The thing that separates AerCap from other top aircraft lessors is gumption. 

AerCap has a track record of making big, bold deals, attempted when the rest of the industry is fearful. Big deals are what has made it the world’s biggest lessor by portfolio value. 

In 2010, coming out of the financial crisis, it bought Genesis Lease for $1.8 billion. And in 2013, it bought ILFC from its struggling parent company AIG for $26 billion. At the time of the deal, ILFC was more than twice the size of AerCap.

Yesterday Bloomberg reported AerCap is close to a deal to acquire GECAS, the world’s second-biggest lessor, for “more than $30 billion”. If the deal were to go through, it would create an industry giant of unprecedented size, controlling 18 per cent of the entire global aircraft fleet. The combined business would be almost three times as large by portfolio value as the second largest, Avolon. 

An acquisition of GECAS by AerCap would have a nice symmetry to it. Both companies grew out of the original Guinness Peat Aviation business in Shannon. GECAS retains its co-headquarters there.

For all the potential upside, big M&A deals are super risky. Boston Consulting Group found M&A deals valued at more than $1 billion are written down by almost twice as much as small ones.

Given the risk involved in such a huge transaction, why is AerCap making this move now? And what would it mean for the Irish aircraft leasing industry?

Why AerCap wants GECAS 

For AerCap, GECAS has a lot to offer. An acquisition would almost double AerCap in size. Size is beneficial to lessors for a few reasons. 

First and foremost, being bigger would lower the interest AerCap has to pay on its debts. Aircraft lessors’ business model is to borrow money from the capital markets, buy planes with it, lease the planes out, and keep the difference between the rent and the interest payments. Smaller interest payments mean more profits. 

A second benefit is that AerCap is one of the world’s biggest buyers of airplanes. After the deal, it would be the world’s biggest. Buying more planes from Boeing and Airbus will allow it to extract better prices from them. A third related benefit is that being bigger will allow it to get better prices from its customers. A lessor that’s renting out a fleet of planes to Delta Airlines will be able to charge a bit more per plane than one renting out one or two planes.

A fourth benefit – from AerCap shareholders’ perspective – is that GECAS and AerCap both do the same things. So the company will be able to strip out some costs by combining the two businesses. For example, they won’t need two separate teams to manage the relationship with each airline. One team will go. AerCap spent €232 million on sales, general and administrative expenses last year. That number might drop by a third. 

AerCap shareholders will have been frantically plugging these estimates into their discounted cash flow models yesterday morning, trying to figure out how they changed the company’s value before the US market opened at 2.30pm Irish time. The share jumped 16 per cent in the hours after opening. So between the cost of capital, scale benefits and cost cutting, the market sees value in this deal. 

Why now?

Covid has been good and bad to the lessors. AerCap’s share price is still 9 per cent below where it was in January 2020. 50 airlines have gone bankrupt since then, and more are unable to pay their leases. The pandemic clearly hasn’t been good. 

But if Covid has hurt AerCap, it has hurt its competitors even more. Any aviation companies without a strong balance sheet, and access to debt markets, have been smashed. That describes smaller lessors, and almost all airlines.

AerCap has one of the strongest balance sheets in aviation. It led the industry out of the worst phase of the crisis when it showed, in June, that it was still able to raise $1.2 billion in debt at low rates. It was able to do this through its size and its relatively low level of debt (for the industry). 

The following chart shows the amount of debt, relative to equity, of the eight listed lessors. 

“2020/21 proved the theory that unencumbered assets lead to more flexibility,” says Johann Juan, an aviation industry analyst at Fitch. “Big lessors managed flexibility really well. And they have benefited from the open capital markets environment.” 

Now, coming out of Covid, the airlines’ balance sheets are too stretched to buy fleets of new aircraft. Instead, they are going to have to rely more on the lessors. It’s expected that lessors share of the overall market will hit 50 per cent in the coming years.

Why GECAS is selling

Why does GECAS want to sell? Well GECAS is the aircraft leasing arm of General Electric (GE), the giant industrial conglomerate. GE is going through something of a crisis at the moment. In 2018 it dropped out of the Dow Jones index of leading US companies, after more than a century in the index. Since 2018 it’s decided to focus on its industrial business and sell off non-core business lines. All of which is to say, GECAS has been on the block for a few years.

For GE, it’s much easier to sell GECAS as one entity than to sell it bit by bit. In selling it bit by bit, they’d have to fight over how much costs are transferring in each sale. And after they sell its most attractive assets, like its newer narrow body planes, they’d be left with non-core assets that would be difficult to shift at a good price. 

Remember, GECAS is the second biggest lessor. So there is only a handful of companies capable of buying it whole. It will be a huge challenge, even for AerCap. There are only six lessors with more than €10 billion of assets who could conceivably take it on — Avolon, BBAM, SMBC Aviation Capital, ICBC Leasing, BOC aviation and Air Lease Corporation. And there’s only one lessor in the world with a track record of having pulled off such a huge deal.

How to pay for it

How might AerCap pull off a deal of this size? We don’t have a lot to go off at the moment, except a rumoured price of around $30 billion. So what follows is very much back of the envelope. 

GECAS is a division of GE, and GE doesn’t break out detailed financials for it. What we know is that in 2020 it had $35.8 billion of assets, $3.9 billion of revenue and a net loss of $786 million. In 2019, before things got bad, it made $1.0 billion of profit on $4.9 billion of revenue. What we don’t know is GECAS’s liabilities or equity. Which is a bit important in trying to value a company. 

AerCap has 4.2 times more assets than it has equity (that is adjusted equity, after taking into account some convertible notes it has). If we assume the same ratio at GECAS, then it has $8.5 billion of equity. That’s the number AerCap would have to finance, whether with cash or its own shares. It has $1.2 billion of cash. So that leaves a very rough target of $7.3 billion that would need to be financed through a combination of shares and increased leverage. This is how AerCap financed the ILFL deal back in 2013/14.

The fact AerCap shares are up 16 per cent on the mere rumour of a deal with GECAS says the shareholders are not worried about being diluted. The market’s reaction says investors believe the combined company’s earnings will go up on a per share basis more than the dilution will reduce them. More simply, the market thinks the deal will boost earnings per share.

AerCap’s share price at market opening yesterday morning

The risks

How might this deal go wrong? As we’ve seen, the biggest M&A deals are the ones that are most risky. More than half of big deals destroy value for shareholders. 

The first challenge is over logistics. It’s always hard to combine two organisations. The challenge gets exponentially harder when each company has over $30 billion in assets. 

The next is competition. The deal would merge the number one and two lessors in the industry; it would own 18 per cent of the global airline fleet. Competition authorities in the US or Europe might have something to say about the deal. It might be that AerCap has to sell off assets to get the deal approved.

The next risk is over the health of the aviation market. Passenger numbers dropped 82 per cent in Europe in the six months to November 2020 and 67 per cent in the UK; in buying now, AerCap is betting this is the bottom of the market and that the industry will recover. 

Then there are GECAS’s not-useful-to-Aercap assets, like its freight and helicopter leasing businesses. These will have to be sold off. 

Finally, the biggest question is over the price. The right price could solve all these problems, make money for AerCap shareholders, and make a world-dominating company in the bargain.