American International Group Inc says no one is willing to pay what its aircraft leasing business, ILFC, is worth, but a successful IPO by a new competitor created by ILFC co-founder Steven Udvar-Hazy could change all of that.
ILFC, together with General Electric Co's Commercial Aviation Services, has long dominated aircraft leasing, leaving just over half of the market to smaller players. Now, one of those small competitors, Air Lease, is planning to raise up to $700 million in an IPO on Monday. It has just over a year of operating history and some 160 aircraft on order.
Once on the New York Stock Exchange, Air Lease will be ILFC's closest publicly-traded rival, complete with Hazy, the godfather of aircraft lease finance and his management team of ILFC alumni. "He knows the business better than anybody else. You really have to watch this offering," said Josef Schuster, founder of Chicago-based IPO investment firm IPOX Schuster LLC.
"It's obviously important in terms of valuation ... it could help to price the unit of AIG higher or lower." AIG has repeatedly signalled the possibility of selling ILFC if someone offered an appropriate price. In December, Chairman Steve Miller said ILFC is unlikely to be a part of AIG in five or 10 years, but so far no buyer has been willing to pay what AIG thought its aircraft leasing arm was worth.
Aircraft leasing - together with the broader airline industry and the global economy it is closely tied to - was hurt by the financial crisis, but has since recovered, benefiting from growing global air travel and the willingness of banks to again lend money.
"Right now you have a very nice market environment and there's an element of rising tide lifting all boats," said Richard Aboulafia, an analyst at aerospace and defence consulting firm Teal Group. "There's an awful lot of people and awful lot of money coming into this space," he said of aircraft leasing.
In the world of leasing, it usually comes down to just that: generating enough financing to sustain growth. In fact, financing is exactly what has beleaguered ILFC. The company, co-founded by Hazy in 1973 and sold to AIG in 1990, strained under the weight of AIG's financial troubles during the crisis.
Since then, Aboulafia said, the industry logic has been turned on its head: It is no longer the multi-billion-dollar entities with deep-pocketed parent companies that get more capital, but the smaller - and younger - ventures. Hazy - who retired from ILFC in February 2010 amid friction over financing and started Air Lease - has clearly set himself up to benefit from the shift with a fresh and much smaller portfolio.
ILFC has adjusted, too, focusing on more fuel-efficient and newer narrow-body aircraft from EADS unit Airbus and Boeing Co, as well as placing sizeable orders for Boeing's upcoming 787 Dreamliner. The March orders, worth about $7.5 billion, were ILFC's first since October 2007 and were seen as the first major sign of recovery in the industry since the recession. Air Lease's IPO is now seen as the second. Its ripple effect could impact the entire industry, including ILFC.
"It's a vote of confidence, for certain," Aboulafia said. Air Lease is coming at a generous premium to public peers AerCap Holdings NV, Aircastle Ltd and Fly Leasing Ltd - roughly 1.5 times book value, compared with their average of 0.8 times to 0.9 times, according to IFR, a Thomson Reuters service. Everybody in the industry will be closely watching the IPO on Monday, analysts said.
But one of them warned against viewing Air Lease's IPO as a complete dress rehearsal for ILFC because Air Lease has some features that ILFC lacks. Like GE's aircraft leasing unit and other older companies, ILFC has struggled with the legacy of older aircraft that are quickly losing value and has resorted to write-offs, while Air Lease is starting largely anew.
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