PARIS/NEW YORK (Reuters) - The financial hurricane blowing through Wall Street is beginning to ruffle one of the global economy’s strongest sectors: commercial aerospace.
International Lease Finance Corp, the world’s biggest plane buyer, is up for sale as its owner American International Group Inc (AIG.N) tries to raise cash to pay back a lifesaving $85 billion Federal Reserve loan.
The Los Angeles-based lessor is the most important commercial customer for Boeing Co (BA.N) and Airbus, a unit of EADS EAD.PA. Shares of both plane makers plunged on Wednesday, as investors worried about the outcome of a sale, and what an uncertain ILFC would mean for the industry.
“It’s going to be a difficult deal to pull off,” said John McMahon, an aircraft leasing industry veteran, who now runs Ireland-based lessor Genesis Lease Ltd GLS.N. “Even in the best of times it would be a seriously big deal. There aren’t too many parties around that are capable of executing.”
ILFC, based in Los Angeles, is the world’s biggest plane lessor by fleet value, with almost 1,000 planes on its books, worth $55 billion. It’s a debt-heavy operation which needs a strong, long-term balance sheet to keep its business going.
ILFC could be worth $5 billion to $8 billion based on valuations of smaller listed rivals, Wachovia Capital Markets said in a note to clients on Tuesday.
No obvious buyers have emerged, and sovereign wealth funds from the Middle East and China are seen as the only buyers with the muscle to pull it off.
Boeing and Airbus have so far sailed above the credit crisis and spike in oil prices, as global demand for new planes defies fears of a global recession.
ILFC has played a leading role in a three-year boom in plane orders. It is the biggest buyer of Boeing’s fuel-saving 787 Dreamliner, which it encouraged the plane maker to build, and is one of the few customers for Airbus’ giant A380 superjumbo.
One out of every three jetliners flying across the world is now leased, indicating the importance of ILFC and other leasing companies in the aerospace industry.
ILFC itself has 155 planes on order from Boeing and Airbus, worth about $25 billion. (See FACTBOX-Planes ordered by AIG’s leasing giant nN17466852)
That is only a fraction of the 7,500 outstanding orders Boeing and Airbus have on their books, but if they were deferred or canceled it would be a blow to the plane makers, which are already concerned about a possible spike in cancellations as airlines struggle with high oil prices.
“That (the ILFC orders) won’t disappear unless ILFC disappears,” said McMahon. “It’s a highly profitable business. The problem it has is that its owner is in difficulties.”
ILFC’s founder and chief executive, Steven Udvar-Hazy, effectively invented the business of plane leasing when he started the company in 1973. The benefits of leasing rather than buying planes appealed to start-ups and traditional airlines alike, and Hazy built up and sold the company to AIG in 1990 for $1.3 billion.
ILFC’s influence depends mainly on the timing and intuition of Hungarian-born Udvar-Hazy, a towering figure in aviation who regularly instructs Airbus and Boeing on crucial design decisions. Any successful sale of ILFC will depend on his backing.
“Hazy is a figurehead in the industry, and his choice of new parent would be an important factor,” said Les Weal, director of valuations and appraisals at British aviation consultant Ascend. “He is a very hands-on guy.”
Growing concerned about AIG’s finances, he was reported to be hatching a plan to take back ILFC earlier this year and may be willing invest some of his multibillion-dollar fortune in a deal.
A management buyout funded by private equity might be Udvar-Hazy’s ideal way forward, but it is difficult to see investors willing to commit so much money with no obvious prospect of selling the business on, said McMahon.
That leaves state-backed funds in the Middle East and China as the most likely buyers.
Late in 2006, the Bank of China bought Singapore Aircraft Leasing Enterprise for almost $1 billion, and may be on the hunt for similar assets.
In Dubai, the leasing unit of state-run Dubai Aerospace Enterprise (DAE) is “rapidly establishing itself as a world-class aircraft leasing business,” according to its own description.
“(The AIG situation) is something that is still in flux,” DAE Capital Chief Executive Bob Genise told Reuters, declining to comment on his interest in making a bid.
Officials at Abu Dhabi investment firm Mubadala Development Co, another possible buyer with a fast-growing aerospace division, were not available for comment.
Additional reporting by John Irish, Stanley Carvalho and Paritosh Bansal; Editing by Gary Hill