Domhnal Slattery was struggling to understand the disconnect. His colleagues and contacts in China were increasingly concerned about the potential consequences of a virus that was devastating parts of the country. Yet the global financial markets seemed eerily unperturbed, with both sentiment and share values surging. 

So, 12 months ago, he sat down with his chief financial officer Andy Cronin to assess how the coronavirus could potentially impact Avolon, the aircraft leasing giant that Slattery had founded at the height of the last financial crisis in 2010.

Slattery and Cronin were worried it could be a ‘black swan’ moment, albeit with a small b and a small s, and that the best buffer for any looming crisis was cash. So, they pushed the button on a $1.75 billion bond offer to strengthen its liquidity position. The auction was oversubscribed, and the coupon was priced at an all time low. 

“We did not really need to raise the money at that point. Ordinarily, we would have done it in a more regular cadence throughout the year. But we knew it could get choppy,” Slattery says.

The pre-emptive decision to go the markets set the tone for Avolon’s 2020 strategy. With the global aviation industry effectively grounded and its customers under financial siege, Slattery pivoted Avolon’s focus away from profit to cash.   

It cuts its capital commitments heavily, cancelling orders for 102 Boeing 737 Max jets and deliveries of other aircraft, and capitalised on its strong credit rating by raising $4.4 billion of debt during 2020 at an average 3.7 per cent coupon. Overall, it reduced its capital and debt principal commitments between 2020 and 2024 by more than $9.5 billion.

“We coined a one liner, a strapline, which was that we wanted to be ‘long cash, short metal’,” Slattery says. “The only metric that we focused in on was liquidity: do we have or can we get access to enough cash to survive the crisis.”

As of now, the answer is yes. The company, the third largest aviation leasing firm globally with net assets of $28 billion and 842 aircraft on its roster, closed 2020 with liquidity of $6.5 billion, and it is currently in the markets again, with a $1.5 billion debt auction expected to close today.

“One of the characteristics with pandemics over the millennia is that they always end. They are finite. But you just don’t know when that point is going to be,” Slattery says. 

“With the global recession or the financial crisis of ’08, ’09, ’10, no one really knew when it was going to stop. It went all the way to 2011 with the European sovereign debt crisis.  

“We took a view this was going to be horrible for two to three years, and we needed to make sure we had enough cash to survive. There will be no winners in the leasing community from this, only survivors.”

*****

In September 2019, I sat down with Domhnal Slattery in his spacious office in Avolon’s pristine headquarters, located in the well-heeled Dublin suburb of Ballsbridge. Slattery was charismatic and engaging, happily talking about the high and lows of his own entrepreneurial journey and the characters – from Fred Goodwin to Tony Ryan – he had encountered along the way.  

He shared his fears about the global economic outlook, his worries about start-up culture in Ireland and his hopes for the Irish economy. He spoke about Tribe, the five cultural values that underpin the business, and how, before Avolon, he made and lost a personal fortune. 

As he recounted the Avolon story, from start-up to IPO within five years, and from IPO to private ownership, Slattery’s passion shone through. 

“This is the best gig I have ever done,” he told me at the time. “How lucky am I? Did I ever think that the top business school in the world (INSEAD) would be teaching our company as a case study in their MBA? Seriously?”

Sixteen months later, the world has changed – and Slattery’s industry has been impacted more than most.  The International Air Transport Association (IATA) has revised its 2021 outlook three times since the start of the pandemic. The latest forecast, published in late November, predicts an industry net loss of $118.5 billion in 2020 and a further loss of $38.7 billion in 2021.

The bulk of the pain is being felt by airlines, but the aviation leasing sector has been far from immune. 

In a report on the aviation industry published this week, accountants PWC summed up the sectoral problems: “Lenders and lessors have also been counting the cost of their exposure to airlines that can no longer meet their financial obligations as revenues collapse. Many of the traditional aviation lending banks are out of the market, with others repricing transactions and taking a more conservative approach to risk. 

“Lessors are starting to see revenues flowing in again, but the majority of their leases remain in arrears or have been substantially restructured and lessors have their own funding obligations to service.”

A report by Alton Aviation Consultancy, which has its headquarters in New York, estimates that about four out of every 10 leased aircraft are grounded as the pandemic continues to hit air travel. Alton predicts that “as more airlines enter bankruptcy/administration repossessions will become more frequent”.

However, if Slattery is feeling the pressure of running an aviation titan during a time of crisis, he is certainly not letting it show. Unlike in September 2019, this interview was not in person, but the same enthusiasm and energy remained.

Ian Kehoe (IK): You raised $4.4 billion last year. You are out there at the moment raising $1.5 billion. One of the trends is that lessors do well during times of turmoil because airlines look to preserve cash. The market certainly seem to think so given your access to capital?

Domhnal Slattery (DS): Correct. But this is a crisis like no other in that the cyclical amplitude of the market over a decade provides ample opportunity in a down cycle, which are typically driven by an economic down cycle. This time around it is not yet entirely clear when the ‘buy signal’ starts flashing. There used to use a phrase back in the financial crisis: ‘was there another shoe to drop?’. Now unquestionably from our perspective, we started to feel in Q4 2020 that the buy signal was starting to flicker. It was not a bright green, but it was starting to flicker. It was sending off a message that if you were brave enough and you had the foresight and the risk management skills, now was probably the time to begin selectively underwriting new deal flow where you get returns and economics that reflected the risk backdrop. 

In Q4, over that period and before any vaccines were announced, the narrative felt very good, particularly around Moderna. I had been watching the tech for some time – way before Covid. So, in the last four months of 2020, we committed a billion dollars of new capital to new deals, new transactions, but with returns that were commensurate with the risk. 

On one hand, we are restructuring and dealing with that. On the other hand, we were looking selectively around the world as to where we could do deals, and specifically it was in North America. We backed a couple of the larger carriers in North America for financing. That buy signal is still flashing but it has not got any more intense. Obviously the third wave globally is not really getting people very bullish, but the vaccine rollout is the tailwind. 

I spoke to some of our colleagues in China this morning and they were quite downbeat because they are now starting to see outbreaks throughout China of the new variant. The Chinese are a little nervous in the last week or two, whereas they had been quite bullish from September on last year.

Two things will happen here. There will be consolidation among the major lessors. Secondly, you are going to have a higher propensity for airlines to lease aircraft, because they can’t afford them. 

IK: I read your quotes in The Economist where you talked about airlines becoming more about sales and marketing, akin to hotel chains. That would obviously play to the strengths of lessors like Avolon. Are we going to see a fundamental alignment of the global aviation industry?

DS: I am never one for talking up our own shop – it can lack credibility. I go back to strategic tenets. The driver towards more aircraft leasing over the last 20 or 30 years has been a realisation by the airlines that they should not be tying up their capital in these assets. They don’t have the balance sheets to finance them. The vast majority of airlines – even in a normal environment – are sub investment grade. Now they are all effectively broke. 

Two things will happen here. There will be consolidation among the major lessors – you are going to have a smaller number of bigger players in that top ten group. Secondly, you are going to have a higher propensity for airlines to lease aircraft, because they can’t afford them. 

I am talking over the next three to five years – post vaccine, post stabilisation of the world. Because if you look at all of the bailouts that have happened globally, particular the US and Europe, that is debt that has gone on the balance sheets of airlines.

Dick Forsberg, who is now semi-retired and used to be our head of strategy, wrote a good piece with PWC. We agree with it. I think this crisis is a reset button with the big players consolidating and getting bigger, and airlines wanting to lease more because they can’t afford to buy. And the third, and most important, thing is that the returns that lessors will need for their equity and capital will stabilise into a more normal range. 

In the last three to give years, pre-Covid, as a result of the massive quantitative easing globally, you had a huge number of new entrants, particularly Chinese bank-funded entrants, who did not know and understand the challenges of the industry and simply thought that everything was up. A lot of those guys are going exit the industry because they now realise that there is far more to aircraft leasing than just buying an aircraft and putting it out on lease. It is a complex business and it takes multiple cycles of experience to survive and thrive through the cycles.

So, net-net at a strategic level, there will be less bigger guys doing more leasing, and less airlines buying airplanes. In theory, that should be good for us over time.

IK: The Altron report said there would be more repossessions of aircraft. The PWC report you mentioned predicted a surge in merger and acquisition activity in the aviation sector in the months ahead. 

DS:  The big players with strong credit ratings will become more relevant, and we will continue to drive down the cost of our borrowings because bond investors will see us as a less risky play.

“There appears to be a myopia around the relative importance of aviation for Ireland.” 

Domhnal Slattery has never been afraid to enter public debate. In 2019, for example, he commissioned and published Project i, a deep dive report that compared the start-up system in Ireland to the best in class in other countries. The report was controversial, highlighting a lack of encouragement of entrepreneurship in Ireland, little focus from the government on entrepreneurship and a lack of ambition from Irish companies.

More recently, he penned a strong opinion piece for The Sunday Independent in November, calling on the government to “follow the example of other countries and rapidly introduce tangible supports for our regional airports”. (A government rescue package was later announced). Slattery said he wrote the piece after Shannon Airport reached out to him – the businessman is from Clare and retains strong links with the mid-west. 

And while the government appointed a high-powered task force to look at the aviation industry (Gus Kelly of AerCap and Conor McCarthy of Dublin Aerospace were both on the taskforce), its recommendations have been largely ignored. This has fostered a view within the industry that the state has not adequately stepped in behind the aviation sector. 

IK: I will come to the government’s response on aviation in a moment. But what is your view on the state’s overall economic and financial response to Covid-19?

DS: Leaving aside the aviation sector, the mass market response is hard to fault. They were speedy, very fast. They did not get it all right all of the time, but no government did. I had a meeting with Philip Lane, and he made the point that pandemics end. When you are in a pandemic, you put your foot on the gas and you don’t worry about deficits because you know that you have to keep everybody in the game. 

That was the ECB stance, and it fed right through to individual governments. The Irish government was proactive. We worked closely with the government on PPE – and the headset was very open, they were embracing the private sector and getting everyone working together. 

IK: You are close to the aviation sector, and you wrote an opinion piece in The Sunday Independent about the lack of support for regional airports. There is also a broader point that many of the recommendations of the aviation task force have yet to be implemented. Why?

DS: The aviation task force produced a concise report driven by facts and had a number of recommendations that were logical and easy to understand. It should have been adopted rapidly by the government. For whatever reason, there appears to be a myopia around the relative importance of aviation for Ireland – forget about aircraft leasing as a financial service, but the global connectivity for an island nation.

I interviewed Micheál Martin this morning for a conference and this was one of the key subjects. He brought it up that the government fully appreciate and fully understand the central role that aviation plays in the connectivity quadrant. He brought up the need to balance it with the environmental agenda and so on. Saying all of that, it took a lot of pressure to help regional airports. They had been left in the wind. The executive at Shannon Airport reached out and said they were in serious trouble. They had already taken self-help measures – reduce workforce, reduce salaries, all the stuff you would expect a management team to do if they were fighting the good fight. They were being left dangle in the wind by the government. 

A lot of those guys are going exit the industry because they now realise that there is far more to aircraft leasing than just buying an aircraft and putting it out on lease. 

IK: Other governments were quick to step in to help airports and airlines. 

DS: We did a bit of research and analysed what other governments were doing around Europe to support regional airports. It became overriding clear that the Irish government was way behind the eight ball and European governments have piled hundreds of millions, if not billions, supporting the aerospace food chain – Air France and KLM being cases in point.  They supported the national carrier, but also the airports. In Ireland, we have a flag carrier, but it is only by brand. It is owned by IAG. So, they were off the hook in terms having to write a cheque to an airline, and Ryanair was long on liquidity. The real bone of contention was how the government managed rules and regulations for flying to Ireland to other countries. 

But on the other hand, if I had been the Taoiseach, I would have instigated, almost immediately, on a PCR test for people coming into Ireland as they did in New Zealand – which as a similar economic profile as Ireland. I don’t think we did a great job around that. Why wouldn’t we have had a PCR test as criteria for coming into Ireland? We only announced it a few weeks ago. But there has been 1,500 people coming in from Brazil in the last few weeks where there has been a horrific strain. We could have been a lot smarter, a lot more aggressive, a lot more proactive in that particular area.

The future of work, and start-ups

Domhnal Slattery and his senior executive team at Avolon spent four months on video calls during the first lockdown wrestling with a HR project. And, for four months, they got nowhere.  When they finally got back into a room together, they solved the problem in less than an hour. 

“We are animals and we read signs, we read if someone thinks an idea is good or not,” Slattery says. “I would have been a bit of a dinosaur pre-Covid around the concept of having a large percentage of your workforce working from home some or all of the time. My headset as a CEO was that it would not be great because I am losing the Tribe mentality, the innovation that often only happens face to face. And I actually still believe that. I still believe that the breakthrough ideas, in a business context, happen when humans are physically close to each other.

“What has changed fundamentally is a recognition that there are certain roles in all companies where the person employed in that role is far more efficient and far happier working remotely. My sense is that Avolon, where we have 300 people, that could be 20 per cent of our population. And I think for larger organisations it could be even more where you have big back office functionality. A lot of these people are not on mega salaries and so therefore they are commuting because they can’t afford the city centre property. Business leaders like myself and our senior leaders at Avolon now fundamentally trust that people will get their jobs done at home. My concern has flipped the other way. At home, we are seeing people find it harder to disconnect. We are removing the unnecessary presenteeism.”

Does he believe that business travel will ever recover? “Don’t forget there are a billion people in south east Asia who are coming up the curve and becoming businesspeople for the first time and they will want to be with their customers. Human nature kicks in. When people see that their competitors have visited their customer, they will do likewise,” he says.  

The driver towards more aircraft leasing has been a realisation by the airlines that they should not be tying up their capital in these assets. They don’t have the balance sheets to finance them.

Finally, I ask Slattery if his views on the state’s attitude to entrepreneurship have changed since the Project i report was published, given Enterprise Ireland backed companies reported a net decrease in jobs last year.

“Any metrics coming out of 2020 will be skewed one way or the other, but a few things have evolved and changed. I think the government’s appreciation and realisation of the importance of commercialisation of PhD research has stepped up dramatically in the last few months. I asked Micheál Martin why the public and private sector could not work together to create a scholarship for 1,000 PhDs. It would be a rallying call out of this crisis,” he said. 

“The universities have the capacity to do it. There is a much deeper appreciate of that and the Taoiseach also said on our call that we need to wake up to the fact that we need to commercialise the research that is coming from academics. That is a wave that will continue. Has it got to creating more jobs yet? Not yet. But we are trending in the right direction.

“Whether in the arts or in business, you see the greatest creativity happen in a time of crisis. I suspect there is going to be a wave of start-ups.”