in the presentation, especially after the first 15 minutes or so.

[abtan]

Hey Carcosa, thanks for the indepth coverage.

Few highlevel questions I have w regard to my DD:
1. How do you think of purchase rights as an asset on b/s. Yes, previous acquisitions via merger proxy have all been based on a multiple of book value but other lessors didn't record purchase rights as an asset; of how much value would this be to an acquirer? Would it be fair to mark this at full value? Net of this option, NAV is reduced dramatically and AVAP doesn't trade at a huge disparity to larger lessors i.e. Aer and AL. Moreover, the option is pure turbo prop and ends 2027, wondering your thoughts on this.

2. Turboprop ATR's attractiveness. Didn't hear very favorable opinions on ATR turboprop; according to mgmt, Bombardier has ceased production and so ATRs are the only replacement choice for old turboprops. How true is this? And has secondary market valuations held up - any sources I can use to check on this.

Appreciate

Hi nr98

When doing my own calculations on NAV, I actually exclude the purchase rights in my workings.

If nothing else changed and lease income, debt repayments, depreciation rates, etc... continued as expected for the next few years, my NAV in 2027 comes to £2.26/share.

The current share price is £1.24, giving me a CAGR to 2027 of 16.7%.

The one area where I'm less confident is on ATR valuations.
I recall seeing a recent article that an airline in Vietnam had struggled to sell one of its ATRs (via auction I think), which seems odd given everything I hear from Avation about this aircraft being in high demand.
There were a few other articles too on ATR valuations, which didn't inspire me with confidence.

Having said that it seems like yourself and Carcosa know much more about this than me, so I imagine that I'm missing something.

In any case, even if the aircraft valuations on the balance sheet are overstated, there should hopefully be a large enough margin of safety given the difference between the current SP (£1.24) and my NAV looking 4 years out (£2.26).


As a side note I'd like to extend my thanks to both of you for providing such insightful commentary.

Cheers

[nr98]

Thanks Carcosa for the heads up. Will tune in when the relevant slides and transcripts are released.

Re Abtan, issue with your NAV calc is that you're assuming AVAP remains publicly traded into 2027; but what if someone lobs a bid within the year or so (maybe Oceanwood pushes for it). What is the actual NAV we would have to deal with + the appropriate discount on top of that -> a best case scenario would be at 1x adjusted BV given ATRs have just been sold at a 15% premium as per Carcosa.

Regards,
NR98

[Carcosa]

When the actual video becomes available on the Avation website I would highly recommend a viewing of yesterday's Bloomberg arranged presentation

However I am providing my auto generated transcript from yesterday's presentation with Jeff Chatfield.

I assure you this 16 page transcript is not for the faint of heart and only the most enthusiastic of investors should review it! I have highlighted parts of the text which I found of particular note.

Some of the items discussed are:
No unleased ATR's available worldwide
ESG/Sustainable Fuels puts the ATR's ahead of the pack for both operators and financiers.
Inflation/Interest rates are forcing airlines to look at used aircraft more than new aircraft
The A220's are worth more than they paid for them
Avation is now financially under-levered
Avation will not be tapping shareholders to fund growth
Avation has been approached several times to sell large portions of their fleet (but that would destroy the company's future)
Only a very large bid for the company would be recommended
Lease engine business is a bad business to be in
The CTC has effectively failed and Jeff has said so in the past. It is not to be relied upon
Russia discussed
etc

I think that i should point out that because of my past commercial aviation related career I have a fondness for the topic. I would be hard pressed to forcefully recommend Avation as an investment over the short term. There are better opportunities out there for a quick buck. For 99% investors the investment case can be summed up with reviewing, P/NAV, and a P/E. There is little need to go into the weeds as I do. I just like the aircraft leasing industry.

[Carcosa]

This weeks news is going to be brief because I've been posting too much on this board recently.

Avation in the Media
Not only did Jeff Chatfield provide an hours long detailed presentation hosted by Bloomberg earlier this week which was well covered in the industry press but also,further media exposure by Avation came to the fore last Friday at https://www.directorstalkinterviews.com ... 4121119085

19 Aircraft Fleet For Sale
The remaining assets belonging to privately held aviation investment firm and leasing company Voyager Aviation (VAH) appears to be strong following the latest round of bids for it's 19-aircraft portfolio, comprising Airbus A220-300, A330-200, -300, Boeing 777-300ER and 747F assets. Airborne Capital, Deucalion Aviation, Azorra and Castlelake are maintaining their interest in the mixed portfolio, it is reported.

Narrowbody Base Values
Base value of a new Airbus A220-300 was US$38.25million (m) in 2019, and will was expected to climb to US$39.227m in 2023.
The same-age A320-200 aircraft was at US$18.713m in 2019 and is expected to drop to US$17.626m in 2023.

Narrowbody Lease Rates
Lease rates for a new Airbus A220-300 are expected to grow to US$278,000 per month by July 2023.

More on the A220.
Airbus now has nearly 800 orders for the A220

When Airbus took over what was to be the A220 series aircraft from Bombardier, Airbus at the time, concluded the cost of only the airplane was about $24m. Boeing calculated that before credits, the price to Delta Airlines as a result of price dumping for the A220 at that time was $24m and $19.6 after credits.

Base value of a new Airbus A220-300 was $38.25m in 2019, compared to the base value of a Boeing 737 MAX 8 being $52.306m in 2019. By the time Avation purchased the Air Baltic A220's they got the aircraft for around $34m (credits would have gone to the airline, not Avation)

Airbus is reportedly raising the sales price of the A220 to around $40m or more.

In summary a A220 of essentially the same spec as 2019 now costs ~17% more than what Avation aquired them for. Hence Avation's A220's are potentially worth more than they bought them for several years ago. This implies Avation's Loan to Value, has decreased.

India
Following on from last weeks news, India’s National Company Law Appellate Tribunal decision will delay repossession of around 50 young Airbus A320 and A320neo aircraft. As Jeff Chatfield said, the CTC is essentially unfit for purpose.

[simoan]

Hi Carvosa,

Please don’t feel you need to stop posting information, if you have the time. I really enjoy reading your thoughts on the data you’ve found in the public domain on aircraft leasing as it relates to Avation. Such excellent research is incredibly rare in a free to read forum such as TLF. You’ve even piqued my interest enough to consider opening a position again at some point!

All the best, Si

[abtan]

Hi Carcosa

I'd like to echo Simoan's comment.
Your thoughts are great and I thoroughly enjoy reading them.

Thanks
A

[abtan]

Re Abtan, issue with your NAV calc is that you're assuming AVAP remains publicly traded into 2027; but what if someone lobs a bid within the year or so (maybe Oceanwood pushes for it). What is the actual NAV we would have to deal with + the appropriate discount on top of that -> a best case scenario would be at 1x adjusted BV given ATRs have just been sold at a 15% premium as per Carcosa.

Regards,
NR98

Hi NR98

My workings were based on cash flows for the next few years.
I thought this would be easy enough to do given that debt interest payments and lease income should be fixed.

When I finished it was easy enough to calculate a reasonably accurate 2027 NAV - based on cashflows and the value of the current planes on the books (excluding purchase rights/asset sales) - assuming depreciation continued at its current rate.

My very basic conclusions:
a) if a takeover approach came in before 2027, it should be significantly higher than the current share price.
b) if a takeover approach does not come in, then my IRR to 2027 is c17%.

Seems a decent outcome either way.

[Carcosa]

Link to the Bloomberg moderated presentation

[abtan]

Thanks for the link Carcosa

Avation have informed me that a link to the presentation for non-subscribers will be available in due course.
Hopefully not too long as I would really like to view it.

---

On a related note I wondered whether you had looked at Air Lease?
I must be missing something because the story seems quite similar to Avation, in that there is significant asset backing (c$30b) which more than covers the outstanding debt ($19b) and yet the market cap looks far comparatively quite low (c$4.5b).

Here is the latest Air Lease presentation:
https://d17avvkqn7yvpt.cloudfront.net/s ... 1Q23vF.pdf

Is this another seemingly cheap valuation? Thoughts from anyone would be appreciated.

[Carcosa]

Good info abtan, thanks.

Air Lease Corp.
Yes, I have heard of them. They seem to be pushing innovative ways of financing.

In March, Air Lease surprised the market with a $600 million sukuk issuance at 5.85% coupon. The transaction showed Islamic financing was available, first time in 14 years in North America, suggesting that investment grade players that used the unsecured bond market, are now looking carefully for those ‘new’ sources of financing.

Within the middle east, sukuk financing is more prevalent. Etihad Aviation Group issued the world’s first transition sukuk, and was linked to Etihad’s carbon reduction targets and investments in next generation aircraft. This somewhat ties in with with Avation's 'green' financing activities and their push with new low C02 ATR72-600's.

Furthermore Air Lease see possibilities of having a very new approach to the traditional export credit offering often used in Europe. Looking at government-guaranteed structures from the European export credit agencies with “light covenants” and a special purpose company (SPC) rather than a a more restrictive mortgage structure which makes it a lot more flexible when transitioning an aircraft between jurisdictions due to the government involvement.

Overall Air Lease Corp have very healthy credit ratings, a major player in the market. Have unfortunately lost a portion of the fleet in Russia but that has now gone through the books and who knows, maybe in a few years they will actually get something back. Also have aircraft in China which is probaly not a great market place to be given global politics. Having said all that they appear to be a solid company with a worldwide operating footprint,


ATR Market Prices
For those who like to know market prices, IBA (https://www.iba.aero/) a genuine market respected company said in Dec 2022 the Market Value of a new ATR720600 with the new low CO2 PW127XT-M engines is $21.34 million per aircraft. This compares with to a 2022 ATR72-600 of about $18.9 - $19.7m (AVAP AR) but with the older engine marque.


Avilease Portfolio Building
New leasing platform Avilease and Apollo Global Management, were leading the bidding process for Standard Chartered's aviation business. Riyadh-based Avilease want the aircraft leasing portfolio, while Apollo Global Management want the debt book. The sale process attracted initial bidders such as High Ridge Aviation, Aquila Air, BBAM, Bellinger Credit, Castlelake, DAE Capital, Macquarie Airfinance, and SMBC Aviation Capital, among others. Standard Chartered hired JP Morgan Chase to gauge buyer interest, and more than 11 parties entered the second round of bids. The successful takeover bids for Standard Chartered's aviation business aim to achieve par pricing, and while economic conditions may pose challenges, market sources suggest that the lease assets could potentially attract offers exceeding book value. Standard Chartered's owned and managed fleet comprises 121 aircraft on lease to 33 airlines

It will be interesting if these aircraft will be sold above book value.

Furthermore, Avilease announced the acquisition of 13 aircraft with leases attached from operating lessor Avolon.

So seems quite clear Avilease are on the hunt to rapidly build up their fleet... ATR's anyone???

Old ATR's Finding New Homes
Air Serbia has leased in several ATR72-600 of 2013/4 vintage in recent months, bringing their fleet of ATR72-600 to six.

[Carcosa]

The Avation Bloomberg Webinar - 24 May 2023 - REPLAY link requires registration but it is free to access.


How Many ATR's does Avation Have?
Meant to post this a while back..but forgot....
Avation has an interesting approach when reporting the number of aircraft in their fleet to investors. Presently, they state that they have 16 ATR72-600's with an additional 2 on order. However, it's important to note that this may not accurately represent their current fleet size. In reality, Avation likely possesses 18 aircraft at the moment. The distinction lies in the fact that the last two aircraft have almost certainly been manufactured but are yet to be delivered. Avation only tend to report 'delivered' aircraft. As a result, financial payments and ongoing maintenance costs for these stored aircraft may still be on-going. It's worth mentioning that one of these aircraft is currentlylisted for sale on their website


Furthermore, Avation holds 28 ATR options, indicating a projection of acquiring 6 aircraft annually until 2027. If an order were placed today, the first new aircraft deliveries would not be until the end of 2025, at the earliest (okay, technically not true as they may have opportunities to acquire production slots already blocked). It is crucial to understand that these options will expire to nil value if left unused. Consequently, Avation will likely need to significantly expand their fleet size to accommodate the full utilisation of the options, resulting in a total of 46 aircraft (28+16+2). In practice, Avation may choose to "sell" some of these options or negotiate scheduling adjustments. Such flexibility could potentially be acceptable to ATR. I plan to inquire about these matters during the next investor call.


Weekly news associated with Avation's business sector

A220's
AirBaltic - Of which Avation has leased six A220's to, is wanting to buy 30 more A220 aircraft to add to its existing 50 aircraft. The move comes as the airline prepares for a late 2024 IPO, for which the tentative business plan envisages up to 100 aircraft by 2030. As mentioned in my May 4th post, SALB offers are six of aircraft are expected to be submitted by August 2023. I fully expect Avation to participate but perhaps not able to provide a competitive offer.

Mandarin Airlines
Mandarin Airlines - which has three ATR's leased from Avation - has acquired three additional ATR72-600 aircraft for $69 million, i.e. $23m each, according to a China Airlines filing with the Taiwan Stock Exchange. Thus providing another pricing point. I suspect these prices are pre-credits e.g. training, support, spares, maintenance etc., so perhaps knock off ~$1.5m per aircraft?

Avilease
As suggested in an earlier post of mine, it has now been reported that Avilease paid above book value for the aircraft leasing business. Don't know any specifics.

[Carcosa]

A brief(?) word about aircraft value. I note that over the years some investors make outlandish claims regarding the value of aircraft, more so given that the A380 fleet is mentioned as being worth XXX millions. So maybe its worthwhile to consider what aircraft valuation means.

Most of the time the recent valuations I mention are 'base value'

Different stakeholders in the aviation industry, such as airlines, aircraft lessors, and investors, assess the value of an aircraft based on their specific perspectives and considerations.

For airlines, an aircraft's value is determined by analysing its potential to generate profits. Factors like mission flexibility, seat mile costs, reliability, maintenance, and fleet commonality are important considerations for airlines when assessing an aircraft's value.

Aircraft lessors, on the other hand, derive their aircraft valuations based on the expected lease income and residual value of the aircraft. Key risk factors for lessors include credit risk and asset risk. Therefore, having a popular aircraft with good remarketing potential and above-average value retention is significant for them.

The International Society of Transport Aircraft Trading (ISTAT) has defined standard aircraft value terms that are commonly used in the industry:

1. Base Value (BV): It represents the hypothetical value of a single aircraft in a balanced market, where supply and demand are reasonably equal and not affected by short-term events. Base value is often used to analyse historical values or project future values, but it's important to note that the real market is never completely balanced or unaffected by short-term events. Obviously wars, pandemic fuel prices are some factors that prevent a balanced market from existing.

2. Current Market Value (CMV): This represents the appraiser's opinion of the most likely trading price for an aircraft under the perceived market conditions at a given time. CMV takes into account recent transactions, demand for the aircraft type, availability on the market, and industry sources' views. It assumes an aircraft's maintenance status is at half-life or above average for new or fairly new aircraft.

In a stable market environment, the current market value of an aircraft tends to align with its base value. Divergence between base and market value indicates an imbalance in the market, such as prevailing conditions supporting higher or lower trading prices.

Other terms include Future Base Value, which is an appraiser's forecast of an aircraft's value in the future based on its now base value, and Adjusted Market Value, which accounts for the actual maintenance status of the aircraft. This is why A380 valuation's have to be carefully scrutinised. For example the three appraisers offered significantly different valuations for Dorics/Amedeos's A380's because it was less of an appraisal and more of a guess due to no secondary market existing. Obviously Doric/Amedeo just average the three costs to provide a figure for investors but clearly to be credible they Doric also provided figures that were 75% less than the average, and even then over the years proved to be optimistic.

Value trends in aircraft depreciation are influenced by factors like age, technological advancements, fuel efficiency, legislation and major maintenance requirements. Older aircraft needing significant cash expenditures for maintenance are unlikely to remain in service and may be retired or parted out. This is why lessors often mention the average fleet life of their aircraft.

In 2020 during the pandemic the ATR72-600's CMV declined by -23% for a 5 year aircraft and -35% decline in a ten year old aircraft. Yet, base value hardly moved at all.

Also interesting to note that not a single ATR42/72 order was cancelled compared to almost 100% cancellation of Q400 and CRJ900's

So in summary, relating to Avation's ATR72's and A220's we appear to be in a market where CMV > BV driven by:
1) Legislation, e.g. lower emissions
2) Significant lack of production capacity (ATR's and A220's)
3) ATR segment has no effective competitors e.g. SpaceJet programme cancelled, Dash 8-Q400 stopped production
4) Existing regional aircraft fleet (not only ATR's) are coming up for replacement
5) Inflation translating into higher than anticipated hull values
6) A220 order backlog is huge

Ultimately this means that going forward we should continue to see aircraft sales above book value, transitioned aircraft leases at a higher lease factor than was forecast and residual values being greater than anticipated not to mention being supportive for the NAV.

These conditions are likely to persist for many years. Which is why I believe the opportunities for Avation is very encouraging over the next few years. The risk comes down to the execution of those opportunities.

[Carcosa]

Weekly news associated with Avation's business sector

Global Fleet Demand Forecast
Airbus issued their latest edition of its Global Market Forecast for the 2023-2042 period.

ATR's equivalent forecast (2022-2041) can be found here indicating a further 2450 ATR segment aircraft are required without accounting for regulatory changes.


A New Look
Check out ATR's recent news release which showcases ATR's "HighLine", showing their collection of high-end cabin interiors. There is more information from their PDF brochure

"Multi-Class”: 50-seat interior including a dedicated first class (Clearly designed for the United States, Canada, and Mexico markets where regulation is such that regional aircraft max pax capacity is 50 seats)
“Premium-Flex”: For boutique airlines and charter operators.
“All-Business Class”: cabins that can accommodate up to 30 guests to match the requirements of Part 135 and semi-private airlines.
“Multi-Section”: interiors ensuring transport for Heads of State and Governments’ representatives.
“Bespoke VIP”: can be tailored to reflect personal lifestyles, operator’s needs or high-end destinations requiring a luxurious experience.

Overall this is a positive and interesting niche development but not necessarily one without significant risk for lessors.


More High Price Notes
Griffin Global Asset Management issued $1 billion senior unsecured notes at 7.75% (2026) and 8.00% (2028)
https://www.griffingam.com/press-page/g ... s-offering

VietJet Still not Complying
Have mentioned this in earlier posts but latest indications are that Vietnam/VietJet is continuing to fight lawsuits to comply with its international treaties as they continue facing pressure to implement Russia's dual-aircraft registration system. Four Vietjet Airbus A321 and A321neo aircraft are at the center of the dispute and remain in Vietnam.

Some leasing executives have compared these actions to Russia's large-scale expropriation of aircraft in 2022.

Meanwhile, some lessors with exposure to Vietjet claim that the airline continues to default, while others commend the airline for doing its best during challenging times (Avation?).


References:
What lease? This note discusses the structures typically used in aircraft financing transactions including secured loans, sale leasebacks, finance leases, Japanese operating leases, enhanced equipment trust certificates, and export credit agency transactions. It also discusses the advantages and disadvantages of these structures and the factors that may cause an airline/lessor to consider one structure over another.

[Carcosa]

Weekly news associated with Avation's business sector

The Paris Airshow resulted in a number of ATR Press releases. https://www.atr-aircraft.com/event/paris-air-show-2023/
Announced Orders:
6 ATR 72-600 from Mandarin Airlines (An Avation lessee)
2 ATR 72-600 with “All-Business Class” premium configuration from Berjaya Air (See last weeks report)
3 ATR 72-600 from Azul, plus options for 2 additional aircraft
8 ATR 72-600 from 3 undisclosed customers
3 ATR 42-600 from 2 undisclosed customers.

Other ATR News
ATR reported a clear upward trend and solid market appeal
On track to achieve its 40+ delivery objective for 2023.

Cost of Capital
Aviation Capital Group (ACG) closed $500m of senior unsecured notes due 2030 at 6.375%. This follows on from an earlier $600m of senior unsecured notes due 2028 at 6.25%. ACG has more than 480 associated aircraft.


Did You Know?...How Aircraft Leasing Started

The aircraft leasing business sector originated in the USA in 1953 with the pioneering efforts of George Batchelor, an aviation entrepreneur. Batchelor, a former US Army Air Corp pilot in World War II, recognized an opportunity to purchase surplus military aircraft being sold off by the US military at low prices. He converted these aircraft, such as the DC-3 he bought for $3,000, into charter aircraft for commercial use and established his own airline, Arrow Air.

Facing stiff competition from seven major players dominating the US airline market, Batchelor decided to shut down Arrow Air in 1953. He shifted his focus to aircraft maintenance and leasing instead, founding International Air Leases Inc.

However it is generally recognised that the first 'true' commercial aircraft leasing company, International Lease Finance Corporation (ILFC), formed in 1973, in Los Angeles, California by Steven F. Udvar-Házy is when aircraft leasing really came into its own.

During the early 1970s, the aviation industry was experiencing a period of rapid expansion, with increasing demand for air travel. At the same time, airlines faced challenges in acquiring new aircraft due to various constraints. Traditional financing options, such as bank loans, were often insufficient or costly for airlines to purchase new aircraft outright.

Recognising the need for alternative financing solutions, Steven Udvar-Házy, a Hungarian-born entrepreneur with a background in aviation, identified an opportunity to establish a company that specialized in leasing aircraft to airlines. He believed that leasing could provide airlines with greater flexibility and access to modern aircraft without the large upfront costs associated with outright ownership.

The company's initial focus was on acquiring new aircraft directly from manufacturers and leasing them to airlines worldwide. By purchasing aircraft in bulk, ILFC was able to negotiate favorable terms with manufacturers and offer more attractive lease rates to airlines.

[Clitheroekid]

This article may be of interest to AVAP shareholders by way of a background explanation of the aircraft leasing industry - https://www.lexology.com/library/detail.aspx?g=d1e5100a-7e51-43da-a12b-4bad758264b1&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2023-06-23&utm_term=

[jwk88]

Hi Carcosa,

I noticed you mentioned a takeover as part of your thinking a few times. On the Bloomberg interview Jeff said it is a seller's market and Investment Grade lessors should purchase everything they can because of their cost of capital advantage. Do you think Jeff will sell the company if they can't reduce their cost of debt? He said they received inbounds for a significant number of aircraft too.

Thx!
JWK