Analysis: Lessons from the Air Lease acquisition
The recent $28.2 billion acquisition of Air Lease Corporation by Sumitomo Corporation, SMBC Aviation Capital, Apollo, and Brookfield is one of the most significant mergers in the aircraft leasing space.
The merger raises interesting questions about the future of aircraft leasing and leaves AerCap as the only US-listed aircraft lessor. Lessors at Ishka’s Singapore conference last week speculated that the merger would prompt SMBC Aviation Capital (SMBC AC) to choose to offer more mid-life aircraft for sale.
But one source highlights that there are likely to be fewer immediate aircraft sales offered to traders because of the nature of the consortium that acquired Air Lease. The lessor was too large to be acquired by one entity, explains the source, so SMBC AC teamed with other interested parties to acquire the parts of Air Lease it was interested in.
Brookfield has a strategic stake in aircraft lessor Castlelake, while Apollo, via its managed funds, has substantial investments in Perseus Aviation, Merx Aviation, and aircraft lending platform PK Finance. It is not clear what parts of Air Lease will be split between the various entities, though Air Lease’s orderbook is expected to be assumed by SMBC AC. Under this scenario, it is questionable, or even unlikely, there will be any near-term aircraft sales set to hit the intra-lessor market, except perhaps some potential outright sales from the Air Lease portfolio to Castlelake or Merx which have been pre-determined by the new owners.
Additionally, sources note, the Air Lease acquisition looks to be a significant boost to SMBC AC’s managed portfolios, with the two platforms following similar investment strategies.
“The Air Lease portfolio is pretty clean, with an investment strategy focused on new technology,” aviation consultant Dick Forsberg tells Ishka. “Almost all of what they acquired was through direct orders with Airbus and Boeing. So, I don't think that SMBC is going to be looking at the portfolio and thinking ‘there’s going to need to be a huge adjustment to align with our own portfolio strategy’. I don't think there's going to be a mass sell-off. I think it'll be measured.”
However, Forsberg notes, traders should not necessarily be sounding the alarm on a restricted market.
“Obviously, overall, SMBC is going to have to be trading more aircraft. So, I think the trading community shouldn't be concerned that there will be fewer opportunities to transact. Yes, there will be one fewer transactor - but if you look back at history, Air Lease wasn't that big a trader.”
More M&A on the cards?
One of the key takeaways from the acquisition is that there is clearly some debt appetite for future M&A. SMBC, Citi and Goldman Sachs Bank provided $12.1 billion in committed financing to make the deal happen. This is an impressive amount of debt to raise. Without understanding the terms, it is impossible to hard to argue that debt financing was cheap, but clearly the size of the debt portion underwritten by the three banks means that there is clearly debt available for acquisitions.
SMBC AC and Air Lease are top names, and the strength of underlying assets in the Air Lease portfolio would have likely helped when it came to negotiating debt facilities. All this suggests that the banks would have likely offered favourable financing terms. At the very least, it shows debt financing is available.
Fewer orderbook lessors available
The majority of recent lessor M&A has involved lessors with orderbooks – or in some cases, an outright acquisition of orderbooks, for example, DAE’s purchase of CALC’s Boeing orders in 2023. M&A in the midlife space is arguably more difficult – raising debt in scale is harder, credit profiles are riskier, and many mid-life players are asset managers rather than balance sheet lessors.
“If your only business is managing other people’s assets, all your overhead is allocated to that third-party work, so you’re effectively a fee income player, and that’s not going to get you the same long-term results or growth trajectory as having your own assets on book as well,” notes Forsberg.
“The great thing about having a portfolio and being in the market and buying and trading aircraft is that if you want the analysts to value your business, they’ve got a five-to-ten-year lock-in of revenues that they can easily reference. You don’t have that same thing with asset managers, because the guys who are paying your fees might decide one day that they don’t really like the way you’re doing this and move on. So, it’s a different business with different challenges.”
With this latest transaction, SMBC Aviation Capital seems set to acquire the entirety of Air Lease’s orderbook, leaving the list of orderbook lessors – which had already been dwindling for some time – one entry shorter.
The Ishka View
The Air Lease deal is a big win for SMBC Aviation Capital, boosting the lessor’s managed portfolio and likely granting it access to a substantial stream of new technology aircraft deliveries in the form of Air Lease’s orderbook.
The other winners from the deal are Air Lease shareholders, who snagged a significant premium on their stock. New aircraft deliveries, which had been a key pillar of the Air Lease strategy, have been constrained in recent years, with a cooling effect on the lessor’s growth and share price. The acquisition is also a fascinating case study in how separate – and potentially even rival – aircraft investors can combine to acquire and divide one of the largest names in the sector.
Will the deal light a fire under other lessors looking to expand through M&A? Dubai Aerospace Enterprise and AviLease are two firms often touted by leasing insiders as the keenest on growth through acquisition. The Air Lease deal has shown that financing is available for even the largest-scale acquisitions, but only time will tell.
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