* AerCap takeover of ILFC revives Ireland as leasing hub
* Shannon was heart of late tycoon Tony Ryan's leasing
* Insiders say merger could prompt a wave of industry IPOs
* Veterans see new volatility despite aviation boom
By Conor Humphries and Tim Hepher
SHANNON, Ireland, Jan 19 Twenty years after the
spectacular collapse of Irish tycoon Tony Ryan's plane leasing
empire, the Emerald Isle has restored its grip on the world's
aircraft fleet with a mega-merger that could pave the way for a
wave of multi-billion-dollar IPOs.
The $5 billion takeover of U.S. leasing giant ILFC by AerCap
, a firm that emerged from the ruins of Ryan's pioneering
Guinness Peat Aviation (GPA), is set to send ownership of its
fleet of 1,000 jets to Shannon, a small town in the west of
Ireland where GPA pioneered the plane leasing industry in the
A disastrous bet on an airline boom that was cut short by
the Gulf War led to GPA's effective collapse in 1993 and an
exodus from Shannon.
Ryan bounced back to found Ryanair, now Europe's
largest carrier by passenger numbers, and firms set up by the
jet-setting Irishmen he trained have brought ownership of about
one in four of the world's commercial fleet back to Ireland.
"What goes around comes around is an expression I could
use," said Patrick Blaney, one of the GPA executives who helped
restructure the firm after a failed initial flotation in 1992
and who still lives nearby.
"It leaves me with a warm feeling, for certain."
Like other executives from the firm who remember how the
exuberance of the late 1980s gave way to the airline failures of
the early 1990s, Blaney sees some warning signs that not all of
the world's aviation firms will survive the current boom intact.
Yet Ireland's rebirth looks set to whet the appetite of
aircraft financiers holding their own mini-Davos gathering in
Dublin this week.
Their industry is basking in greater market recognition in
the wake of the purchase of ILFC and is at last supported by
robust profits at many airlines after years of restructuring and
adjustment to high oil prices.
"This transaction will drive a lot of people to look at the
IPO market," said Aengus Kelly, Chief Executive of AerCap. "It
may encourage people to get involved in this business soon,
before the values start to move on further."
From shaky roots in the 1970s, leasing has become a dominant
force in aviation, with aircraft portfolios at leading firms
worth an estimated $200 billion.
The industry is credited with making air travel cheaper and
safer. Operating leases allow airlines to avoid huge capital
costs and rent a modern jetliner, potentially worth $40-50
million at market prices, with all the latest equipment.
A mid-level executive from Ireland's national airline Aer
Lingus in the mid-1970s, Ryan, who died in 2007, spotted the
same opportunity as his great rival ILFC founder Steven
Udvar-Hazy in California.
When Ryan was tasked with finding a home for a mothballed
Aer Lingus Boeing 747 during the winter months, he flew around
the world until Thailand's Air Siam agreed to take it. He
quickly realised serious money could be made by financing and
operating planes for other airlines.
After founding GPA in 1975, he surrounded himself with a
team of ambitious young executives who travelled hundreds of
thousands of miles a year - occasionally dipping behind the Iron
curtain - to match parked planes and expanding airlines.
At weekends they would retire to their country piles near
the Shannon estuary, a key refuelling spot for transatlantic
planes from the 1930s to 1960s, where locals suffering from the
1980s recession looked on in awe.
"They had more money than anyone in the town had ever seen,"
said the manager of the nearby Dromoland Castle Hotel, Mark
Nolan, who remembers struggling to meet the demands of his
"spoiled, opulent" clientele.
"But it all dried up pretty quickly," he said.
The good times ended when the first Gulf War hit the
industry and torpedoed Ryan's attempted IPO, leaving him with
$17 billion in orders and not enough capital to fund them.
"He over-reached himself," said Christopher Brown, author of
"Crash Landing", an inside account of how GPA crumbled. "He
bought too many aircraft and didn't realise the cycle was
turning until it was far too late to get out of the hole."
Just before turbulence hit, ILFC managed to sell itself to
insurance giant AIG, guaranteeing it a steady flow of
cheap funding, until it was laid low by the 2008 financial
crisis, which froze its access to unsecured market financing.
While Ryan was ruined, until Ryanair rebuilt his fortune,
some executives joined the two entities that split from GPA, and
others set up by themselves.
GECAS, built by General Electric on about 60 percent
of GPA's fleet and 75 percent of its people, went on to become
the world's largest lessor, with most of its 1,700 planes owned
and still managed from its Shannon office.
Other executives played a key role in the rise of several of
the top 10 lessors, including SMBC Aviation Capital, Babcock &
Brown Aircraft Management and AerCap, now the industry
"Ireland is the centre of air leasing in the world, and that
came from GPA. The seeds were sown," said Kelly, whose company
AerCap acquired what was left of GPA after its carve-up.
As AIG desperately searched for an owner for its leasing
unit last year, Kelly stepped up again, orchestrating a merger
with AerCap and bringing ILFC under what is left of GPA.
While AerCap's corporate headquarters is in the Netherlands,
it manages its fleet in Ireland, which remains the industry hub,
thanks to what many say is an unrivalled web of international
tax agreements, a low corporate tax rate and world-leading
aviation financing expertise.
The deal, which is due to close in May, will create a listed
company with a market cap likely around $8 billion, hugely
expanding the volume of publicly traded shares in the sector.
"This is a transformative transaction. It shows for the
first time that large-scale consolidation is possible, and it
should make the public market more attractive," said Domhnal
Slattery, who started his career in GPA and now manages 182
planes at privately owned Dublin-based lessor Avolon.
However, another wave of record aircraft orders and the
bulging backlogs of leading planemakers Airbus and
Boeing, have renewed fears that the industry is
over-extending itself, just as it did in the late 1980s.
Airbus and Boeing have announced record combined orders for
more than 3,000 passenger jets in 2013, and the waiting list for
new jets is as long as nine years on average, a headache for
buyers unable to finance commitments so far in the future.
At the same time, manufacturers are vying to increase
output, raising fears of overproduction, a double headache for
lessors who are chasing the same airlines and also depend on
healthy second-hand prices in order to preserve the underlying
value of their assets.
Still, most forecasters in the industry say the economic
picture has changed for the better. China and emerging markets
have spurred demand that did not exist in Ryan's day, and air
travel is expanding to serve a new Asian middle class.
The bruises and knocks still felt by GPA veterans may, in
theory, have led to a more mature, less gung-ho industry.
Executives say many of the checks and balances were brought to
the industry by GECAS, which married financial portfolio skills
with the international reach and customer focus of the old GPA.
"What GPA did not have, which is an integral part of most
leasing companies today, is a deep-rooted system of risk
management," said Slattery, who started at GPA and then GECAS.
"It was an entrepreneurial, opportunistic, go-go style culture.
Let's do the deal and think about the risk later."
Even with those checks, "the margin for error is slim", said
a senior leasing industry executive, asking not to be named.
An accelerated slowdown in China or an economic or currency
mishap elsewhere could upset the fine-tuned calculations in an
industry that produces a thinner average return on equity than
its financial peers and depends heavily on access to the
cheapest possible financing.
The temptation that both GPA and ILFC succumbed to in
varying degrees remains - to maximise margins by borrowing short
and laying themselves open to a liquidity crunch.
"I don't think anything has changed that makes it more or
less likely that someone will fail," said GPA veteran Colm
Barrington, chief executive of FLY Leasing. "It's liquidity that
drives lessors to the wall."