Aercap CEO Aengus Kelly sealed a successful Paris Air Show for Boeing Tuesday when he announced that he'll buy 100 of its forthcoming 737 MAXs. In an interview, he frankly described some of the brutal financial realities of the airplane business.
Paris — Aengus Kelly sealed a successful Paris Air Show for Boeing when he announced Tuesday he’ll buy 100 of the forthcoming 737 MAX aircraft.
As chief executive of Aercap, the largest aircraft leasing company in the world, Kelly and only a few others in the aviation business sit atop a pyramid of power along with Airbus and Boeing. In an interview soon after his order announcement, he frankly described some of the brutal financial realities of the airplane business.
Those lower down the pyramid — less powerful, less savvy, new to the business or with sparser resources — can lose their shirts placing multibillion-dollar orders that exceed their needs.
“This is where Boeing and Airbus make so much money,” said Kelly. Later, “The vast majority of airlines have to go back to the two (manufacturers) and say, I want some help. That’s a very expensive conversation for these airlines.”
The alternative though, is a brand new jet that’s sitting parked.
“I don’t care how efficient the airplane is, if it flies from nowhere to nowhere with no-one on board, you are going to incinerate cash,” Kelly said.
According to market pricing data from aircraft valuation firm Avitas, Tuesday’s MAX deal is worth about $5.3 billion, allowing for standard discounts, though it’s listed at twice that value at catalog pricing.
Aercap now has almost 500 new commercial airliners on order, adding to an existing fleet of about 1,300 aircraft. Kelly says that makes his company “by dollar value, the biggest owner of airplanes in the world, by quite a distance.”
The other leasing giant, GECAS, the airplane leasing arm of GE, has more planes; but those are mostly less expensive narrowbody aircraft, whereas Aercap has a large number of expensive widebodies. Many of the bigger jets were inherited from former leasing giant ILFC, which Aercap acquired from AIG a year ago.
Kelly, an Irishman trained as an accountant who got his start in the airplane business 17 years ago with the seminal Irish leasing company Guinness Peat Aviation, is much more a financial wizard than an airplane geek.
“We buy, sell, or lease more than one aircraft every day, 365 days a year,” he said. According to company financial filings, Aercap at the end of March had total assets of $44 billion, with liquidity of $7.2 billion. It made a net profit of $305 million in the first three months of the year.
Kelly is acutely aware of where that places him on the aviation pyramid.
In an earlier interview in March, on the balcony of his hotel suite at the annual International Society of Transport Aircraft Trading (ISTAT) conference, he gestured to the people gathered below for lunch and remarked that “downstairs, people make a big deal if someone’s got $50 million. That’s chump change in the big scheme of things.”
He added that even if some of the aviation wheelers and dealers at the conference might lose money, “when there are a few guys flaking out downstairs here, it doesn’t matter. It’s not moving the needle for the big people like ourselves.”
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In Paris Tuesday, Kelly talked more about the power plays in the business.
“At Boeing and Airbus, this is the way the ordering works… ,” he began. He then described a process that clearly doesn’t apply to his own dealings with the jet makers, but to the smaller fry.
“An airline walks into Boeing or Airbus. On one side of the table you’ve got a guy who’s doing a deal that’s once in a lifetime. On the other side, there’s a guy doing a deal every day,” Kelly said. “There’s only one winner in that trade.”
He said the airline guys routinely “get spooked by Boeing and Airbus,” who tell them that the plane they want will be sold out and there are few open slots left. “Many airlines who don’t interact frequently with the airlines over-order on that basis,” he added.
The result is that a few years later, they have a plane to take that they don’t need or have room for. That’s when they must go back to the jet maker and ask to be cut a break, which the manufacturers will do — for a price.
That account, of course, may serve to encourage airlines to go with a lessor instead of buying direct.
In any case, being crushed by the manufacturer is not Kelly’s fate.
Speaking of the deal to buy the MAXs, which he said was long in coming but got finalized after an intense week of negotiations in Dublin and Seattle just before the Air Show, he sang the praises of the Boeing sales team. To secure the big boost for Boeing in Paris, they undoubtedly gave him a better-than-decent discount.
Aercap has the money and the leverage to buy the most popular airplanes, whatever they are. Today it has mostly A320s and A330s from Airbus and 737s and 777s from Boeing. Ten years down the road, Kelly said, he’ll have shifted the fleet to A320neos and A350s from Airbus and 737 MAXs and 787s from Boeing.
He already has his A320neos, his A350s and his 787s on order. He now has his MAXs.
“We’re very excited about it,” said Kelly. “This is a great airplane.”