Former CFO of Air Lease Corporation
Jim has over 30 years of aircraft leasing experience and has spent time as a lessor, a lender, and an airline customer in the industry. In 1990, he joined GPA, now AerCap, and then spent 5 years at GECAS before joining Merrill Lynch running structured finance in the late 90’s. He has over 5 years experience as an airline CFO and was the CFO of Air Lease working closely with Steve Hazy between 2010-12. Jim now runs an aircraft restructuring boutique to assist airlines and lessors globally. Read moreView Profile Page
Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.
Jim, can you provide some context to your role at GPA, back in the nineties?
I joined GPA in the summer of 1990. To understand what I was doing at GPA, we have to go back three years in time. When I graduated from business school, I went to American Airlines in treasury and, subsequently, United Airlines in treasury. We were financing aircraft growth in both of those airlines, using a pretty sophisticated tax benefit structure. You could do a 25-year leveraged lease, where you are basically taking the full economic life of the asset but it was still considered an operating lease for accounting purposes and it was off balance sheet treatment.
What was interesting about that was that the airlines weren’t making a lot of money; these are capital intensive businesses. In the United States, you are able to take 100% depreciation and, on an accelerated basis, it was about seven and a half years. It was a nice way for US corporates, that were much bigger and more profitable, to be able to shelter their current gains and take a run on a pretty decent asset, over a long period of time. The benefit of that was that you were able to really well-match the debt – its tenor and duration – against the asset. 25-year life of the asset; 25-year debt. Let’s face it, airplanes are cool and people think they are really interesting assets. It was kind of fun and it was pretty sophisticated.
When I came to GPA in 1990, they had just ordered something like 300 airplanes. It was going through a huge growth phase and it had a problem; it had an asset liability mismatch. Again, 25-year life of assets being financed with a four-year revolving credit facility, where you are constantly having to refresh that facility by finding longer term financing solutions.
GPA had a leasing division, out in the market, placing airplanes and working with the customers. Then you had capital, which was the side I came into. Our job was to create financing profit as well as to use these kinds of technologies to better match the assets, with the leases and the financing in place. We did this pretty well and 1990 and 1991 were good years for us. I did a number of these structures with airplanes and airlines that don’t exist anymore; even some of the capital providers don’t exist anymore. I was doing this in Japan, as well. I was based in New York, I’d come to Shannon and spend time with the powers that be, for about a week a month.
They were really pretty heady times. In the leasing market, I would say, at the time that I joined, you had two global players. You had GPA and a company called ILFA, International Lease Finance Corporation, which was founded by the other major icon in this sector, Steve Házy. I think I am actually the only one who has worked for both Tony Ryan and Steve Házy. Tony was probably more focused on the marketing side of the business and I wasn’t in Shannon all the time, so I knew him and he knew me, but it wasn’t a close working relationship. I was Házy’s first CFO at Air Lease, so we had a slightly different rapport.
You had these two global businesses and there weren’t really many other people doing this. The percentage of aircraft that were leased at that time was probably 14% to 15%; 1350 assets of the global fleet. That grew pretty quickly over the nineties. It became 25% of all the aircraft that were leased, something like 3700. It was a pretty strong growth decade for leasing. I think there were some pretty interesting macro things that were pushing that. We had the Gulf War, in 1990, and that created supply issues in the oil sector, so oil was spiking. You certainly had Asia going into recession. I think the rest of the world was going into recession in the early nineties. You had a pretty challenging time for the airlines and they weren’t making money.
Ironically, that was good for leasing because it’s a capital-intensive business and the airlines could use leasing as a way to preserve capital and get the assets that they thought they needed to grow.
That was the context of when I went into GPA and it was a pretty good decade. The GPA story has a somewhat sad ending and I think that’s probably where you want to go next. The particular challenges that we faced – I’ve touched on a few of them – were that we were going through a hyper-growth phase. When I joined and these large orders had been announced I thought, cool, this is going to be a lot of fun and there will be lots of financing challenges. The reality was, the company didn’t have a strong enough capital base to do what it needed to do.
With that in mind, the company undertook to do an IPO in 1992. It was launched in June and it was going to be a global listing in London, the US, Japan. We were going to multiple markets, with a really complex structure, and we were looking to raise about a billion to a billion and a half of new equity, to recement this new growth. And it just bombed. There were a lot of reasons for that. It got pulled; there wasn’t enough interest and we were a wounded animal. All of a sudden, we were this high flyer, we can do anything, with real confidence bordering on arrogance within the business, but it was really a blast and we thought we’d power through it.
The reality was, we went into a restructuring mode after that. We had an off-campus session and said, it’s a setback, but we’ll get through this. We needed to try and create a billion dollars of liquidity pretty quickly. Myself and my colleagues in GPA capital – like Peter Barrett who now runs SMBC, who was one of my junior colleagues at GPA – were all tasked with going out and selling assets with leases in place, to try and generate a billion of liquidity to stabilize the platform.
You know how this goes. I’d signed up on a new 767-300ER, nice long lease in place. Maybe it was a 1.5 or two million below our book value. No, Jim, we’re not going to do that deal. We can’t take a book loss. A month later, I get a call from Shannon saying, hey Jim, could we do that deal at the same price? No, we can’t. The price was going to be lower. So we were chasing the market down.
The long and short of it is, we ended up falling into the arms of GE which was having its own issues. GE Capital was a long-term credit provider to the sector. It didn’t have any marketing capability and it really wanted the marketing folks at GPA; that was the prime thing they were looking for and they were going to buy a slug of really good assets at cheap prices. The upshot is, we ended up taking a billion-dollar book hit when this deal was closed. GPA remained an independent business, but its marketing was managed by GECAS going forward and GE took some of the financial folks, like me. I thought, what the heck. There’s more money than god at GE; that was the case at the time. It’s a capital-intensive business, AAA borrowing rating, all good, so this should be fine.
I was there for five years, in a variety of different capacities, and the last was as head of risk management for all of the long-term credit structured things. It wasn’t nearly as much fun as working with GPA. I’ll just leave it at that.
I then went to Merrill Lynch in 1998 and I ended up leading the team at Merrill that advised TPG on its purchase of a majority stake of what was GPA, at that point. Patrick Blaney had cleaned it up very nicely; TPG bought it. I led the team advising TPG on that. That eventually rolled up into what is now AerCap, so it’s a funny, small world. When you look at how things have evolved, GPA was a great spawning ground for the leasing business, as we know it today. Dómhnal Slattery now runs Avolon; I worked with him when he was putting MD-11s at Varig and I was doing the lease financing. We go back a long way.
Jim, when looking at this asset liability misalignment at GPA, how do you compare that to the current capital structure of AerCap and Air Lease?
The sector has just got much bigger, over time. There have been natural dips and cycles. There was a cycle that came out of GPA’s demise. A lot of those people left and didn’t go to GECAS and they started their own firms. Then you had another dip that happened after 9/11, when you had a lot of restructuring of the US airlines in the early 2000s. Then you had the financial crisis. People got capitalized and started again. I think the capital, generally, has always been there. When I look at the other side – ILFLC and ALC – ILFC got trapped. It was a public company for years and then was bought by AIG. Then, of course, AIG stumbled and that was really the poster child for the financial crisis. ILFC couldn’t fund itself; it could not find funding to grow the business.
Macquarie took advantage and bought a bunch of assets to give them liquidity and then, ultimately, a few years later, AerCap bought ILFC at a nicely diminished book value. I would say that what is different now is that you have a lot more knowledge in the capital markets, about aircraft. Generally, aircraft are perceived as liquid, ultimately movable, assets. Up until now, you really haven’t had a global disruption on this scale and so it’s a bit of a challenging time.
Through the cycles, there have really been very few hiccups. The portfolios themselves have performed pretty well, over time. I think you probably have more funding sources today than you did back then. As Gus Kelly likes to call it, there was tourist capital infecting the sector. Before the pandemic, people saying, okay, I’m going to put a billion dollars to work in this sector and, all that really did was generate frothy prices for aircraft that were being sold in sale leasebacks or traded with leases in place. If you are doing sale leasebacks, you are getting pretty ugly and low lease rate factors as a result. In a perfect world, you would love to see a 1% per month lease rate factor on the cost of your equipment and the 50 basis points per month. You are getting half of what you would look for in an ROA.