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marketwatch.com
Fleet everything in downturn, says Genesis Lease CEO
By Aude Lagorce, MarketWatch
Last update: 11:54 a.m. EDT July 15, 2008
FARNBOROUGH, England (MarketWatch) -- Owning the wrong kind of aircraft has been fatal to several airlines in recent months as oil prices have skyrocketed, but aircraft leasing companies aren't immune to that pitfall, Genesis Lease Chief Executive John McMahon said.
"The outlook for aircraft leasing companies in the current climate largely depends on the kind of aircraft they have," he told MarketWatch in an interview.
With oil prices flirting with $148 a barrel, owning a fleet of older gas-guzzling jetliners is synonymous with a death sentence for an airline, and carriers around the world are rushing to retire such aircraft.
Leasing companies have no direct exposure to fuel prices, but their shares have declined as sharply in recent months as that of airlines, which Citigroup analysts last week said was an overreaction as the former have "better earnings visibility and substantially better balance sheets and cash flow generation."
With cash in tight supply, many airlines are finding they can't afford to buy newer, more fuel efficient jets to replace the older airliners, and turning to leasing companies instead.
"Demand for leasing is increasing because it's a very useful financial tool and allows airlines to take assets off the balance sheet," said Doug McVitie of consultancy Arran Aerospace.
Leased aircraft account for roughly 33% of the world-wide fleet of about 19,000 jetliners, up from 23% 10 years ago, according to Ascend Worldwide, an aviation-consulting firm in London. Ascend expects the total leased fleet to rise to about 45% of all jetliners by 2017.
Genesis Lease confident in young fleet
McMahon believes a fleet of hard-wearing single-aisle aircraft means Ireland-based Genesis is well positioned to ride out the industry downturn.
"We're going to be because we have aircraft that are relatively new and in high demand because of the broad customer base," he said. "But that may not be the case for everybody [...] and the outlook is that high oil prices are going to be with us for some time."
The two-year old firm has 53 aircraft with an average age of 6.3 years. That's considered young in an industry where 40-year-old jets are still in service. The fleet consists almost exclusively of A320-family jets and next-generation Boeing 737s, models perennially popular with a wide variety of airlines because of their durability and flexibility.
It is this broad customer base, combined with plane makers Airbus' and Boeing's decision not to develop a replacement for these aircraft for another decade, that underlie McMahon's belief that demand for Genesis' jets will hold up even as airlines in the U.S. and Europe cut capacity.
The executive also believes his efforts to limit the company's exposure to a particular region or a particular customer will leave it less vulnerable to a sharp downturn. At the end of the first quarter, 51 of Genesis' 53 aircraft were on lease to 33 airlines in 17 countries.
Aloha hit
But despite these precautions, Genesis has already been hit by the ripples of the crisis engulfing the industry.
At the end of March Hawaiian carrier Aloha Airlines, one of its customers, went belly up, leaving Genesis with a hefty bill to recover the two Boeing 737-700s it had leased the airline and refit them for a new customer. Transition costs are likely to come in between $500,000 and $1 million per aircraft.
More bankruptcies in the sector are almost unavoidable. Since the start of the year more than two dozens airlines, mostly in the U.S. but also in Europe and Asia, have gone out of business, and analysts predict the deadly combination of record-high fuel prices and slowing consumer demand will claim more victims.
Despite the record number of airlines going bust, there is little risk these collapses will create an oversupply of single-aisle aircraft on the market. At the end of April, about 50 aircraft were back on the market because of bankruptcies, out of roughly 5,800 such aircraft in operation. Demand for single aisles is so strong that nearly 5,000 are on order.
In fact Genesis intends to buy more in the future.
"More 737s and more A320 family aircraft is really what we're interested in," he said, although the company will also look at 777s and A330s.
Genesis would rather pass, however, on the A350 XWB, Airbus' upcoming long-range wide-body aircraft and Boeing's rival 787. Although such planes have garnered large orders from leasing giants like AIG's International Lease Finance Corp., Genesis prefers stick to aircraft with a wide, existing customer base for now.
"Ultimately it's the airlines that make the success or failure of a new aircraft model," said McMahon |
