AerCap (AER.N) has emerged as one of the leading forces in aviation after agreeing to buy the world's second-largest jet lessor, but its chief executive said on Monday he was in no hurry to join the industry's recent plane ordering bonanza.
AerCap announced plans last week to buy International Lease Finance Corp from insurer AIG (AIG.N) for $5 billion, cementing ILFC's role as the industry's number two by fleet size behind General Electric's (GE.N) aircraft financing arm GECAS.
AerCap Chief Executive Aengus Kelly said the Dutch-based company's priority would be to digest ILFC and manage its large portfolio, which includes an order book for next-generation aircraft, while restoring its debt to investment grade.
"Our focus initially will be to harvest the value we have created in this transaction and to start de-levering the balance sheet," Kelly said in a telephone interview.
"It is not about wanting to order, but if we don't get the right price, as in the past, we will be very careful in the use of our capital and we won't spend it where we don't think we are getting an appropriate risk-reward return."
Standard & Poor's said last week it planned to lower AerCap's corporate credit rating BB+ from BBB-, dipping below investment grade, as a result of the deal to buy ILFC.
Kelly said AerCap intended to restore the rating to investment grade. Asked how long this might take, he said, "The deal won't close until April or May 2014, so you would have to show a couple of years of financial results post-closing, I would think."
While many airlines and leasing companies have placed large orders with Airbus and Boeing, giving them work for seven or eight years, AerCap last placed a direct order in 2007 and has mainly bought aircraft from airlines while agreeing to lease them back.
One reason AerCap says it has been cautious has been the long wait before most available deliveries, meaning the cost can rise sharply after escalation or adjustments for inflation.
But ILFC, which helped launch the Boeing 787 and Airbus A350 and has ordered 150 A320neos, represented a one-off opportunity to buy a portfolio with good prices and early availability after Chinese suitors missed payment deadlines.
"ILFC had very attractive pricing, attractive slots and types and we didn't buy (the aircraft) from manufacturers. We bought them from AIG (at) a big discount to book value. So it was a question of the value - we just thought this was outstanding," Kelly said.
NO RUSH TO BUY UPDATED BOEING 777
One aircraft missing from the portfolio of either company is Boeing's 737 MAX, an upgraded model designed to compete with Airbus's A320neo as planemakers offer increased fuel savings.
Asked whether AerCap would now order the plane, Kelly said, "That will depend on Boeing quite frankly ... and the pricing they are willing to put on the table."
Nor is AerCap rushing to buy another revamped aircraft, a fresh version of the Boeing 777 wide-body jet due out in 2020.
"I am sure it will be (in our fleet) in time but we will be looking into 2025 before many of those aircraft start to deliver in size. It is something we will look at carefully at the right time, but it is quite far out at the moment."
From its beginnings 40 years ago, aircraft leasing is growing as the number of young airlines needed to meet growth in emerging markets increases. Leasing allows airlines to preserve cash, while lessors benefit from a mobile asset.
Kelly said the ILFC deal would not necessarily lead to further consolidation but could encourage others to go public.
"I think this is the deal that was needed to give the industry momentum," Kelly said.
"I think this transaction will drive a lot of people to look at the IPO market and may encourage people who are waiting in the wings to say ‘if I want to get involved I had better do it soon before the values start to move on further'."
AerCap has said it would run ILFC as a separate entity and relocate its fleet of some 1,000 owned and managed aircraft in Ireland, where it has offices in addition to its headquarters in the Netherlands.
Asked what would happen to the management team led by Henri Courpron, he said: "We are bringing together two great platforms and we want as many of the ILFC people as possible to be staying with us and I am sure they will".
AerCap plans to sell part of the ILFC assets which include dozens of older aircraft like Airbus A340s on which the U.S. company has taken significant writedowns.
ILFC was unable to sell aircraft in large quantities because doing so would have forced it to pay tax under some $4 billion of deferred tax liabilities. Relocating the assets to Irish jurisdiction will make them easier to sell, Kelly said.
He indicated that AeroTurbine, the world's second-largest aircraft break-up business which AerCap sold to ILFC in 2011, would stay in the company for now. Aircraft owners can break up planes and sell parts when their useful economic life runs out.
"We bought it in 2006, because we had an older portfolio...(By 2011) we thought AeroTurbine had done its job for us, as by then we had a very young portfolio and had managed to monetize our assets. In ILFC it is an important part of the platform."
(Editing by Tom Pfeiffer)